March 9, 2010
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Vol 3, Issue 3 | |
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| Greetings! |
Good morning, and happy March.
February was a welcome turnaround after a rough January in the stock market. Domestic stocks gained ground, with the large-cap Vanguard 500 Index up 3.1%. Small- and mid-cap domestic stock indexes are now in the black for the year while the large-cap index is still slightly negative. International stocks were flat for the month, and are still down almost 5% for the year so far, but emerging-markets stocks and bonds saw matching 1.1% gains. Domestic high-quality intermediate-term and high-yield bonds both eked out gains for the month, adding slightly to the solid gains earned in January.
There's a lot going on in the financial world right now. In this newsletter, we have some information that may be immediately helpful in preparing your taxes, as well as some bigger picture articles on evaluating an early retirement offer and Part II in my series on tapping into the equity in your home for retirement income. As always, feel free to e-mail me at jean@keenerfinancial.com with requests for newsletter topics you'd like to see covered. Thank you, and live well. |
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| Haiti Donation Tax Deduction for 09 Returns |
 If you donated money to Haitian relief efforts in January or February, you may be able to take the deduction on your 2009 tax return. You can treat qualified contributions as if they were made on December 31, 2009. As a result, if you itemize deductions on Form 1040, Schedule A, you can elect to claim the deduction for the Haitian relief contribution on your 2009 federal income tax return. To qualify, the contribution must be made in cash. To facilitate charitable donations made via text messages, a telephone bill showing the name of the organization, and the date and amount of the contribution, will satisfy charitable deduction recordkeeping requirements. Ask your tax preparer if you're eligible for this deduction. |
| Credit Card Law Provisions |
 The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 included several provisions that became effective on February 22, 2010.
Some of these changes could affect you:
Credit card companies are prohibited from increasing annual percentage rates (APRs) that apply to existing balances unless (1) the index on which the rate is based changes, (2) the APR was a promotional rate that has expired, (3) you failed to comply with a hardship workout plan, or (4) you're more than 60 days past due on the account; if an increase in APR is the result of you falling 60 days past due on the account, the rate will be restored to what it was before the increase if you make timely minimum payments for six months.
If different APRs apply to separate portions of an outstanding balance, the amount of any payment beyond the minimum payment due must be applied to the portion of the balance with the highest APR.
If you're under age 21, you won't be able to get credit unless you have a cosigner over age 21 or can demonstrate an ability to repay the debt.
You can't be charged an over-the-limit fee unless you authorize the credit card company to complete the transaction that causes the balance to exceed your credit limit. |
| Home Buyer's Tax Credit Time Running Out |
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If you--and your spouse, if you're married--did not own any other principal residence during the three-year period ending on the date of purchase, the credit is worth up to $8,000 ($4,000 if you're married and file separate returns).
If you--and your spouse, if you're married--have maintained the same principal residence for at least five consecutive years in the eight-year period ending at the time you purchase a new principal residence, the credit is worth up to $6,500 ($3,250 if you're married and file separate returns).
The credit is reduced if your modified adjusted gross income (MAGI) exceeds $125,000 ($225,000 if married filing a joint return) and is completely eliminated if your MAGI reaches $145,000 ($245,000 if married filing a joint return).
You can't claim the first-time homebuyer tax credit if the purchase price of your principal residence exceeds $800,000. Other limitations and provisions also apply. |
| Proposed 2011 Budget Items that May Affect You |
 The President's proposed 2011 budget offers Congress multiple initiatives. The budget that ultimately emerges from Congress will likely differ significantly from that proposed by the President, but the proposed budget is valuable in that it provides a framework for discussion over the next few months. The proposed budget includes:
For businesses
A new tax credit of $5,000 for each new hire made by an employer, a one-year extension of 2009 bonus depreciation and Section 179 expensing limits, and requirements for employers who do not offer retirement plans to implement automatic IRAs for employees.
For students
Expanded Pell Grant limits, a permanent American Opportunity tax credit, and a proposal to strengthen income-based repayment plans for student loans (overburdened borrowers would pay only 10% of discretionary income in loan payments and remaining debt would be forgiven after 20 years).
For individual taxpayers
A return of the top two marginal tax rates to 39.6% and 36% in 2011, and an expanded 28% tax bracket; a permanent extension of the current 0% and 15% rates on long-term capital gain, with a new 20% rate for higher-income individuals; permanent extension of the federal estate tax and the alternative minimum tax (AMT) rules and exemption amounts, at 2009 levels. |
| Tapping Equity in Your Home (Part II of II) |
 Last month we started the discussion on how to tap into your equity in your home in retirement with a review of reverse mortgages. If you missed last month's article, click here to read it. This month, we'll complete the discussion by looking at the second option to tap home equity: trading down.
If your home is larger than you need, trading down to a smaller place may be a good way to increase your retirement income. The difference between the price that you receive for your present home and the cost of a smaller new home can be added to your retirement funds to provide you with additional investment income. The amount of cash that you can get by trading down depends on the value of your present home, the cost of purchasing a new home, and the incidental costs involved in the trade (e.g., brokerage commissions, legal fees, closing costs, and moving expenses). You should estimate these amounts to get some idea of the net amount that you will receive. To check the present value of your home, you should get an estimate of its selling price from two or three real estate agents. You should also get an estimate of the cost of your replacement home by shopping around for the type of home that you think you'll want.
If you think that the tax consequences of trading down are a drawback, think again.
You may be able to exclude from federal taxation up to $250,000 ($500,000 if you're married and file a joint return) of any resulting capital gain, regardless of your age. To qualify for this exclusion, you generally must have owned and used the home as your principal residence for a total of two out of the five years before the sale. An individual, or either spouse in a married couple, can generally use this exemption only once every two years. However, even if you don't meet these tests, a partial exemption may be available. (For sales and exchanges made after December 31, 2008, this homesale exclusion won't apply to the extent the gain is allocated to periods (not including any period before January 1, 2009) during which the property was not used as your, or your spouse's, principal residence.)
