In This Issue
Featured Article
The AMT. Yet Another Tax Code
Curt's Quick Comment
Are You Prepared for Disability?
From the Financial Presses
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Featured Article
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Financial Strategies
Planning Techniques, Procedures and Guidance for Military Professionals

Welcome to the October issue of Financial Strategies.  It seems like it was just a couple weeks ago that I was dropping my boys off at college and by the end of this month they'll be more than halfway through the semester.  Time flies.  And speaking of time flying, this issue opens up with an article on the Alternative Minimum Tax (AMT).  Tax season will be here before we know it and for more and more of us the AMT becomes an issue each year.

In the Featured Article, I'm introducing a new service.  I call it a Vulnerability Assessment.  Much like the Vulnerability Assessments many of you are used to, this Assessment identifies problems.  For a small investment, I will review your current financial plan (formal or informal) and identify the Vulnerabilites I see.

My Quick Comment gives an intro to ETFs, a security that could make sense in your investment portfolio.

Many Americans are not ready for the potential for a major disability.  The second main article covers disability insurance and the fact that most Americans fail to insure their largest asset...the ability to earn money through work.  One thing that really surprised me was the statement that even amongst those who work with a Financial Advisor, relatively few have planned for or have awareness of disability risk.  I have to wonder what kind of Financial Advisors they are working with.  At C.L. Sheldon & Company, our Financial Strategies always include an analysis of disability risk.

As with previous issues of Financial Strategies, this issue wraps up with a review of writings from the Financial Presses.  The first article talks about how market prognosticators are rarely right.  This is one of the reasons we don't try to time or predict the market.  It just doesn't work.  The second article talks about Social Security and how your decision to start the benefit can affect your lifetime standard of living.

I hope you have a great October.  I'm not too pleased with my Green Bay Packers.  They need to "step up to the plate"  (I know, mixed sport's analogy).  The Packers did teach me one thing about investing though.  To read about what they taught me click here.
Curtis L. Sheldon, EA
C.L. Sheldon & Company, LLC
(703)542-400 or (800) 928-1820
The AMT.  Yet Another Tax Code


The Alternative Minimum Tax (AMT) was added to the Tax Code to prevent the "rich" from exploiting the tax code and paying little to no tax.  While that may have been the intent, the AMT no longer applies to just the 1% folks.  It hits plenty of people with much more modest incomes.  And, the problem is that sometimes the strategies that make sense for "normal" taxes won't help you when you calculate your tax burden under the AMT.  The AMT is much too complicated to completely explain in a short article like this and to be honest, it makes even my head hurt.  But, I'll explain what the AMT is and point out a few things that make you more likely to be subject to the AMT.


The AMT is a completely different set of tax rules.  When calculating your AMT several of the methods that one uses to reduce taxable income are not allowed.  The AMT is essentially a "Flat Tax" with only two brackets -- 26% or 28%.  You do get one "Exemption".  After calculating your tax burden under both AMT rules and normal rules you in essence pay the higher amount.  That is the AMT...from 50,000 feet.


So, what makes you more likely to be subject to the AMT? There are several things and they don't all have to do with Tax Shelters.


Exemptions.  Exemptions (the amount you take off for each person you claim when calculating your taxes) are not allowed when calculating your AMT burden.  So if you have a large number of exemptions (5 or so), you increase your chances of having tax due under AMT.  (As a side note, for those with children in college, if you are subject to AMT, it may make more sense for the child to file and claim themselves instead of filing as your dependent).


State Income Taxes.  State Income Taxes paid are deductible if you itemize, when calculating your taxes.  Under the AMT state taxes are added back to establish your income subject to AMT.  If you live in a state with high income taxes, you increase your chances of being subject to AMT.


Mortgage Interest.  Mortgage interest is also deductible if you itemize.  However, only the amount of interest paid for the acquisition or improvement on your residence is deductible for AMT.  So, if you refinance your home and take out equity you must add back in the interest paid attributable to the equity portion to determine your income subject to AMT.


Medical Expenses.  Medical expenses that exceed 7.5% of your Adjusted Gross Income (AGI) are deductible when calculating your taxes.  Under AMT rules, you must add back in the medical expenses from 7.5% to 10%%.  Another way to think of it is that under AMT you can only deduct the medical expenses that exceed 10% of AMT.  If you have large medical bills you increase your likelihood of being subject to AMT.  I don't know if this qualifies as good news, but starting in 2013 as a result of ObamaCare you will only be able to deduct medical expenses that exceed 10% of AGI when calculating your regular tax (I never quite figured how that makes healthcare more affordable).  So this AMT issue will go away.


