On Stock Market Volatility

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Putting it All into Perspective
By Sean G. Todd, Esq., M. Tax, CFP, CPA

The US stock market has taken investors on a bumpy ride in recent years. This volatility has tested investor discipline and prompted some doctors to question their commitment to equities. While no one knows the future, looking at the past may help you gain a better view of long-term market performance and put the recent market volatility in perspective.

Historical Performance

The historical distribution of US market returns since 1926 tells us that performance years are stacked in ascending order by return range. For example:

  • Market performance over the past two years has been extreme by historical standards. In 2008, US stocks experienced their second-worst calendar return in eighty-four years. Then, in 2009, stocks rebounded strongly to deliver a return in the top quartile of the historical distribution.
  • Over the long term, the market’s positive return years have outnumbered the negative return years. Since 1926, the market has experienced a positive return in almost three-quarters of the calendar years.
  • Not only are the positive years more numerous, there is a larger concentration of performance in the higher ranges of returns.
  • The sequence of calendar returns appears random, suggesting that accurately predicting future performance is a difficult task for any investor, physician or professional manager.

UPDATE: https://money.cnn.com/data/markets

Assessment

Over time, the market has rewarded investors who can bear the risk of stocks and stay committed through various periods of performance. And, professional counsel and advice goes a long way in helping you develop, implement and maintain your strategy.

Conclusion

The recent extreme market volatility has challenged many physician investors to rethink their investment strategy or to prompt them to initiate an investment strategy. And so, your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, be sure to subscribe. It is fast, free and secure.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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Are We in a Bond Market Bubble?

Beware all Physicians and Investors

By Sean G. Todd, Esq., M. Tax, CFP, CPA

Investors have been pouring money into bonds. The Investment Company Institute statistics show that since January 2007, average net new money going into bond mutual funds each month has been roughly four times greater than net outflows from equity funds.* So does that mean we’re in the bond market’s equivalent of the late-1990s tech bubble?

What’s been driving interest in bonds?

There are several reasons why bond funds have been attracting investor interest.

First, in the wake of both the tech crash of 2000-2002 and the 2008 financial crisis, the Federal Reserve felt it needed to make credit more available by lowering interest rates. Over the last 10 years, the yield on the 10-year Treasury bond has fallen from 5% to well under 3% at the end of 2010.

And for the first time ever, 5-year Treasury Inflation-Protected Securities (TIPS) actually paid a negative yield when they were auctioned last October.

Because bond prices rise as interest rates fall, that has increased bond prices generally.

As a result, bonds have outperformed stocks in recent years. For the last 20-year period, total returns from stocks and bonds have been equal: 8.2%.

And during the decade between January 2000 and the end of 2009, bonds actually outperformed stocks; the S&P 500 saw a total return of -0.9%, while long-term government bonds returned 7.7%.

That outperformance has lured investors who may have forgotten that past performance doesn’t guarantee future results, and invest in an asset class based on its recent history rather than its prospects for the future.

The Demographics

Next, demographics also have played a role. Many aging baby boomers who became accustomed to investing much of their IRAs and 401(k)s in stocks are beginning to realize that their time horizon for retirement isn’t as long as it used to be, and that they should consider allocating an increasing percentage of their retirement portfolios to income-producing assets. The financial crisis also sent many frightened investors scurrying to put their money anywhere besides stocks.

Finally, diminished dividends from stocks have encouraged many investors to look elsewhere for income. During the tech boom, companies preferred to reinvest in growth or buy back stock rather than increase dividends, and according to Standard and Poor’s, 2009 was the worst year on record for dividend payments.

Though there has been some reversal of that trend in recent months, stingy dividends helped make bonds and their income more attractive.

What to Watch out For

No investing trend lasts forever without interruption. Here are some factors that could affect bond prices:

  • Signs that inflation is picking up: Higher inflation means fixed income payments will have less purchasing power in the future, diminishing bonds’ appeal as income vehicles.
  • Fed reversal on interest rates: As the economy recovers, the Federal Reserve will need to withdraw the support it has given the bond markets. As it gradually rachets up interest rates, bonds will begin to reverse their pattern of the last decade. Depending on the pace of the Fed action, that reversal could be swift. Rising interest rates typically mean falling bond prices, and longer-term bonds often feel the most impact because bond buyers are reluctant to tie up their money long-term if a better rate lies ahead.
  • Lack of overseas interest in U.S. debt: Foreign buyers have been large purchasers of U.S. government debt. If foreign buyers show signs of turning away from U.S. debt, it could send shivers through the bond markets.
  • Muni bond troubles: Some experts worry that defaults by cash-strapped state and local governments could become a problem.

Assessment

However, balance those factors against the possibility of further sovereign debt problems abroad. Several European nations are still struggling to deal with their debt problems; another bout of global jitters like the one in spring 2009 could remind investors that the United States has never defaulted on its debt. Also, if the potential for deflation that the Fed is so concerned about turns into an actual decline in wages and prices, that could be a positive for bonds, since the income they pay would be more valuable as prices fall. Either way, now is an especially good time to keep an eye on your bond investments.

Source: Average of monthly net new cash flows from January 2007 through September 2010 as reported in Investment Company Institute’s “Long-Term Mutual Fund Flows Historical Data” as of Nov. 20, 2010.

Source: U.S. Treasury historical data on daily Treasury yield curve rates.

Source: “Record Setting Auction Data,” http://www.treasurydirect.gov.

