Considering an Annuity?

Managed Payout Funds Are One More Entry in the Retirement Spend-Down Picture

Insurers have long been part of the effort to help retirees spend down their nest eggs through annuity products. Now, the mutual fund industry is jumping in with a competing offering for individuals who may or may not be so keen on annuities.

Called “target distribution” or “managed payout” funds, individuals who are retired or about to retire can invest in these fund products that contain stocks, bonds or other asset classes. They are structured so investors can designate regular withdrawals and the account balance can be transferred easily at the time of the account holder’s death to any spousal or non-spousal beneficiary.

Managed payout funds have been compared to fixed immediate annuities and are also known as retirement income funds. Any distribution taken by the account holder is expected to keep pace with inflation and come from dividends, fund appreciation and a portion of principal. The rest of the assets stay invested.

For retirees who want to continue building their nest egg while generating a steady stream of monthly income, they’re worth examining. It’s estimated that some $16 trillion in retirement assets are up for grabs and looking for disciplined distribution.

These funds issue checks regularly based on the account holder’s preferences, but the amounts are tied overall to fund performance. Vanguard, Fidelity Investments and Charles Schwab have all recently entered this business. Most of these funds encourage account holders to pull out between 3-7 percent of their total portfolio annually.

As the number of retiring Americans continues to increase, there will continue to be new wrinkles in the spend-out game. It makes good sense to get some personalized advice on how to best spend down your assets in a way that fits your needs. One way would be to consult a financial planning professional a few years before you’re ready to retire to check the following:

• See how your current assets are working so you know if you have enough to retire – know what you have before you question how to spend it.
• Consider various scenarios that describe the way you’ll want to live after retirement and whether your invested assets support that plan.
• Are your long-term care needs covered? Before you start talking about locking up assets in specialized fund products, make sure you have money in reserve or long-term care insurance in place should you need to pay for temporary disability or end-of-life care.
• What are the fees on the various managed payout funds you’re looking at? Most specialized funds have some fee structure that you should compare against other alternatives. Compare the expense ratio of your chosen fund against other possibilities.
• How will your assets in these funds be invested? Do those choices match your risk tolerance and your investment goals post-retirement? You’ll still need to be making smart investing choices with what hasn’t been spent down.
  
  August 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.

Traveling Smart During the Hot, Pricey Summer of ‘08

Summer is when we hope to get time off to relax. But with regular gasoline prices nearing $4 and energy prices pushing tourism expenses higher on everything from plane fare to meals out, paying for this year’s summer vacation might be a significant source of financial stress.

A recent GfK Roper Reports survey indicated that 55 percent of respondents said they are limiting “discretionary expenses like eating out and vacations.”

If that sounds like your agenda, here are some ways to save on travel this summer:

Stay closer to home: Is it that boring around home? Rather than flying across the country, check out the tourism website for your state or the nearest adjoining state to yours and just see what looks interesting. Those websites offer coupons, too. Also, sign up for e-mail from your local transit agencies and check their websites – you might hear about special deals at local museums or parks and free parking sites where you can leave your car before you pick up the train or bus.

Get smart about your travel points: If there’s a particular hotel chain you’re going to stay in, see whether they’re part of a larger network where you can earn points or other incentives toward future stays. Also, rather than multiple credit cards, try and narrow your usage to plastic that carries the best points plans toward hotels, airlines and car rental agencies you use all the time for fun or business.

Go off-season: Admittedly, it’s tougher with kids since they can only travel when school’s out, but if you don’t have a family, start traveling out-of-season all the time. Vegas and Aruba might be hotter than blazes in July, but as long as you have sun block and access to good air conditioning, then you can take solace counting what you’ll save on hotels, meals and other expenses that dip in price when the crowds are low.

Let travel opportunities find you online: If you have a favorite airline, resort or hotel chain, get on their mailing lists online and be ready to react if they offer a great deal.

