End of the Year Decisions

News Brief By: Allen G. Yee

As the year comes to a close it is important to not only layout a strong financial plan for 2012, which may result in substantial tax breaks. More often than not, we are too concerned with looking too far ahead that we sometimes miss practical, simple, solutions that rest right before our eyes. So, take the time to organize and formulate a plan of action for 2012 but also see that you close out 2011 on top.   

What are year-end investment decisions?

Year-end investment decisions may sometimes result in substantial tax savings. Tax planning may allow you to control the timing and method by which you report your income and claim your deductions and credits. The basic strategy for year-end planning is both to time your income so that it will be taxed at a lower rate, and to time your deductible expenses so that they may be claimed in years when you are in a higher tax bracket. In terms of investment planning, investing in capital assets may increase your ability to time the recognition of some of your income and may help you to take advantage of tax rates that are lower than the ordinary income tax rates. You have the flexibility to control when you recognize the income or loss on many types of investment assets. In most cases, you determine when to sell your capital assets. In some cases, however, shifting potential capital gain income to other taxpayers through gifting may be an appropriate strategy.

How do you use the capital gains tax to lower your taxes?

Capital gains and losses are accorded special tax treatment. Currently, the top long-term capital gains tax rate is 15 percent (for most types of assets), while the top ordinary income tax rate is 35 percent–that’s a difference of 20 percent. As a consequence, by converting some of your ordinary income to long-term capital gain income, it may be possible for you to reduce your federal income tax liability.

Caution: Under the Jobs and Growth Tax Relief Reconciliation Act of 2003, the Tax Increase Prevention and Reconciliation Act of 2005, and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, long-term capital gains tax rates are 15 percent for taxpayers in tax brackets higher than 15 percent, and zero percent (in 2008-2012) for taxpayers in the 15 percent or 10 percent tax brackets. Prior to May 6, 2003, long-term capital gains tax rates were 20 percent and 10 percent, respectively. Beginning in 2013, long-term capital gains tax rates will revert back to these pre-2003 Tax Act levels.

Timing your capital gain recognition

Careful timing of when you sell capital assets may help you to reduce your federal income tax liability. For example, if it’s late in the year and you want to sell a capital asset, you can wait until January to sell it so that you realize your capital gain or loss next year (assuming that you have a calendar tax year). This strategy is particularly useful if you are in a higher marginal tax bracket in the current year and expect to be in a lower one in the following year. Timing can also be important because capital gain income increases your adjusted gross income (AGI). Itemized deductions and personal exemptions may be phased out or decreased if your AGI in a given year exceeds a specified threshold.

Plan your year-end capital gain and loss status

Planning the time when you recognize capital losses may also be important. If you expect to recognize a capital gain this year, you should review your portfolio for possible capital losses that can be used to offset the gains. If you have any capital loss carryforwards, you should review your portfolio for capital gain opportunities to make use of such carryforwards. In general, net capital losses are deductible dollar-for-dollar against net capital gains. Excess losses are allowed to offset up to $3,000 ($1,500 for individuals filing married filing separate tax returns) of ordinary income per year. Losses over and above the limit may be carried forward indefinitely.

The following strategies may be appropriate:

• Sell capital gain property before the end of the year if you have already realized capital losses for the year that exceed the sum of any capital gains you have realized plus $3,000 ($1,500 for individuals filing married filing separate tax returns).
• If you have gains for the year that exceed your losses, sell property with built-in losses to offset the excess gains.
• If your other allowable deductions for the year exceed your income, you should, to the extent possible, avoid realizing any further capital losses for the year.
• If you’ve held a capital asset for close to 12 months and want to sell it, wait awhile (if possible). You can take advantage of the lower long-term capital gains rates if you hold the asset for over 12 months before selling it. 

How do you select investments to control income?

You can select investments likely to produce ordinary income such as interest, or income that is taxed at reduced rates (certain qualifying dividends or long-term capital gains). You can also select investments likely to produce ordinary or capital losses. You can control when your investment earnings are taxed, bearing in mind that income distributions are generally not taxed until you receive them (assuming that you use the cash method of accounting). By knowing the tax rules, you can lower your taxes.

