In This Issue
Featured Article
Plop, Plop, Fizz, Fizz...
Curt's Quick Comment
529 Plans and You
From the Financial Presses
Quick Links
Featured Article
As I mentioned in last month's Financial Strategies, we are now offering Tax Preparation Services and would be happy to provide that service to you.  If you still prefer to do your taxes yourself, we have an arrangement with 1040.com to complete taxes on line.
  
5% of gross proceeds from taxes completed on-line will be donated to military related charities.  To file your taxes on-line, click here.  And don't forget to pass this information on to your friends and family. 
  
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Financial Strategies
Planning Techniques, Procedures and Guidance for Military Professionals
Greetings!

Welcome to this month's issue of Financial Strategies.  There is nothing left to talk about when it comes to football until next season, so I'll be brief today.
  
The first thing I want to mention is our new on-line tax preparation service offered in affiliation with 1040.com.  I still think that most people need professional assistance to prepare their taxes (see the lead article).  But if you prefer to do your taxes yourself, you can prepare your taxes AND support military related charities.  5% of gross proceeds from taxes prepared though C.L. Sheldon & Company on-line will be donated to military related charities.  See the featured article for more information or click here.
  
The first article in this issue talks about the changes involved in regards to the American Taxpayer Relief Act (ATRA).  The article covers the high points, but not everything in the law (there aren't enough electrons for that).
  
My Quick Comments talks about a few things to keep in mind as you file your taxes this year.
  
The second article covers 529 plans as a way to save for college.  Even if you are a "late-game" saver for college, state sponsored 529 plans may provide tax benefits that are worth considering.
  
And as always, I've included a couple of articles that I found interesting.  The first article covers rebalancing.  A key component of investment management that many investors forget.  This hurt a lot of people when the correction occurred in 2008.  I almost didn't include the second article as you could take the wrong lesson from it.  The point is to not listen to the day-to-day gyrations of the financial presses.  The point is NOT to invest contrary to what the masses are doing.
  
Have a great weekend and I hope somebody wins the Super Bowl.  The Pack Will Be Back!
  
Curt
Curtis L. Sheldon, EA
C.L. Sheldon & Company, LLC
(703)542-400 or (800) 928-1820
Plop, Plop, Fizz Fizz. Oh What A Relief it Is!
 
Since the last edition of Financial Strategies the dust has settled on the American Taxpayer Relief Act.  While the press talks about the extension of the Bush and tax rates, there is a little bit more to it.  These changes affect your planning, not your filing this year (with a few limited exceptions) So let's take a look at some big changes...
  
Marginal Tax Rates.
  
The top marginal tax rate will increase to 39.6% of Taxable Income, the number after deductions and exemptions, in excess of $450,000 for taxpayers filing Married Filing Jointly(MFJ) , $400,000 for taxpayers filing Single, and $425,000 for taxpayers filing as Head of Household (HoH).   NOTE:  This is the only time that I will reference Taxable Income in relation to taxes.
  
It is interesting to note that at lower tax rates (10% and 15%) the top of the bracket for MFJ is twice the the top of the Single bracket.  That is not the case for the higher brackets and especially the new 39.6 % bracket.  Who says the marriage penalty has been eliminated (I'm talking about taxes only!)?  I guess the government wants to discourage dual income households.
  
Capital Gains and Qualified Dividend Tax Rates
  
Capital Gains.  According to the law there will be 3 tax rates on Capital Gains.  0$, 15% and 20%.  In actuality there will be 5.
  
0% - Those in the 10% of 15% bracket
  
15% - Those in the 25%, plus some in the 28% and 33% bracket (Those with below AGI limits...see next)
  
18.8% (15% + 3.8% ObamaCare Surtax) - Those in the 28%, 33% and 35% bracket with Adjusted Gross Income (AGI) above $250,000 MFJ, $200,000 Single and HoH
  
20% - I haven't figured out anyone that this one actually applies to.
  
23.8% (20% + 3.8% ObamaCare Surtax) - Those in the 39.6% bracket.
  
Qualified Dividends.  The law states the same rates as Capital Gains.  However, the actual rate will be the same as shown above.
  
Itemized Deduction and Personal Exemption Phase Out
  
Itemized Deductions.  In another attempt to keep Enrolled Agents and Accountants employed, Congress has revived a extremely complicated rule (No, I didn't lobby for the rule).  For taxpayers that exceed certain AGI limits ($300,000 MFJ, $250,000 Single/HoH... what marriage penalty?) their itemized deductions will be reduced by 3%.  For example a MFJ taxpayer with $310,000 AGI, will have his itemized deductions reduced by $300 resulting in a tax increase of about $100.  But it isn't quite that simple.  The reduction doesn't apply to all deductions and can not reduce itemized deduction by more than 80%.
  
Personal Exemptions. In an even more complicated rule, personal exemptions will phase out for those above the same AGI limits.  The rule is:  2% reduction for each $2,500 that AGI exceeds the limit.  Easy huh?  The good news is that if you are subject to AGI this might not affect you
  
The rough numbers I've heard is that this will be the equivalent of increasing marginal tax rates by about 1% for each $1,000 in income for those affected.
  