Look for value weeks on the calendar: For family friendly venues, you might want to check prices on the edges of summer when schools are still letting out or going back into session. It’s not a bad time for grownups to travel either – you’ll beat the crowds.

Check out your motor club: Major organizations like AAA negotiate good prices on popular tourism locations around the country, even places like Disney World. Again, even if you don’t have kids, check your motor club’s offerings on hotel, destination, rental car and even train discounts.

Merge errands into your trip: This is not just vacation advice, but good everyday advice – if you can pack regular errands into your vacation time in the car, do it. For example, when returning from a trip, consider incorporating your regular errands on the drive home (consider stopping in states or counties with cheaper sales taxes that might save money on similarly priced items).

Leave or return on a Monday or Tuesday: Play around with the days of the week that you can schedule your trip just to see if you can find significant savings on hotel and airfares. Fighting to get home on a Saturday or Sunday can cost you money.

Pinch those gasoline pennies: If you’re driving your own car on trips, focus on maintenance and when and where you’re buying your gas. Keep your tires inflated and make sure your engine is in good shape for maximum fuel economy. Also, don’t carry tons of stuff – heavier cars burn more gas. Consider joining a wholesale club that sells their own gas onsite – you might save a considerable sum not only at home, but in out-of-town locations where you’re staying (hit the Internet and check before you go). Also, buy gasoline mid-week when prices generally stabilize from spikes entering the weekend and starting the workweek. Last but not least, buy gas when daytime temperatures are lowest. Why? Because during cool hours, gasoline is densest and packs more fuel power.


June 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.

Get A Head Start On Tax Planning For 2008

It’s still a month until most of us will file our 2007 tax returns, but it’s a good idea to keep in mind key tax changes that will affect our 2008 returns. Here are some of the highlights:

Wider tax brackets: In one of the rare cases in life where inflation looks like a good thing, all tax-bracket thresholds will be increasing. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $65,100, up from $63,700 in 2007.

Personal exemption: The personal exemption – which you’re allowed to claim for yourself and each dependent you have -- will go up $100 to $3,500 for 2008.

Standard deduction: Single filers will see this deduction increase $100 from 2007 levels to $5,450. Married couples filing jointly will see their standard deduction rise to $10,950, $200 more, and the amount for heads of households who don’t itemize will be $8,000, up $150. For married taxpayers age 65 and older, they’ll be allowed to add $1,050 to the regular standard deduction – unchanged from 2007, and singles will get an extra $1,350 compared to $1,300 in tax year 2007.

Phase-out of itemized deductions: Taxpayers will start to see the value of their itemized deductions go down after their taxable income exceeds $159,950 in 2008. That’s $3,550 higher than in 2007.

Retirement plan contributions: The contribution amount allowed for Roth IRAs begins to phase out for joint filers with incomes exceeding $159,000 (up from $156,000 in 2007) and $101,000 (up from $99,000) for singles and heads of household. For contributions to a traditional IRA, the deduction phase-out range for an individual covered by a retirement plan at work begins at income of $85,000 for joint filers (up from $83,000) and $53,000 for a single person or head of household (up from $52,000). The annual contribution limit for most defined contribution plans rises to $46,000, up from $45,000 in 2007.

Hope education credit: The maximum Hope credit, available for the first two years of post-secondary education, is $1,800, up from $1,650 in 2007.

Energy breaks: The federal government extended its credit on 30 percent of qualified solar generators for residential use.

The Kiddie Tax: The amount of investment income a child under age 19 -- or a full-time student under 24 -- can earn before excess earnings are taxed at his or her parents' rate will go up $100 to $1,800 in 2008.

Tax-free parking and transit passes: Employers will be allowed to give employees parking valued at $220 a month as a tax-free fringe benefit in 2008, up $5 from 2007.


March 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.

Getting Today’s Best Returns from a Home Renovation

It’s a much different picture renovating a home in 2007 than in 1997. Fueled by huge gains in the price of real estate, homeowners a decade ago were tapping home equity with little care since prices were expected to keep climbing, more than covering the cost of such improvements.