What about shifting income?

It may be possible to shift potential capital gains to other taxpayers through gifts. If you are in a 25 percent or higher individual marginal tax bracket, the zero percent long-term capital gains tax rate (in 2008 through 2012) for those in the 10 or 15 percent bracket may provide an incentive for you to transfer appreciated assets to relatives in those lower tax brackets.

*PLEASE NOTE: The information above being provided is strictly as a courtesy. When you link to any of the sites provided here, you are leaving this site. We make no representation as to the completeness or accuracy of information provided at these web sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to. Registered Representatives Offering securities Offered Through First Allied Securities, Inc. Registered Broker-Dealer Member FINRA, SIPC. Allen Yee, CEA, RFC, CA Insurance License #0747874

Resources: Broadridge Forefield, “Year-End Investment Decisions”

Guidant Response: 5 Worries for Investors in 2012

News Brief By: Allen G. Yee

There’s plenty to worry about in the world, what’s 5 more?  I’m not saying one should have a Pollyannaish attitude about the world, economy or stock market.  But, life goes on and investments will continue rise and fall and in some years with substantially greater volatility.  What matters is the strategy you have deployed and how it handles those events.  I’ve said it many times, but the Buy and Hold strategy and other purely offensive strategies will not work in secular bear markets.  Those strategies will work, all the way up to the crash.

*PLEASE NOTE: The information above being provided is strictly as a courtesy. When you link to any of the sites provided here, you are leaving this site. We make no representation as to the completeness or accuracy of information provided at these web sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to. Registered Representatives Offering securities Offered Through First Allied Securities, Inc. Registered Broker-Dealer Member FINRA, SIPC. Allen Yee, CEA, RFC, CA Insurance License #0747874

Five Things Investors Have to Worry About in 2012

By: Patti Domm
CNBC Executive News Editor

Investors can blame Europe for choking off stock market gains in 2011, but there’s a growing list of geopolitical flashpoints lurking in 2012—and any one of them could pose a risk to stocks.

Market guru Laszlo Birinyi said there already is a long list of “known unknowns” coming in 2012, and many of them involve elections in places like France, Mexico, India and Russia.

Of course, the U.S. presidential election is also on the horizon in November, and there was plenty of domestic political squabbling that swamped the market this past year.

Read Full Story Here

Guidant Response: Gold Entering a Bear Market

News Brief By: Allen G. Yee

Gold has historically been viewed as a safe haven during uncertain economic times; will it be different this time?  Despite the debt issues in Europe and the sustainability of the US and Chinese economy gold is off its recent highs.  However, could it be a worthwhile asset to own and hold particularly as the economic and debt issues will not abate soon?  The answer really depends on an individual’s circumstance such as risk tolerance, time horizon, economic/market view, etc.

*PLEASE NOTE: The information above being provided is strictly as a courtesy. When you link to any of the sites provided here, you are leaving this site. We make no representation as to the completeness or accuracy of information provided at these web sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to. Registered Representatives Offering securities Offered Through First Allied Securities, Inc. Registered Broker-Dealer Member FINRA, SIPC. Allen Yee, CEA, RFC, CA Insurance License #0747874

Gold is nearing bear market territory even as economic fear persists. 4 reasons why gold has lost its luster

By Nin-Hai Tseng, writer-reporter

Gold prices are nearing bear market territory, and yet the global economic fear that drove many investors to the metal remains. What gives?

FORTUNE – For the 11^th year in a row, gold prices have rallied, making this one of the longest winning streaks for the yellow metal. And for most of 2011, it seemed like nothing could stop prices from climbing — gold prices peaked in September at more than $1,900 an ounce.

But in recent months, many high-profile investors have sold their positions, suggesting that gold’s glory days could be coming to an end.

Read Full Story Here

Housing Still Is and Will Remain a Mess, for a Long Time…

By Allen G. Yee

During these turbulent and uncertain times, one of the most frequent questions I am asked is my opinion of the status of real estate and whether or not it has bottomed.  To clarify, there are many types of real estate; industrial, office, retail, multi-family and residential to name the most common.  Since most of my real estate questions refer to residential housing, that is the area in which I will focus.