Trading down can reduce your housing costs
The other important financial benefit of trading down is that it reduces housing costs--often substantially. A smaller home usually means lower real estate taxes and smaller bills for heating, cooling, insurance, and maintenance costs. If your move is from a single-family house to a condominium, your costs may be reduced even more because outside painting, roof repair, landscaping, and similar costs disappear into lower monthly condo fees. You should carefully estimate the amount of the cost savings that you'll get from trading down. Compare the annual cost of maintaining your present home with the expected annual cost of maintaining your new home. Be sure to prorate expenses that do not occur regularly, such as indoor and outdoor painting and roof repairs.
But trading down may have disadvantages
Consider the possible drawbacks of trading down. For instance, you may not want to reduce your living space by moving to a smaller home. Or, you may not be able to find a smaller home as attractive as your present home. Another common problem with trading down occurs if you are strongly attached to your present home. You may not want to be uprooted from your home and the social network around it. There is also the very real issue of the perceived status of a larger and how owning a large home makes you feel.
Before you include a plan to trade down in your retirement plans, it's important to imagine how you will feel when it comes time to make the move. Visualize each of the issues above individually to determine if they are a concern for you. Talk with friends or family members who may have completed such a move. After you've completed this process, then you can really weigh the financial benefits of trading down against any trade-offs that may be relevant to you. |
| Evaluating An Early Retirement Offer |
 In today's corporate environment, cost cutting, restructuring, and downsizing are the norm, and many employers are offering their employees early retirement packages. But how do you know if the seemingly attractive offer you've received is a good one? By evaluating it carefully to make sure that the offer fits your needs.
What's the severance package?
Most early retirement offers include a severance package that is based on your annual salary and years of service at the company. For example, your employer might offer you one or two weeks' salary (or even a month's salary) for each year of service. Make sure that the severance package will be enough for you to make the transition to the next phase of your life. Also, make sure that you understand the payout options available to you. You may be able to take a lump-sum severance payment and then invest the money to provide income, or use it to meet large expenses. Or, you may be able to take deferred payments over several years to spread out your income tax bill on the money.
How does all of this affect your pension?
If your employer has a traditional pension plan, the retirement benefits you receive from the plan are based on your age, years of service, and annual salary. You typically must work until your company's normal retirement age (usually 65) to receive the maximum benefits. This means that you may receive smaller benefits if you accept an offer to retire early. The difference between this reduced pension and a full pension could be large, because pension benefits typically accrue faster as you near retirement. However, your employer may provide you with larger pension benefits until you can start collecting Social Security at age 62. Or, your employer might boost your pension benefits by adding years to your age, length of service, or both. These types of pension sweeteners are key features to look for in your employer's offer--especially if a reduced pension won't give you enough income.
Does the offer include health insurance?
Does your employer's early retirement offer include medical coverage for you and your family? If not, look at your other health insurance options, such as COBRA, a private policy, or dependent coverage through your spouse's employer-sponsored plan. Because your health-care costs will probably increase as you age, an offer with no medical coverage may not be worth taking if these other options are unavailable or too expensive. Even if the offer does include medical coverage, make sure that you understand and evaluate the coverage. Will you be covered for life, or at least until you're eligible for Medicare? Is the coverage adequate and affordable (some employers may cut benefits or raise premiums for early retirees)? If your employer's coverage doesn't meet your health insurance needs, you may be able to fill the gaps with other insurance.
What other benefits are available?
Some early retirement offers include employer-sponsored life insurance. This can help you meet your life insurance needs, and the coverage probably won't cost you much (if anything). However, continued employer coverage is usually limited (e.g., one year's coverage equal to your annual salary) or may not be offered at all. This may not be a problem if you already have enough life insurance elsewhere, or if you're financially secure and don't need life insurance. Otherwise, weigh your needs against the cost of buying an individual policy. You may also be able to convert some of your old employer coverage to an individual policy, though your premium will be higher than when you were employed.
In addition, a good early retirement offer may include other perks.
Your employer may provide you and other early retirees with financial planning assistance. This can come in handy if you feel overwhelmed by all of the financial issues that early retirement brings. Your employer may also offer job placement assistance to help you find other employment. If you have company stock options, your employer may give you more time to exercise them. Other benefits, such as educational assistance, may also be available. Check with your employer to find out exactly what its offer includes.
In addition to the specific offer, consider the big picture.
Evaluating the offer itself is really just the beginning of the decision. Even if it's a fantastic offer, you still need to look at it in the context of your entire financial situation and personal goals. Will you need to find another job? If so, how does the salary you could expect to earn compare to your current income? Can you afford to retire early? If you do retire, what kind of adjustments will you need to make to your retirement plans and goals? What will happen if you say no?
After answering all of these questions, then you're in a position to make the best decision for yourself and any family members. |
| Free Financial Education Seminars |
The Keller Public Library has re-opened, and it is beautiful! I will holding free community financial education seminars there starting in April. Seminars are the third Tuesday of each month at 6:30 pm and last about an hour. They are held in the Community Room at the entrance to the library. Advance registration to tchiv@cityofkeller.com is encouraged because space is limited.
For April 20, our topic is Your Retirement Savings Game Plan.
Future months topics include:
May: Common Investing Mistakes and How to Avoid Them
June: Where does all your money go? How to build a budget that works for you and stick with it.
July: Saving for College in Texas
The Keller Public Library is located at 640 Johnson Road. | |
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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@keenerfinancial.com.
Sincerely,
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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 ©2010, Keener Financial Planning, LLC. |
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