Conclusion

And so, your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com and http://www.springerpub.com/Search/marcinko

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Healthcare Organizations: www.HealthcareFinancials.com

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Legal Strategies for Doctors Sheltering Employment Income

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Strategies for Medical Professionals to Consider in 2011

[By Sean G. Todd Esq, CPA, CFP®]

Thomas Stanley, author of “The Millionaire Next Door” (1996), revealed according to his findings at the time, two-thirds of millionaires in the U.S. were self-employed or small-business owners.  Also noted was the fact that even more people work for external companies and run small home-based businesses on the side. You need to spot the correlation – the tax code is written for the small business owner as there are massive tax-planning opportunities that are not subject to the standard income limitations.

Tax Reduction Opportunities

Perhaps one of the greatest tax-reduction opportunities is the use of small business retirement plans! Under current laws, the IRS typically does not include money contributed to these plans in the profits of a business owner or self-employed individual. If an affluent taxpayer can delay excessive spending until retirement, current taxation on those funds can be avoided.

In applying the right planning, additional income can be sheltered by maximizing the use of small business healthcare plans and employee benefits plans is another option. When our clients utilize health savings accounts, health reimbursement arrangements and Section 125 plans, expenses that would have been above the deduction thresholds for individual taxpayers can be paid on a pretax basis through the business.

Putting the Kids to Work

Another legal income sheltering strategy that we counsel our investment advisory clients on is to put offspring on the payroll of a business. We require them to work – which is not a bad thing in the least. Doing so provides two major benefits: FICA and federal unemployment taxes may not need to be paid if the child is a minor, and the child may be able to contribute to a Roth IRA out of earned income. Employing a spouse garners similar results. As an aside, we always try to be clear on “Who is the boss” in these situations. When utilizing the employment strategy, one must account for the annual cap on the amount of FICA an individual must pay, one spouse can be compensated substantially higher than the limit. Doing so may mean that one spouse pays less into the Social Security system, but it also gives a couple the opportunity to invest privately instead of putting it in the hands of the Social Security system. We and our clients prefer this strategy.

Legal Strategies for Sheltering Investment Income

We are a big user of technology in our advisory practice with allows our clients to utilize another underutilized tax reduction technique commonly missed by stockbrokers which is “tax lot matching”. This technique allows our clients to specify which shares of a stock or mutual fund he or she is selling, as opposed to the default IRS method of first in, first out (FIFO). Tax lot matching can provide huge savings when shares of a stock that show little gain, or even a loss, are sold instead of shares from long-term investments that show substantial gains.

Our affluent investors like doctors, with children, have utilized additional opportunities to shelter investment income and gains from the IRS. We utilize an account which provides a unique tax savings opportunity. When our client parent owns highly appreciated shares of stock, we “gift” the stock to a child and have the child sell it and then report a portion of the profits on the child’s substantially lower tax bracket. This type of planning requires knowledge of income taxes, estate tax laws and legal issues — all of which we confidently provide to our clients.

Section 529 Plans

We have counseled our affluent parents and grandparents of a unique opportunity to use Section 529 plans to shift money out of their estates and shield the growth of substantial amounts from future income taxes, if used for the college expenses of any family member. Under the Internal Revenue Code, any donor can gift up to five times their annual gift exclusion limit into a Section 529 account for a child, as long as multiple gifts to the same person aren’t given in the five years following. With the top estate tax bracket exceeding 50%, this can equal an estate tax savings of more than $25,000 for every $50,000 gift.

Charitable Works

Last but not least, we advise our affluent investors who have a charitable streak to avoid donating cash as much as possible. The IRS allows investors to donate substantially appreciated securities to nonprofit organizations and take a charitable deduction for the full amount. This saves investors the trouble of having to sell the assets themselves, pay tax on the gain and give smaller donations to the charity. In short, donate the stock and keep the cash.

“Grey Area” Strategies to Avoid

As mentioned before, the IRS has no problem with affluent investors avoiding as much taxation as legally allowable. Still, no article about affluent tax-planning strategies would be complete without a warning about the practices that can land you in hot water and wearing the orange jumpsuit. Even though you may overhear people bragging about these strategies at cocktails parties, be forewarned – they can lead to fines and even jail time.

Offshore Trusts

The most popular of the abusive tax strategies that receives heavy IRS prosecution is offshore asset trusts. While it may sound very tax savvy and sophisticated to have a Swiss or Cayman Islands bank account, these accounts are illegal when used to avoid U.S. income taxes. Additionally, the various post-9/11 regulations put strict limits on how much money can be transferred offshore and for what purposes. If someone recommends that you use one of these trusts, you’ll want to get second and third opinions from independent tax professionals.

Non-Arm’s-Length Transactions

The IRS also frowns on affluent investors conducting “non-arm’s-length” transactions to avoid taxation. These are tax planning strategies often done by “do-it-yourself” individuals. In short, all transactions among related parties should be conducted as if they were made between complete strangers. For example, parents who sell appreciated real estate to their children for half of the market value (to avoid paying tax on the gain) would not likely do this with a complete stranger. Affluent tax strategies that are not done in an arm’s-length fashion are subject to IRS action.

FLPs

Family Limited Partnerships (FLP) have become a popular way of attempting to transfer assets to the next generation, with the parents both retaining control of the assets and avoiding gift tax rules. While there are instances where such partnerships can be properly structured, they are abused enough to garner heavy scrutiny from the IRS. Utilizing a FLP can provide many income and estate tax advantages. Properly implementing and using a FLP requires proper professional counsel and advice. We strongly discourage anyone from trying to “do-it-yourself” with this level of tax planning.

Financial Planning

Developing and implementing an effective tax strategy is a key component to a successful financial plan. An effective tax strategy does not put out of the realm of possibility the fact that someone making hundreds of thousands of dollars to pay close to the same amount of taxes, as someone earning just a fraction of that. The key is to be deliberate and strategic about employing legal affluent tax planning strategies well in advance of your tax-filing deadline. Doing so will ensure that you and your family members, not the IRS, are the ultimate beneficiaries of your hard work.