Recently, Professor Robert Shiller of Yale University and co-creator of the Case-Shiller Housing Index stated he believed that prices could decrease another 10 to 25% from current prices and will not bottom out for many years.  There is a shadow inventory of homes either held back intentionally or that have yet to complete the foreclosure process.  This could be an ominous signal that an avalanche of homes could be coming to an already over saturated market, further depressing prices.  You can watch the interview here.

To further enforce the point, in Harry Dent’s book The Great Crash Ahead, he warns that real estate has not bottomed and that people may be sucked into purchasing real estate because it is seemingly cheap.  Further, he believes America is in the midst of a major restructuring in the US economy, which includes a sediment change in how Americans view real estate.  The demographic demand for starter homes will begin first but not until echo boomers can afford starter homes, which would be 4-5 years away assuming the economy improves.

My view is that combined with economic issues, much of the housing concerns can also be attributed to a large demographic shift.  Most residential housing is owned by older generations.  The Greatest Generation (born from 1901-1924), Silent Generation (born from 1925-1945) and Baby Boom Generation (born from 1946-1964) own a substantial amount of residential housing, not only their primary residence, but rentals as well.  The landlords in this group have had to deal with the 3-T’s of rental properties: Tenants, Toilets, and Taxes!!  As they age, they become more eager to exit the rental game.  In my opinion, many of the members of these generations are looking to downsize their portfolio of property.  This act of property reduction is much like an inverted pyramid.  As they age, it becomes difficult to manage multiple rental properties and they look to sell.  As children grow and leave the house, they look to downsize their primary residence to a smaller home.  Perhaps after, is yet an even smaller condo.  And for many, a 300 square-foot room in an assisted living facility. The question is who will buy this huge inventory of homes?  Generation X (born roughly between 1965 and 1980) is next in line.  While they may purchase primary homes, they only have 46 million members.  And like me, those who grew up helping mom and dad with the 3-T’s of rentals have been traumatized, and are more adverse to owning rentals.  So how are they going to absorb roughly 80+ million baby boomers and prior generation’s real estate?  I believe they won’t.   Some will be purchased by younger generations, many by institutions, but since there will undoubtedly be a greater supply than demand, housing will reset to prices below our normal comprehension on a general basis.  However, remember real estate is a unique product and no two are alike.  So remember the adage- location, location, location followed up by employment, employment, employment.

Link above is to: http://finance.yahoo.com/blogs/daily-ticker/shiller-house-prices-probably-won-t-hit-bottom-162755874.html

Year-End Investment Planning: The Clock Is Ticking

Investment planning at the end of 2010 was complicated by uncertainty over whether existing tax rates would be extended. This year, it’s the congressional “supercommittee” charged with tackling the country’s deficit financing problem that’s the source of uncertainty. Even though you may not be sure how the committee’s work might ultimately affect you, here are some factors to keep in mind as you plot your year-end strategy.

Harvest tax losses if appropriate

If you plan to harvest losses to offset capital gains, you may want to think about the cost basis of those shares. To maximize your losses for tax purposes, you would sell shares that have lost the most, which would enable you to offset more gains. Unless you specify which shares of stock are to be sold, your broker will typically treat them as sold based on the FIFO (first in, first out) method, meaning that the first shares bought are considered to be the first shares sold. However, you can designate specific shares as the ones sold or direct the broker to use a different method, such as LIFO (last in, first out) or highest in, first out. You can also use a standing order or instruction to specify that a particular method is to be used.

As of this year, brokers must report to the Internal Revenue Service your cost basis for the sale of any shares of stock bought after January 1, 2011. That will make it even more important to make sure when preparing your tax returns that your cost basis records for such sales are accurate and agree with those of your broker. If you decide to specify stock shares in order to determine your cost basis, you must do so by the settlement date (typically, three days after execution of the trade) in order for your broker’s records for the stock sale to be accurate.

Mutual funds, dividend reinvestment plans, bonds, and other securities eventually also will be subject to the same mandatory cost basis reporting requirement.