Today, with the slowdown in real estate and the widening damage in the subprime loan market, home prices aren’t rising much – and falling in some places. And lenders tend to be a lot choosier these days about who to do business with. So before considering a home renovation, it makes sense to make sure your financial house is in order:

Start with your credit report: If you’re considering borrowing, make sure your credit report and payment records are in the best possible shape. As in most economic crises, lenders go from being permissive to squeamish in an instant, so even people with good credit behavior are going to be under the microscope. Start by checking your credit report -- you have the right to get all three of your credit reports – from Experian, TransUnion and Equifax – once a year for free. You can do so by ordering them at www.annualcreditreport.com, but do so at staggered times throughout the year so you can catch potential errors in your report as they happen. Also, if you need to clean up any bad behavior – late bills, heavy credit card debt, clean it up before you wander back into the real estate market. Remember that a bad credit score can raise the total cost of your mortgage.

See what kind of payoff your chosen renovation will have: During the housing boom, people thought virtually any renovation would offer big returns. That wasn’t true then, and it’s particularly untrue now. Take the time to figure out what renovations have the best chance for return on investment now – go to Remodeling magazine’s annual Cost vs. Value report online (http://www.remodeling.hw.net/content/CvsV/CostvsValue-project.asp?articleID=381305&sectionID=173) and check 2006 project cost averages for your region of the country. In this market, renovate because it’s going to bring you comfort or pleasure, not because you’re expecting immediate profits.

Know how long you’ll need to stick around: When you sell, remember that most married couples can exclude from their taxable income up to $500,000 of gain and most individuals filing single or married filing separately can exclude up to $250,000. It’s required that you must have owned and used your home as your principal residence for two out of five years before the sale. The exclusion is generally applicable once every two years. However, if you are unable to meet the two-year ownership and use requirements because of a change in employment, health reasons or unforeseen circumstances, then your exclusion may be prorated.

Beware the bump in property taxes: The great thing about a more valuable home is the potential higher value when you sell. The bad thing is a visit from the county assessor – more valuable property tends to lead to higher tax assessments. Make sure you cannot only afford the cost of renovation, but what you’ll need to pay higher taxes if your home is reassessed.


Don’t forget to deduct applicable sales tax: If sales tax was imposed on a major renovation or if your state or locality imposes a general sales tax on the sale of a home or the cost of a substantial addition or major renovation, you might be able to deduct it. This alternative is particularly valuable in low-tax states, and the sales tax paid on the purchase of some large items including the purchase of a home or major addition can be added to the table amounts.

Make sure your renovation makes your home salable: A discussion with a real estate agent or someone familiar with the value of improvements in your immediate neighborhood can tell you what will add to value or take it away. For instance, a big addition can take away from the value of a home if it’s not aesthetically in tune with the rest of the neighborhood. Obviously, any renovation that keeps your house on the market longer better be worth it now because it might damage your sales prospects later.



January 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.

It’s Time to Start Thinking About the Estate Tax Again

Back in 2001, the Economic Growth and Tax Relief Reconciliation Act triggered a gradual increase in the dollar threshold of estates subject to the estate tax. In tax years 2007 and 2008, estates valued at more than $2 million may be taxed as much as 45 percent, while in tax year 2009, the threshold will increase to $3.5 million. The year after that, the tax will be repealed for a year.

However, in 2011, unless Congress acts, the party’s over. The estate tax will be reset at up to 55 percent on estates at a significantly lower threshold – $1 million.

While bills continue to swirl around Congress and many expect a Band-Aid of some sort before 2011, no one seems to believe that the so-called “death tax” is likely to be eliminated altogether. That makes it tough for individuals to set a clear course for their own estate planning. If you suspect your estate or the estate of relatives you might inherit from may fall prey to the estate tax, it makes sense right now to enlist the help of experts. Assets may be expected to grow over time, and your estate may turn out to be larger than you may think. You should be talking to estate and tax specialists as well as financial advisors such as Certified Financial Planner™ professionals.

