Faith Based Investing

We are now in plain view of the “fiscal cliff”. After the election, Congress may or may not end up keeping income and estate tax rates at their recent levels. Next year may bring some notable financial developments, and it isn’t too soon for households to think about them.

You may want to prioritize tax reduction. If the Bush-era tax cuts sunset, everyone will see higher taxes. The federal income tax brackets (10%, 15%, 25%, 28%, 33%, 35%) that we have known for the last nine years would be replaced by five higher ones (15%, 28%, 31%, 36%, 39.6%) come 2013.

High earners may want to watch their incomes. If your earned income for 2013 tops $200,000 – or exceeds $250,000, in the case of a couple – you may face two Medicare surtaxes. While the Medicare payroll tax on earned incomes above these levels is set to rise to 2.35% from the current 1.45%, the second surtax may prove to be the real annoyance: there is scheduled to be a 3.8% charge on net investment income for individuals and couples whose modified adjusted gross incomes surpass these levels.

Some fine points about this second surtax must be mentioned. It would actually be levied on the lesser of two amounts – either your net investment income or excess MAGI above the $200,000/$250,000 levels. Most investment income derived from material participation in a business activity would be exempt from the 3.8% surtax, along with tax-exempt interest income, tax-exempt gains realized from selling your home, retirement plan distributions and income that would already be subject to self-employed Social Security tax.

The bottom line is that a bonus, an IRA distribution, or a sizable capital gain may push your earned income above these thresholds – and it will be wise to consider the impact that would have.

You may have less take-home pay next year. Social Security taxes for paycheck employees are slated to return to the 6.2% level in 2013. They’ve been at 4.2% since the start of 2011. If you earn $75,000 during 2013, you will take home about $1,500 less of it than you would have in 2012. If you earn $50,000, we’re talking $1,000 less.

Any 2013 Social Security COLA may be minor. In 2012, the cost of living adjustment to Social Security benefits was 3.6%. Before that, Social Security recipients went three years without a COLA. As inflation is mild, whatever COLA is announced this fall in tandem with Medicare premium changes may not amount to much.

Next year, medical expense deductions may shrink. If you are thinking about delaying a procedure or surgery until 2013, remember that the itemized deduction threshold for unreimbursed medical expenses is set to increase from 7.5% to 10% of adjusted gross income in 2013. Even if that happens, however, the threshold will remain at 7.5% through 2016 for taxpayers age 65 and older.

You may be able to find a better Medicare Advantage plan for 2013. The Affordable Care Act has altered the landscape for these plans (and their prescription drug coverage). Using Medicare’s Plan Finder (click on the “Find health & drug plans” link at Medicare.gov), you may discover similar or better coverage at lower premiums. The enrollment period for 2013 coverage runs from October 15 to December 7.

Those without work may find a safety net gone. Extended jobless benefits may disappear for the long-term unemployed at the start of 2013. Will Congress extend them once again? Possibly – but that isn’t a given.

The estate & gift tax exemptions may shrink significantly. The (unified) lifetime federal gift and estate tax exemption is currently set at $5.12 million – and it will drop to $1 million in 2013 if Congress stands pat. Federal gift tax and estate tax rates are also slated to max out at 55% in 2013, as opposed to 35% in 2012. Right now, an unused portion of a $5.12 million lifetime exemption is portable to a surviving spouse; in 2013, that portability is supposed to disappear.

Many analysts and economists think that Congress will eventually abide by President Obama’s wishes and take things back to 2009 instead of 2001 – that is, a $3.5 million estate tax exemption, a $1 million lifetime gift tax exemption, and a 45% maximum estate and gift tax rate.

Prepare for year-end drama … and for 2013. The last two months of 2012 will surely bring political theatre to Capitol Hill. As it unfolds, you may want to look ahead to next year and consider the impact that these potential changes could have on your financial life.

Need a second opinion on your financial strategy? Give us a call at 866-594-9919 for a FREE 30 minute review.

