Ocotber 15, 2010
| Vol 3, Issue 10 |
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| Greetings! |  Good morning.
We've had quite a nice month in the market. The S&P 500 is up 9% since the beginning of September taking us back into positive territory for the year. The U.S. bond market was flat in September, but is also solidly up year-to-date.
The 2011 cost-of-living adjustment announcement for social security is expected today. As of this writing, forecasts were for another year without a raise, but nothing official had been announced.
I will be serving as a panelist and attending the Garrett Planning Network annual conference in Eureka Springs from October 22 - 24. I'm expecting to learn lots of great information for you, but please be patient with communication during that week as I will have limited access to email and voicemail.
In this month's newsletter, we have information on medicare open enrollment, 2010 year-end investment planning, avoiding portfolio diversification pitfalls, and more. As always, feel free to e-mail me at [email protected] with requests for newsletter topics you'd like to see covered or to discuss concerns or questions on anything in the financial world. Thank you, and live well. |
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| Year-End Investment Planning |
 We talked about year-end tax planning last month, and this month we're focusing on investments. If you don't normally review your investments at the end of each year, 2010 might be a good time to start. And if year-end investment planning is already part of your routine, you might want to pay special attention this year. Why? Because significant changes in the tax code that are scheduled to go into effect in 2011 could substantially alter the taxation of your portfolio next year. That could in turn affect your investment strategy. And since many expect additional changes that will affect next year's tax landscape, it's even more important than usual to think about whether your portfolio needs fine-tuning.
Begin planning before December 31
If you plan to sell a profitable investment at some point, you'll want to assess whether you should sell before the end of the year. That's especially true if you're in a low tax bracket or you have investments that have appreciated substantially. Investors in the 10% and 15% tax brackets currently owe no capital gains taxes on long-term capital gains. That is scheduled to change in 2011, when the long-term capital gains rate at this level is scheduled to increase from 0 to 10%. If you're in the 25% bracket or higher this year, you'll also need to think about this issue, though the scheduled increase from the current 15% to 20% isn't quite as dramatic as the leap from 0 to 10% that those in the lower income brackets will face. (Special, slightly lower rates for investments held for more than five years will apply beginning in 2011.)
Also, the tax brackets themselves are scheduled to change next year. If you plan to harvest a tax loss and think you may be in a higher tax bracket next year, it might make sense to first determine whether the loss would be more valuable later. Though tax considerations shouldn't be the sole factor in a decision to buy or sell, they shouldn't be ignored, either--especially this year.Complicating your decisions, of course, is the uncertainty about whether the scheduled changes will undergo further revision before the end of the year. One possibility is to have a game plan based on the current scenario, and adjust it as warranted. It may seem like a burden, but for those in higher tax brackets, the extra effort could pay off come tax time. Think about your overall tax burden
If you converted an IRA to a Roth IRA this year or are thinking about doing so before the end of the year, you may need to take that into account when deciding whether to book capital gains in 2010. That's because you're able to report the taxable ordinary income from the conversion on either your 2010 return or in the 2011 and 2012 tax years (half of the income in each year). Your decision about when you will account for the taxable income that results from a Roth conversion may affect your decision about the timing of investment sales, or vice versa. If you choose to report the income resulting from your Roth conversion on your 2010 return, consider whether it makes sense to realize sizable capital gains this year. If you feel it's to your advantage to sell assets and pay the capital gains tax in 2010, you may want to consider opting to postpone payment of the taxes owed on the Roth conversion until 2011 and 2012. That would mean the total taxes owed would be spread over three years rather than one (though as noted above, your future tax bracket also should be factored into the calculation).
Consider the tax status of dividends
Qualifying dividends are scheduled once again to be taxed next year as ordinary income, as they were before 2003, rather than at long-term capital gains rates, which are typically lower. If you'll be in the 15% tax bracket, that represents an increase of 15%. And if you'll be in the 28% tax bracket or higher next year, the change in the tax status of dividend payments could also have an impact; the higher your tax bracket in 2011, the greater the impact.
Don't forget the usual suspects In addition to staying on top of the tax issues that complicate this year's investment planning efforts, there are some tasks that are useful every year. A portfolio review can tell you whether it's time to adjust your holdings to maintain an appropriate asset allocation. Also, if you have losses, you may be able to harvest those losing positions to offset some or all of any capital gains. Be sure to consider how long you've owned the asset; assets held a year or less generate short-term capital gains and are taxed as ordinary income.If you're selling an investment but intend to repurchase it later, be careful not to buy within 30 days before or after a sale of the same security. Doing so would constitute a violation of the "wash sale" rule, and the tax loss would be disallowed.
