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It Is Summertime...Time For Tax Planning!
Curt's Quick Comment
Near-Zero Interest Rates: Trade-Offs for Investors
From the Financial Presses
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Financial Strategies

Planning Techniques, Procedures and Guidance for

Military Professionals



Welcome to the June edition of Financial Strategies.  I know it is the start of summer and the last thing you want to think about is your just mailed them in.  Right?  But, 2012 is a critical year for tax planning and if you wait until the end of the year to plan your strategy you may not be able to do everything you need to do to legally reduce your tax bill.  The first article in this issue will give you some ideas for planning your taxes.


The second article talks about what today's low interest rate environment means to you.  As always there are trade-offs and sometimes winners and losers when outside forces intervene in the market.  In this period of historically low interest rates, remember that when interest rates go up, bond prices go down.  For those of you that have access to TSP, you can avoid that risk by investing in the G Fund.  To find out more about the G Fund see my article in the April edition of Financial Strategies.


I selected the last two articles because they involve things that we face everyday.  The first article talks about "skimming".  This form of fraud has happened to me while travelling overseas, but it can happen here too.  The second article quizzes you on employee benefits.  See how much you really understand about your benefits. 


I appreciate the fact that you took the time to read this edition.  I know your time is valuable and that you are busy.  It is summer though, so take some time to smell the roses.  Just plan your taxes first...





Summertime and the Living Is Easy...
So Take a Look at Your Tax Plan 


Form 1040

As mentioned above, 2012 is a critical year of change when it comes to your taxes and planning to minimize your tax bill.  Several popular deductions have already expired, many more will expire next year as a result of the taxes imposed by ObamaCare and the expiration of the Bush tax cuts.  You may be able to minimize your overall tax bill if you start planning/working now.  I'll cover some of the things that have already changed, Capital Gains Planning and Deduction Planning.


What has Already Changed?


You can no longer deduct tuition and fees (though you can still take the American Opportunity Credit, or Lifetime Learning Credit if eligible...Adjusted Gross Income [AGI] restrictions apply)


You can no longer choose to deduct state and local sales tax versus state and local income tax.  Sales tax is no longer deductible.

Mortgage Insurance payments are no longer deductible.

The Energy efficiency credits are no longer available

The Alternative Minimum Tax Exemption has been reduced.

This isn't a complete list.  There really isn't much you can do to plan for a tax benefit that has already been eliminated, but you might want to adjust your withholding if you received a significant tax deduction/credit from one of the above items last year and were planning on it again for this year.  As an example, for a taxpayer in the 25% bracket the elimination of the tuition deduction could increase the taxpayer's tax bill by $1,000.


Capital Gains Planning 


Capital Gains Tax Rate.  If the Bush Tax cuts expire, the Long-Term (assets held for more than one year) Capital Gains tax rate will increase for almost all American Taxpayers.  Currently the rates are 0% or 15% depending on your tax bracket.  Starting in 2013, under current law, the tax rate for long-term capital gains will increase to either 10% or 20% (there will be a separate "super" long-term capital gains for assets after 31 Dec 2000 held more than 5 years).

Medicare Surtax.  If ObamaCare is not overturned by the Supreme Court there will be an additional tax on "investment" income starting in 2013.  The government has cast a wide net for investment income and it includes capital gains, dividends, interest and others.  For many people reading this eNewsletter the primary exposure will be the sale of investment property such as a rental house.  If you kept a home as an investment when you PCS'd, and sell it after 1 Jan 13 the gain will be counted as investment income for computing this tax (it is unclear to me so far, whether depreciation recapture will count as "investment" income...more to follow).  To be subject to this tax your Adjusted Gross Income must exceed $250,000 for Married Filing Jointly or $200,000 for Single.  You pay tax on the part of your income that is greater than the limit AND is also investment income.  The surtax is 3.8% of the taxable amount.


What to do?


Consider taking Capital Gains this year if it appears the Bush Tax Cuts will expire.  For those in the 10% or 15% marginal tax bracket there is no real downside to taking the gains...your tax rate will never be less than zero.  For those with a tax rate above 15% the argument is not as compelling, but it is still worth considering.

It makes less sense to shelter Capital Gains with Capital losses this year. If the Bush tax cuts expire it may be better to take the losses next year.  That way you will be sheltering income that would be taxed at a higher rate (and also potentially subject to the Medicare surtax).

With the ObamaCare Medicare surtax, you need to consider the effects of the tax on the sale of the investments.  In the case of a rental property a "like-kind" exchange could defer the gain potentially to a year when you AGI is below the threshold.  It may be worth considering.  Beyond that, realize that your gains on investments will be 3.8% lower than they are this year...if you have to pay the surtax. 


Deduction Planning


Medical Expense Deduction.  As a result of ObamaCare the amount of medical expenses you can deduct will be reduced in 2013.  In 2012 you can deduct medical expenses that exceed 7.5% of AGI.  In 2013, you will only be able to deduct the medical expenses that exceed 10% of AGI.  For example we'll look at a taxpayer has an AGI of $50,000,  is in the 15% bracket and has $5,000 of medical expenses in both 2012 and 2013.  In 2012 he will have a deduction of $1,250.  In 2013 he will have no deduction and a $188 increase in his tax bill.