Here are some things to keep in mind as you plan those conversations:

Think about a life insurance trust: Whether you need it for estate liquidity or for other purposes, an irrevocable life insurance trust can be created to keep the proceeds of the insurance out of your taxable estate. An added benefit is that such trusts may permit spousal access to the cash value of the policy. Yet note the word “irrevocable” – it means a decision that cannot be changed.

If your assets are expected to increase: A grantor-retained annuity trust, or GRAT, is an irrevocable trust that is popular among families with assets that are expected to increase, because such appreciation can be passed on to heirs with minimal tax consequences.

Prepare a gifting strategy: Under current law, unlimited amounts can be left to a spouse or to charity free of federal estate tax. Other heirs can receive a total of $2 million, tax-free, when deaths occur in 2007 or 2008. If your assets are over the estate tax limit, it might make sense to devise a gifting strategy that spends down your total taxable estate while still allowing you a comfortable lifestyle. You might, for instance, consider making direct payments for someone else’s medical bills or education tuition. No gift tax applies for these items, so payments can be unlimited.



January 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.

Pay Close Attention to So-Called “Default” Investments

One of the provisions of the Pension Protection Act of 2006 was to allow companies to automatically enroll their employees in their companies’ 401(k) plans, but it wasn’t until last October that companies got guidance on the categories of investments they had to choose for their workers’ contributions.

The decision contained a controversial provision. The Labor Department decided to prohibit stable-value funds or guaranteed investment contracts (GICs) from the choices, because many experts find them too conservative for younger investors.

Instead, companies can now offer balanced mutual funds among their QDIAs (Qualified Default Investment Alternatives) as well as target and lifecycle funds. Balanced funds create an assortment of investments that fit the group of employees as a whole, while target or lifecycle funds contain specific mixtures of investments targeted to an investor’s age or retirement date.

What’s also important to know is that employers won’t be liable for employees’ money lost while invested in a QDIA, but they’ll be responsible for doing the due diligence to select the investments, for monitoring the investments’ performance and for deciding whether to keep or jettison those investments.

So does that mean that you can comfortably rely on default investments for your entire retirement strategy? No.

Target investments specifically have become very popular. Money has been gushing into these funds, according to the Investment Company Institute. By yearend 2006, this particular category of funds held $114.3 billion in assets, up from only $12.3 billion in 2001. Why the demand? In part such funds have been positioned as “no-brainer” investments for individuals without the time, inclination or knowledge to choose investments for themselves. 401(k) plan architect Ted Benna was quoted earlier this year as saying that within 5-10 years, more than 75 percent of 401(k) plan assets could be invested in target funds.

A trained financial expert such as a Certified Financial Planner™ professional can help individuals meet specific goals in retirement that aren’t addressed by these one-size-fits-all plans. For instance, some critics say life-expectancy issues are not adequately addressed in target-date plans, and they definitely don’t address scenarios in which you plan to work in retirement or spend your assets in unconventional ways. Also, some critics offer that many people may underfund such plans without realizing the correct amounts they should invest to meet their goal. A planner’s job is to help advise individuals on an ongoing basis about meeting such goals.

That said, how should you evaluate a target-date fund? Here are some questions you should ask:

Do you know how much money you’ll need to retire? This is one of the questions you should start with based on your age and the vision of retirement you have. It is one thing to invest in a fund that promises consistent growth until your retirement date, but what if you need more growth? What if there are specific tax and spending issues that might interfere with putting the right amount of money into such funds each year? This is why individual advice makes sense. A mutual fund can’t ask you what your goals are, nor can it make sure you’re investing enough.

How did your employer select the funds it’s offering? Obviously, most employers want to make the right fund choices for employees, but just because they’re offering target funds doesn’t mean they’re offering the right target funds for you and your needs. Keep in mind that most fund choices offered to companies are heavily marketed and might not be the cheapest or most efficient investment choices out there. Always check the Morningstar rating of any fund your 401(k) invests in.