Finally, if you're considering the purchase of a mutual fund outside of a tax-advantaged account, find out when the fund will distribute dividends or capital gains, and consider postponing action until after that date to avoid owing tax on that distribution. |
| Medicare Open Enrollment Season |
 If you're currently enrolled in Medicare, you've probably begun receiving information about your coverage. That's because the annual enrollment period for Medicare runs from November 15 through December 31. During this period, you can make changes to your Medicare coverage that will be effective on January 1, 2011. Even if you like the Medicare coverage you already have, it's a good time to explore your options, especially if your health or financial circumstances have changed.
Reviewing your Medicare plan
Your Medicare plan sends you two important documents every year. The first, called the Evidence of Coverage, gives you information about what your plan covers, and its cost. The second, called the Annual Notice of Change, lists changes to your plan for the upcoming year (these will take effect in January). You can use these documents to evaluate your current plan and decide if you need different coverage. If you haven't already gotten one, you should soon receive a copy of Medicare & You 2011, the official government Medicare handbook. It contains detailed information about Medicare that should help you decide if your current plan is right for you.
Here are a few points to consider as you review your coverage:
- Will your current plan cover all the services you need and the health-care providers you need to see next year?
- Does your current plan cost more or less than other options?
- Make sure you consider premiums, deductibles, and other out-of-pocket costs you pay such as co-payments or coinsurance costs, and determine if any of these costs are changing.
- Do you need to join a Medicare drug plan? When comparing plans, consider the cost of drugs under each plan, and make sure the drugs you take will still be covered next year.
What's new?
This year, it's especially important to carefully review your coverage, because legislation passed in 2010 will affect your Medicare coverage next year. Some costs and coverages will be different. For example, starting in 2011, if you're enrolled in original Medicare, you'll be entitled to a free annual physical and wellness plan, and other preventive care services will be fully covered. If you have a Medicare prescription drug plan, and you have prescription costs high enough to put you into the coverage gap known as "the donut hole," you'll receive a 50% discount on brand-name drugs and a small discount on generic drugs.
Medicare Advantage plans will be affected too.
The open enrollment period that used to be available each year from January 1 through March 31 is changing; starting next year, this period will run from January 1 through February 15. If you're enrolled in a Medicare Advantage plan, the only option you'll have during this period is to disenroll from your plan and switch back to original Medicare (formerly you could switch to a different Medicare Advantage plan during this time). However, if you return to original Medicare and lose drug coverage provided by your Medicare Advantage plan, you'll also be able to enroll in a Medicare prescription drug plan.What if you want to keep your current plan?
If you're happy with your current coverage, you don't need to switch plans. You can keep the plan you have if it still meets your needs.If you have any questions or concerns about your coverage or need help comparing your options, call 1-800-Medicare. Or, you can find a tool on the official Medicare website, www.medicare.gov, that compares Medicare plans, Medigap plans, and Medicare prescription drug plans available in your area. |
| Portfolio Diversification Pitfalls and How to Avoid Them |
 You're diversified, right? You own all kinds of investments - individual stocks, traditional mutual funds, and those new-fangled exchange-traded funds (ETFs) - and have multiple accounts at different financial institutions. That's enough, isn't it?
Well, maybe not.