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

What do you do when you’re self-employed or commission-reliant?

When your income stream is uneven, you must deal with some distinct financial issues. Besides cash flow, what do you do about your tax strategy? How should you try to save? If you are self-employed, what about health coverage?

Budgeting. One significant financial detail in your life probably won’t fluctuate – the amount of money that you need to live on per month. A detailed monthly budget is essential. Maybe you need (or want) to pay for 17 expenses in your life per month. In some months, you may be able to easily pay for all 17. In other months, you may be able to pay for only 12. The key is to list them in order of priority, from the crucial to the near-frivolous. List every expense you can think of and rank them in order. Arranging automated bill paying may be useful if you are looking at several fixed monthly debts you will have for the long run.

Managing taxes. Sans withholding, you must be disciplined. If you are self-employed and your income is predictable, you can estimate taxes and arrange quarterly payments to the IRS (take a look at Form 1040-ES, Estimated Tax for Individuals.) For the record, the IRS says you don’t have to make quarterly tax payments until you actually have the corresponding income.

Estimating tax becomes much tougher, however, when your income stream is inconsistent or if you have multiple income streams. If you underestimate your quarterly payments, you must pay interest. Schedule AI of Form 2210 (found in IRS Publication 505) can be a great help here – as complex as it appears, it is a solid way to document and calculate estimated quarterly payments when your income fluctuates. (If you are a self-employed fisherman or farmer, special rules apply.)

Legions of freelancers neglect to set money aside for taxes. It might be wise to set up a savings account dedicated to that purpose, so you don’t have hassles come April.

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Sizing up stocks

The plans of the diligent lead to profit as surely as haste leads to poverty. —Proverbs 21:5 NIV

My youngest son Jack loves to eat, period! Not an hour goes by after a meal before he’s saying, “I’m hungry! Can I have a snack?” He’s got a love for food and he eats lots of it. Good thing he’s quite active and can work off all those calories. My oldest son, Cameron, is quite the opposite.

Cameron carefully stalks the dinner table, sizing up his quarry and looking for the best tastes. It’s not a quantity thing with him; it’s all about the taste. He’s the sneaky one Mom has to watch. Cookies stand no chance. If she’s not looking, those cookies become easy, helpless gooey prey. Cakes mysteriously end up with patches of icing gone, vanished with no explanation or trace of who did it. We all know who did it, though! Like- wise, investors are also always on the prowl for tasty treats.

While stock appreciation is by far the most sought-after treat, a company paying a regular dividend can be icing on the cake. However, just as with any investment, there are many things you should consider.

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Is SS Income Tax Free?

Many new retirees assume that Social Security income is tax-free. That is not always the case. The Social Security Amendments of 1983 opened the door to taxes on some SSI, depending on the amount of income someone earns in a calendar year.

How much of your SSI is potentially taxable? As much as 85% of it, under certain conditions. Four factors determine how much of your SSI will be taxed:

• The total amount of income that you earn.
• Where it comes from.
• Your taxpayer filing status.
• Your provisional income – a MAGI calculation which you can figure out by using Worksheet 34-1 in IRS Publication 915 or the Social Security Benefits Worksheet in the instruction booklets for IRS Form 1040 and Form 1040A.

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YOUR ANNUAL FINANCIAL TO-DO LIST

Things you can do before and for the New Year.  Your list may be long, but get started today!

The end of the year is a good time to review your personal finances. What are your financial, business or life priorities for 2012? Try to specify the goals you want to accomplish. Think about the consistent investing, saving or budgeting methods you could use to realize them. Also, consider these year-end moves.

Think about adjusting or timing your income and tax deductions. If you earn a lot of money and have the option of postponing a portion of the taxable income you will make in 2011 until 2012, this decision can bring you some tax savings. You might also consider accelerating payment of deductible expenses if you are close to the line on itemized deductions – another way to potentially save some bucks.

