February 23, 2012Vol 5, Issue 2
DFW Financial Planning

Jean Keener, CFPGood morning.


As you've probably noticed on your investment statements and in the news, the markets have continued their strong start to the year.  Year to date, large U.S. company stocks (S&P 500 Index) are up more than 8%, developed international company stocks (MSCI EAFE index) are up 10%, and emerging markets stocks (MSCI EM index) are up nearly 16%.  On the bond side, both the U.S. and global aggregate bond market indices are up a fraction of a percent for the year. 


This is a nice and enjoyable break from the market turmoil we experienced so much of last year.  With international markets starting the year stronger than U.S. markets, it's a fresh reminder of the benefits of maintaining diversifed allocations even through last year's poor performance overseas.  However, we're all keenly aware that the economic recovery in the U.S. is still proceeding slowly and European debt issues are not resolved.  So it's reasonable to expect that we'll see more volatility as this year unfolds. 


In this month's newsletter, we have some inspiration from Keller High School seniors to refocus on paying yourself first, an update on recent tax legislation and proposals, information on how social security works when you're divorced, 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.  Thanks, and live well!

In This Issue
Pay Yourself First
Tax Legislation Update
New Cost Basis Rules
Social Security and Divorce
Upcoming Personal Finance Workshops
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Quick Links
Pay Yourself First

Pay Yourself FirstFor the past three years, I've taught the Junior Achievement personal finance course to one of Ms. Turner's economics classes at Keller High School.  In the very first session each semester we talk about the concept of Pay Yourself First.  It's an idea the high school seniors easily embrace as they plan their mock monthly budgets with savings, rent, transportation, groceries, and other expenses.  They "get" the concept of putting their savings aside first before they pay any other bills or spend any other money.


But paying yourself first is something that sometimes as adults we tend to forget.  For many of us, we have some retirement savings on auto-pilot through an employer retirement plan.  But additional savings toward retirement or other goals is often an after-thought with anything that's left over at the end of the month.  And so we fall into patterns where we have lists of things we'd like to do "some day" or "when we have some extra money."  The lists may include starting to save for children's college, finding out if the money going into the 401(k) is enough, setting aside funds for that bucket-list vacation with the grandkids, or something else.  And months or years can go by with "some day" never arriving.


If we remind ourselves of the advice the Keller high school seniors so easily adopt - pay yourself first - our goals can come to fruition quickly.


So, where to start? 


There's one necessity for everyone - a cash reserve.  If you already have one, great.  If not, this should be your first pay-yourself-first project.  Pick an amount to set aside first whenever you receive monthly income - whether it's a paycheck, a draw from a business, social security, or any other source of income.   Make it enough to be substantial in progress toward your goal, but not so much that it will choke the rest of your monthly budget.


The second necessity for everyone is retirement.  If you're not on track with your retirement savings (or you're not sure), defining this goal and beginning and/or expanding your regular savings towards it is a must.   There are lots of tax efficient ways to make your savings dollars go far with retirement.


After the cash reserve and retirement goals, I would suggest adding at least one other goal that's important to you to the pay-yourself-first list.  Pick a goal that matches your priorities and reflects something or someone important to you - this will give you that feeling of happiness and satisfaction each month as you set the funds aside.  And it will make is easier later in the month when you may need to forego another expenditure because the funds are already spoken for.


And then take pride in your progress toward your goals, and celebrate when you reach one of your pay-yourself-first milestones.

Tax Legislation Update

Payroll Tax Cut Extension


Tax Legislation UpdateThe payroll tax cut has been officically extended through December 31 -- reducing Social Security taxes from 6.2% of income to 4.2% for workers.


The same bill extends unemployment benefits from 59 weeks to anywhere from 89 to 99 weeks, depending on the unemployment level in each state, and will require the recipients of unemployment insurance payments who have not finished high school to enroll in a GED program. States could also create voluntary training programs for those seeking jobless benefits.


In other provisions, doctors who treat Medicare patients would avoid seeing their payments cut. To partially offset the costs, federal workers would have to pay more into their pension plans, and $5 billion will be cut from the new health care law.


Proposed Budget Tax Changes


President Obama has released a new proposed budget which would, among other things, extend the Bush-era tax cuts for all but the top two brackets. The 33% and 35% marginal rates would go back to their pre-2001 levels of 36% and 39.6%. The budget proposal would also raise the long-term capital gains rate to 20% for single taxpayers with more than $200,000 a year in income, or married taxpayers filing jointly earning $250,000 per year. For these same upper-income taxpayers, the tax rate on qualified dividends would revert to ordinary income rates--up to a maximum of 39.6%. For everyone else, dividends would still be taxed at a 15% or 0% rate, depending on the tax bracket.