What if you leave your job and take your 401(k) with you? What happens to your targeted investment plan then? Obviously you’ll roll over these assets into another tax-advantaged retirement plan, but what will happen to your annual retirement savings strategy at that point? Always ask.

What are you paying for a targeted fund? Granted, the investment choices are being made for you, but what are you paying for those choices? Often, these funds are constructed based on a fund-of-funds structure that layers a fee on top of the fees incurred by the individual funds. Always understand the fee structure of any fund you invest in.



January 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.

Homeowners in Trouble Need to be Proactive

According to a November report by Standard & Poor’s, about half a trillion dollars' worth of adjustable-rate mortgages are due to reset to higher rates in 2008 when their two-year teaser rate periods come to an end.

Even though general interest rates have been headed down recently, you should know that it may not affect the mortgage market all that much. And if you suspect the lapse of your teaser rate will make your future monthly payments unaffordable, you need to take action now, not when higher payments take hold.

Mortgage trouble can be a sign of other concerns in a person or family’s financial life, and it makes sense to review your entire financial picture. One way to do this is to seek out the advice of a trained financial expert such as a Certified Financial Planner™ professional. A CFP can examine what you’re doing right and wrong with credit as a whole and make suggestions on how to circumvent immediate problems. In general, their advice might be the following:

Act first: If you believe that you are going to be late with a payment of any kind – not just your mortgage lender’s – contact the lender first. A recent Freddie Mac survey reported that of 2,000 homeowners reporting they were behind in their payments, 31 percent said they had not contacted their lenders despite repeated warnings of penalties and foreclosure in the mail.

Use every contact you have: If you have a person-to-person relationship with your lender, start by talking to a branch manager or an actual human you can use as a stepping stone to getting the right answers. If you have worked with a mortgage broker for years, perhaps they can help you get closer to a lending official who can consider your case more quickly and effectively.

Know the best time to act: There’s a key window to exploit. At 15 days past due, a file is typically referred to a lender’s collection department, and at 30 days, the delinquency is reported to the credit bureau. Once the 15-day notice arrives, immediately respond to the letter, and try to reach a department manager during the day to explain your situation and formulate a plan of action. If you are late, it won’t prevent a ding in your credit rating, but it may save your loan and your home.

Know your mortgage rights: Check your loan agreement and learn what your lender can or cannot do if you fail to make payment. Check the State government housing division and get information on the applicable law.

Go back to the basics: Review your spending plan and make appropriate changes. Now is the time to prioritize.

Ask for a change in your loan agreement: Under certain circumstances, such as loss of a job, medical problems or evidence of other financial burdens beyond your control, a lender might either renegotiate the terms of your loan or temporarily grant a forbearance agreement that would suspend payments or allow you a lower payment over a period of time. Ask under what conditions you might be eligible for either option.

Refinance if you can: The best option to rescue yourself from a huge jump in your monthly mortgage payment is to refinance, preferably into a fixed-rate mortgage. Keep in mind your lender won’t be all that excited about it if your credit picture isn’t that healthy and if your home value has dropped, refinancing will be even less likely. Have a conversation with a tax advisor or a financial planner to see if there are options.

If foreclosure is looming: Use your advisors to see if they know legal or other resources to help you negotiate with your lender to prevent the loss of your home. Obviously, the time to act was before the foreclosure notice was issued, but as a situation worsens, it’s obviously no time to go it alone. Keep in mind that a lender doesn’t want you to go into foreclosure any more than you do – lenders almost always lose money in foreclosure. Do consult with tax and legal advisors during this process, and stay away from foreclosure prevention companies since their fees are high. Always keep in mind that foreclosure victims are easy targets for scams.



December 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.

Try and Avoid These Stupid IRA Mistakes

Fortunately, Dec. 31 is not the final decision date for what we do with our individual retirement accounts – the final 2007 IRA contribution deadline comes on April 15 next year – but it’s a good time to review the do’s and don’ts of successful IRA management.

