October 2012 Newsletter

Year-End Income Tax Planning:

The purpose of year-end tax planning is to look for opportunities to reduce your current or future income taxes, given the existing tax laws and your own personal circumstances. While this effort has always been challenging, this year is articularly difficult due to the presidential election and the long-standing gridlock in Congress. It is very likely that Congress and the President will not come to a “meeting of the minds” until 2013, although that “compromise” may be retroactive. We also do not know what may be included in that “compromise”. What we do know is that the Bush Era Tax Cuts from 2001 and 2003 will sunset at the end of this year and the effects of the 2010 Health Care Act will begin in 2013.

Among the more important changes between 2012 and 2013 are the increases in the marginal income tax brackets. For 2012 we have 5 income tax brackets, 10%, 15%, 25%, 33% and 35%, and starting in 2013 we will have the 15%, 28%, 31%, 36% and 39.6% income tax brackets. For those who are currently in the 10% and 15% marginal income tax brackets, the capital gains tax is 0%. For those in the higher tax brackets, 2012 is the last year in which qualified dividends and long term capital gains, on other than collectibles and depreciation recapture on real property, are taxed at 15%. From a planning perspective, investors should consider selling appreciated securities in 2012 and take advantage of the lower tax brackets. In addition, taxpayers should also consider harvesting investment losses in 2012 to offset gains.

Another impact of the 2010 Health Care Act is the 3.8% Medicare Tax on unearned income. Unearned income includes interest, dividends, annuities, royalties, rents, and other passive activities. This tax would also apply to those who sell their personal residence and the gain is in excess of the IRC Section 121 exclusion of $250,000 for single taxpayers and $500,000 for married taxpayers filing jointly. The impact of this new tax will be borne by those single taxpayers with modified adjusted gross income (MAGI) in excess of $200,000 and married taxpayers filing jointly with MAGI in excess of$250,000. For most taxpayers, the MAGI will equal adjusted gross income. The modifications to adjusted gross income are those associated with taxpayers living abroad that have foreign earned income. In order to limit the impact of this new tax, investors should consider accelerating unearned income into 2012.

Many taxpayers know that unreimbursed medical expenses are deductible to the extent that they exceed 7.5% of adjusted gross income. In 2013, those under age 65 will have to overcome the higher threshold of 10% of adjusted gross income. If you are planning elective medical procedures, accelerating that expense into 2012 will allow you to deduct more of the costs.

A common tax planning technique is to make gifts to charity with appreciated stock. The benefit of this approach is to escape capital gain taxation and take a charitable deduction for the market value of the security. This tax planning technique will be better utilized in 2013 rather than 2012 due to the potential for higher tax rates in 2013. If tax rates go up, the deduction will be worth more in 2013 than in 2012.

This year, income tax planning is more challenging than in past years, but taking the time to look at your circumstances and devising a tax minimization strategy is well worth the effort.

Ways Parents Can Help Their Boomerang Kids

It’s been called the new retirement wild card. But it’s not inflation, health-care costs, or taxes, though those things certainly matter. What is it that’s causing so much uncertainty? It’s boomerang kids, and the money their parents spend on them. The trend According to the U.S. Census Bureau, there were 6 million young adults ages 25 to 34 living at home in 2011–19% of all men (up from 14% in 2005) and 10% of all women (up from 8% in 2005). Not surprisingly, the percentages are higher for young adults in the 18 to 24 age bracket, with 59% of young men and 50% of young women living with their parents in 2011.

Sociologists have cited a number of reasons for this trend–the recession, college debt, the high cost of housing, delayed marriage, and a tendency toward prolonged adolescence. But whatever the reason, there’s no doubt that boomerang children can be a mixed blessing for their parents, both emotionally and financially. Just when parents may be looking forward to being on their own and preparing for their retirement, their children are back in the nest and relying on their income. While the extra company might be welcome, you don’t want to sacrifice your emotional and financial health to help your kids.

Set ground rules. If your adult children can’t afford to live on their own, establish ground rules for moving back home, including general house rules, how long they plan to (or can) stay, and how they can contribute to the household in terms of rent and chores. As an adult, your child should be expected to contribute financially to the household overhead if he or she is working. Determine a reasonable amount your child can contribute toward rent, food, utilities, and car expenses. You can then choose to apply this money directly to household expenses or set it aside and give it to your child when he or she moves out, when it can be used for a security deposit on an apartment, a down payment on a car, or some other necessary expense.

