December 6, 2013Vol 6, Issue 4 
DFW Financial Planning

Jean Keener, CFPI hope this email finds you warm and safely out of the ice and snow.


We are nearing the end of a truly unusual year in the investment markets.  Large US company stocks are up more than 27% year-to-date. International developed-market stocks are up more than 17%.  Emerging markets stocks are still down about 3% for the year.  And the broad US bond market has remained basically flat in the second half of the year, still down about 2% year-to-date.  If you're feeling some concern about future returns given this year's extraordinary stock market growth, you may find the article on stock market predictions later in the newsletter interesting.


Also in this edition of the newsletter, we have year-end tax planning tips, an update on the IRS rules for legally married same-sex couples beginning in 2013, and more.


Please let me know if you have suggestions for newsletter articles or questions on your financial planning world.  If we don't talk before the end of the year, I wish you a relaxing and enjoyable holiday season with friends and family.  Thanks for reading, and Live Well!

In This Issue
Year-End Tax Planning
IRS Rules Affect Same-Sex Couples for 2013
Paying Off Your Mortgage in Retirement
Stock Market Predictions
We're Honored ... D Magazine and Keller Citizen
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Year-End Tax Planning

2013 Year End Tax Planning As the end of the 2013 tax year approaches, set aside some time to evaluate your situation. Here are some things to keep in mind as you consider potential year-end tax moves.


1. The tax landscape has changed for higher-income individuals


This year a new 39.6% federal income tax rate applies if your taxable income exceeds $400,000 ($450,000 if you're married and file a joint return, $225,000 if you're married and file separately). If your income crosses that threshold, you'll also be subject to a new 20% maximum tax rate on long-term capital gains and qualifying dividends (last year, the maximum rate that applied was 15%).


That's not all--you could see a difference even if your income doesn't reach that level. That's because if your adjusted gross income is more than $250,000 ($300,000 if you're married and file a joint return, $150,000 if you're married and file separately), your personal and dependency exemptions may be phased out this year, and your itemized deductions may be limited.


2. New Medicare taxes apply

Two new Medicare taxes apply this year. If your wages exceed $200,000 this year ($250,000 if you're married and file a joint return, $125,000 if you're married and file separately), the hospital insurance (HI) portion of the payroll tax--commonly referred to as the Medicare portion--is increased by 0.9%. Also, a 3.8% Medicare contribution tax generally applies to some or all of your net investment income if your modified adjusted gross income exceeds those dollar thresholds.  

3. Don't forget the basics--retirement plan contributions

Make sure that you're taking full advantage of tax-advantaged retirement savings vehicles. Traditional IRAs (assuming that you qualify to make deductible contributions) and employer-sponsored retirement plans such as 401(k) plans allow you to contribute funds pretax, reducing your 2013 income. Contributions that you make to a Roth IRA (assuming you meet the income requirements) or a Roth 401(k) plan are made with after-tax dollars, but qualified Roth distributions are completely free from federal income tax.

For 2013, you can contribute up to $17,500 to a 401(k) plan ($23,000 if you're age 50 or older), and up to $5,500 to a traditional or Roth IRA ($6,500 if you're age 50 or older). The window to make 2013 contributions to an employer plan typically closes at the end of the year, while you generally have until the due date of your federal income tax return to make 2013 IRA contributions.  

4. Expiring provisions

A number of key provisions are scheduled to expire at the end of 2013.  While it's always possible that some of them may be extended, they include:
  • Increased Internal Revenue Code Section 179 expense limits and "bonus" depreciation provisions end.
  • The increased (100%) exclusion of capital gain from the sale or exchange of qualified small business stock (provided certain requirements, including a five-year holding period, are met) will not apply to qualified small business stock issued and acquired after 2013.
  • This will be the last year that you'll be able to make qualified charitable distributions (QCDs) of up to $100,000 from an IRA directly to a qualified charity if you're 70� or older; such distributions may be excluded from income and count toward satisfying any required minimum distributions (RMDs) you would otherwise have to receive from your IRA in 2013.
  • The above-the-line deductions for qualified higher education expenses, and for up to $250 of out-of-pocket classroom expenses paid by education professionals, will not be available starting with the 2014 tax year.
  • This will also be the last year you'll be able to elect to deduct state and local sales tax in lieu of state and local income tax if you itemize deductions.