The bill would create a permanent solution to the vexing Alternative Minimum Tax, essentially replacing its complex formulae with the so-called Buffett Rule, requiring any household earning more than $1 million a year to pay at least 30% of income in federal taxes.


Also: instead of allowing the current estate, gift and generation-skipping transfer tax rates to expire and default back to a $1 million exemption and 55% tax rate at the end of the year, the budget proposal would take the estate tax system back 2009 rates. That would give each spouse a $3.5 million estate tax and generation-skipping tax exemption to work under, a $1 million gift tax extension for each spouse, and a maximum 45% estate tax rate for amounts above these levels.


In all, the tax proposals are expected increase government receipts by an estimated $1.5 trillion over the next ten years.


The budget proposal virtually ensures that Congress will take up the extremely messy, highly-partisan issue of taxes during this election year, which may actually be good news for taxpayers. Without Congressional action, estate tax and income tax rates were due to revert back, as of January 1, 2013, to rates not seen in more than a decade.   Regardless of where you stand on the issues, it's a good idea to follow the debate to be informed of how it may affect your financial plans.


If you have a lot of spare time, you can read the full text of the budget proposal here: http://www.whitehouse.gov/omb/budget/Overview, and if you're curious about historical tax rates every year going back to the very first income tax in 1913, you can find them here: http://www.taxfoundation.org/taxdata/show/151.html.

New Cost Basis Rules

New Cost Basis RulesAnyone who has ever been baffled by calculating the net proceeds from the sale of an investment will find some relief, starting with the 2011 tax return due April 17. If you bought any stocks after January 1, 2011, and sold them later in the year, you should have received information from your broker that tells you the adjusted cost basis of those stocks. Your adjusted cost basis, which affects the amount of tax you may owe on the sale, represents the original purchase price plus any commissions or other fees, and takes into account factors such as stock splits, corporate acquisitions or spinoffs, and reinvested dividends.


In the past, cost basis information has sometimes been available as a service; the Emergency Economic Stabilization Act of 2008 now requires all broker-dealers and other financial intermediaries to report the information on your 1099-B form. However, you won't be the only one to receive that information; your broker also is required to report the same information to the Internal Revenue Service. Individual taxpayers (or their tax preparers) will still be responsible for accurately reporting the net proceeds of a sale on their federal income tax returns, but the IRS will now have a better way to double-check those figures.

In some cases, you're still on your own this year


The new reporting requirements don't mean you can empty your files completely. Because they're being phased in, the rules don't apply to stocks bought before January 1, 2011, for which you'll still need to do your own calculations, or to securities held in retirement accounts. Cost basis reporting does go into effect this year for mutual funds and stock bought as part of a dividend reinvestment plan; however, it will apply only to shares bought after January 1, 2012, and will be reported on the 1099-B that will be available in 2013 for the tax year 2012. And cost basis for bonds, options, and other securities won't have to be reported until 2013, so those will still need to be monitored independently.


Brokers also will be required to report losses that are disallowed as a result of a wash sale (which occurs when shares are sold and then repurchased within 30 days). However, they only have to do so if the newly acquired securities are identical to the securities sold (meaning the securities share the same CUSIP identification number). They also are not required to report adjusted cost basis for wash sales when the purchase and sale transactions occur in different accounts.

You can tailor your reporting method to suit your tax situation


Investors sometimes use cost basis to help manage their tax liability on a securities sale. If you're one of them, the reporting requirements make it more important to determine in advance what accounting method you wish to use for each sale. Most broker-dealers will designate a default option to use if you do not specify a method. That default will typically be the so-called FIFO method (an acronym for "first in, first out"), which means that the first shares of a security purchased are considered the first shares sold. However, your broker might also allow you to specify LIFO ("last in, first out") or designate specific shares as the ones sold. In some cases, such as shares bought through a direct reinvestment program, using an average cost basis for all shares may be most convenient (most mutual fund companies already employ this method of calculating cost basis).


If you don't want to use your broker's default method, you may be able to put in a standing order specifying the method you want to use for all trades, or choose on a case-by-case basis; you may also authorize your financial professional to make that decision for you. The rules permit investors to change the designated method for a given trade until the settlement date (the date on which money actually changes hands, which for a typical stock sale is three business days after execution of the trade). After the trade settles, you cannot change your mind about the method used.