Mistake No. 1 – Failure to start: Do you have either a traditional or Roth IRA as part of your retirement strategy? If not, get some advice – a Certified Financial Planner™ professional is a good start – to review your overall retirement options and give you some ideas where to start.

Mistake No. 2 – Not comparing the advantages of traditional IRAs and Roth IRAs: The biggest differences between a traditional IRA and a Roth is the way Uncle Sam treats taxes on both types of IRA investments. If you put money in a traditional IRA, you’ll be able to deduct that contribution on your income taxes. In a Roth, you don’t receive the tax deduction for those contributions, but when it’s time to take the money out, you won’t have to pay taxes on it.

Mistake No. 3 – Forgetting income limits for a Roth IRA: The income limits for establishing a Roth are as follows: for a married couple filing jointly or a qualified surviving spouse, you can’t contribute if your modified adjusted gross income exceeds $166,000; if you’re filing single, you can’t contribute if your modified AGI exceeds $114,000, and for married people filing separately, you can’t contribute if your modified AGI exceeds $100,000. If you exceed those income limits and make a deposit, you might be subject to a penalty.

Mistake No. 4 – Failing to make sure your beneficiaries are correct: Starting in 2007, a direct transfer from a deceased employee’s IRA, qualified pension, profit-sharing or stock bonus plan, annuity plan, tax-sheltered annuity, 403(b) plan or a governmental deferred compensation plan to any qualified IRA can be treated as an eligible rollover distribution if the beneficiary is not the deceased’s spouse. That means your kids or any other designated recipient can inherit your IRAs without negative tax consequences at that time. Non-spouse beneficiaries need to check with a tax expert when they must begin distributions from an inherited IRA. Of course, no matter what the investment, make sure your beneficiaries are always current.

Mistake No. 5 – Not knowing the maximum contribution: For both traditional and Roth IRAs, the maximum annual contribution for 2007 is $4,000 unless you are age 50 or older, when you can add an additional $1,000 to that total. But review the income limits for contributions as you go.

Mistake No. 6 – Frittering away your tax refund: Did you know you could deposit your tax refund directly into your IRA? It works for a health or education savings account as well. While many people use their tax refund as a bonus to buy a treat or pay off bills, consider filing your taxes a bit early and arrange to e-file a direct deposit to your IRA so you can note that deposit for the 2007 tax year by next April 15.

Mistake No. 7 – Forgetting retirement savings benefits for active military personnel: The 2006 Heroes Earned Retirement Opportunities (HERO) Act allows active military personnel and their families to put a potentially greater contribution toward their traditional or Roth IRA accounts. The act allows tax-free combat pay to be considered as earned income to determine the contribution amount for traditional and Roth IRAs – it hadn’t before. Before, a military person who earned only combat pay wasn’t allowed to contribute to either form of IRA. This change is retroactive to 2004 and affected military personnel have until May 28, 2009 to make their contribution, though amended returns may be filed.

Mistake No. 8 – Withdrawing money early from an IRA of blowing a rollover: Money taken out of an IRA is subject to income taxes and a penalty if you are under 59 ½ years old and do not put it back into an IRA within 60 days. When moving assets, most of the time a trustee-to-trustee transfer can be more efficient and with less margin for error. If the IRA distribution check is made payable to you, there is a greater chance you’ll miss the 60-day deadline and you’ll face taxes and penalties.


December 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.

Say Goodbeye to 2007 with Some Smart Tax Moves

December’s a busy month, but it’s not too late to focus on last-minute tax savings. Consult a tax or financial advisor such as a Certified Financial Planner™ professional to see if these might work for you:

Do an AMT sweep: One of the reasons why it’s wise to consult a tax adviser before you start accelerating deductions is that certain people over $75,000 find themselves more susceptible to the alternative minimum tax if they proceed. The AMT is an alternative taxation process that’s figured separately from your regular tax liability and you have to pay whichever tax is higher. State and local income taxes and property taxes, for example, are not deductible when figuring the AMT. Under the regular rules, medical expenses that exceed 7.5 percent of adjusted gross income can be deducted under the regular rules, but under the AMT, that threshold is 10 percent. Also, under regular rules, interest on up to $100,000 of home-equity loan debt is deductible no matter how the money is used, but under the AMT, the deduction holds only if the money was used to buy or improve a primary or second home. It pays to check your AMT risk before you execute any end-of-the-year tax-savings strategy.

