Investing, Who can you trust

With the news about Bernard Madoff and another “investment manager” Joseph S. Forte who took investors for about 50 million in the Philadelphia area, many investors are asking who you can trust for financial advice. The good news is there are basic things you can do to protect yourself.

Joseph S. Forte was not licensed or registered with the state or federal government. You will find that the majority of individuals committing securities fraud are not licensed or properly registered. This is your first line of defense. Go to the Financial Industry Regulator Authority’s website FINRA.org and use their BrokerCheck tool. This tool will let you know if the individual is registered with FINRA and if they have any violations. It also allows you to look up a registered investment advisor firm who may not be required to be licensed but should be registered. If the RIA has fewer than 25 million dollars under management you will need to check their record with the state government. If the individual is not on record with FINRA or the state you do not want to give them your money.

You want to avoid individuals who make claims that they can provide specific rates of return. An advisor may be able to put you into an investment that will guarantee 4% over 5 years with some strings attached, but if they are claiming market beating returns and above average fixed rates be careful. That leads us to the next line of defense.

Know what your money is invested in. You should receive a report of what investments you are in. The advisor should be able to tell you were your money is and you should receive detailed statements with the holdings. Avoid advisors who claim they can not disclose how or where they invest your money. This is a major red flag.

If the advisor is providing returns to good to be true or if your balance never fluctuates while earning above average returns, fraud is most likely involved. This was the biggest tip off in the Madoff scandal. It is simply impossible to provide above average returns without volatility in your account.

You can also protect yourself by understanding what type of financial service you need. A life insurance agent may be able to provide advice for protecting your family in case of death, but you should not seek tax advice from them. Do not be afraid to ask questions like; how long have you been working in this area of finance, what companies have you worked for in the past, and how are you compensated.

FINRA has a very good section on their website under the tab “Protect Yourself” with many more tips to avoid being scammed. I encourage everyone to read it before working with a financial professional.

As someone who works in the industry I can tell you that the majority of professionals are just that, professionals. They do what they do because they love helping people with their finances and want to build a business doing it. In any business you have a few bad apples that ruin it for the rest. As a consumer you need to protect yourself. Taking the few simple steps mentioned above will help you avoid most of the bad apples.

Ten Ways to Save on Taxes

Contribute to your 401K or a Traditional IRA.  

You get two tax benefits with these accounts.  Your contributions are before tax with the 401K and tax deductible in an IRA if you are within the income limits (IRA Pub 590).  A pretax benefit and a deduction is basically the same thing except the first in done through your payroll and the other is taken on your tax return. The advantage is an individual in the 25% tax bracket contributing $100 would have an out of pocket contribution of $75.  The other $25 is being put up by Uncle Sam.

The interest or earnings is these accounts grow tax deferred which means you do not have to pay taxes until the money is withdrawn.  Generally there is a 10% penalty for withdrawals prior to age 59 ½. 

Flexible Spending Accounts

Take advantage of flexible spending accounts.  These accounts are set up by your employer and allow you to pay for things like health care expenses, and childcare cost with before tax dollars.  There are limits to how much you can put into these accounts and if you do not use the funds by a certain date you lose them.  

Commuter Benefits

Another employer benefit is commuter benefits.  This allows you to pay for parking and mass transit through payroll deduction with pre-tax dollars.  

Deductions. 

Many people miss deductions that they qualify for.  Certain deductions like the ones above and others: alimony, educator deduction for teachers who buy supplies out of pocket for their class room, moving expenses for job relocation and more.  

Tax Credits.

Tax credits reduce your taxes dollar for dollar.  The energy tax credit which expired 12/31/2007 is not available for your 2008 return but has been reinstated for 2009.  So if you buy new energy efficient exterior doors, windows, insulation, or a high efficiency heater or water heater you can qualify for as much as a $500 credit.  

Tax harvesting investments.

If you sell certain investments at a loss you can write off the losses against the gains plus an additional $3000 (Married filing jointly) against ordinary income. Read Get Rich Slowly's blog on the subject. 

 Hold on to your investment for more than one year because long term capital gains top out at 15% for investments held greater than 1 year.  

Tax Favored Investments

As mentioned above employers sponsored plans and IRA’s are a great way to save on taxes but so are other accounts like education savings accounts and 529 for tuition.  The Roth IRA is a great way to save taxes in the future. See post, "To Roth or not to Roth". 

If you are in a high tax bracket you may be better off investing in tax free municipal bonds versus corporate bonds.  They have lower yields but on a tax equivalent basis you may be better off. 

