Sunday, November 30, 2008

Tipping at Year End

Every December I read articles telling me how much I should tip people like my barber/hair dresser, house cleaner, mailman etc. One article stated that you should tip them what ever the cost of their one time service is. So if a haircut cost $20 dollars, you give the barber a $20 tip in December. Does that mean I give my mailman 42 cents? Maybe we should make it like the income tax system and have progressive tipping. The more you make the more you give with adjustment for dependents and the elderly. I want to know who sits around and fells compelled to tell people how much they should be tipping.

Here is the problem I have with every article I come across. IT IS NOT A TIP. It is a gift for Christmas. Let me just say up front, I am not a Christian complaining that we are taking the “Christ out of Christmas”. The only reason I see that we are so concerned with tipping at year end is because of Christmas. So I say if you do not celebrate Christmas you may not want to give at all. Most people want to give anyway no matter what their religious beliefs are. So if you want to give here is what I think.

I much rather receive a thought out gift from a client than money. I would agree cash is king in most cases, but a gift says that you were truly thinking about the person. I would not put a price on the gift, but say that it should be something the individual may like. My barber likes different kinds of fruits. So I could have picked him up a fruit basket. I say could have because I also took the easy way out and gave cash. Not a lot. I usually give him an extra 3 dollars. This time I gave him 10 dollars. Why 10 dollars? I have no idea it just seemed right to me. But the fact is I was not thinking about him until I needed a haircut, so he got cash. I am sure he is happy with the money but a gift would have made him say wow, that guy remembered me.

Tell me what you think and not what you heard.

Friday, November 28, 2008

You may be in for a big surprise

It happens after every down year in the stock market. I start getting calls in February asking; how did I lose X amount of money in my mutual funds but still have to pay long and short term capital gains?

The answer is how mutual funds work. First you can buy and sell the fund and the fund manager can buy and sell stocks within the fund. You buy ABC mutual fund for $10 a share and by the end of the year it is $6 a share. If you never sell your shares you do not realize the loss, which means you can not deduct it on your return. The fund manager of ABC buys a stock for the fund and decided to sell it before the end of the year for a big gain. Unless the fund manager sells another stock at a loss, the capital gain will be passed on to you. You will have to report this gain and pay taxes on it.

What you can do.
Call your mutual fund company or go to their website and ask/look for the estimated short and long term capital gains. If the fund is going to pay a large capital gain and you have a large loss you may want to consider selling the fund so you can write off the loss and not have to pay taxes on the internal gains. It is important that you get out of the fund before the record date. If you own the fund on the record date you will receive the distribution.

If you would like to get back into the fund you need to beware of the wash sale rule. The wash sale rule states that you can not claim the loss of an investment when the same investment was purchased within 30 days before or after the sale date. This simple means you need to wait 31 days to buy it back.

You also want to consider if the fund is closed to new investors. If you sell you may not be able to get back in. Also if you are in funds with sales loads, you want to check the cost of selling and what happens if you want to buy back in. Most likely you will have to pay the load again.

Selling a fund to take advantage of the loss is something that you should consider only after talking to your tax preparer and your financial advisor.

Sunday, November 23, 2008

Key IRS Limits Increase for 2009

The IRS has announced changes in key limits for 2009.

There are new limits for both the standard deduction and personal and dependency exemption. 

The personal and dependency exemption will increase to $3,650.

The standard deduction will increase to $5,700 for single filers and $11,400 for married filing jointly.  Head of household will increase to $8,350

The above limits could affect whether or not you should itemize deductions for your 2009  return (filed in 2010).

The annual gift exclusion has increased to $13,000.  This means you can now make a gift of $13,000 without having to file a gift tax form or paying taxes on the gift.

Pension Plan Limits

The 402(g)(3) limits that affect the amount you can save in your 401(k)/403(b) plan has increased to $16,500 and those age 50 and older can contribute an extra $5,500 in 2009. 

Ask your employer if you can fill out a new salary reduction agreement now to take affect in January 2009 so you can spread the new limits throughout the year. 

Roth IRA

The adjusted gross income limitation under Section 408A(c)(3)(C)(ii)(I) for determining the maximum Roth IRA contribution for married taxpayers filing a joint return or for taxpayers filing as a qualifying widow(er) is increased from $159,000 to $166,000. The adjusted gross income limitation under Section 408A(c)(3)(C)(ii)(II) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $101,000 to $105,000.

Traditional IRA

The applicable dollar amount under Section 219(g)(3)(B)(i) for determining the deductible amount of an IRA contribution for taxpayers who are active participants filing a joint return or as a qualifying widow(er) is increased from $85,000 to $89,000.

The applicable dollar amount under Section 219(g)(3)(B)(ii) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $53,000 to $55,000. The applicable dollar amount under Section 219(g)(7)(A) for a taxpayer who is not an active participant but whose spouse is an active participant is increased from $159,000 to $166,000.


