Abundance or Scarcity?

Posted on November 23rd, 2011 in Financial Abundance, Newsletter Articles by wayne

Thanksgiving is a day of gratitude for our many blessings and a time to appreciate our abundance.   Do you live from a sense of financial abundance during the other 364 days of the year or do you often live in fear, from a belief in scarcity?

Our wealth far exceeds the basic human requirements of food, shelter and clothing.  In spite of this, I meet many people who do not feel that they live in financial abundance.  Why do some people live from a sense of financial abundance while others, often with more financial resources, live in fear of financial scarcity?

As a Certified Financial Planner (CFP®), I strive to help my clients move from a fear of financial scarcity to a sense of financial abundance.  This transformation requires a commitment to actively manage, protect and control one’s financial activities.   Let’s review the “Seven Steps to Financial Abundance.”  While following these steps will not guarantee financial abundance, as a minimum, they should help reduce fear of financial scarcity.

1. Spend Less Than You Earn

The first step on the path to financial abundance is to create excess earnings.  If you contribute to a retirement plan, your contributions are included in excess earnings.

A reasonable goal is excess earnings of at least 15% of after tax income.  To meet this goal, consider the “pay-yourself-first” approach.  On payday, make the first payment to your excess earnings fund.  This fund can be used to buy your first house, pay for your children’s education or your help fund retirement.

If you have not already done so, use excess earnings to build an emergency fund. With an emergency fund, you will be able to survive a job layoff or short term disability, without prematurely using funds from you retirement account.

2. Maximize Your Financial Resources

The next step toward financial abundance is to maximize your savings income.  If you have a company sponsored retirement plan, as a minimum, contribute the maximum amount that your company will “match.”  When your company matches 50% of your contribution, the company’s contribution is “free money,” guaranteeing an immediate 50% investment return on your retirement savings.

If you are saving for your children’s education, Coverdell Education Savings Account and/or Section 529 College Savings Plans can help.   Your educational savings will grow and no taxes will be paid on the growth and income from these plans.

If you are responsible for your health insurance, a high deductible health insurance plan (HDHP) plus funding your Health Savings Account (HSA), to the maximum amount allowed, will virtually guarantee a lower (after tax) cost for your health care.

3.  Minimize Your Taxes

Using every legal method for reducing taxes is the next step toward financial abundance.  If you are married and your spouse has no earned income, you may be able to fund a “spousal IRA.”  With a spousal IRA, you may deduct an additional $5,000 ($6,000 if your spouse is over age 50) from your income taxes.

If you have children in college, be sure to claim the American Opportunity credit or Lifetime Learning Credits.  These tax credits can reduce your taxes by up to $2,500 annually to offset high educational costs.

Use appreciated long term stock for your charitable giving.  You pay no taxes on the stock’s appreciation and receive a charitable deduction of the stock’s full value. Establishing a Donor Advised Charitable Giving Fund makes this easy to do.

4. Manage Your Investments

Properly managing investments is a critical step toward financial abundance.  If you manage your own investments, implement an asset allocation that allows you to sleep well at night.  Low cost, indexed mutual funds or Exchange Trades Funds will provide superior long term results for most investors.

If you use an investment advisor, investigate potential conflicts between how the advisor is compensated and your best interests.  The advisor should always be a fiduciary, guaranteeing that they will put your interests ahead of their compensation.

5. Protect Your Financial Resources

Fear of the unknown can produce a sense of scarcity.  Proper insurance to protect your financial resources is important in keeping this fear at bay.  The requirement for health, life and property insurance is often well understood.

Disability insurance is sometimes overlooked.  Peter Ubel, professor of psychology states, “If people are smart, they will invest wisely in [disability] insurance.”   A serious, long-term disability can destroy even the best financial plan.

Protecting yourself from catastrophic financial risks is a necessary step in obtaining financial abundance.

6. Control Your Personal Finances

The stock market, tax codes, the economy or negative world events are outside of our control.  Things we cannot control increase the fear of scarcity.  We can control our spending habits, our prioritization of saving for our family’s future and our decision to plan for our financial well-being.