Itemized Deduction Limitations.  If the Bush Tax Cuts expire and you have an AGI of more than about $177,000 (Except Married Filing Separately) in 2013 you will start to lose some more of your itemized deductions.  The phase-out calculation is complicated.  Essentially, you multiply the amount your AGI exceeds the phase-out ($177,000) by 3%.  You reduce your itemized deductions by this amount...but the total reduction cannot exceed 80% of your itemized deductions.  To further complicate the calculations medical expenses, casualty losses, investment interest and wagering losses (to the extent of wagering gains) are not subject to reduction.  But mortgage interest, state income taxes, property taxes and charitable contributions are.

Personal Exemptions Limitations.  Again, if the Bush Tax Cuts expire you may face a reduction in the amount you can claim for each personal exemption.  You're subject to this "stealth tax increase" if your AGI will exceed $265,550 in 2013. In another easy to understand calculation your Personal Exemptions will be reduced by 2% for each $2,500 (or fraction thereof) that you income exceeds the threshold.  If there is any good news here, if you are already subject to AMT, this won't hurt you (Wow!) 


What to do?

This is a critical year to bunch deductions.   


If you deduct medical expenses and you have choices, get as much medical work done this year as possible.  Don't put it off until next year. 


If you itemize deductions and have a high AGI then you may want to pull as much mortgage interest, charitable contributions, and state and local taxes into 2012 as possible and legal... Assuming you believe the Bush Tax Cuts will expire. 


As I stated at the start of this article, this is a big year for tax planning.  Coming up with a plan in December (when the financial press starts talking about taxes) may not be the best idea.  Think it through and decide what you want to do when certain triggers occur.  Or, we'll be happy to help you plan for tax eventualities on a stand-alone basis or as part of an integrated financial plan.  Feel free to contact us for a free initial consultation. 

Curt's Quick Comment
Do you have a very low deductible on your Auto and Homeowner's Insurance Policies?  If so, you might be inefficiently spending your insurance dollars.  Instead, raise the deductibles to as high as you can afford to pay if you have a loss.  Use the savings in premiums to buy an Umbrella Policy (if you don't have one), build up your Emergency Fund or increase your the amount of money you invest.
Near-Zero Interest Rates:
Trade-Offs for Investors


The Federal Reserve's recent announcement that it will maintain the federal funds rate in a range between 0.00% and 0.25% through December 2014 has generated the usual analysis about whether Chairman Bernanke and his colleagues are doing the right thing. But the Federal Reserve's policy may be less about right versus wrong than about the trade-offs for investors and consumers.
When the Federal Reserve makes a determination about movements in interest rates, it bases its decision on prospects for economic growth and whether existing growth can be sustained. The Federal Reserve considers the outlook for inflation, the federal budget, consumer finances, corporate earnings, and a variety of other factors. Maintaining interest rates at a historically low level, which has been the Federal Reserve's policy since December 2008, is a tool for stimulating economic growth.  


A Domino Effect


The fallout from the Federal Reserve's actions can be significant. The federal funds rate influences the prime rate, which in turn has a bearing on rates that lenders charge for consumer and corporate borrowing. When the prime rate is relatively low, lenders may offer lower rates for mortgages, credit cards, and other forms of credit than they otherwise would. It is important to remember that consumer demand and a household's creditworthiness are also significant factors in interest rates assessed by lenders.


There are other plusses associated with low short-term rates. Borrowing costs are relatively low for corporations, which can impact earnings and escalate stock market returns.(1) In addition, with banks offering marginal returns on savings products, investors have a strong incentive to add to equity allocations with the goal of earning higher returns. 


A Flip Side


Just as low short-term interest rates bring certain benefits, there may be drawbacks for investors and also for the broader economy. When short-term rates eventually go up, the situation is likely to be a negative for bondholders because of the inverse relation between interest rates and bond prices.(2) Historically, rising interest rates have caused the prices of existing bonds to decline because newly issued bonds carry higher rates, which push down the value of previously issued securities. Holding a bond until maturity, when an investor can recoup principal, can lessen interest rate risk.


Low interest rates also are a potential negative for savers, in particular retirees who depend on savings products to finance living expenses. In addition, there remains the question of whether low short-term interest rates encourage certain investors to gravitate to assets that are relatively risky given the investor's tolerance for volatility and time horizon. A recent blog post noted that flows into high-yield bond funds have exceeded those for ultra-short and U.S. government bond funds.(3)

Economic policy frequently presents both plusses and minuses, and low short-term interest rates are no exception. You may want to evaluate your exposure to interest rate risk and think about how you will cope with the situation when Federal Reserve policy changes. 





1. Investing in stocks involves risks, including loss of principal. 


2. Bonds are subject to market and interest rate risk if sold prior to maturity. Bonds are subject to availability and change in price. 




3. Source:, "Why Investors Should Ignore the Fed," April 19, 2012. Lower-quality debt securities involve greater risk of default or price changes due to changes in the credit quality of the issuer.



Required Attribution
Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.
2012 S&P Capital IQ Financial Communications. All rights reserved.
May 2012 - This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by C.L. Sheldon & Company, LLC, a member of FPA.







From the Financial Presses 



How to Guard Against Skimmers

In this age of technology, you probably don't think twice about using the ATM at your bank, the self-checkout machine at the supermarket, or various credit card terminals around town. It's never been a problem before. But a new type of crime called "skimming" may give you pause...(To read more click  here


Take a Quiz on Employee Benefits
What's the next best thing to compensation? Most individuals would cite employee benefits. In fact, it can be argued that employee benefits may be preferable to compensation when they are tax-free....(To read more click here)

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Military Professionals have unique financial benefits and unique financial needs.  Take a look at our website at to see if we can help you reach your financial 
and lifetime goals.