Assessment 

What is one of the greatest tax-planning opportunities to come along in decades? We utilize this strategy everyday with our clients. Sadly, many affluent investors are not permitted to use them because their adjusted gross incomes are too high. What is the opportunity? In the alternative, our clients fund a non-deductible traditional IRA. While these IRAs don’t provide upfront deductions or tax-free withdrawals, the earnings can still accumulate on a tax-deferred basis over the long-term. How can all this help you financially?  You are seeing exactly why a solid investment plan needs to take into account tax planning.  Implementing tax strategies are guaranteed wins for our clients.  What is your tax strategy?

Here is the level of confidence we have in our ability to develop a beneficial strategy for you.  Take advantage of our offer to meet with you confidentially without cost or obligation.  Based on our meeting and a review of your strategy, we will put in writing the opportunities available to you.  After receiving this written strategy, you get to decide how best to implement the same.  Our strategy relies on competence in trusts and estates, income taxes and financial instruments and capitalizes on the ability to integrate each of these disciplines.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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Tax Strategies for Retiring Medical Professionals

Some Valuable Tips for 2011

By Sean G. Todd, Esq., M. Tax, CFP©, CPA 

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We need to start this ME-P with the famous quote made by Benjamin Franklin almost 300 years ago and yet still rings true: 

Nothing in life is certain except death and taxes.”

I believe physicians and all individuals better be formulating a tax-efficient investment and distribution strategy. Here is why: as a physician retiree or planning-to-be retired, with an effective tax strategy, you will keep more of your hard-earned assets for yourself and your heirs. Here are a few items for consideration which just might help with your money management during your later years.

The General “Rules”

1.  Utilize Tax Efficient Investments

Municipal bonds or “munis” have long been appreciated by retirees seeking a haven from taxes and stock market volatility. In general, the interest paid on municipal bonds is exempt from federal taxes and sometimes state and local taxes as well. The higher your tax bracket, the more you may benefit from investing in munis. This is not the “silver bullet” to retirement income planning. Yet, we see unknowing investors being exposed to a significant downside risk which could result in significant losses of their assets.

2.  Utilize Tax Efficient Mutual Funds/Index Funds

A more acceptable point is that all mutual funds are not created equal. A prudent move might be to reallocate part of your portfolio to start investing in tax-managed mutual funds. Managers of these funds pursue tax efficiency by employing a number of strategies. For instance, they might limit the number of times they trade investments within a fund or sell securities at a loss to offset portfolio gains. Equity index funds may be even more tax-efficient than actively managed stock funds – having the ability to identify which index fund(s) are being more tax efficient is where we come in.

It’s also important to review which types of securities are held in taxable versus tax-deferred accounts. Why? Because in 2003, Congress reduced the maximum federal tax rate on some dividend-producing investments and long-term capital gains to 15%. In light of these changes, many financial experts recommend keeping real estate investment trusts (REITs), high-yield bonds, and high-turnover stock mutual funds in tax-deferred accounts. Low-turnover stock funds, municipal bonds, and growth or value stocks may be more appropriate for taxable accounts.

A Comparison Chart

Just for ease of comparison on a pure return basis, I thought the following chart would make a great reference.  Would a tax-free bond be a better investment for you than a taxable bond? Compare the yields to see. For instance, if you were in the 25% federal tax bracket, a taxable bond would need to earn a yield of 6.67% to equal a 5% tax-exempt municipal bond yield.

Federal Tax Rate 15% 25% 28% 33% 35%
Tax-Exempt Rate Taxable-Equivalent Yield
4% 4.71% 5.33% 5.56% 5.97% 6.15%
5% 5.88% 6.67% 6.94% 7.46% 7.69%
6% 7.06% 8% 8.33% 8.96% 9.23%
7% 8.24% 9.33% 9.72% 10.45% 10.77%
8% 9.41% 10.67% 11.11% 11.94% 12.31%

*The yields shown above are for illustrative purposes only and are not intended to reflect the actual yields of any investment. 

3.  A question we get frequently: Which Security to Tap First?

A successful retirement plan is largely based on a sustainable income stream. This type of financial planning requires a specific set of skills. To facilitate a consistent income stream, another major decision is when to liquidate various types of assets.  The advantage of holding on to tax-deferred investments is that they compound on a before-tax basis and therefore have a greater earning potential than their taxable counterparts.

Consideration must also be given to making qualified withdrawals from tax-deferred investments which are taxed at ordinary federal income tax rates up to 35%, while distribution, in the form of capital gains or dividends, from investment in taxable accounts are taxed at a maximum 15% [Capital gains on investments held for less than one year are taxed at regular income tax rates].

This reason makes it beneficial to hold securities in taxable accounts long enough to qualify for the 15% rate.  When the focus is on estate planning, long term capital gains are more attractive because the beneficiary will receive a step-up in basis on appreciated assets inherited at death.
Another consideration when developing the sustainable retirement income plan is the timeframe for tapping into tax-deferred accounts.  Keep in mind, the deadline for taking required annual minimum distributions (RMDs) and have you taken into account the possible impact of the proposed tax law changes on your retirement income distribution plan?

4.  The Ins and Outs of RMDs

The IRS mandates that you begin taking an annual RMD from traditional IRAs and employer-sponsored retirement plans after you reach age 70 1/2. The premise behind the RMD rule is simple — the longer you are expected to live, the less the IRS requires you to withdraw (and pay taxes on) each year. RMDs are now based on a uniform table, which takes into consideration the participant’s and beneficiary’s lifetimes, based on the participant’s age. Failure to take the RMD can result in a tax penalty equal to 50% of the required amount.