Other Changes
  
American Opportunity Credit.   Extended for five years.  This provides up to a $2,500 Credit (dollar for dollar reduction in taxes) for qualifying education costs paid by the taxpayer.  This Credit starts to phase out at $160,000 AGI for MFJ, $80,000 for Single/HoH.
  
Child Tax Credit.  Extended for five years.  $1,000 for each child under 17.  Phases out at AGI of $110,000 MFJ; $75,000 Single/HoH.  A portion of the credit may be refundable...you get a larger refund than what you had withheld in taxes.  This generally applies to low income families, however for military members that deployed a combat zone, they have the option of excluding or including their Combat Pay when calculating the credit and may chose whichever is more advantageous.
  
AMT Patch.  The Alternative Minimum Tax (AMT) is not going away.  But at least now, the exemption is permanent and tied to inflation.  This will make tax planning a little easier.
  
There are some considerations here for tax planning.  As always, keep your AGI as low as possible to avoid additional taxes and loss of deductions/credits.  There are several ways to do that.  The simplest is to deduct as much as possible to tax advantaged vehicles (TSP, 401(k), 403(b), IRAs).  Beyond that, look carefully at your investment allocation in both asset choice and location. 
Curt's Quick Comment

 

If you claim the Education Tax Credits (American Opportunity Credit and Lifetime Earning Credit) you won't be able to file your taxes this year until late February or early March.  The IRS computer system isn't ready to receive the form required to claim the credit.

 

Twofer this month.  Remember the IRS never initiates contact with taxpayers through email  If you get an email from the IRS it is a SCAM. 

Saving for College: Understanding 529 PlansDiploma

 

Looking to save for your child's education? You have a number of tax-advantaged federal and state college savings vehicles at your disposal, including the 529 plan.

 

Expecting a bundle of joy or has your bundle started growing up an you're wondering if you will be able to afford sending him or her off to college? Fortunately, you have a number of tax-advantaged federal and state college savings vehicles at your disposal, including the 529 plan, which comes in two varieties: the prepaid tuition plan and the savings plan.

 

The Prepaid 529 Plan

 

A prepaid plan allows you to pay now at today's rates for school tomorrow. In return, your account is guaranteed to pay for the tuition and fees at the state's public universities and colleges by the time your child graduates from high school. Note that prepaid plans often do not cover the costs for room and board. Your child also may use the prepaid account to attend a private or out-of-state school, but you might risk forfeiting some of its value depending on how the plan values its contracts. Note, too, that most prepaid plans require that you or your child be a resident of the state in which the plan is offered.

  

The 529 Savings Plan

 

The 529 college savings plan is far more flexible than the prepaid tuition schemes. The money accumulated may be used at any school you choose and for all qualified higher education expenses, including room and board.

 

Each state determines what the lifetime contribution limit or account balance cap will be in its 529 plan, but typically such limits range between $100,000 and $270,000. Investment minimums are low (most plans let you sock away as little as $25 a month as long as a minimum of $500 is accumulated within two years of the initial purchase date), and there is no restriction on how much you may contribute every year unless the account is nearing the lifetime cap.

 

However, since 529 contributions are treated as gifts subject to gift-tax limitations, if you want to make a tax-free contribution, it shouldn't exceed $13,000 annually ($26,000 if you're contributing with your spouse). There's one exception, however: You may contribute as much as $65,000 tax free in one year ($130,000 with your spouse), but that contribution will be treated as if it were being made in $13,000 installments over the next five years. That means you can't make other tax-free gifts to the beneficiary during that time.

 

Most 529 savings plans offer a menu of age-based portfolios, and some also offer a small selection of stock and bond funds. In the former case, your annual contributions get invested in a pre-selected portfolio of stocks and bonds. Early on, the portfolio is tilted toward stocks, and as the time for college nears, the weighting shifts toward bonds. You can switch investments up to twice a year.

 

The quality of 529 college savings plans varies by state, but in most instances you may open an account in any state you'd like. All 529 plans offer generous tax breaks, provided you use the money for qualified expenses. While your contribution is not deductible on your federal taxes, your investment will grow tax-deferred and withdrawals will not be subject to federal tax.

 

You should always compare the 529 plan of your choice with any 529 college savings plan offered by your home state or your beneficiary's home state and consider, before investing, any state tax or other benefits that are only available for investments in the home state's plan. You should always read the Plan Disclosure Document which includes investment objectives, risks, fees, charges and expenses, and other information. You should read the Plan Disclosure Document carefully before investing.

 

Investment Risks

 

Investing in college savings plans comes with some risk. Unlike prepaid tuition plans, they don't lock in tuition prices. Nor does the state back or guarantee the investments. There also is the risk with most college savings plan investment options that you may lose money or your investment may not grow enough to pay for college.

 

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

 

It's A Question of Proper Balance

 

Do you tend to put off certain chores-maybe cleaning the gutters, organizing your files, or changing batteries in smoke detectors? Most people can add another item to their to-do list: rebalancing a portfolio. However, unlike neglecting some of the others, failing to rebalance could result in significant financial losses...(Read More Here)

 

Investors Flee Stocks At Precisely The Wrong Time

 

The percentage of American households owning stock mutual funds dropped to 46.4% in 2011, and it has fallen every year since 2008, according to Investment Company Institute. In addition, outflows from domestic stock mutual funds in 2012 neared the record-breaking pace of 2008, the worst year ever for outflows...(Read More Here)  

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