With this control, we have significant power over personal finances.  Once this power is recognized, fear of scarcity is diminished and a feeling of financial security begins to permeate our lives, leading us toward financial abundance.

7. Have Faith in Continued Abundance

Overcoming the fear of scarcity requires faith in continued abundance.

By implementing the first six steps, you have done everything in your power to control your financial abundance.   However, without faith that your abundance will continue, doubts and fears of the unknown and uncontrollable future can become overwhelming.

Living in financial abundance requires controlling consumer-driven consumption, maximizing and protecting financial resources and faith that abundance will continue.  If you do not feel that you can take these steps alone, find a knowledgeable and trustworthy financial guide to help you with this journey.

Once you escape the fear of scarcity, you may find true serenity.  When living in financial abundance, you may even decide to share more of your abundance with your favorite charitable organizations, spreading the gift of Thanksgiving.

It’s Broken

Posted on November 6th, 2011 in Newsletter Articles, Taxes by wayne

Ready for a riddle?  What federal government program requires 72,000 pages of written text to explain, has an annual compliance cost of over $350 billion and is a key contributor to our current economic morass?  The answer is the US tax code.  The current tax code is so broken that no amount of tweaking will fix it.

Let’s explore why the code has become so complex and why both political parties are unwilling to fix it.

First, let’s examine the individual income tax.  In 2010, the US treasury collected $899 Billion in individual income taxes.  Estimates from the GAO and other sources estimate that the cost of compliance (tax preparation) in 2010 for individuals was approximately $150 Billion.  This cost includes the “fair value” of each individual’s time in compiling tax data, the time required to fill out the complex tax forms for those who do their own taxes and the revenue collected by CPAs and tax lawyers to file individual tax returns.

The vast majority of these compliance costs could be saved if individuals merely paid a percentage of their total income with no deductions or credits of any kind.  To protect the poor, there could be a minimum level of income below which no taxes are levied.  With this approach, the compliance costs could be turned into tax revenues with no net cost increase to the American taxpayer.

If such a simple change could increase tax receipts with no effect on the individual tax payer, why aren’t politicians clamoring for this reform.  The answer lies in the 72,000 pages of our tax code.  Every segment of our tax code has special interest “gifts” that are important to special interest groups who give money to the politicians that protect them.  As an example, the mortgage interest deduction benefits home builders, realtors, mortgage brokers, lawyers, banks and investment speculators.  These groups provide millions of dollars to politicians in both parties.

The corporate income tax is even more insidious.  In 2010, the US Treasury collected $191 Billion from corporations.  It is estimated that in 2010, corporations spent almost $190 Billion in tax compliance.  Large corporations are the obvious benefactors of the current tax code distortions, with corporations such a GE paying no income tax in 2010.  How many millions do you suppose GE spent on lawyers and accountants to assure this tax outcome?

The current US corporate tax code is 35% of net earnings, the highest corporate tax rate of any industrialized country.  If all of the corporate welfare ( and with it the tax code compliance cost) were eliminated, corporations could pay a lower percentage of their total earnings and the federal government could collect almost twice the revenue, with no negative impact on the corporation’s total expenses.

With this approach, the US corporate tax rate could likely be cut dramatically and still provide twice the current tax revenue.  An added benefit is that lower federal corporate tax rates would attract foreign companies to the US and provide less incentive for US companies to move operations abroad.  This combination could dramatically increase our GDP while significantly decreasing our rate of unemployment.

By eliminating all deductions and credits in the current tax code so individuals and corporations pay taxes equal to their current taxes plus their current tax preparation/ tax compliance cost, the federal deficit could be reduced by over $3 Trillion dollars (over a 10 year time frame), with the a net increased cost to both individuals and corporations of $0.

So once again the question, if this approach is so simple, why are some billionaires calling for higher tax rates instead of tax code reform.  Once again, the answer can be found in the 72,000 pages of the tax code.  The current tax code protects the super rich from paying the same income tax rates as the rest of us.