Inside Tip: Why you should not wait until you retire to develop a sustainable retirement income plan: If you’ll be pushed into a higher tax bracket at age 70 1/2 due to the RMD rule, it may pay to begin taking withdrawals during your sixties. Unlike traditional IRAs, Roth IRAs do not require you to begin taking distributions by age 70 1/2. In fact, you’re never required to take distributions from your Roth IRA, and qualified withdrawals are tax free. For this reason, you may wish to liquidate investments in a Roth IRA after you’ve exhausted other sources of income. Be aware, however, that your beneficiaries will be required to take RMDs after your death. 

Estate Planning and Gifting

Attaining proper investment counsel and advice has to answer the question—-“What happens when I die?”  Many strategies can be implemented by clients to address the various ways to make the tax payments on your assets easier for your heirs to handle. Who is the proper beneficiary of your money accounts?  If you do not name a beneficiary, your assets could end up in probate, and your beneficiaries could be taking distributions faster than they expected.

In most cases spousal beneficiaries are ideal, because they have several options that aren’t available to other beneficiaries, including the marital deduction for the federal estate tax, and the ability to transfer plan assets — in most cases — into a rollover IRA.

Also consider transferring assets into an irrevocable trust if you’re close to the threshold for owing estate taxes based on the sunset provisions.  Best estate tax avoidance plan today – die in 2010 as there is no limit on the amount you can pass to the next generation estate tax free.  Assets in this type of arrangement are passed on free of estate taxes, saving heirs tens of thousands of dollars.

Inside Tip: If you plan on moving assets from tax-deferred accounts do so before you reach age 70 1/2, when RMDs must begin.

Finally, if you have a taxable estate, you can give up to $13,000 per individual ($26,000 per married couple) each year to anyone tax free.  If you need my contact information, please let me know.  Also, consider making gifts to children over age 14 as dividends may be taxed — or gains tapped — at much lower tax rates than those that apply to adults.

Inside Tip: You may want to consider a transfer of appreciated securities to custodial accounts (UTMAs and UGMAs) to help save for a grandchild’s higher education expenses.

Market Focus

As individuals, especially doctors living in mini-mansions, come to grips with not being able to sell their homes for a value they once thought possible, we are apt to suggest that we might see increased activity in the home improvements sector as individuals just decide to make the upgrade to their existing home while they wait this whole real estate mess out. 

How can all this help you financially?  You are seeing exactly why you cannot base your investment decisions on the latest headline or try to time the market  Single and doubles in the investment world will score more runs than trying to to hit a home run (timing the market). What is your singles and doubles strategy? 

Summary

  • Formulating a tax-efficient investment and distribution strategy may allow you to keep more assets for you and your heirs.
  • Consider tax-efficient investments, such as municipal bonds and index funds, to help reduce exposure to taxes.  It’s what you keep that counts.
  • Tax-deferred investments compound on a before-tax basis and therefore have greater earning potential than their taxable counterparts. However, qualified withdrawals from tax-deferred investments are taxed at income tax rates up to 35%, whereas distributions from taxable investments held for more than 12 months are taxed at a maximum 15%.
  • You must begin taking an annual amount of money (known as a required minimum distribution) from some tax-deferred accounts after you reach age 70 1/2.
  • Review how your assets fit into a comprehensive estate plan to make the most of your money while you’re alive and to maximize the amount you’ll pass along to your heirs.
  • Before selling appreciated investment assets, be sure that you have owned them for at least one year. That way, you’ll qualify for lower capital gains taxes.
  • If you’re considering placing assets in a trust or custodial account, think carefully about which assets would be most appropriate to transfer.
  • Schedule a meeting with a financial professional to review your tax management strategies.
  • Remember to begin taking required minimum distributions from traditional IRAs and employer-sponsored retirement accounts after you reach age 70 1/2 in order to avoid costly penalties.

Conclusion

And so, your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

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Healthcare Organizations: www.HealthcareFinancials.com

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On the Current Domestic Economic Headwinds

About Consumer Confidence in October 2010

By Sean G. Todd, Esq., M. Tax, CFP©, CPA

Physicians and all consumers are feeling less confident the longer our economy continues to recover slowly; in fact it is at the lowest level in 7 months [47.5]. Just so you understand the significance of this low number:  a reading of 100 or greater would indicate strong growth; and the index has not reached that level since mid 2007.  

Index Critical

Why is this index critical? Well, two-thirds of the U.S. economy is dependant upon consumer spending.  As confidence falls so to will spending and so to will any sustained economic recovery. Contributing factors include sustained high unemployment and unfavorable business conditions. Few believe any improvement in economic growth is likely to happen in the coming months.  A surprising statistic is that in September, the number of consumers calling business conditions “bad” outweighed those saying conditions are “good” by nearly 6 to 1.  Consumers appear to be waiting on sustained job growth which is not being reported in any sector. 

Questioning the Headwind

Here is why I questioned whether this is really a headwind.  Take a second to digest these one month percentage gains:  37.6%; 33.1%; 28.5%; 27.6% and 25.6%.  Can you think of the companies posting such returns?  Here they are: Carmax, Office Depot, J.C. Penny, Nordstrom and Best Buy, respectively.  Dumbfounded? Carmax is the best performing stock in the S&P500 index this month – not a gold stock or tech company. Carmax sells used cars.  This is sharp contrast to the index number being reported above. I think it is interesting that Costco is not one of the companies named. The index appears to be nothing but a number so should we actually be tracking what consumers do and not how they answer some survey which is the basis for the index number. Or this could just be another case of pent up demand?  The savings rate has risen during this downturn and credit card usage is also down – so some consumers might again feel comfortable making the new purchase commitment after spending the past year being a non-consumer.  