Charitable donations

Most people donate to charity because they want to help the cause, but if you itemize it is also a deduction on your tax return. You will need to make sure the charity qualifies as one under IRS guidelines. You also want to write a check or use a credit card so you have a record of your donation.  If you are donating clothing or other items, get a receipt. 

Start a family business.

A family business will allow you to pass income to your kids who should be in a lower tax bracket.  You may also take the home office deduction if you use part of your home to run the business.  Pay attention to the rules for the home office deduction because if you take it, you want to get it right.  It is rumored that tax payers taking the home office deduction are more likely to be audited.  That takes us to our last tax saving tip.

Stay organized and keep good records.

Many people lose track of medical expenses, auto miles, charitable donation and other deductions that they could take if they only had the records.  Start a file in January and start putting all tax records for the current year in it.  You can organize it right before tax time.  If you are one of those people that can stay organized then keep separate files for certain deductions (like health care expenses) and credits.  Once you have your records organized and your tax return completed, hold on to them.

You can find out all the details on the above tips at IRS.gov. 

 

Are we Rewarding the Financial Irresponsible

I was sitting in traffic one morning and I started to recall a conversation between me, my wife and a few other people around 2002.  My wife asked a question something along the line, how is everybody affording all of these things.  Everybody being our neighbors, and things being in-ground pools, vinyl fences, pavers, new cars, and many other luxuries.   I stated, I guess they make loans and are in debt up to their eyeballs.  I went on to say that I can not live that way and what if something happens were people can not pay their debt.  Someone chimed in and said but everyone is in debt up to their eyeballs and what could happen to everyone.  

At the time I thought to myself that is no way to look at it.  Now with the bailout of financial institutions to big to fail and individuals who borrowed more than they can repay being bailed out one way or another, I am wondering who is better off.  I think the answer is those of us who acted responsible.  

For one thing if I get laid off from my job I have enough savings to get me through for 6 months or more.  The debt I am carrying is more than I would like, but manageable. Those individuals who made financial mistakes can not feel good about themselves and must have more stress than those who were responsible.  The ultimate test is would you want to trade places with one of the individuals going into foreclosure even if they are getting a deal.  I certainly would not.  

So the lesson is when mass numbers of people are irresponsible you can count on a government bailout but those who acted responsible will be in a better place.  

Tell us what you think.  Is the bailouts fair and do you wish you ran up your credit card or bought a house you could not afford?

Choosing a tax preparer; Do you need a CPA?

One thing that I have learned in my career is that people hate filling out forms.  It can be the simplest form with basic information and people would still pay someone to fill it out.  

The majority of people have simple tax returns and could fill out the forms themselves.  You could purchase software that helps you fill out the forms by interviewing you with questions such as, did you receive a W-2. If you answer yes, the software will then ask you to type the numbers from your W-2 into the program. The program will put the numbers on the correct tax forms. I will put a shameless plug in for the software I use at Happy Returns Tax Service. It cost $19.95 to $24.95  depending on if you use form1040EZ, 1040A or 1040.  It includes Federal, State and e-file.  It is a bargin compared to some of the software on the market and there are no hidden fees.   

Although many people find the tax software great, I find others who get frustrated with software and rather have someone else prepare their return.  There is a good article by John P Cummings, “How to Choose a Qualified Tax Preparer” on the IRS’s website.   

He does a good job of spelling out the qualifications of a Certified Public Account (CPA) and an Enrolled agent (EA).  A CPA can be very expensive even for a basic return.  In my opinion, many people who have a job and some basic investments like stocks, bonds and mutual funds do not need a CPA.  If you own a business, have multiple rental properties or are in complicated investment like; limited partnerships and stock options, then I would suggest you pay the price for a CPA.  

When choosing a professional to prepare your tax return ask for referrals. Avoid tax preparers that claim they can get you the biggest refunds.  I had clients ask me why there refund was larger the pervious year when prepared by another tax professional.  After reviewing the return, I would state that you gave more money to charity the previous year or you had work done to your home that qualified for an energy credit.  Their response is, “No I didn’t”.   Be careful you are still responsible for the return.  

If you are considered a low- and middle-income taxpayer age 60 or older you may qualify for help from the AARP Tax-Aide program.  It has nearly 32,000 volunteers staffing 8,500 sites across the United States. These IRS certified volunteers provide free tax counseling and preparation services. Visit their free AARP Tax-Aide site locator, where you can enter your zip code and receive location addresses, schedules, and other contact information.

Taxes are a frustrating task for many, but if you can find a true professional or good help it can make all the difference.  Happy tax season.   

Am I a Socialist

This may be my most controversial Blog yet or ever to come. I just finished the Book by Scott Burns and Laurence J. Kotlikoff, "Spend ‘til The End". Then I watched Michael Moore’s film "Sicko". I am not going to give my opinion of the book or the film, but both got me thinking about the American way of life. 

