December 3, 2009
Vol 2, Issue 12
Jean Keener
Jean Keener
I hope you had a wonderful Thanksgiving and are looking forward to a great rest of the holiday season.
The S&P 500 went up another 5.6% in November.  It's now up more than 22% for the year.  Historically speaking, market valuations are now higher than the median range over extended history.   If you're interested in market history and would like to discuss this benchmark, please feel free to give me a call.
In this newsletter, we have advice on tracking your spending, year-end investment moves to save taxes, the expanded home buyers credit, and more.  As always, feel free to e-mail me at with requests for newsletter topics you'd like to see covered.  Thank you, and warmest holiday wishes to you and your family!
In This Issue
2010 Key Financial Numbers
Tips on Tracking Your Spending
Tax-Saving Investment Moves
Expanded home buyers tax credit
Gift Idea: Financial Planning
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2010 Key Numbers
The key numbers guide to limits on retirement plan contributions, tax brackets, tax credit and deduction phase-outs, social security benefits, medicare, and much more has been updated for 2010.  Not a lot of changes from last year, but still a convenient reference.  Click here to view and/or print it.
Tips on Tracking Your Spending
Writing down what you spendAnswering the questions: Where does your money go each month? or What are your monthly expenses?  can be a real stumper for many.  And finding the answer can be very eye opening.  Awareness of this information can lead to almost instant changes in your ability to meet your financial goals ... from saving for retirement or college to establishing an emergency fund or funding a vacation.
But how do you go about tracking expenses if you're not already doing it? 
Here are some of the best ways I've seen people accomplish "writing down" their expenses.  If you have others that you've found successful, I would love to add them to this list -- please share them with me!
  1. Carry a mini notebook and record expenditures as you go.  You can then manually total purchases up with a calculator or add it to one the higher-tech methods that follow.
  2. Get a receipt for everything.  Then every couple of days or weeks, enter the receipts into Quicken or other personal finance software (this is my personal method).
  3. Set up an account with or to have all of your credit / debit purchases automatically tracked and categorized.  Then you'll just be responsible for adding the cash transactions. 
  4. Keep an excel spreadsheet.  Update it a couple times a month from a combination of bank statements, ATM receipts, credit card statements, and cash receipts.
 The important factor with all of these is keeping up with it.  If you wait many weeks or months between tracking, it will be nearly impossible to account for every dollar or even most dollars spent.
In my experience, writing down everything I eat is the fastest way to shed weight.  And it's also the fastest way to gain clarity on what we spend.  Of all the sophisticated financial planning scenarios we discuss, this is the most basic and sometimes the most transforming.  If tracking your spending is not a current habit for you, it gets my vote as the best "resolution" for December or the new year.
Year-End Tax Saving Investment Moves
Year End Tax-Saving Investment MovesDecember is a good time to consider investing moves to improve your tax situation in April.  However, before you take any action, it's important to keep these factors in mind.
Consider your overall portfolio
Review your total portfolio and desired asset allocation before making any moves designed to reduce tax liability.  It doesn't make sense to buy or sell an investment for tax reasons if it ends up hurting your overall portfolio.  After-tax returns are what really matter, not just tax savings.

Consider how long you've owned each investment
Assets held for a year or less generate short-term capital gains, which are taxed as ordinary income. Depending on your tax bracket, that rate could be as high as 35%, not including state taxes. Long-term capital gains on the sale of assets held for more than a year are taxed at lower rates: 15% for most investors, 0% (through tax year 2010) for anyone in the two lowest tax brackets. (Long-term gains on collectibles are slightly different; those are taxed at 28%.) 
Your holding period can also affect the treatment of qualified stock dividends, which are taxed at the more favorable long-term capital gains rates if you have held the stock at least 61 days. (Those days must occur within the 121-day period that starts 60 days before the stock's ex-dividend date; preferred stock must be held for 91 days within a 181-day window.) The lower rate also depends on when and whether your shares were hedged or optioned during those 61 days. Check with your tax professional to make sure you don't inadvertently incur unnecessary taxes by selling or buying at the wrong time.
Use losses to offset gains and some income
If you have realized capital gains from selling securities at a profit and you have no tax losses carried forward from previous years, you can sell losing positions to avoid being taxed on some or all of those gains. Any losses over and above the amount of your gains can be used to offset up to $3,000 of ordinary income ($1,500 for a married person filing separately) or carried forward to reduce your taxes in future years. Selling losing positions for the tax benefit they will provide next April is a common financial practice known as "harvesting your losses."  This strategy only applies to taxable accounts -- not 401(k)s or IRAs.