Of course, other analysis may indicate that smaller retailers are not experiencing the same level of renewed activity and the economic outlook still looks grim. It seems it is not going to get a lot worse, just that it is not going to be getter better quick enough for most.

Home Sales

As doctors and most all individuals come to grips with not being able to sell their homes for a value they once thought possible, we are apt to suggest that we might see increased activity in the home improvements sector as individuals just decide to make the upgrade to their existing home while they wait this whole real estate mess out. 

Assessment  

How can all this help you financially?  You are seeing exactly why you cannot base your investment decisions on the latest headline or try to time the market.  Baseball singles and doubles in the investment world will score more runs than trying to hit a home run (timing the market). 

Conclusion

And so, your thoughts and comments on this ME-P are appreciated. So, what is your financial planning strategy for hitting singles and doubles? Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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Healthcare Organizations: www.HealthcareFinancials.com

Physician Advisors: www.CertifiedMedicalPlanner.com

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Tax Planning Strategies for Physicians in 2010-11

Ten Ways to Lower your Taxes

By Sean G. Todd, Esq., M. Tax, CFP®, CPA

1. Buy a home

You can take advantage of a buyer’s real estate market and buy a home at prices not seen for years. We are seeing prices discounted from 10-30%. First time buyers – doctors and other individuals – who haven’t owned a residence in the last three years – can claim up to the $8,000 tax credit. Current homeowners who’ve lived in their residence for five of the eight years before buying can get up to $6,500. Remember a tax credit is a dollar-for-dollar reduction in your tax liability. Taxpayers love tax credits. You must have a contract in place by April 30, 2010, and the deal closed by June 30th to qualify for this outstanding credit.

2. Avoid the Making Work Pay trap 

This is an accounting trick … timing. This tax break was designed to put more money in consumer hands quicker (by under-withholding), but if you work two jobs it may have a tax bite. If you work more than one medical job, check with a tax advisor, or the payroll department at your office to make sure your W-4 is filled out properly at each job.

3. Make a Roth Conversion

The $100,000 income limit has been eliminated in 2010. Now, anyone can now convert a traditional IRA to a Roth retirement account. But, review the numbers.  Everyone’s situation is unique and making the conversion may not be a smart financial decision. But, note that you will have to pay taxes on the previously untaxed amounts in your traditional IRA that you convert. The good news is you can choose to pay half the conversion costs on your 2011 taxes and the other half in 2012.  Beware, making the conversion might push you into the next tax bracket and could cause some deductions to be lost—so you have to run the numbers.

4. Gain tax benefits from improving your home’s energy efficiency

You might be eligible for more tax credits based on your improvements to the principal residence. Making such improvements might just make your home a bit more-cozy. Homeowners can claim up to 30 percent of the first $5,000 spent on qualifying residential energy upgrades, or up to $1,500 in tax credits. A solar home heating system can get you even bigger tax credits.  We are uncertain if these credits will be extended so if you need to make home repairs, consider energy-efficient upgrades now.

5. Buy a hybrid car now…but not just any hybrid

The hybrid credit is set to expire in 2010. The credit remains good only with manufacturers that have not sold 60,000 eligible cars. So shop carefully to make sure the hybrid you are looking at qualifies.  Be sure to get the salesman’s representation that this vehicle qualifies and the manufacturer has sold less than the above amount to qualify.

6. See an Estate Tax Professional

Right now–everyone is trying to figure this area out. Since Congress has really messed this area up by the lack of clarity and with our deficit spending, you can expect that money hungry legislators will want to reclaim more of your money they don’t deserve. Ask a licensed Tax Attorney or CPA to help you arrange your affairs to make sure you and your heirs do not give the IRS more than necessary.

7. You must take your Required Minimum Distributions for your retirement accounts

Many doctors utilize tax-deferred savings plans such as traditional IRAs or workplace 401(k)s or 403(b)s to save for retirement. Now, the IRS is again telling us you have to start taking money out of these accounts via required minimum distributions, or RMDs, once you turn 70 1/2.  You were given a reprieve in 2009 from taking RMDs.

8. Plan for rising income tax rates

By law, the Bush tax cuts expire at the end of 2010. Tax rates go up for higher income earners and the 10 percent rate is eliminated for lower earners. One can only speculate what Congress will do in the light of trillion dollar deficits, but keep an eye out and plan accordingly. Be proactive and not reactive. Do not be afraid to call your Senators and Congressperson and let them know how you feel about tax hikes.

9. Act now to take capital gains at lower rates

George W. Bush’s tax cuts included reductions in capital gains tax rates based on taxpayer adjusted gross income. Right now the highest rate is 15 percent for individuals in the 25 percent to 35 percent tax brackets.  Taxpayers in the 10 percent and 15 percent tax brackets pay no capital gains tax at all. Current law says this is scheduled to change in 2011.The top rate will return to 20 percent; the zero rate will revert to 10 percent. And with this administration and the party controlling Congress, this could get worse. Here is the wildcard: there is no guarantee they won’t make retroactive changes, either.

10. Watch out for health care changes

In light of the Massachusetts special election going to a Republican, health care changes could jump off the fast track; but nevertheless there could be ramifications for you tax wise if something does finally pass. Keep your eye on this and stay out from under the surgeon’s knife on this one!

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Assessment

There is nothing like a good tax advisor, and it pays to be as informed as possible.

Conclusion

And so, your thoughts and comments on this ME-P are appreciated. What was missed? Fee free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too! Then, be sure to subscribe to the ME-P. It is fast, free and secure.

