You can’t believe everything you read in the paper… December 9, 2011
Posted by forwardfinancialplanning1 in Bond Mutual Funds, Equity Mutual Funds, Federal Income Taxes, Income Taxes, State Income Taxes.add a comment
Many of our readers reside in the Bloomington-Normal, Illinois area and subsequently subscribe to the local newspaper, The Pantagraph. An article in the December 8, 2011 “Money & Markets” column of the Money section is entitled “December is tax time”——not surprising given the time of year. However, the authors, AP writers Mark Jewel, and Jenni Sohn might want to double-check their sources as the article contains several inaccurate statements.
Their article is based on the annual mutual fund practice (required by law) of distributing to shareholders the pro-rata share of realized capital gains that have resulted within the mutual fund portfolio. The authors suggest that due to poor 2011 equity market returns, “many stock funds won’t have capital gains to pass on.” They continue with, “Some may even have losses that investors can use to offset gains on other investments.” While their first statement may eventually prove to be true, there’s no doubt about the second statement—it is incorrect. Mutual funds do not pass through the pro-rata share of net realized portfolio losses to shareholders. Rather, residual realized portfolio losses must be “carried forward” by the fund into future years.
The authors later state that capital gains are not a concern for a tax-free municipal bond fund. This supposition is also incorrect since only municipal bond interest payments (and not capital gains) escape the reach of the tax man.
The moral of the story??? It’s prudent to obtain guidance from a professional in the field. Jewel and Sohn do provide some good advice in that regard as they suggest that the complexity of the tax laws makes it wise to, “Consider consulting an accountant or other tax advisor about your strategy.” Perhaps they should heed some of their own advice……………!!!
Honor system no more July 9, 2011
Posted by forwardfinancialplanning1 in Federal Income Taxes, Income Taxes, Investing-General, State Income Taxes.add a comment
The United States has one of the highest income tax compliance rates in the world. Despite this fact, the IRS is taking measures to increase compliance even more. The reporting of “cost basis” on the sale of financial securities has traditionally operated as a de facto honor system because there was no reporting on cost basis required of financial services firms such as broker-dealers and mutual fund companies. The IRS did require the reporting of the gross proceeds from a security sale, but as mentioned above, had no way of matching this against the unreported acquisition cost. So, the taxpayer basically provided the cost basis and the subsequent profit/loss and holding period with the IRS having no way, other than an audit, in which to verify the information.
However, this situation is changing. Starting this year, financial services firms must also report the cost basis of certain securities sales. In addition, they must also report the security holding period (short or long term) for the capital gain or loss.
This new reporting requirement applies to individual stock sales in 2011, mutual funds, most ETF’s and dividend reinvestment plans in 2012 and other securities such as bonds and options in 2013. Thus, investors will need to start doing some tax planning in advance prior to initiating a security sale. Since investors frequently accumulate securities positions in multiple acquisition lots, the financial service firm handling the transaction will ask which lot is being sold. So, dig out your records……………………
More on the magnitude of the federal deficit May 11, 2011
Posted by forwardfinancialplanning1 in Economic Conditions, Federal Income Taxes, Income Taxes.add a comment
Several previous postings on this site have commented on our federal government’s propensity to spend more than it receives in tax revenue. Some in Washington would like you to believe that the deficit is merely a case of revenue shortfalls that can be remedied by asking the wealthy to pay taxes at a higher marginal rate. While it is correct that federal income tax rates are currently lower than they have been for much of the past 50 years, proponents of tax increases are not being truthful when they claim that we merely need to “soak the rich” and end tax breaks for “big oil” in order to close the deficit.
Recent House testimony by Rep. David Schweikert of the 5th Congressional district in Arizona clarifies this circumstance. Schweikert notes that the federal government currently borrows $4.7 billion a day to fund its operations. By eliminating all depreciation, oil depletion allowances and incentives for fossil fuel exploration, we can fund 2 minutes of government operations on a typical day. Likewise, had the so-called Bush tax cuts been allowed to expire at the end of 2010 (rather than being extended for two more years), that “massive” injection of additional revenue would have paid for an additional 28 minutes on the typical day in Washington. Unfortunately, all days (even in D.C) have 24 hours………….most of which can only be paid for by major decreases in entitlements and other federal spending.
A Reality of the Tax-Spend Debate April 17, 2011
Posted by forwardfinancialplanning1 in Economic Conditions, Federal Income Taxes, Income Taxes.add a comment
There is currently a political junkie’s nirvana taking place in Washington as Congress and President Obama posture and debate on the future of the country’s spending, taxes and social programs. Particularly interesting is the important question of “Who pays for it?” The president has advocated for higher marginal tax rates on the wealthiest slice of American taxpayers while the Republicans have resisted. Regardless of where one stands on this issue, there is one irrefutable fact that neither side can change—there aren’t enough “wealthy” people to pay for all the federal government’s spending!