Thursday, November 20, 2008

Time to Negotiate

The one thing that I have found during this economic downturn is that you have a lot more leverage when it comes to negotiating price on just about anything. I recently got an oil change and the person changing my oil did the usual routine by stating what I need done; new wiper blades, cabin air filter, and regular air filter. I stated I did not want to spend all that money right now and then he asked; what if I take $15 off the total. I went for it.

Many people I talk to are calling their cable/satellite provider to cancel HBO or HD. The companies are offering the services free for 6 months or so if you do not cancel. I imagine the logic is that if they let customers cancel those services, the customer will realize they can live without HD and not turn the service back on.

If you know you have a high credit score, now is a great time to call your credit card company and ask for a lower rate. The fact that they are only lending to people with better than average credit, puts you in a category with few others. Credit card companies are now going after a smaller pool of applicants, which makes you a very valuable customer. Ask for a better deal or shop around for one.

It is hard to find anything good about the current state of our economy but as I find trends like the ones above I will let you know.

Have you been able to negotiate a better price or deal or something that in the past you thought not possible? Let us know.

Thursday, November 13, 2008

To Roth or not to Roth

The question of whether to invest in a Roth IRA versus a Traditional IRA comes up often during retirement saving discussions. The first thing that needs to be address is whether or not you can even invest in a Roth IRA. The IRS sets income limits on who can invest in a Roth. For taxpayers filing a joint return in 2008 or as a qualifying widor(er) a phase out of contributions starts at $159,000 to $169,000. For all other taxpayers (other than married taxpayers filing separate returns) the phase out starts at $101,000 to $116,000. For complete details of the phase out visit This means that if your AGI is above the phase out you can not contribute to the Roth.

In order to realize the full benefits of the Traditional IRA it depends if you are eligible to participate in an employer sponsored plan. If you are eligible to participate in an employer sponsored plan and you are a taxpayer filing a joint return in 2008 or as a qualifying widor(er) you are unable to deduct the Traditional IRA contributions if your income is above $85,000. For all other taxpayers (other than married taxpayers filing separate returns) if income is above $53,000 you lose the deduction. If your spouse is eligible to participant in an employer plan, but you are not, and your combined income is above $159,000 you will also lose the deduction.
So for high income taxpayers your employer sponsored plan is most likely your best option. If you are above the limits hopefully your employer has added the Roth 401(k)/403(b) as an option under the plan. Which are not subject to the limits. If so the discussion below will be helpful.

Now that eligibility is out of the way let me say this. I do not claim to have the right answer to the question because in my opinion no one can. We do not know what the future holds but we can look at the landscape and make educated guesses on what we should consider when making a decision.

Let’s go over the benefits of a Roth versus a Traditional IRA. With the Roth you make a contribution with dollars that you have already paid taxes on. This means that there is no tax break in the present day. Your contribution grows tax free which mean you do not pay taxes on the earning even when witdrawn (rules apply). Let’s say you made a $1000 contribution to a Roth IRA and ten years later you had $2000. If you are age 59 ½ or older your $2000 is completely tax free.

Now let’s say you contribute $1000 to a Traditional IRA. If you are in the 15% tax bracket you will save $150 in federal income tax. If you are in the 35% tax bracket you will save $350 in federal income tax. The higher your tax bracket the more you save today. The money grows taxed deferred which means you do not pay income tax on the earnings in the year they are earned. If your $1000 grows to $2000, and at age 59 ½ you withdrawal the account balance, you will pay income tax on the full $2000. Depending on what tax braket you are in at the time on withdrawl, determines the amount of tax you pay.

When considering to Roth or not to Roth one can not ignore their current tax situation. For younger workers who are most likely in lower tax brackets and will be moving into higher tax brackets, I say go with the Roth for two reasons. Currently income taxes are historically low, which means you are not receiving much of a current tax benefit. The second reason is you may not be eligible to contribute to a Roth in the future, and your employer may not offer the Roth 401(k). You will also have access to your original investment (basis) before age 59 ½ without penalty. This is sometimes considered a bad thing depending on one’s view.

For individuals who are in higher tax brackets and still eligible, I say split your contributions. The tax code is a progressive tax. So for a single taxpayer (in 2007) if your taxable income is $81,100 for example, and you contribute $4,000 or more to your employer plan you will reduce the amount of tax you pay in the 28% bracket to zero. This is because your income is not taxed at 28% until you go over $77,100. By doing $4000 you take your highest tax bracket down to 25%. Then you can contribute another $4000 to a Roth IRA. For income tax brackets go to

For those of you who are not eligible to contribute to the Roth IRA because of the income limits you should press your employer to add the Roth 401(K) to their plan. The reason is that the Roth does have its place in estate planning which is beyond the scope of this current blog.

Anyone serious about saving for retirement should contact both their tax advisor and financial advisor for individualize advice.