In This Issue
Featured Article
Post ObamaCare Planning
Curt's Quick Comment
REITs Right for You?
From the Financial Presses
Quick Links
Featured Article
I'll talk about myself for just a moment.  I'm excited to say that I've just been added to the "stable" of writers at FiGuide.  FiGuide is a blog sponsored by the National Association of Personal Financial Advisors (NAPFA).  There are some pretty bright folks writing there and I'm proud to be in their company.  You can see one of my recent posts on FiGuide by clicking here 
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Financial Strategies
Planning Techniques, Procedures and Guidance for Military Professionals

Labor Day is over and Fall is here.  Most likely, the kids are in school and more importantly, football season has started (Go Packers!).  It also means that the year will pass by faster than most of us expect and before we know it, we'll be dealing with the tax impacts of the Affordable Care Act (ObamaCare).  The main article in this edition of the eNewsletter addresses what you can do to plan for the Medicare Surtax on Investment Income.  This won't apply to all of you, but it will apply to more and more of you each year as the cut-off for the tax is NOT inflation adjusted.

My quick comment talks about Disability Insurance, something almost everyone needs and few understand.  Take a look to get thinking about how it applies to you.

Following that is an article concerning Real Estate Investment Trusts (REITs) and their plusses and minuses.  REITs are normally not well correlated with the Stock Market and under the right circumstances can help reduce wide value swings in your portfolio.

I wrap up this edition with a couple of thought pieces.  I don't agree with all the conclusions of the articles, but I do agree with their premises.  1) If you have aging parents, you need to start laying plans now.  2)  The financial presses aren't there to give you sound financial advice...they're there to sell newspapers and magazines/increase ratings.

Oh, and I forgot the Featured Article.  It's just a quick "brag" about how I got picked up to post on another blog site.  There is a link in the article if you want to check out the blog.

Good luck to your football team this fall whoever it may be (unless it is the Minnesota Vikings or Dallas Cowboys!).

Curtis L. Sheldon, EA
C.L. Sheldon & Company, LLC
(703)542-400 or (800) 928-1820
Planning in a ObamaCare Medicare Surtax World

 Form 1040

Whether you agree with it or not, ObamaCare is the law of the land and the taxes associated with it will go into effect.  One of those taxes is the Medicare Surtax and it goes into effect in less than 4 months.  You need to be aware of it and ready for it.  To help you along those lines I'll review to whom the ObamaCare Medicare Surtax applies, ways to reduce the amount of income subject to the Surtax and how to make sure you don't inadvertently subject yourself to the tax.


Who does the ObamaCare Surtax apply to?


First of all, the ObamaCare Medicare Surtax applies to investment income only.  Beyond that it applies to Individuals with a Adjusted Gross Income (AGI) of greater than $200,000; Married Couples with an AGI of greater than $250,000; and Trusts with retained income of more than approximately $12,000 (exact amount will depend on inflation adjustments...the other two numbers are not inflation adjusted).  So to be subject to the tax you have to have both investment income and AGI above the limits listed.  As a reminder AGI is calculated on the first page of the IRS Form 1040 and is the last line on that page.  In calculating AGI your itemized/standard deductions and personal exemptions are not deducted from your income.


The IRS takes a pretty broad view of what is included in investment income.  It includes interest, dividends, capital gains, rental income, annuity income and royalties.  Also, according to some thought leaders on taxation that I've spoken with, most likely depreciation recapture will be considered investment income as well (though I haven't seen anything from the IRS that says that...yet).  Also, your primary residence is not subject to the Surtax unless you have a gain of greater than $250,000/$500,000 Single/Married on the sale of the house.


So, if your AGI is above the cut-offs and you have investment income you could be subject to the ObamaCare Surtax.


How do you limit the amount of the ObamaCare Surtax that you pay?


Many of the things that you would routinely use to reduce your tax burden will likely reduce your exposure to the ObamaCare Surtax.


Reduce AGI.  If you can reduce your AGI below the limits above, then you don't have to worry about this tax.  Some deductions that reduce AGI are 401(k) and Traditional IRA contributions (subject to separate AGI limitations), Student Loan Interest Deductions, Certain Business Expenses of Reservists, Self-Employment Tax, Self-Employed Retirement Plans and Self Employed Health Insurance Deductions.