You should also discuss your child’s long-term plan for independence. Does your child have a job or is he or she making sincere efforts to look for work? Does your child need or want to go back to school? Is your child working and saving money for rent, a down payment on a home, or graduate school? Make sure your child’s plans are realistic and that he or she is taking steps to meet those goals. It’s a balancing act, and there isn’t a road map or any right answers. It’s common for parents to wonder if they’re making a mistake by cushioning their child’s transition to adulthood too long or feel anxious if their child isn’t making sufficient progress toward independence.

Turn off the free-flowing money spigot. It can be tempting for parents to pay all of their adult children’s expenses–big and small–in an effort to help them get on their feet, but doing so is unlikely to teach them self-sufficiency. Instead, it will probably make them further dependent on you.

If you can afford it, consider giving your child a lump sum for him or her to budget rather than just paying your child’s ongoing expenses or paying off his or her debt, and make it clear that is all the financial assistance you plan to provide. Or, instead of giving your child money outright, consider loaning your child money at a low interest rate. If you can’t afford to hand over a sum of cash or prefer not to, consider helping with a few critical expenses.

Evaluate what your money is being spent on. A car payment? Credit card debt? Health insurance? A fancy cell phone? Student loans? General spending money? Your child is going to have to cut the frills and live with the basics. If your child is under age 26, consider adding him or her to your family health plan; otherwise, consider helping him or her pay for health insurance. Think twice about co-signing a new car loan or agreeing to expensive lease payments. Have your child buy a cheaper used car and raise the deductible on his or her car insurance policy to lower premiums. Help your child research the best repayment plan for student loans, but don’t pay the bills unless absolutely necessary. Same goes for credit card balances. Have your child choose a less expensive cell phone plan, or consolidate phones under a family plan and have your child pay his or her share. Bottom line–it’s important for your child to live within his or her financial means, not yours.

Solidify your own retirement plan. Even if your child contributes financially to the household, you may still find yourself paying for items he or she can’t afford, like student loans or medical bills, or agreeing to pay for bigger ticket items like graduate school or a house down payment. But beware of jeopardizing your retirement to do this–make sure your retirement savings are on track. A financial professional can help you see whether your current rate of savings will provide you with enough income during retirement, and can also help you determine how much you can afford to spend on your adult child now.

Four Retirement Planning Mistakes to Avoid

We all recognize the importance of planning and saving for retirement, but too many of us fall victim to one or more common mistakes. Here are four easily avoidable mistakes that could prevent you from reaching your retirement goals.

1. Putting off planning and saving

Because retirement may be many years away, it’s easy to put off planning for it. The longer you wait, however, the harder it is to make up the difference later. That’s because the sooner you start saving, the more time your investments have to grow. You could save by age 65 if you contribute $3,000 annually, starting at ages 20 ($679,500), 35 ($254,400), and 45 ($120,000). As you can see, a few years can make a big difference in how much you’ll accumulate. Don’t make the mistake of promising yourself that you’ll start saving for retirement as soon as you’ve bought a house or that new car, or after you’ve fully financed your child’s education–it’s important that you start saving as much as you can, as soon as you can.

2. Underestimating how much retirement income you’ll need

One of the biggest retirement planning mistakes you can make is to underestimate the amount you’ll need to accumulate by the time you retire. It’s often repeated that you’ll need 70% to 80% of your preretirement income after you retire. However, depending on your lifestyle and individual circumstances, it’s not inconceivable that you may need to replace 100% or more of your preretirement income.

With the future of Social Security uncertain, and fewer and fewer people covered by traditional pension plans these days, your individual savings are more important than ever. Keep in mind that because people are living longer, healthier lives, your retirement dollars may need to last a long time. The average 65-year-old American can currently expect to live another 19.2 years (Source: National Vital Statistics Report, Volume 60, Number 4, January 2012). However, that’s the average–many can expect to live longer, some much longer, lives. In order to estimate how much you’ll need to accumulate, you’ll need to estimate the expenses you’re likely to incur in retirement. Do you intend to travel? Will your mortgage be paid off? Might you have significant health-care expenses not covered by insurance or Medicare? Try thinking about your current expenses, and how they might change between now and the time you retire.

3. Ignoring tax-favored retirement plans

Probably the best way to accumulate funds for retirement is to take advantage of IRAs and employer retirement plans like 401(k)s, 403(b)s, and 457(b)s. The reason these plans are so important is that they combine the power of compounding with the benefit of tax deferred (and in some cases, tax free) growth. For most people, it makes sense to maximize contributions to these plans, whether it’s on a pre-tax or after-tax (Roth) basis. If your employer’s plan has matching contributions, make sure you contribute at least enough to get the full company match. It’s essentially free money. (Some plans may require that you work a certain number of years before you’re vested in (i.e., before you own) employer matching contributions. Check with your plan administrator.)