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Physician Advisors: www.CertifiedMedicalPlanner.org

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Tax Credits and Home Improvements for 2009-10

Income Tax Reduction Strategies

By Sean G. Todd; Esq, CPA, MTax, CFP® Sean G. Todd

Let’s take a look at how all ME-P readers can directly reduce income taxes in 2009. The use of tax credits are a very effective way to reduce how much you pay the IRS. A tax credit is a dollar for dollar reduction in your tax liability. So, anyone doing home improvements? 

Tax Credits Available

We always have to follow the rules to make sure our expenditures qualify: 

1)  The home improvement must be placed in service from January 1, 2009 through December 31, 2010
2)  The improvement must be for taxpayer’s principal residence, except for geothermal heat pumps, solar water heaters, solar panels, and small wind energy systems (where second homes qualify)
3)  $1,500 is the maximum total amount that can be claimed for all products placed in service in 2009 & 2010 for most home improvements, except for geothermal heat pumps, solar water heaters, solar panels, fuel cells, and small wind energy systems which are not subject to this cap, and are in effect through 2016
4) You must have a Manufacturer’s Certification Statement to qualify
5)  Improvements made in 2009 will be claimed on your 2009 taxes (filed by April 15, 2010) — use IRS Tax Form 5695 (2009 version) — it will be available late 2009 or early 2010

Assessment

Note: Recording keeping: put your receipt with certification statements.

Conclusion

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And so, your thoughts and comments on this Medical Executive-Post are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, be sure to subscribe to the ME-P. It is fast, free and secure.

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com 

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Medical Risk Management: http://www.jbpub.com/catalog/9780763733421

Healthcare Organizations: www.HealthcareFinancials.com

Health Administration Terms: www.HealthDictionarySeries.com

Physician Advisors: www.CertifiedMedicalPlanner.com

Subscribe Now: Did you like this Medical Executive-Post, or find it helpful, interesting and informative? Want to get the latest ME-Ps delivered to your email box each morning? Just subscribe using the link below. You can unsubscribe at any time. Security is assured.

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Tax Efficient Investing

Friends and ME-P Readers,

By Sean G. Todd; Esq, M.Tax, CPA, CFP®

Summer is here for sure in Atlanta—90 degrees plus day after day. I’ve been enjoying the fresh sweet corn, a BLT and a large glass of sweet tea at dinner—now that is a fine meal. Why do I share this with you — because at mid-year, I think from time to time we have to step back from all that we are involved in, concerned with, and what we think is important to actually appreciate all that we have and not overlook the small things. Which brings me to the topic of this Medical Executive-Post and not overlooking the small things—like taxes. As a physician-investor, you have to keep an eye on the impact taxes have on your investment portfolio because it is what you keep after taxes that counts.

Of the Markets

During my last post—I indicated that I was not sure if the recent reprieve in the markets was sustainable. And, we did experience a mild reversal recently. But, did you know that doing nothing is actually doing something? I’m pretty certain that the past investment strategies are not going to work going forward and I share these with ME-P readers as to why I believe this is true; and how best to position your portfolio going forward. Other professionals agree—the rules have changed — have you changed anything? Let’s move on to the real reason you continue to read our posts: To be able to make the right long-term decision during these difficult times. In this post we need to focus on the importance of tax-efficient investing.  We are confident that you and your friends and colleagues whom you choose to share this ME-P will benefit from the information discussed, as well.

Why Tax Efficient Investing is Important

Physicians and all investors have experienced some turbulent times over the last 12 months and it appears more rough waters lie ahead. As a physician-investor, you are unable to control the markets but there are certainly things you can control and should. One of these is taxes. Given the level of government spending, additional tax revenues will be needed which equates to higher taxes. You cannot plan your taxes on April 15th but you have to implement a tax strategy plan during the year so you can capture the benefit on April 15th. With increased taxes on the horizon, tax-efficient investment is going to be more important than ever. Brokers or the 1-800 do-it-yourself brokerage firms are not licensed to give you tax advice, but CPAs and EAs, are. The old saying goes, “It’s not what you make, but what you keep after taxes that counts”. This statement will become even more important going forward.

Returns Lost to Taxes

Have you thought of the impact on your portfolio that taxes have on your investment returns? Good financial advisors should as these are still some of the most important decisions you face as an investor.

Take for example a physician-investor in the top tax bracket earned an average return of 15% on actively managed mutual funds in a taxable account from 1981 to 2001. After taxes, average return dwindled to roughly 12% – which means our investor lost an average of 2.4% in return to taxes (the numbers reflect a compound rate of return). Investment return lost to taxes don’t just affect mutual fund investors — you have to look at your entire holdings in your taxable accounts and how you manage your investments, because, investors in individual stocks and bonds are vulnerable too. Like I indicated, you do have a lot of control over your taxes and should actively control them given the significant impact on your total investment return. Something for consideration: Diversification and asset allocation are great tools for helping to reduce portfolio volatility, but we’re still going to be subject to the short-term whims of the market, no matter how diligent we might be in setting up our portfolios and selecting our individual investments. One of the areas that we have the greatest degree of control is the area of tax-efficient implementations. Doesn’t it make sense that where we can exercise the most control, we do so?

Tax-Efficient Investing is More Important than Ever

Work with me here. If we assume that over the next 20 years annual compound returns for the broad stock market average between 8% and 10%, and bonds average about half that, then average portfolio returns would be less than what we enjoyed over the last 20 years. What this actually means is that any return lost to taxes will be a much bigger deal. In other words, losing 2.4% per year to taxes may not have seemed like much if you were making 15-20% annual returns. But if you only expect to make 9% on your investments, keeping as much of that return as possible, can be vital to achieving your long-term goals. The real impact– 2.4% tax impact will cause you to lose 26% of your 9% gain. Thinking you got a 9% gain but your real after-tax gain is only 6.6%. This is a big annual difference and a significant compound difference.