Shelter Income.  Income earned inside of IRAs, Qualified Retirement Plans and 529 Plans is sheltered from the ObamaCare Surtax both when earned and when taken out of the plans.  Annuities, which I generally don't like as an accumulation asset due to their expenses, can also shelter income from the Surtax.   If you have maxed-out all your IRAs and Qualified Retirement Plans and are still subject to the Surtax the expenses in an annuity may be more tolerable.  Finally, you can shelter income through investments (such as real estate or limited partnerships) that reduce income through the use of depreciation and other "non-tangible" expenses.


Tax-Free Income.  Income that is free from Federal Taxation, such as Municipal Bonds is not subject to the ObamaCare Surtax.  Just be careful that you don't purchase Private Activity Bonds (used to finance things like Pro Football Stadiums) as they are subject to the Alternative Minimum Tax.


Gift Appreciated Assets.  If you normally support a Charity or an individual with cash you could gift appreciated assets instead.  In the case of the Charity you'll get a tax deduction for the gift (the amount of the deduction depends on whether the asset has been held for more than a year).  In both cases the capital gain will never be a part of your Adjusted Gross Income, so it will never be subject to the ObamaCare Surtax (the person who receives the gift would declare any gains as income...The assumption is that the person who receives the gift would not have an AGI of greater than $200K).  The increased tax savings may make it worth your time to go through the procedure to gift the asset. 


How do you make sure you don't inadvertently become subject to the ObamaCare Surtax?


There are three potential traps that I foresee that could catch unsuspecting taxpayers.

Roth IRA Conversions.  When you convert funds from a Traditional IRA to a Roth IRA you have taxable income.  As mentioned above, that income is not subject to the ObamaCare Surtax but, it increases your income/AGI.  So the end result might be that the conversion would make other investment income subject to the Surtax.  If you don't make the conversion (in this scenario) the original investment income wouldn't have been taxed.  There are other variables, but if you are considering a Roth IRA Conversion, I'd think real hard about doing it this year or doing it in small portions after 2013 starts.

Selling Rental Real Estate.  Capital Gains from the sale of Investment Property is subject to the ObamaCare Surtax.  And remember, it looks like depreciation will be as well.  So not only will your income include the difference in what you paid for the property and the price but it will include the depreciation that you took (as a side note, the IRS says that you must pay taxes on the depreciation you took or should have taken).  There are two things you can do to prevent this.  Invest in another "Like-Kind" asset and defer the gain through what is known as a 1031 exchange or make sure you sell the investment property in a year when you other income (including the gain from the sale) will be below the thresholds.

Estate Planning.  If your estate plan includes the use of trusts to distribute your assets make sure you plan to keep the trust's retained income below approximately $12,000.  This could be very important for those with Special Needs Children, whose estate plan includes the use of Special Needs Trusts. If this situation applies to you, talk to your estate planning attorney and tax advisor as soon as possible.

Wrapping it up

This isn't the only tax increase in ObamaCare and others target taxpayers at all income levels.  As always, don't let the tax tail wag the dog.  On the other hand, don't plan in a vacuum either.  Reducing your gains on your investments by 3.8% (From 7% to 6.73% for example) can have a significant impact on your returns.  If you do reduce your rate of return to 6.73%, $10,000 will be worth $6,280 less at the end of 30 years than if you didn't pay the tax and earned the full 7%.  
Curt's Quick Comment
Are you covered by Long-Term Disability Insurance at work?  Two things you want to make sure you understand when it comes to your policy is the definition of disability and the elimination period.  The definition of disability is usually "own-occupation" or "any-occupation" (there are others).  Under most circumstances you are better protected with "own-occupation".  The elimination period is how long you will need to be disabled before you begin to receive benefits.  Depending on how long that period is, you might want to adjust you Emergency Fund.  Of course there are other variables, but this is a "Quick Comment".
REITs Right for Your Portfolio?


For most Americans, an investment in real estate begins and ends with the purchase of a home. Yet investments in shopping centers, office buildings, and hotels may be available to investors, thanks to real estate investment trusts (REITs).