Brokers also will be required to report to the IRS the cost basis of a short sale in the year in which the short is closed (in the past, it was done for the year a short sale was opened).

Social Security and Divorce

Social Security and Divorce

If you're divorced and were married for at least 10 years, you may be entitled to social security benefits based on your former spouse's earnings record.  


If your former spouse is still living


Your divorced spouse benefits are based on 50% of your ex-spouse's benefit at full retirement age.  You are eligible to start this benefit as early as age 62, but it will be permanently reduced if you start before your full retirement age.


If your own PIA is higher than half of your divorced spouse's PIA, you will receive your own benefit instead of your spousal benefit.  If you wait to file until your full retirement age, even if your PIA is higher, you have the option to restrict your application to just divorced spouse benefits.  By restricting your application, your personal benefit will continue to earn delayed retirement credits.  Then you can reapply for your social security benefits on your own record at age 70 and enjoy the higher benefit with inflation adjustments for life.  This can be a great strategy if your PIA is higher than half your divorced spouse's and you have enough income to offset the reduced social security benefits until age 70.


You filing for benefits based on your former spouse's earnings record does not reduce your ex-spouse's benefit, and the ex-spouse is not notified when you file.  You will need to have proof of the marriage and divorce when you apply.


If you're age 62 or older and you've been divorced for at least two years, you can receive Social Security benefits based on your former spouse's earnings as long as your former spouse is eligible for retirement benefits.  It doesn't matter whether your former spouse has chosen to retire or has submitted an application for Social Security benefits.


If you're age 62 or older and are caring for a dependent child who is entitled to child's benefits based on a deceased parent's Social Security record, then your benefits won't be reduced currently and will remain unreduced later, after you reach your full retirement age. Bear in mind that you can't receive a spouse's benefits prior to age 62, even if you have a dependent child.

If your former spouse has died


You may qualify for survivor's benefits based on 100% of your former spouse's social security benefit.  If you're under full retirement age, your benefits will be reduced for each month you receive benefits under your full retirement age. Benefits at age 60 will be 71.5 percent of your former spouse's PIA.


It's also important to note that a divorced spouse may be entitled to a mother's or father's benefit if caring for the dependent child (under age 16 or disabled) of his or her deceased former spouse. Typically, the amount of a mother or father's benefit is equal to 75 percent of the deceased spouse's PIA. Unlike a spousal benefit, it isn't necessary for the marriage to have lasted 10 years.

How does remarriage of the husband and/or the wife impact Social Security benefits?  


If your ex-spouse gets remarried and you don't, your Social Security entitlement will be unaffected. If your ex-spouse is married to a second spouse for at least 10 years and then they get a divorce, you and that second spouse will each be entitled to collect an amount equal to one-half of the former spouse's benefits (assuming that you each meet the requirements set forth above).  


If you're the one who remarries, you would no longer be entitled to divorced spouse benefits under your ex-spouse's earnings record.  However, if you don't remarry until after age 60, you can still claim survivor's benefits on your ex-spouse's record if your former spouse dies before you.


This is a complicated area and this article covers many situations that may occur, but not all.  Getting advice specific to you is the best way to explore these benefits for your situation!

Upcoming Personal Finance Workshops
Keller Public Library Free Financial Education Seminars

Next month's workshop is a new topic in the personal finance series -- it will cover how to get the most out of your employer retirement plan.  We'll look at how to select the best funds based on the information provided, getting the most of employer matching, how to diversify, and how to coordinate your 401k plan with your other investments.


The next workshop is Tuesday, March 20 at 6:30 pm.  Registration is encouraged for planning purposes to [email protected].


 Workshops are usually on the 3rd Tuesday of the month at 6:30 pm.  Please mark your calendars and tell your friends about ones that interest you.    


  • March: Getting the most of your 401k - how to select investments that are right for you and maximize employer matching
  • April: Couples and Money: Harmonize your Finances and your Relationship - jointly presented with Marriage and Family Therapist, Maryellen Dabal
  • May: Structuring your Retirement Income (designed for those in retirement or within 5 years)
  • June: Social Security Planning for baby boomers


 The Keller Public Library is located at 640 Johnson Road.


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]
Jean Keener, CFP, CRPC, CFDS
Keener Financial Planning

Keener Financial Planning provides as-needed financial planning and investment services on an hourly and flat-fee basis.

All newsletter content except where otherwise credited Copyright 2012, Keener Financial Planning, LLC.