 Parts of this article were adapted with permission from Broadridge Investor Communications Solutions Inc.  

IRS Rules Affect Same-Sex Couples for 2013

IRS Same-Sex Marriage Regulations 2013 The U.S. Department of the Treasury and the Internal Revenue Service (IRS) have announced that same-sex couples who are legally married in jurisdictions that recognize same-sex marriage will be treated as married for all federal tax purposes. Guidance has been provided in the form of a Revenue Ruling (Rev. Rul. 2013-17) and associated Frequently Asked Questions.


The state granting the marriage is key, not the state of residence. 

If a same-sex couple is legally married in a state that recognizes same-sex marriage, the couple will be treated as married for all federal tax purposes. This is true even if the couple resides in a state like Texas that does not recognize same-sex marriage. So, a same-sex couple legally married in a state or foreign country that recognizes same-sex marriage, but residing in a state that does not recognize same-sex marriage, will be treated as married for federal tax purposes even though it's possible the couple may not be treated as married for state tax purposes. Recognition also applies to same-sex couples legally married in the District of Columbia, a U.S. territory, or a foreign country.    

Registered domestic partnerships, civil unions, and other formal relationships recognized under state law do not qualify--only couples legally married under state law will be treated as married for federal tax purposes.


Applies for all federal tax purposes

Legally married same-sex couples are treated as married for all federal tax purposes. This applies for federal estate and gift tax purposes, and for federal income tax purposes, including:

  • Filing status issues
  • Personal and dependency exemptions
  • Standard deductions
  • Employee benefits
  • IRA contributions and deductions
  • The earned income tax credit (EITC)
  • The child tax credit

2013 tax year implications 

If you are legally married on the last day of the year, you generally have to file your 2013 federal income tax return as a married individual. That means same-sex couples treated as married for federal income tax purposes will generally have to choose whether to file their 2013 federal income tax return as married filing jointly, or as married filing separately.  Continuing to file as single is not an option for legally married individuals.

This change may affect many year-end financial decisions regarding timing of income and deductions including retirement plan distributions and contributions.  I would strongly encourage you to review your tax situation prior to year-end when you have the greatest ability to plan proactively.   

Prior tax years 

If you were married prior to 2013, you may also amend prior year federal income tax returns, choosing to be treated as married for federal income tax purposes (assuming that you were legally married on the last day of the tax year(s) being amended). You're only able to file an amended return, however, for any tax year still open under the statute of limitations. Generally, the statute of limitations for filing a refund claim is three years from the date a return was filed, or two years from the date tax was paid, whichever is later. For most individuals, that means claims can still generally be filed for tax years 2010, 2011, and 2012. You are not required to amend a prior year return, however.  

t's important to note that if you choose to amend a prior year federal income tax return in order to be treated as married, all items on the return must be adjusted to consistently reflect your marital status (i.e., married filing jointly or married filing separately). That is, if you amend a prior year tax return to be treated as married, you are treated as married for all items and issues related to the return.    

Note: If your employer provided health coverage for your same-sex spouse and included the value of that coverage in your adjusted gross income (AGI), amending your prior year return to reflect your status as a married individual may allow you to recover the income taxes paid on the value of this coverage. Similarly, if you paid premiums for health-care coverage for your same-sex spouse with after-tax dollars, you may be able to reduce your income by these premium amounts.  

Note: For tax year 2012, same-sex spouses who filed their federal income tax returns before September 16, 2013 (the effective date of the Revenue Ruling) may choose--but are not required--to amend their 2012 federal income tax returns to file as married (i.e., married filing jointly or married filing separately). Same-sex spouses who file an original federal income tax return for the 2012 tax year (or for any prior tax year, for that matter) on or after September 16, 2013, will not have a choice--if legally married for the tax year, they will generally have to file their federal income tax return as married filing jointly or married filing separately.


Parts of this article were adapted with permission from Broadridge Investor Communications Solutions Inc.  