Miscellaneous Deductions.  Miscellaneous deductions taken when calculating your taxes must be added back in when calculating AMT.  So, if you have big miscellaneous deductions, say from a job hunt, you are more likely to owe AMT.


Municipal Bonds.  Interest on Municipal Bonds is not subject to normal tax or AMT.  Except...interest on Private Activity Municipal Bonds is subject to AMT.  Private Activity Bonds fund things like NFL football stadiums.


Income.  As your income goes up your likelihood of being subject to AMT increases.  The exemption for AMT starts to phase out at $112,000 for Single and Head of Household taxpayers and at $150,000 for Married Filing Jointly taxpayers.  The more your income (calculated by adding in all the above items plus others to your income after deductions) exceeds these thresholds the more likely you it is that you will owe AMT.


Those are just some of the things that can cause you to owe taxes under the AMT.  Some of the others, such as Intangible Drilling Costs, Investment Interest Expense, Incentive Stock Options are much more complicated.


The AMT seems like something that other people have to worry about, but it isn't that hard to become subject to it yourself.

Curt's Quick Comment

Do you know what an ETF is?  For most purposes, an ETF is very similar to a Mutual Fund.  A couple of key differences are:

1.  ETFs can be more Tax Efficient than Mutual Funds
2.  ETFs can be traded inter-day (you don't have to wait for the close of the market)
3.  ETFs may trade at a discount or premium to their underlying assets

ETFs started out as primarily index based, but have evolved to include products that are very difficult to understand and use in an Financial Plan.
Most Americans Unprepared for Disability 


For millions of Americans, purchasing adequate disability income insurance is a potentially effective way of protecting against the financial hardship that could arise if illness or injury were to result in a long-term absence from work. Yet a new study found that the majority of Americans lack basic knowledge about the likelihood of a disability and are unprepared to handle such a life-changing event.(1)


The Social Security Administration estimates that one in four of today's 20-year-olds will become disabled at some point during their working years. The study found that women across all age groups report a higher incidence of disability than their male counterparts, with arthritis and back/spine problems being the leading causes.


The financial impact of disability can be severe. A person with an annual income of $50,000 who works for 40 years is projected to make more than $2 million in future earnings. The loss of these earnings can be devastating for an individual or a family -- and for women, the financial consequences can be more severe. The study found that women are twice as likely as men (22% vs. 12%) to think their cash reserves would last less than a month. Single women have an even bleaker outlook.


According to the study, 61% of women and 46% of men have never researched disability insurance -- and fewer than 10% have purchased disability insurance plans. Even among individuals who work with a financial advisor, awareness and planning around the topic of disability is low. Fewer than half have consulted with advisors about what would happen if they or their spouse became disabled, and fewer women (37%) than men (52%) have had this discussion with an advisor.


Types of Insurance


For most people, there are two main forms of disability income insurance to consider: employer-sponsored policies and private insurance policies. Employer-sponsored policies (called "group" policies) are relatively inexpensive to purchase and generally remain in effect for as long as the individual continues to work for the company.


Private insurance policies are paid for by individuals and provide coverage when group policies don't apply or don't provide enough income. On the surface, a private policy is usually more expensive to purchase than a group policy. However, a private policy's potential to provide much greater benefits over time may make it a more prudent long-term choice.


For all practical purposes, if you need the income you earn at work, you probably also need disability income insurance. Among those who are most likely to need disability income insurance coverage are small-business owners, the self-employed, high-income professionals, and the primary breadwinners in a household. Your insurance professional can help you find out if you have enough coverage.


(1) Source: State Farm Center for Women and Financial Services, "Women and the Risk of Disability," May 2012. 


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


Top Wall Street Strategist Wrong Again on Sectors


Every December, Wall Street's top strategists launch a media blitz to tell investors where to put their money. Articulate, attractive and extremely high-paid spokespeople appear on Fox Business News, CNN, and CNBC and get quoted in magazines, newspapers, and financial websites. How do their picks pan out? Not too well...(Click Here to read more)


Look Out America,

Here Come Millions Of Baby Boomers!


The first wave of the massive baby boom generation has reached retirement age at a time of great financial uncertainty. There were an estimated 79 million people born in the United States from 1946 through 1964, and in 2008, the oldest in that group turned 62, the earliest age of eligibility for Social Security retirement benefits. But 2008 also marked the height of the global economic crisis, and though conditions have improved since then, the economy has been growing fitfully, unemployment remains high, and home prices, which plunged during the crisis, have just begun to recover...(Click Here to read more)

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.
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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 .