According to the IRS, the entire taxable income of all filers earning over $100,000 in 2008 was about $1.582 trillion dollars. Reporting a taxable income over $100k would hardly classify a household as wealthy—two middle-aged teachers filing jointly (depending of course, on deductions/exemptions etc) might reach this range–especially in high cost of living states. Nonetheless, if marginal tax rates were increased to 100%, that is, taking all of their taxable income, they could still not cover this year’s projected federal budget deficit of $1.65 trillion.
Also gleaned from the IRS data is that over 40% of households who filed a return in 2008 had no federal tax liability. This means of course, that any federally taxable income which was withheld from their paychecks was refunded when they filed their tax return. It seems quite obvious that with the Feds currently borrowing $0.40 out of every dollar that they spend, things are going to have to change. And, all of us are going to have to pay for it………………..
New IRS Regulation for 2011 November 6, 2010
Posted by forwardfinancialplanning1 in Federal Income Taxes, Income Taxes, State Income Taxes.add a comment
A new IRS regulation goes into effect in 2011 that will require investors to do some tax planning when selling investments in the future. Starting in 2011, investment firms will be required to report cost basis to the IRS when a client sells a security. The impact of this requirement is that if the client has multiple lots of the security and is not liquidating the entire position, one of the IRS-approved accounting methods will have to be specified.
This will most likely not be too difficult for owners of common stocks as most are accustomed to selecting specific lots to identify cost basis when completing their income taxes. It may create greater challenges for mutual fund investors, especially if they are reinvesting dividends. There are several IRS approved methods for determining cost basis on mutual funds. The new reporting requirement will cause investment firms to “need to know” the clients preferred method in order to properly report the cost basis on the sale transaction.
Fortunately, this new requirement will take effect over an extended period of time, allowing investors an elongated learning curve. Investment firms and brokers will only be required to report cost basis on the sale of securities which were purchased after December 31, 2010. Clearly, there will need to be improvements to record-keeping systems, but investors should take heed and be aware of the new requirement.
Harvest Time ??? July 25, 2010
Posted by forwardfinancialplanning1 in Bond Mutual Funds, Federal Income Taxes, Income Taxes.add a comment
Generally it’s prudent to postpone the recognition of capital gains so as to avoid the income tax liability that comes along with the gains. However, the 2010 tax year may be the exception to this general rule. Barring congressional action, the Bush tax cuts expire on December 31, 2010. This event will cause long term capital gains rates to increase for any capital gain realized after year end. Hence, it might be wise for investors to search their portfolios and realize any possible long term gains by selling the position prior to the New Year.
Normally, investors attempting to “harvest” gains would look first to their stock and stock fund holdings. Once again however, 2010 may be the exception. Given the dismal performance of the stock market during the past decade, many portfolios do not hold any unrealized equity capital gains. Again, the unusual may apply as the majority of unrealized capital gains within taxable accounts may come from bond holdings. With interest rates at multi-generational lows, bond prices are as high as they’ve been in many years. Most reinvested bond mutual fund dividends from 2008 and the first half of 2009 are “in the money” and can be sold at preferential long term capital gains rates.
Another advantage of this strategy is that an investor doesn’t run the risk of disturbing their desired asset allocation for more than a day as they can repurchase the position immediately after the sale. This is because the IRS “wash sale” rule applies only to realized capital losses, not capital gains. Harvesting gains will also create a “step-up” in basis for the future as the position is re-established at the current, higher price. So, 2010 may be the year to think differently and reduce income taxes as a result.
Beware of aggressive tax preparers March 22, 2010
Posted by forwardfinancialplanning1 in Federal Income Taxes, Income Taxes, State Income Taxes.add a comment
As April 15 approaches, many Americans are occupied by the annual income tax return preparation ritual. Many choose to “farm-out” the task to paid preparers and the airwaves are filled with promotional blurbs. Some firms market themselves as being able to obtain higher refunds for their clients. Since the IRS code is identical for all preparers, one has to wonder how one firm can claim an advantage in this regard. Either these firms are comparing themselves to grossly incompetent competitors or are taking some extremely aggressive positions regarding deductions, exemptions, tax credits and adjustments to income.
In 2011, it will be interesting to see if these promotional tactics continue as the IRS will require tax preparers to register for the first time. Preparers will be assigned a preparer tax identification number (PTIN) and competency tests will be administered. On-going education will be required and most importantly, ethics rules will apply to all paid tax preparers.
Free money that nobody wants March 6, 2010
Posted by forwardfinancialplanning1 in Federal Income Taxes, Income Taxes.add a comment
The IRS code provides an incentive for individuals and couples to save for their retirement. The Savers Tax Credit provides a 50% tax credit for retirement contributions up to $2,000 annually for single filers earning up to $16,750 and couples filing jointly earning up to $33,500. The credit phases out at $27, 750 for singles and $55,500 for couples. However, a study by Behavioral Research Associates reports that 34% of all eligible taxpayers who could have claimed the credit failed to do so. Other research released by Transamerica in 2008 indicated that more than 80% of American workers with household incomes less than $50,000 were not even aware of the Savers Tax Credit. With statistics like this, it’s not surprising that many commentators feel our nation is failing in its retirement readiness.