In short, Spend ‘til The End is an economist’s view of financial planning and suggestions of how to raise and "smooth" your living standard. Sicko is one man's view of the short comings of the United States health care system and a case for national health care. It is one sided and meant to build the case for national health care. 

The book points out how student loans can lower your standard of living for a very long time, possibly into your fifties and sixties. The book touches on planning for health care expenditures and long term care in retirement. Sicko suggests that we will all be better off with a health care system that is free and covers everyone. What if we did not need to worry about the cost of either education or health care? What if both were socialized? 

The more I thought about these questions the more of a case financially I could make that both should be provided as a right of citizenship. Yes taxes would go up, but they would be offset by the current cost of each. Currently I am spending about 6.3% of household income for medical expenses. My employer is spending about 8% of my salary for health care expenses. Would we need to raise corporate taxes and payroll taxes more than that to provide health care for everyone? I am not sure and it is a tough calculation to make. Part of the problem is that currently some of the uninsured are covered with the premiums of the insured. If an uninsured person goes to the emergency room and does not pay the bill, the cost is passed onto the insured. You would also have to factor in those who can not afford there medication and wind up in the hospital because of it. 

This has happened to a family member of mine. The hospital bill was over thirty thousand dollars back in the late nineties. That would have paid for about ten years of medication. This individual now has Medicare part D and has been getting the medication. 

Healthier employees are more productive employees and that would also have to be factored into the cost. Many people would retire earlier if they had health insurance and would be replaced with younger workers that can be paid less. People who do not get their annual check up because of the cost (even some with insurance do not go because of the co-pay) would get their check up and prevent or catch illnesses earlier which would lead to overall lower cost. 

What would happen if a college education was free? Companies and institutions would not have to pay their employees as much to make up the cost of college. If you are a doctor with a half million dollars in student loans, you need to make a certain income just to cover the loan payments. Some individuals may enter a field that pays less, like social work if they did not have to pay for student loans. Or maybe you know you want to do social work and have been accepted to an Ivy League school, but opt to go to a community college because of the cost. Would we have better educated individuals applying for lower paying jobs and possibly making a greater impact to those institutions? Not sure, but there are definitely students choosing their school on price. This is a wise thing to do. 

I know this Blog will be controversial, but I try to think outside the box. As Americans, are we truly happy with the current systems for providing education and health care to our citizens? Is there another way of doing things that would raise the living standard of every American? 

I believe that I am a capitalist, but one that can see the economic benefits of providing both health care and education to everyone. I do not believe that the systems would need to be run by the government and could still remain competitive. 

What do you think? 

Keeping Income Tax Records

This is the time of year where everyone needs to pay extra attention to there mail.  You will start to receive tax information from your employer, bank, investment companies, mortgage company, and others.  It is important to gather the documents and keep them together so when it is time to prepare your taxes, you have them. Missing one item on your return may subject you to an audit or cause you to pay a tax preparer to file an amended return. 

You need to keep good records for more than filing your taxes. With the federal deficit expected to be at an all time high, the IRS will be cracking down on tax cheats and possibly doing more audits.  If you happen to get audited you want to make sure you have all the documentation for your deductions and credits.  With lending standards tightening and banks requiring more documents to get a loan, having your records organized will make the process that much easier. If you are looking for either tax advice or financial advice providing a few years worth of tax returns will provide the advisor with an easy and quick view of your overall financial picture.  

Many people ask how long they should keep tax returns and records.   Publication 552  suggest that,

“You must keep your records as long as they may be

needed for the administration of any provision of the Internal

Revenue Code. Generally, this means you must keep

records that support items shown on your return until the

period of limitations for that return runs out.

The period of limitations is the period of time in which

you can amend your return to claim a credit or refund or the

IRS can assess additional tax…”

 

This means you should keep records for 3-7 years.  I would suggest you keep a copy of your return forever and dispose of some of the supporting documents after 3-7 years.  If you own property you will want to keep capital improvement records for as long as you own the property and 3-6 years after the property is sold. 

If you own a business, which has different requirements for record keeping you may want to keep records as long as you own a business.  If you want to sell your business the buyer will want to see many years of records.  

That being said, with electronic record keeping I see no reason why people should not keep their records forever.  You can buy a scanner for as little as $20 and scan all your records onto a drive.  Combo fax, scan and print machines are less than $200 and usually come with the software to store the documents electronically.  

The bottom line is that you never know when you will need a document from the past or for what.  Keeping your documents organized and for long periods of time is never a bad idea.