Don’t procrastinate on tax break for small business stock

If you plan to invest in a qualifying small business, you may want to do so by December 31. That’s because 100% of any capital gains on the sale of qualified small business stock issued after September 27, 2010, and before January 1, 2012, can be excluded from your taxable income. (The exclusion is scheduled to revert to 50% next year.)

To claim the 100% exclusion, you must have acquired the stock at original issue (with some exceptions for stock acquired as an inheritance or gift). Also, the business must satisfy certain requirements, and you must hold the stock for at least five years. There are limits on the total amount of gain that is eligible for the exclusion. There also may be special considerations if you roll over the gain from the sale of your stock to another qualified small business stock, or if you receive qualified stock as part of your deferred compensation plan. Don’t hesitate to get expert help with your specific situation.

Consider the potential impact of higher interest rates

Interest rates have been at historic lows in recent years, but as the economy continues to heal, that won’t always be the case. The Federal Reserve Board has said that raising interest rates won’t be its first step in reducing the support it has given the monetary system. However, at some point, interest rates are likely to begin moving up again. When that happens–and there’s no way to know for sure when that might be–bond prices will begin to feel the impact. As bond yields begin to rise, bond prices will begin to tumble, since prices move in the opposite direction from bond yields.

Don’t let payroll tax increase derail long-term plans

If you’ve benefitted from the 2% reduction in workers’ Social Security taxes in 2011, congratulations! However, be aware that the provision is scheduled to expire at the end of this year. If you’ve been saving or investing that money, your long-term plans will benefit if you can figure out how to replace that source of funding for your investment efforts.

Forefield, Inc. Copyright 2011 Forefield, Inc.

GAO Report Suggests Annuities as Retirement Income Option

The U.S. Government Accountability Office (GAO) reports that financial experts typically recommend that middle-net-worth retirees use a portion of their savings to buy an income annuity (immediate annuity) to help meet necessary retirement expenses. The report, Ensuring Income throughout Retirement Requires Difficult Choices, finds that while Social Security continues to be the primary source of fixed income in retirement, it is not enough to meet the income needs of most retirees. Also, the shift from employer-sponsored defined benefit pension plans to defined contribution plans, coupled with increasing life expectancies, is forcing retirees to assume more responsibility for managing their savings to ensure that they have sufficient income throughout retirement. An income annuity is an alternative to self-managing savings that offers retirees a steady source of income they won’t outlive.

 
Why income annuities?

Generally, an income annuity, also referred to as an immediate annuity, is issued by an insurance company. It is typically purchased with a single lump sum of money (premium) paid to the issuer in exchange for payments made for life (single life income annuity), or for the joint lives of the annuity owner and his or her spouse or partner (joint and survivor income annuity). Payments generally begin no later than one year from the date the issuer receives the premium. The GAO report suggests income annuities:

• Help protect retirees against the risk of underperforming investments
• Help protect retirees against the risk of outliving their savings (longevity risk)
• Help relieve retirees of the task of managing their investments at older ages when their capacity to do so may be diminished, and
• Provide a base of guaranteed income that may serve as a dependable “cushion” for retirees who might otherwise spend too little for fear of outliving their assets (guarantees are subject to the claims-paying ability of the annuity issuer)

Why income annuities may not work

Income annuities aren’t for everyone nor do they work in every situation. Particularly, income annuities may not be appropriate for people:

• With predictably shorter-than-normal life expectancies
• Who have limited savings, since the funds used to purchase income annuities generally are not available to cover large, unanticipated expenses
• Who are concerned about income taxes, since the income from annuities purchased with nonqualified funds is typically taxed as ordinary income, whereas some or all of the investment return on liquidated savings in stocks, bonds, or mutual funds may be taxed at lower capital gains or dividend tax rates
• Who want to provide a bequest of their assets at their death

When might an income annuity be appropriate?