The second reason tax efficiency is more important than ever is because of the changes to the tax rules in 2003. A notable provision: the 15% tax rate on qualified dividend income. Often a missed opportunity! Previously it might have made sense to hold dividend-paying stocks in a tax-deferred account such as an IRA instead of a taxable account. Either way, dividends were taxed at your ordinary income tax rate between 28% and 39.6% prior to 2001. The thought was the IRA offered tax-deferred potential growth.

Currently, qualified dividends in a taxable account are taxed at a maximum rate of 15%. Those save dividends would be taxed at the ordinary rate—currently as high as 35% when withdrawn from your tax-deferred account. As a result, the value of putting dividend-paying stocks in taxable accounts has grown significantly.

What Investments Go Where?

I need to speak in general terms here, investment that tend to lose less of their return to income taxes are good selections to go into taxable accounts. With that said the opposite should be true: Investments that lose more of their return to taxes could go into tax-deferred accounts. Here’s where tax-smart investors might want to place their investments.

Taxable Accounts Tax-Deferred accounts – Traditional IRAs, 401(k)s and deferred annuities
Ideally place…
Individual Stocks you plan to hold more than one year Individual stocks you plan to hold one year or less
Tax-managed stock funds, index funds, low turnover stock funds Actively managed funds that generate significant short-term capital gains
Stocks or mutual funds that pay qualified dividends Taxable bond funds, zero-coupon bonds, inflation protected bonds or high yield bond funds
Municipal bonds, I bonds Reits

DISCLOSURE: This assumes you hold investments in both types of accounts. A different set of rules would apply if you held all your investments in a taxable account or a tax-deferred account.

In general, holding tax-efficient investment in taxable account and less tax-efficient investment in tax-advantaged account should add value over time. It appears that the above serves as a simple set of guidelines to go by but there are additional considerations before making the above allocation.

Additional Considerations

Reallocation of your Portfolio

To maintain your strategic asset allocation will cause additional tax drag on return, to the extent you rebalance in taxable accounts. You may want to focus on your rebalancing efforts on your tax-advantaged accounts, including your taxable accounts only when necessary. Keep in mind, adding new money to underweighted asset classes in also a tax-efficient way to help keep your portfolio allocation in balance.

Active Trading

Active trading by individuals or by mutual funds, when successful tends to be less tax efficient and better suited for tax-advantaged accounts. A caveat: Realized losses in your tax-advantaged accounts cannot be recognized to offset realized gains on your tax return.

Liquidity Preference

If an investor wanted liquidity, then they might be holding bonds in their taxable accounts, even if it makes more sense to form a tax perspective to hold them in tax advantaged accounts. In other situations, it may be impractical to implement all of your portfolio’s fixed income allocation using taxable bonds in tax-advantaged accounts. If so, compare the after-tax return on taxable bonds to the tax-exempt return on municipal bonds to see which makes the most sense on an after-tax basis.

Estate Planning Issues

One cannot overlook the estate planning issues in deciding which account will hold a given type of investment. Also, what is the philanthropic intent of the doctor or investor? Stocks held in taxable accounts receive a step-up in cost basis at death (something heirs greatly appreciate) which is not the same for tax-advantaged accounts. Additionally, highly appreciated stocks held in taxable accounts more than a year might be well-suited for charitable giving.

Roth IRA

This type of account might just be an exception to all of the above. The rules are different when investors involve a Roth IRA. Since qualified distributions are tax free, assets you believe will have the greatest potential for higher return are best placed inside a Roth IRA, when possible.

Conclusion

And so, your thoughts and comments on this Medical Executive-Post are appreciated. Tell us what you think. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, be sure to subscribe to the ME-P. It is fast, free and secure.

Link: http://feeds.feedburner.com/HealthcareFinancialsthePostForcxos

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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Practice Management: http://www.springerpub.com/prod.aspx?prod_id=23759

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Medical Risk Management: http://www.jbpub.com/catalog/9780763733421

Healthcare Organizations: www.HealthcareFinancials.com

Health Administration Terms: www.HealthDictionarySeries.com

Physician Advisors: www.CertifiedMedicalPlanner.com

Subscribe Now: Did you like this Medical Executive-Post, or find it helpful, interesting and informative? Want to get the latest ME-Ps delivered to your email box each morning? Just subscribe using the link below. You can unsubscribe at any time. Security is assured.

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Sponsors Welcomed

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Tax Tips for Under or Unemployed Medical Professionals

Status Still Possible for Physicians and Nurses

By Sean G. Todd, Esq., M. Tax, CFP©, CPA

Tax Attorney

Certified Public Accountant
Certified Financial Planner™ practitioner

Terminated, reduced-in-force, or out of work in 2009? As the April 15th tax deadline approaches, medical professionals and all other under/unemployed folks might have questions regarding their tax returns – unchartered waters for many. More people than ever before may be experiencing the effects of losing their jobs for the first time, or receiving unemployment benefits, and are uncertain about the tax consequences that relate to all this. So, in these difficult times, give some consideration to working with a professional to help you make the right decisions.   

Labor Department Reports

The US Labor Department report issued on February 6, 2009 showed that nearly 2.6 million jobs were lost over the course of 2008, the highest yearly job loss total since 1945. The official unemployment rate is at 7.2%, a 16 year high, according to the labor department. For your assistance, I’ve prepared some of the most common questions along with the answers. Here are several questions and answers to help you through this stressful time.

1. Do I have to still pay my taxes if I was out of work in 2008?

More likely than not! The IRS requires anyone who received a W-2 from their employer and made at least $8,950 (if you’re single and under 65 years old), or made at least $400 if you’re self employed, to file a tax return. These are the baseline cutoff numbers. If you’re anticipating a tax refund, you must file – even if you didn’t work at all. The IRS will not just send you a refund – you must file and claim your refund. Despite being unemployed, you still are required to file your taxes – often times a new level of frustration begins during this already confusing and frustrating time.    