Check investment gains and losses: If you have some capital losses in your taxable investment accounts, see if it makes sense to sell and offset them against any capital gains you've realized this year. Such losses can offset 100 percent of capital gains plus up to another $3,000 in ordinary income. Any losses in excess of that number can be carried forward to the next tax year.

Prepay property taxes: If it makes sense to accelerate that deduction, pay those early 2008 taxes before the end of the month.

Prepay state taxes: Again, if it makes sense based on your tax situation, consider making a fourth-quarter estimated state tax payment due in January this month to accelerate the deduction.

Defer income if possible: Self-employed people and some business owners might elect to invoice customers in January so they don’t have to include that income on their 2007 return. Keep in mind that it only makes sense to defer income if you think you will be in the same or lower tax bracket next year.

Got time to go green? December isn’t exactly everyone’s favorite month for home renovations, but if you are inclined to replace windows, insulation or heating/air conditioning systems that meet particular energy conservation standards, you might qualify for a credit up to $500.

Consider the sales tax/income tax tradeoff: Taxpayers in 2007 will again have the option of claiming either state income tax paid or state sales taxes paid as itemized Schedule A deductions. If your state doesn’t have an income tax, definitely start totaling all the sales taxes you’ve paid. However, if you do pay a state income tax but have purchased such big-ticket items as cars, boats or construction supplies and equipment during the year, run the numbers anyway. The total sales tax deduction is figured on an amount from the IRS state sales tax tables in addition to the actual sales tax amounts paid on the major purchase items. The alternative is to ignore the IRS Tables, and simply add up all sales tax payments.

Plan a stock donation to charity: If you have stock with a large unrealized capital gain that you’ve held longer than a year, you can give that stock to a qualified charity and claim a deduction for the current fair market value of the security. If you have a stock with an unrealized capital loss, do the opposite – sell the stock, claim the capital loss, then donate the resulting cash proceeds to charity. This is actually better than just donating cash, because you get the same deduction and never have to pay the capital gains taxes from the appreciated security.

Make sure donations are documented: As of January 1 this year, you now must have a either a receipt or a canceled check to back up any contribution, regardless of the amount. If you don't have such a written record, the IRS will reject the write-off if the lack of proper record keeping is discovered in an audit.



December 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.

A Family Mission Statement Can Keep Family Goals First and Money Squabbles at Bay

When rich families squabble over the family legacy, it becomes headline news. Witness the recent battle over the ownership of the Wall Street Journal between members of the Bancroft family. When approached by media titan Rupert Murdoch, various family members fought over whether to preserve the family legacy at the legendary daily business paper or take the money and run. Money eventually won.

For most average Americans, such stories are an illustration not only of how money doesn’t buy happiness, but how it breeds dissention and distance between people who could be enjoying their wealth and moving in concert. With all that money, how can people be so unhappy and contentious?

Families with substantial assets – or the promise of substantial assets as a business grows – might consider creating a family mission statement. While the end product should produce a document built from discussion, argument and consensus, it’s not so much about the piece of paper as the process. When a family sits down to discuss what is really important to them, it’s an opportunity to take the machine apart and see how it works. Many families start the process as a way to build consensus about long-term financial, business, estate and philanthropic goals, but to their surprise, money can take a back seat. Families discover particular strengths, weaknesses and unexpected courses of action within their ranks. The process might identify future leaders of the family.

Trained financial advisors, such as Certified Financial Planner ™ professionals, can explain and guide the process. Some planners may be trained to facilitate such discussion based on the size and goals of the family involved.