Paying Off Your Mortgage in Retirement

Paying Off Your Mortgage in Retirement For many homeowners, paying off a mortgage is a financial milestone. This is especially true when you are retired. Not having the burden of a monthly mortgage payment during retirement can free up money to help you live the retirement lifestyle you've always wanted.


To pay off, or not to pay off: that is the question


Some retirees have paid off their mortgage before they reach retirement. For others, however, that monthly obligation continues. If you are retired, you may be wondering whether you should pay off your mortgage. Unfortunately, there's no one answer that's right for everyone. Instead, the answer will depend upon a variety of factors and how they relate to your individual situation.


Return on retirement investments vs. mortgage interest rate


One way many retirees pay off their mortgage is by using funds from their retirement investments. To determine whether this is a good option for you, you'll need to consider the current and anticipated rate of return on your retirement investments versus your current mortgage interest rate. In other words, do you expect to earn a higher after-tax rate of return on your current retirement investments than the after-tax interest rate you currently pay on your mortgage (i.e., the interest rate that you're paying, factoring in any mortgage interest deduction you're entitled to)?


For example, assume you pay an after-tax mortgage interest rate of 4%. You are considering withdrawing funds from your retirement investments to pay off your mortgage balance. In general, you would need to earn an after-tax return of greater than 4% on your retirement investments to make keeping your money invested for retirement the smarter choice.


On the other hand, if your retirement funds are primarily held in investments that typically offer a lower rate of return than the interest rate you pay on your mortgage, you may be better off withdrawing your retirement funds to pay off your mortgage.


Additional considerations


As you weigh your options, you'll also want to consider these additional points:

  • Effect on retirement nest egg--If you rely on your retirement savings for most of your income during retirement, you should generally avoid paying off your mortgage if it will end up depleting a significant portion of your retirement savings. Ideally, you should pay off your mortgage only if you have a small mortgage balance in comparison to your overall retirement nest egg.
  • Tax consequences--Keep in mind that if you are going to withdraw funds from a retirement account to pay off your mortgage, there are some potential tax consequences you should be aware of. First, if you withdraw pretax funds from a retirement account, the amount you withdraw is generally taxable. As a result, you'll want to be sure to account for the taxes you'll have to pay on the amount you withdraw from pretax funds. Depending on your tax bracket, that could be a significant amount. In addition, if you take a large enough distribution from your retirement account, you could end up pushing yourself into a higher income tax bracket. Finally, unless you are 59� or older, you may pay a penalty for early withdrawal.
  • Comfort with mortgage debt--For many retirees, a monthly mortgage obligation can be a heavy burden. If no longer having a mortgage would give you greater peace of mind, give the emotional benefits of paying off your mortgage some extra consideration.

Some material adapted with permission of Broadridge Investor Communication Solutions Inc.   

Stock Market Predictions 
Robert Schiller
Yale Economics Professor Robert Shiller

Yale economics professor Robert Shiller won the Nobel Prize in Economics this year, thrusting him into the spotlight of the mainstream media, and also making millions of investors aware that he has been predicting, for the past several decades, that housing and stock prices are due for a fall.  Financial advisors everywhere are fielding different versions of the same question from their nervous clients:  If a brainiac like Shiller sees a stock market downturn in our future, then shouldn't we all be selling stocks and hiding our money in our mattresses until the bear market blows over?


Prof. Shiller's new-found fame offers a great opportunity to discuss one of the biggest challenges we face as professional investors.  Few people who are not in the business can understand how difficult it is to know the future, and especially how hard it is to move into and out of the investment markets, avoiding downturns and catching market updrafts.


Let's start by looking at the case Prof. Shiller has been making about the investment markets.  One of his innovations is to update the standard price/earnings (PE) ratio--which, as the name implies, divides the total price of all the shares of a given stock by the company's total earnings.  The higher the PE, the more you are paying for a dollar of earnings.  A PE of 8 means it costs $8 to buy a dollar of corporate earnings.  A PE of 25 means it costs $25 to buy that same dollar of earnings.  In general, cheaper is better; that is, a lower PE implies higher future returns over the next 10-20 years.