Many investors believe their portfolio is more diversified than it really is. Here's a sample portfolio that on the surface might appear diversified:
- Fidelity Blue Chip Growth Fund
- Schwab Dividend Equity Fund
- T. Rowe Price US Large Cap Core Fund
- Yacktman Fund
- Rydex S&P Equal Weight ETF
- iShares 400 Social Index ETF
- Procter & Gamble
- Pepsico
- ExxonMobil
- Microsoft
Dig a bit into this collection of six funds and four stocks, and you'll see that this portfolio is not well diversified at all. It's invested almost exclusively in large-cap U.S. stocks. There's almost no exposure to small-cap or international stocks, and there's no bond exposure. A big chunk of your overall portfolio is in the top 25 U.S. companies, and the individual stocks you own are among the largest holdings in several of your mutual fund holdings. Your risk level is comparable to just owning a single S&P 500 Index fund. This portfolio illustrates some false signs of diversification: - Large quantity of mutual funds or ETFs from different fund companies
- Accounts with different institutions
- Several different large-company stocks
A truly diversified portfolio includes many different kinds of assets, as well as many different companies or governments within each asset class. The most basic division of asset classes is between stocks and bonds. Both stocks and bonds can be further divided by geography. Stocks can be categorized based on company size or by whether they are value or growth stocks, while bonds can be categorized based on credit rating quality and whether they are short, intermediate, or long-term bonds. You may also add real estate and commodities for additional diversification. You can avoid these portfolio diversification pitfalls by following 4 simple steps. Details at www.KeenerFinancial.com. |
| Tax Changes from Small Business Jobs Act |
 On September 27, 2010, the Small Business Jobs Act of 2010 (H.R. 5297) was signed into law. This is not terribly interesting reading! But if you're a small business owner, it's worth your time to take a look. The legislation contains several provisions designed to ensure that small businesses have access to adequate credit and contains targeted short-term tax relief for small businesses. Specific tax changes include:
- Increased IRC Section 179 expense limits -- Effective for 2010 and 2011, the maximum amount that a business is able to expense under IRC Section 179 is increased to $500,000 (without the legislation, the expense limit would have been $250,000 for 2010 and $25,000 for 2011). The $500,000 limit is reduced if capital expenditures exceed $2 million. The Act also temporarily expands the application of Section 179 to up to $250,000 of certain real property (for example, qualified restaurant property).
- First-year "bonus" depreciation extended -- The Act extends the additional 50% first-year depreciation deduction that was in effect for 2008 and 2009 for one year, to qualified property acquired and placed in service during 2010.
- Small business stock exclusion increased -- The Act temporarily increases the exclusion percentage for qualified small business stock purchased by individuals to 100%, and does not treat the excluded gain as an alternative minimum tax preference item. Therefore, subject to certain limits, you'll pay no regular tax or alternative minimum tax on the sale of qualified small business stock acquired at original issue after September 27, 2010, and before January 1, 2011, provided you hold the stock for at least five years.
- Small businesses get enhanced general business credit -- Eligible small businesses (generally, non-publicly traded corporations, partnerships, or sole proprietorships with gross receipts averaging $50 million or less) will be able to carry back excess general business credits up to 5 years (instead of 1) in 2010, and will be able to use the general business credit to offset both regular and alternative minimum tax liability.
- Health insurance costs will reduce self-employment tax -- If you're self-employed and pay health insurance premiums for you or your family, you get a break on your 2010 self-employment tax (the tax that you calculate on Form 1040, Schedule SE). That's because, for 2010 only, the deduction you get for the cost of health insurance for yourself and your family will apply in calculating your earnings for purposes of self-employment tax as well as in reducing your income for income tax purposes.
- Cell phones no longer listed property -- Effective 2010, cell phones are not considered listed property, significantly reducing the substantiation rules and depreciation limits that apply when cell phones are used for business purposes.
- New reporting requirements for rental property expenses -- With some exceptions, starting in 2011, if you receive rental income from real property, you'll be required to file an information return (Form 1099) when you make payments totaling $600 or more to a service provider (such as a plumber, painter, or accountant) for rental property expenses.
- Portion of nonqualified annuity can be annuitized -- Beginning in 2011, if you have a nonqualified annuity (an annuity that is held outside of a qualified retirement plan or IRA), you can annuitize only a portion of the annuity, provided the annuitization period is for 10 years or more, or is for the lives of one or more individuals. The portion of the annuity or contract that is annuitized will be treated as a separate contract, and the investment in the annuity will be allocated on a pro-rata basis.
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| Free Personal Finance Workshop Tuesday October 19 |
 I am providing a free personal finance workshop on Tuesday, Oct. 19 at 6:30 pm at the Keller Public Library, and you're invited!
The topic is How much insurance do you really need? We will focus on the basics of life, disability, and long-term care insurance -- who needs them, when you need them, what kind, and how much Space is limited and registration is encouraged to ensure your space. RSVP to [email protected].
Future months topics include (always the third Tuesday of the month):
November: Maximizing Social Security Benefits for Baby Boomers (repeat of August's program)
December: Investing Basics: How to build a diversified portfolio and keep your costs low
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 [email protected]. Sincerely,
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Jean Keener, CRPC, CFDP
Keener Financial Planning
Keener Financial Planning is an hourly, as-needed 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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