The general creation of a family financial mission statement should have four key touchpoints: estate issues, philanthropy, business direction and family dynamics.

Here are some questions that should be asked of everyone in preparing the family’s financial mission statement. They should focus on relationship issues first, and then move into business and money matters.

• What’s most important about our family?
• What do you think our goals should be?
• When do you feel most connected to the rest of us?
• How should we relate to one another?
• What are our strengths as a family?
• Where do you think we’ll be as individuals in 5, 10 and 15 years?
• In order, what are the five things you value most in life?
• How should we behave toward each other?
• How should we resolve our disputes?
• How important is the family business to you?
• What should we be doing differently with our family money as well as our assets inside the business?
• What’s the best way for us to be building our wealth?
• What do you think the role of our family should be in helping the community?
• What should we be doing individually and as a family with regard to philanthropy?

Structurally, the written mission statement can be whatever you agree it should be – a few paragraphs or a page or two. And it needn’t be set in stone – a family should have a meeting every year or two to revise or approve its mission. The family mission statement helps your family establish its identity and the variety of voices within. It can help set goals and diffuse tensions later. It can also be used to moderate discussions that inevitably happen after major changes within the family – death, divorce or happily, an increase in the number of heirs and participants.

As for the age of the participants, it can start in very basic form with younger children and the process can mature as they age. It’s actually a good idea to bring young members into a customized version of the process for youngsters so they can comfortably adjust to working as adults with the older members of the family.

For a handy resource on writing a family mission statement, go to this site: http://www.nightingale.com/mission_select.aspx?from=homepage&element=missiontitle


November 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.

What You Can Do Before the Kiddie Tax Loophole Closes

When President Bush signed new legislation in May to limit gifts to children that take advantage of their lower tax rate, it was the second time in just over 12 months that Congress extended the reach of the so-called kiddie tax, which subjects a child’s income to his/her parents’ higher tax rate.

Maneuvering around the kiddie tax has helped parents save for college educations for years, and given the changes, it’s a good idea to consult a financial or tax adviser to discuss your options.

Congress apparently got fed up with a particular tax strategy used by wealthy families who transfer large piles of stock, mutual fund shares and other assets to their kids (who are typically in the lowest two income brackets of 10 percent and 15 percent) so they could sell those securities at a low capital gains rate. The top rate on long-term capital gains and qualified corporate dividends is 15 percent, but since 2003, those in the lowest two income brackets had a shot at a 5 percent capital gains, which is scheduled to drop to zero for those low-income taxpayers in 2008.

So here’s what’s happening this year and next. During 2007, investment income for a child 17 years old or younger (measured as of Dec. 31, 2007) above $1,700 is subject to his parents’ higher tax rate. (Before 2006’s changes in the law, the kiddie tax applied only to kids younger than 14.)

Starting in 2008, the age limit for the kiddie tax will rise to 18 and under, or 23 and under if the child is a full-time student. There are some exceptions for kids with paid jobs – the expanded provision applies only to children whose earned income does not exceed one-half of the amount of their support needs.

What you can do now

If you had put appreciated securities in your child’s name and the child is a full-time student under the age of 23 but at least 18, your child can sell those securities this year and still claim the 5 percent capital gains rate. There won’t be a zero capital gains rate available to your student next year, so you need to act before the end of the year to take advantage of the 5 percent rate before it becomes the parents’ 15 percent rate in 2008 via the kiddie tax.

You may also want to start or redouble your efforts in the 529 college savings plans you’ve set up for your kids. Qualified withdrawals for education are tax-free and therefore wouldn’t be subject to the kiddie tax. The same is true for qualified withdrawals from Coverdell education savings accounts.

Outside of 529 plans, you might consider investments that generate little or no taxable income such as municipal bonds.

Watch out for financial aid

Whatever gift and tax strategies you apply to your college savings strategy, make sure those assets don’t undermine any efforts your child is making to secure financial aid.


October 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.