This sounds straightforward, but the question is: what earnings measure should you use?  The past four quarters (which gives you the trailing PE), or the estimate of earnings for the next four quarters (the forward PE)?  Company earnings jump around unpredictably, in part because of one-time writeoffs, making a stock seem expensive one quarter and cheap the next.  So Prof. Shiller proposed that we measure the relative cost of stock market shares using the CAPE--the "Cyclically-Adjusted Price/Earnings Ratio"--which basically means using the 10-year moving average of earnings for each company over the past 10 years.  This is also called the P/E 10.


Prof. Shiller's P/E 10 is currently at or around 25, which is well above the long-term average of 15.89.  This is also above the trailing 12-month P/E ratio of 19.89.  So stocks are overvalued and due for a fall.  Right?


Well...  The problem is that other brainiacs have different opinions about the market.  At the same time the mainstream media was discovering Prof. Shiller, Leon Cooperman, chairman and CEO of Omega Advisors (one of the largest and most successful hedge funds on the planet) was telling reports that the market is reasonably valued, and he doesn't see a bear market anytime soon.  He noted that China's economy is improving, Europe is recovering and the U.S. economic growth is slow but steady.  What is going to trigger panic selling?


Meanwhile, it is helpful to remember that at the beginning of 2012, most market pundits seemed to agree that the long bull market that started in March of 2009 was over.  Peter Boockvar, a technical analyst, described the market as "overbought."  Ken Tower, at Quantitative Analysis Service, said that he was leaning more on the side of concern about risk than about generating profits. 


And consider the advice of Paul Franke of the Smarter Investing website at the beginning of 2013: "Statistically, our research shows that the American stock market is extremely overvalued."  He compared stock market conditions at the start of this year to 1929 (before the crash), 1999-2000 (before the "tech wreck" downturn) and 2006-2007 (before the Great Recession).


Should we have jumped out of stocks at the beginning of 2012?  If we had, we would have missed a 15.83% total return on the S&P 500.  Should we have abandoned stocks at the start of 2013?  If we had, we would have missed out on the 27%+ returns year-to-date.  And it is worth remembering that taking Prof. Shiller's advice would have had us out of stocks for most of the recent bull market and, indeed, mostly out of stocks for as long as many of us have been investing.  Prof. Jeremy Siegel of the Wharton School has pointed out that the PE-10 ratio has been above its long-term average for the past 22 years, with the exception of nine months, mostly concentrated in late 2008 and early 2009.


But the most interesting fact of all may be that Prof. Shiller shared his Nobel prize with Eugene Fama and Lars Peter Hansen of the University of Chicago.  Prof. Fama has argued that stock prices are always fairly valued, because they incorporate all available information known to investors at the time.  Prof. Hansen won his prize for testing rational expectations models--which basically are derived from the efficient markets model which Prof. Fama embraces.  In a recent editorial in the New York Times, Prof. Shiller acknowledged that he and his co-Nobel laureates disagree on many points about market valuations.


When so many smart commentators are telling us different things about the future, who should we listen to?  The truth is, no matter how smart (or dumb) any of us happens to be, none of us can see into the future.  The gift of intelligence is not the gift of foresight.  If we followed the advice of every really smart analyst that we read, we would be pulled in every direction at once--and that would be the worst thing possible for you and your hard-earned dollars at work.  We are far better served by maintaining a consistent long-term strategy and ignoring the noise of constant market predictions.


Material adapted with permission of Financial Columnist Bob Veres.

We're Honored ... D Magazine and Keller Citizen


Thank you once again to those who were able to vote in the Keller Citizen's "Best of" survey.  For the fifth year in a row, your support resulted in being named Best Financial Planner.  I greatly appreciate you taking the time to D Magazine Best Financial Planner vote, and your confidence in our firm!


We also had a first this year.  I was delighted to be selected by my Certified Financial Planner professional peers as one of D Magazine's Best Financial Planners in Dallas.  This was the result of voting by CFP members of the Financial Planning Association.  For more details on the selection process, click here.

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 �2013, Keener Financial Planning, LLC.