2. Will I have a tax liability? 

It depends. It depends on a variety of factors since every taxpayer’s tax situation is unique, based on the facts and circumstances of the taxpayer. Some factors may impact a person’s filing requirement such as: if you only had unemployment compensation throughout the year, you may owe some tax on the checks you received. A severance package could also give you a tax bill, as could dividends and interest from investment income. Other factors which also need to be considered would include tax deductions and other life changes as a result of being unemployed: out-of-pocket medical expenses; sale of your home as a result of downsizing or even independent contractor income you might have received.

3. Do I have to include my unemployment checks in taxable income?

In a word, yes. Unemployment compensation is included as taxable income for federal purposes and most state tax returns. When applying for unemployment, we recommend that you elect tax withholding. You can choose whether you want federal and/or state income taxes automatically taken out of your unemployment benefits. If you choose to withhold, federal income taxes are withheld at a 10% rate, while the state rate varies. But since many cash-strapped Americans opt not to withhold – come April they may have to pay up during an already stressful time when extra cash is often times not available. So if you are not electing any tax withholding, a tax bill may be an unwelcome surprise when you file your 2008 return.

4. What if I “took” money from my 401(k)?

The answer depends on the definition of “took”. If you took a loan from your 401(k), exclude this from taxable income. You may owe taxes if you took money out of a retirement plan or 401(k) to supplement your unemployment checks. That counts as income and is taxable too. The taxes are in addition to a 10% penalty on early withdrawals if you’re below the age of 59-1/2. A special election is available to many taxpayers to avoid this 10% penalty on early withdrawals which many do not know about – costing even more in taxes. 

5. What if I did some supplemental work as an independent contractor?

In the attempt to continue to earn an income after being unemployed, you might have done some freelance or project work. Being unemployed allowed you the flexibility to become self-employed. That is the positive side of things – you earned income. Here is the negative side: if you earned some income doing odd jobs or consulting services while unemployed, you’re subject to income tax AND self-employment tax on that income. To report that supplemental work, taxpayers must include a Schedule C with their income tax return, which details the income and expenses for the year. This is where we see a lot of errors – individuals do not prepare schedule C for this type of earnings. If you earned over $30,000 and are now unemployed – you may go to www.lostmyjobtaxprep.com for an exclusive offer.  If you earned more than $600 during one of the projects, expect to receive tax form 1099 and you must include that as taxable income on your income tax return. Also note that if you made less than $600, then you will not be issued a 1099 but are still required to report this income as well on your tax return.

6. Relocated for the new job?

If the new job required you to relocate for the position, you may be able to deduct the moving expenses not reimbursed by your new employer. But there’s a distance test you must meet to qualify for the deduction. The new job site has to be 50 miles further than the distance from your old residence was from the old job, according to Tom Ochsenschlager, vice president of taxation for the American Institute of Certified Public Accountants [AICPA]. This basically prevents you from trying to deduct a move within the same metropolitan area.

7. Are my job search expenses deductible?

Those who were on the job hunt last year can utilize the tax code to their benefit and qualify for a larger refund. There are a slew of tax deductions available. In fact, many of the expenses incurred while looking for a job can be deducted, which can result in some serious tax savings.

Tax Checklists

As readers and subscribers to the Medical Executive-Post are aware, there is a quality initiative in clinical medicine that promotes the use of checklists. So, here is a good, but partial list of those things you need to keep track of:

  • Anything you spend on creating, printing and mailing your resume is deductible.
  • Anything you spend on a career coach or headhunter.
    Any long distance, cell or fax charges directly associated with your job search.
  • Transportation costs such as a bus, taxi, train or plane to an interview is deductible.
  • Mileage costs accrued when you drive to interviews and even to the unemployment office. [Between Jan. 1, 2008, and June 30, 2008, taxpayers can claim 50.5 cents per mile, between July 1, 2008 and Dec. 31 2008 taxpayers can claim 58.5 cents per mile].
  • All job related parking fees and tolls; and,
  • All meals and lodging if the interview was out of town.

Link: https://healthcarefinancials.wordpress.com/2009/01/20/a-homer-simpson-moment-of-clarity-on-medical-quality

Further Explanations

You cannot deduct the cost of the “new interview suit” as it does not qualify as a uniform. Also forget about deducting the value of your time as the IRS deems it to be worthless for tax deduction purposes. So too, forget about deducting your new Coach “briefcase” and matching “interview” shoes – they too are disallowed.  It’s the responsibility of each taxpayer to keep receipts related to any of these expenses in order to substantiate them when filing. In a self-serving interest, we always recommend consulting a professional tax preparer for help.  

Two New Websites

There are two websites especially beneficial for individuals who have lost their jobs and are concerned about protecting their 401(k) account. Individuals who are still employed can benefit from the information provided on the site as well.

Conclusion

And so, your thoughts and comments on this Medical Executive-Post are appreciated.

Speaker:If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com 

Our Other Print Books and Related Information Sources:

Practice Management: http://www.springerpub.com/prod.aspx?prod_id=23759

Physician Financial Planning: http://www.jbpub.com/catalog/0763745790

Medical Risk Management: http://www.jbpub.com/catalog/9780763733421

Physician Advisors: www.CertifiedMedicalPlanner.com

Subscribe Now: Did you like this Medical Executive-Post, or find it helpful, interesting and informative? Want to get the latest ME-Ps delivered to your email box each morning? Just subscribe using the link below. You can unsubscribe at any time. Security is assured.

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