The GAO study describes examples when an income annuity may be appropriate. In one scenario, the study suggests that a household with a total net wealth of $350,000 to $370,000, of which $170,000 to $190,000 is savings (and which does not have a defined benefit pension plan), should consider purchasing an income annuity with a portion of their savings. Retirees with defined benefit pension plans should consider an income annuity option rather than taking a lump-sum rollover to an IRA. Conversely, an income annuity may not be as useful for households with significantly greater net wealth or those households with appreciably less net wealth.
Proposals to access annuities and increase financial literacy

Typically, defined contribution plan sponsors do not offer account holders income annuities as an option. In response, the study makes several recommendations to promote the availability of income annuities for defined contribution plan distributions. These proposals include legislation that would require plan sponsors to offer income annuities as a choice to plan participants, or set income annuities as the default election for plan participants when accessing defined contribution plan benefits. The study also recommends options aimed at improving individuals’ financial literacy, particularly concerning the risks and available choices for managing income throughout retirement.
Report recommendations

The report seeks to offer options to retirees on how to have an adequate income throughout retirement. Generally, the study suggests that middle-income retirees should consider delaying Social Security retirement benefits at least until full retirement age, consider working longer, draw down savings systematically and strategically (typically at an annual rate of between 3% and 6%), elect an annuity instead of a lump sum withdrawal for employer-sponsored defined benefit plans, and for retirees who don’t have a defined benefit plan, purchase an income annuity with some of their savings. To view the report in its entirety, go to (www.gao.gov/new.items/d11400.pdf).

Forefield, Inc. Copyright 2011 Forefield, Inc.

From Allen’s Desk: Can the IRS Waive the 60-day IRA Rollover Deadline?

If you take a distribution from your IRA intending to make a 60-day rollover, but for some reason the funds don’t get to the new IRA trustee in time, the tax impact can be devastating. In general, the rollover is invalid, the distribution becomes a taxable event, and you’re treated as having made a regular, instead of a rollover, contribution to the new IRA. But all may not be lost. The 60-day requirement can be automatically waived in some cases, and the IRS has the discretion to waive the rule in others. The 60-day requirement is automatically waived if all of the following apply:

• The financial institution receives the funds on your behalf before the end of the 60-day rollover period
• You followed all the procedures set by the financial institution for depositing funds into an IRA within the 60-day period (including giving instructions to deposit the funds into an IRA)
• The funds are not deposited into an IRA within the 60-day rollover period solely because of an error on the part of the financial institution
• The funds are deposited within 1 year from the beginning of the 60-day rollover period
• It would have been a valid rollover if the financial institution had deposited the funds as instructed

If you don’t qualify for an automatic waiver, you can apply to the IRS for a discretionary waiver. The IRS may waive the 60-day requirement where failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control. The IRS will consider all relevant facts and circumstances, including:

• Whether errors were made by the financial institution (in addition to those described under automatic waiver, above)
• Whether you were unable to complete the rollover on a timely basis due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country, or postal error
• Whether you used the amount distributed
• How much time has passed since the date of distribution

Forefield, Inc. Copyright 2011 Forefield, Inc.

ETF’s: Do they Belong in Your Portfolio?

Exchange-traded funds (ETFs) have become increasingly popular since they were introduced in the United States in the mid-1990s. Their tax efficiencies and relatively low investing costs have attracted investors who like the idea of combining the diversification of mutual funds with the trading flexibility of stocks. ETFs can fill a unique role in your portfolio, but you need to understand just how they work and the differences among the dizzying variety of ETFs now available.

What is an ETF?

Like a mutual fund, an exchange-traded fund pools the money of many investors and purchases a group of securities. Like index mutual funds, most ETFs are passively managed. Instead of having a portfolio manager who uses his or her judgment to select specific stocks, bonds, or other securities to buy and sell, both index mutual funds and exchange-traded funds attempt to replicate the performance of a specific index.

However, a mutual fund is priced once a day, when the fund’s net asset value is calculated after the market closes. If you buy after that, you will receive the next day’s closing price. By contrast, an ETF is priced throughout the day and can be bought on margin or sold short–in other words, it’s traded just as a stock is.