4. Investing too conservatively

When you retire, you’ll have to rely on your accumulated assets for income. To ensure a consistent and reliable flow of income for the rest of your lifetime, you must provide some safety for your principal. It’s common for individuals approaching retirement to shift a portion of their investment portfolio to more secure income-producing investments, like bonds. Unfortunately, safety comes at the price of reduced growth potential and the risk of erosion of value due to inflation. Safety at the expense of growth can be a critical mistake for those trying to build an adequate retirement nest egg. On the other hand, if you invest too heavily in growth investments, your risk is heightened. A financial professional can help you strike a reasonable balance between safety and growth.

Can I be reimbursed from my health-care FSA for over-the-counter medications?

A health-care flexible spending account (FSA) allows you to pay for certain qualified medical and dental expenses with pretax dollars. With a health-care FSA, you can contribute pretax earnings to the plan (usually through a salary reduction agreement with your employer) and submit qualifying expenses to the plan for reimbursement. If you tend to spend a lot of money on medical expenses that are not covered by your health plan, contributing to an employer-sponsored health-care FSA is a good way to help pay for these expenses.

Although over-the-counter (OTC) medications used to be reimbursable from a health-care FSA, the Patient Protection and Affordable Care Act of 2010 amended the definition of qualified medical expenses for health-care FSA reimbursement purposes. As a result, OTC medications (except for insulin and medications that are prescribed by a physician) are no longer eligible for reimbursement.

However, many OTC medications are also available by prescription. You may want to ask your doctor for a prescription for any OTC medications that you use on a regular basis (e.g., pain relievers and allergy medications). You’ll need to submit the prescription along with a receipt to your FSA provider in order to get reimbursed. Some FSA providers offer forms that allow your doctor to write a prescription once for any of the OTC medications that you’ll need throughout the year.

Currently, there is no legal limit on the amount that you can contribute to a health-care FSA. However, most employers do impose a cap on contributions (typically $3,000 to $5,000). And beginning in 2013, if a health-care FSA is part of a cafeteria plan, annual contributions will be capped at $2,500 (starting in 2014, that amount will be adjusted for inflation).

Finally, when participating in an FSA, it’s important to remember that you cannot carry over any money you contribute from one plan year to the next–in other words, if you don’t use it, you lose it. As a result, it’s important to choose your contribution amount carefully so that you don’t risk losing any contributions at the end of the plan year.

Should I participate in my employer’s wellness program?

Living a healthier lifestyle can greatly improve one’s overall well-being and reduce health-care expenses. As a result, many employers are offering wellness programs to their employees as a way to reduce absenteeism and lower the cost of employer-sponsored health care. According to a 2010 Bureau of Labor Statistics survey, one-third of U.S. private sector workers had access to an employer-sponsored wellness program.

For employers, wellness programs not only reduce health-care costs by promoting healthier living, but they also have been shown to boost employee productivity and morale. The types of wellness programs vary among employers, but they typically cover a variety of healthy living issues, such as:

• Smoking cessation

• Exercise/physical fitness

• Weight loss

• Nutrition education

• Health screenings/assessments

Some companies even provide healthy living education, resources, and incentive tracking through an online “wellness portal.” In addition to helping you live a healthier lifestyle, a wellness program may offer financial benefits. Currently, employers are permitted to offer wellness incentives (e.g., premium discounts, cash rewards) to employees of up to 20% of the cost of their health-care premium. And beginning in 2014, under the 2010 Patient Protection and Affordable Care Act, employers will be able to increase the incentive amount to 30% of the cost of the employee’s premium.

Keep in mind that with certain types of wellness incentives, such as cash bonuses or gift certificates, the value of the reward may be treated as taxable wages and therefore may be subject to payroll taxes.

” DISCLAIMER: This newsletter is for informational purposes only and does not constitute a complete description of our investment advisory services or performance. This newsletter is neither a solicitation nor an offer to sell securities or investment advisory services except, where applicable, in states where we are registered or where an exemption or exclusion from such registration exists. Any information contained in this newsletter, whether stock quotes, charts, articles, or any other statement or statements regarding market or other financial information, is obtained from sources which we and our suppliers believe to be reliable. However, we do not warrant or guarantee the timeliness or accuracy of this information. Nothing in this newsletter should be interpreted to state or imply that past results are any indication of future performance. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION WRITTEN IN THIS OR ANY ‘LINKED’ ARTICLE

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2012