Example: You sold stock in ABC company this year for $2,500 more than you paid when you bought it four years ago. You decide to sell the XYZ stock that you bought six years ago because it seems unlikely to regain the $20,000 you paid for it. You sell your XYZ shares at a $7,000 loss. You offset your $2,500 capital gain, offset $3,000 of ordinary income tax this year, and carry forward the remaining $1,500 to be applied in future tax years.
Time any trades appropriately
If you're selling to harvest losses in a stock or mutual fund and intend to repurchase the same security, make sure you wait at least 31 days before buying it again. Otherwise, the trade is considered a "wash sale," and the tax loss will be disallowed. The wash sale rule also applies if you buy an option on the stock, sell it short, or buy it through your spouse within 30 days before or after the sale.
If you have unrealized losses that you want to capture but still believe in a specific investment, there are a couple of strategies you might think about. If you want to sell but don't want to be out of the market for even a short period, you could sell your position at a loss, then buy a similar exchange-traded fund (ETF) that invests in the same asset class or industry. Or you could double your holdings, then sell your original shares at a loss after 31 days. You'd end up with the same position, but would have captured the tax loss.
If you're buying a mutual fund in a taxable account, find out when it will distribute any dividends or capital gains. Consider delaying your purchase until after that date, which often is near year-end. If you buy just before the distribution, you'll owe taxes this year on that money, even if your own shares haven't appreciated. And if you plan to sell a fund anyway, you may minimize taxes by selling before the distribution date.

Be selective about selling shares

If you own a stock, fund, or ETF and decide to unload some shares, you may be able to maximize your tax advantage. For a mutual fund, the most common way to calculate cost basis is to use the average cost per share. However, you can also request that specific shares be sold--for example, those bought at a certain price. Which shares you choose depends on whether you want to book capital losses to offset gains, or keep gains to a minimum to reduce the tax bite. (This only applies to shares held in a taxable account.) Be aware that you must use the same method when you sell the rest of those shares.
Example: You have invested periodically in a stock for five years, paying a different price each time. You now want to sell some shares. To minimize the capital gains tax you'll pay on them, you could decide to sell the least profitable shares, perhaps those that were only slightly lower when purchased. Or if you wanted losses to offset capital gains, you could specify shares bought above the current price.
Buying a home to cash in on home buyers' credit?
Home Buyers Tax CreditYou may have heard that the first-time home buying tax credit was extended through April 30 next year, and that it now includes a credit for some non-first-time home buyers also.  For details on the extension and who is eligible, visit the IRS website.
This is great news if you fall into the eligible groups and were already planning to purchase a home. 
A tax credit is an actual dollar-for-dollar credit against your tax liability, as compared to a tax deduction which just reduces your taxable income.  A deduction, depending on which tax bracket you're in, saves you between 10% and 35% of the deduction.  The credit saves you 100% of the credit amount.  The home buying credit is also fully refundable, which means you can receive it even if it exceeds your tax liability.
Should you adjust the timing of your home purchase to take advantage of the credit?  
Yes, this is a good idea.  If it's just a question of changing your timing by a few months to take advantage of the tax credit and there aren't other substantial costs with the change, that makes all the sense in the world.  
If you weren't planning to purchase a home already, should this credit motivate you to take action?  
Definitely not.  If you weren't planning to buy a home and aren't financially ready for the purchase, this tax credit doesn't significantly change that math.  
For existing home owners, the costs of a move are too high to even come close to being offset by this credit.  Consider real estate commissions, preparing your home to sell, closing costs on the new home, moving expenses, and ongoing increases in your utilities, maintenance and property taxes if you move to a larger home.
For potential first-time home buyers, the credit doesn't significantly change whether home ownership is right for you.  Yes, the $8,000 is a nice bonus.  But it's a small dent in the costs of owning a home over even the 3-year minimum required to not pay back any of the credit.  The mortgage is just the beginning of the cost of home ownership - consider maintenance, repairs, yard work, and utilities that are typically higher in a home than an apartment.  There's also the property tax and insurance which for most first-time home buyers will be escrowed into their total mortgage payment, however it's up to the home owner to catch up any shortfall in the amounts escrowed.
Bottom line, you should definitely take advantage of the home buyers credit if it fits in with your overall financial plan.  The credit could even provide a good opportunity for you to jump-start your 2009 or 2010 IRA contributions, beef up your emergency fund, or start a 529 plan for your children's college.  But the credit shouldn't tempt you to make a decision that will end up hurting you financially long-term.  Make sure your math includes the long-term total cost of your move!
Give the Gift of Financial Planning
 As we approach the holidays, there may be someone in your life whom you'd like to provide the gift of financial planning.  Gift certificates are available for as little as single hour of financial planning, or I can work with you to customize an engagement for your loved one.  Contact me to discuss this directly, or click on this link to purchase a gift certificate online.  If purchased online by December 21, your gift certificate will be mailed to you in plenty of time for the holidays.
I hope you found this newsletter informative.  KFP offers a free, no-obligation initial consultation to start the financial planning process for new clients.  To learn more or schedule a time, call 817-993-0401 or e-mail
Jean Keener, CRPC, CFDP
Keener Financial Planning

Keener Financial Planning is a fee-only financial planning and investment advisory firm working with individuals at all financial levels.
All newsletter content Copyright 2009, Keener Financial Planning, LLC.