Think about putting more in your 401(k) or 403(b). The IRS hasn’t announced the contribution limit for 2012 yet. Given the moderate inflation of late, we might see the annual limit rise to $17,000 from the present $16,500, or not. In 2011, you can contribute up to $16,500 per year to these accounts with a $5,500 catch-up contribution also allowed if you are age 50 or older. Has your 2011 contribution reached the annual limit? There is still time to put more into your employer-sponsored retirement plan.

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Where’s that “oops button”?

A recent survey found that over 60% of women feel they are better at handling money than men are. However, married women sometimes find themselves in perplexing financial situations – conditions that might be avoided with a little planning and/or foresight. With vigilance, you can plan to steer clear of these 7 mistakes.

1. Not saving enough for retirement after marriage

If your spouse earns a huge salary and has invested avidly, you may have less impetus to save for retirement yourself. Your IRA, 401(k) or 403(b) may start to seem more supplemental than primary. Yet what happens if the relationship ends someday and you personally end up with a retirement savings shortfall? Keep contributing to your own retirement accounts.

2. Dipping into retirement savings once married

If your spouse is really wealthy or has much greater net worth than you do, your retirement nest egg may seem minor in comparison. Your spouse may tell you that with all the investments and savings that you collectively possess, you taking a loan out of your 401(k) won’t be that bad. Well, drawing down your own retirement savings could look like a very bad move 20 or 30 years from now. Who knows what changes life could have in store? Resist the temptation to siphon off your retirement savings.

3. Trusting a reckless spouse with your finances

When you love someone who is cavalier with money, look out. Beware of ceding financial control or your financial say in such a situation. If you marry someone with severe debt problems, don’t think that you will be financially immune from the effects of those problems. If your spouse is a wastrel or has a terrible credit rating, do not “hand over the keys” to the household finances. Watch what goes on with the bank accounts, investment accounts and credit cards among you– keep communication open and encourage transparency.

4. Forfeiting some or all of your financial identity

You may have taken your spouse’s name, but that does not mean you need to give up your own credit card for a shared one, merge your personal checking account into a joint one, and so forth. If you don’t use a credit card for several months or years, you won’t have to pay a fee but it could show up as “inactive” on your credit report. The credit card issuer may move to close the account, and losing the credit history of that card could hurt your credit score. Retain individual savings and investment accounts and individual credit cards.

5. Divorcing with an “equal” rather than equitable financial settlement

If a divorce happens, the impulse may be to amicably split things “50/50” … or, the focus may be on keeping custody of your kids or keeping your home with your financial potential a distant second. However, you must keep your financial future in mind.

Quite often, a woman will be instrumental in building a business or professional practice with her spouse – but she may not be a part of that successful company or professional entity after a divorce. If you divorce and have helped your spouse build a business to greater or lesser degree, you may not only find yourself out of work but taking a job that pays less or having to learn new skills to compete in the job market. Your earnings potential and retirement savings potential may be affected. If you should divorce, seek an equitable settlement that considers your future financial potential; this is even more important than retaining material wealth or real property from the marriage.

6. Losing touch with your career path

If you have happily put a career aside to raise kids, keep in mind that you might find yourself returning to work sooner rather than later. Life events, economic necessity, personal desire and growing children may all be factors. Yet a long, total absence from the workplace can make it difficult to step back in – the technology or outlook of any given field can change radically across a few short years. Try to keep a foot (or at least a toe) in your career via consulting or networking efforts.

7.  Not knowing where your accounts are held

I have met way too many widows who not only did not know where their investment accounts were held, they also were unsure how much if any life insurance was available.   Try to keep a summary document of where all of your accounts are held along with phone numbers. List out life insurance policies, where wills and other estate documents are held, and have a plan in place in the event your spouse goes before you do.

The takeaway: You can plan your financial life together, but make sure you have a plan in place to account for these 7 common mistakes.  A little planning can go a long way!   Please call us at 866-594-9919 if we can help you plan!