How ETFs invest

Since their inception, most ETFs have invested in stocks or bonds, buying the shares represented in a particular index. For example, an ETF might track the Nasdaq 100, the S&P 500, or a bond index. Other ETFs invest in hard assets–for example, gold bullion. In such cases, a commodity or precious-metals ETF may buy futures contracts or quantities of bullion. With the rapid proliferation of ETFs in recent years, if there’s an index, there’s a good chance there’s an ETF that invests in it.

More and more new indexes are being introduced, many of which cover narrow niches of the market, or use novel rules to choose securities. Many so-called rules-based ETFs are beginning to take on aspects of actively managed funds–for example, by limiting the percentage of the fund that can be devoted to a single security or industry.

The new wave of ETFs

New and unique indexes are being developed every day. As a result, ETFs that might seem similar–for example, two funds that invest in large-cap stocks–can actually be quite different. Many indexes define which securities are included based on their market capitalization–the number of shares outstanding times the price per share. However, other indexes and the ETFs that mimic them may select or weight securities within the index based on fundamental factors, such as a stock’s dividend yield.

Why is weighting important? Because it can affect the impact that individual securities have on the fund’s result. For example, an index that is weighted by market cap will be more affected by underperformance at a large-cap company than it would be by an underperforming company with a smaller market cap. That’s because the large-cap company would represent a larger share of the index. However, if the index weighted each security equally, each would have an equal impact on the index’s performance.

The cost advantages and tradeoffs of ETFs

As indicated above, one of the reasons ETFs have gained ground with investors is because of their low annual expenses. Passive index investing means an ETF doesn’t require a portfolio manager or a research staff to select securities; that reduces the fund’s overhead. Also, investing in an index means that trades are generally made only when the index itself changes. As a result, the trading costs required by frequent buying and selling of securities in the fund are minimized.

However, don’t forget that you’ll pay a commission each time you buy or sell ETF shares. That means a one-time lump-sum investment in an ETF will be more cost-effective than dollar-cost averaging, which involves frequent, regular investments over time.

ETFs and taxes

ETFs can be relatively tax efficient. Because it trades so infrequently, an ETF typically distributes few capital gains during the year. In the past, there have been times when some investors found themselves paying taxes on capital gains generated by a mutual fund, even though the value of their fund may actually have dropped. Though it’s not impossible for an ETF to have capital gains, ETFs generally can minimize the ongoing capital gains taxes you’ll pay.

Just how much impact can reducing taxes have over the long term? More than you might think. Even a 1% difference in your return can be significant. For example, if you invest $50,000 and earn an average annual return of 5% (compounded monthly), you would have a pretax amount of $82,350 after 10 years. Even a 1% increase in that return would give you $90,970 at the end of that time. (This hypothetical example is for illustrative purposes only and does not represent the performance of any particular investment. Actual results will vary.)

Make sure you consider how an ETF’s returns will be taxed. Depending on how the fund is organized and what it invests in, returns could be taxed as short-term capital gains, ordinary income, or in the case of gold and silver ETFs, as collectibles; all are taxed at higher rates than long-term capital gains.

What are some other reasons investors use ETFs?

       To get exposure to a particular industry or sector of the market. Because the minimum investment in an ETF is the cost of a single share, ETFs can be a low-cost way to make a diversified investment in alternative investments, a particular investing style, or geographic region.

       To limit losses. Being able to set a stop-loss limit on your ETF shares can help you manage potential losses. A stop-loss order instructs your broker to sell your position if the shares fall to a certain price. If the ETF’s price falls, you’ve minimized your losses. If its price rises over time, you could increase the stop-loss figure accordingly. That lets you pursue potential gains while setting a limit on the amount you can lose.

How to evaluate an ETF

1. Look at the index it tracks. Understand what the index consists of and what rules it follows in selecting and weighting the securities in it.
2. Look at how long the fund and/or its underlying index have been in existence, and if possible, how both have performed in good times and bad.
3. Look at the fund’s expense ratios. The more straightforward its investing strategy, the lower expenses are likely to be. An index using futures contracts is likely to have higher expenses than one that simply replicates the S&P 500.

Your financial professional can help you decide how ETFs might fit your investing strategy.

Forefield, Inc. Copyright 2011 Forefield, Inc.