Regardless of your thoughts on  federal government spending or higher tax rates on the rich, we have an annual $350 Billion in deficit reduction staring us in the face. Perhaps it is time to tell both parties that they must begin supporting their constituents instead of the special interest groups protected by our broken tax code.

Seven Tax Savings Tips

Posted on November 6th, 2011 in Newsletter Articles, Taxes by wayne

I have never met anyone who wished to pay more income taxes than they legitimately owe.  The super rich have accountants and lawyers scrutinizing every aspect of their income and expenses to assure they take advantage of every tax loophole and pay the absolute minimum in taxes.

Since most of the rest of us cannot afford personal tax lawyers, here are seven simple ways that you may be able to lower your tax bill for 2011.

1) Spousal IRAs: If only one spouse has a company retirement plan, the other spouse may contribute up to $5,000 ($6,000 if age 50 or over) to his own IRA, even if he has no earned income in 2011.  The spousal IRA contribution is fully tax deductible and must be made before April 15, 2012.  Your combined incomes must be less than $169,000 to receive the full spousal IRA deduction.

2) Investment Tax harvesting:  Taxable investments with short or long term losses can be sold by year end to provide a tax deduction of up to $3,000 in 2011.  Be careful not to repurchase the same security in less than 30 days as this creates a “wash sale,” eliminating the loss deduction.  However, buying a similar fund is allowed.  Let’s assume that you have the iShares MSCI Emerging Markets ETF (EEM).  You may sell the EEM ETF and immediately buy the similar Vanguard MSCI Emerging Markets ETF (VWO) without creating a wash sale.

3)  Mutual Fund sales:  If you are considering selling a mutual fund, but are waiting until 2012 to avoid paying capital gains taxes in 2011, you may end up paying capital gains taxes in both years.  Most mutual funds have year-end distributions of short term and long term capital gains in December.  By selling now, these year-end distributions can be avoided.

4) Charitable contributions:  If year-end charitable contributions are planned and you have stocks with long term capital gains, consider donating shares of appreciated stocks.  No capital gains taxes are ever paid on the donated appreciated stock and the full charitable deduction is provided for the value of the stock.  The simplest method of accomplishing this is by setting up a donor advised fund through your custodian (brokerage firm).

5) State Sales Tax Deduction: If you itemize deductions and are retired or received limited income in 2011, utilizing the state sales tax deduction instead of state income taxes might prove beneficial.  The benefits of using state sales taxes will only apply if sales receipts for higher priced purchases (each of which was taxed at over 8% in Colorado) have been saved.  If you did not save your receipts in 2011, consider saving receipts in 2012.

6) Colorado 529 Plan: If you are a Colorado resident with a child or grandchild in college, consider putting next year’s funds for tuition, room and board and other required expenses into College Invest, the Colorado 529 plan.  Any contributions made to College Invest in 2011 are dollar for dollar deductible against 2011 Colorado income taxes.  Assume that college expenses for 2012 will be $30,000.  By depositing that amount into College Invest during 2011, the 2011 Colorado income tax bill will be almost $1,400 less.  With this short term approach, keep 529 funds in the money market investment option until they are used to pay for a child’s or grandchild’s college expenses.

7) Roth IRA contributions:  Even if you are covered by a company retirement plan, contributions of up to $5,000 ($6,000 if age 50 or over) to a Roth IRA are allowed, as long as adjusted gross income is below $169K for joint filers or $107K for single filers.  While a Roth IRA contribution does not lower 2011 income taxes, Roth income grows tax free throughout your lifetime and potentially the lifetime of your beneficiary.  If funds are ever required from the Roth IRA, the funds contributed can be withdrawn with no taxes or penalties.

Hopefully, one or more of these tax savings ideas will be helpful in reducing 2011 taxes.  If these tips provide some unexpected savings, I hope that you will save and invest these funds to help you prepare for a financially abundant future.