REITs invest in groups of professionally managed properties such as industrial facilities, office buildings, or apartment complexes. REIT performance has varied historically, with a total annualized return of 11.7% over the past 10 years, and an 8.3% return in 2011. (1)


Investing Beyond the Backyard


There are more than 100 publicly traded REITs, according to the National Association of REITs (NAREIT). Equity REITs, which directly own real estate assets, make up most of the market and have had an annualized return of 10.9% over the past 20 years.1 There are mortgage REITs, which loan money to real estate owners or invest in existing mortgages or mortgage-backed securities, and hybrid REITs, which combine the investing strategies of both equity and mortgage REITs.


REITs resemble closed-end mutual funds, with a fixed number of shares outstanding. REITs are also traded like closed-end funds, offering a price per share. Unlike a closed-end fund, however, REITs measure performance by funds from operations (FFO) rather than by net asset value. FFO is defined as net income plus depreciation and amortization, excluding gains or losses from debt restructurings and from sales of properties. REITs' growth benchmark is FFO growth, while valuation is reflected in an FFO multiple (share price divided by FFO) rather than in a price-earnings ratio.


The REIT Appeal


Today's REITs offer an array of advantages, including:

  • Diversification. REITs can help to diversify an equity portfolio weighted to stocks in other industries. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a nondiversified portfolio. Diversification does not ensure against market risk.
  • Built-in management. Each REIT has a management team, sparing investors the effort of researching each property's management team.
  • Liquidity. Because REIT shares are traded on the major stock exchanges, they are more readily converted into cash than direct investments in properties. Like direct property investments, REITs may lose value.
  • Tax advantages. REITs pay no federal corporate income tax and are legally required to distribute at least 90% of their annual taxable income as dividends, eliminating double taxation of income. Investors can also treat a portion of REIT dividends as a return of capital, although those classified as dividends are taxed at ordinary rates.

Weighing the REIT Risks


As with all investments, REITs have specific risks that are worth considering, including:

  • Lack of industry diversification. Some REITs limit diversification even further by focusing specifically on niche developments such as golf courses or medical offices.
  • Potential changes in the value of underlying holdings. These changes can potentially be influenced by cash flow of real estate assets, occupancy rates, zoning, and other issues.
  • Concern about performance metrics. Critics contend that FFO could be misleading because it adds depreciation back into net income. NAREIT counters that real estate values fluctuate with the market rather than depreciate steadily over time, making FFO a realistic performance measure. Also, REITs may average the rent they will receive over a lease's lifetime rather than report actual rent received, which critics say can further cloud performance figures.
  • Interest rate sensitivity. If rates and borrowing costs rise, construction projects with marginal funding may be shelved, potentially driving down prices across the REIT industry.
  • Environmental liability. Companies in the real estate industry

REITs can be a way to add total return potential to a diversified, long-term portfolio. We can help you decide whether an allocation to a REIT could help you pursue your financial goals.



(1) Source: NAREIT Equity REIT Index, for the period ended December 31, 2011. Past performance is not a guarantee of future results. Individuals cannot invest directly in an index.

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.

From the Financial Presses


Entrees for the "Sandwich Generation"


Bob and Marcy Tannenbaum both have hectic lifestyles. Bob, who is 45, works in the city for a public relations firm. He commutes from the suburbs each day. Marcy, who is employed closer to home, is the director of a nonprofit organization. She'll turn 43 before the end of the year. They're making ends meet, but haven't set aside nearly as much as they'd like for their future needs.  (Read more here)


Is the Media Biased Towards Bad Financial News?


Headlines about the economy in July sounded dire. "IMF Says Doubt Weighs On Economy," reported The Wall Street Journal. "Economy Looks Weaker As Retail Sales Slump," said The Boston Globe. "Fiscal Cliff Could Trigger U.S. Recession: IMF Economist," according to a CNBC story....(Read more here)



Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC 's current written disclosure statement discussing our advisory services and fees is available for review upon request.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).
Military Professionals have unique financial benefits and unique financial needs.  If you think you would like some help developing your Financial Strategy please give us a call at (703) 542-4000 for a free initial consultation or for more information go to our website at .