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February, 2009:

Don’t Go For Desparate Measures, Even in Desparate Times

Feb 23rd, 2009
by jblankenship.
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An amazing thing happened last month:  in the midst of arguably the worst market decline in the lives of most folks, massive amounts of funds are being moved from “safe” investments like money market funds, into junk bonds and emerging market funds.  These are the most volatile of all the funds, risky even in the best times.

So, what’s going on?  According to this article in the Journal, it’s the playing out of human emotion – as the saying goes “desparate times call for desparate measures”.  Or the ultimate “hail mary” play.  Unfortunately, the folks that are trying such moves are the ones that can least afford the additional risk of loss.  If you’re in a desparate position (nearing retirement and your retirement accounts are dwindling), your best bet is to re-think the retirement timeline, and perhaps consider either delaying retirement for a few years or taking a part-time job in your early retirement to ease the transition.

The worst thing  you can do is to take on more risk at this stage in  your life.  You’ve probably noticed how I never recommend playing the lottery:  if more risk was the answer, Lotto would be part of everyone’s portfolio.  Unfortunately for those folks that are trying to pull off a miracle, they’re probably just as well off as if they had played the lottery.

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Now is the time

Feb 19th, 2009
by jblankenship.
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No, I don’t mean that right at this moment we’ve experienced some sort of catalyst that indicates that the markets are ready to take off.  What I mean is that, given the free-fall the markets have experienced in the past five months has presented us with unprecedented opportunities to re-balance, place cash positions in the market, and take advantage of the coming market increases.

Here’s an article from the WSJ that explains things a little more completely.  It’s unsettling to invest in a market with as much downside as we’ve experienced.  But sometimes it is the contrarian that comes out ahead – and this is one of those times.

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Not Scared – Too Much Fun Ahead!

Feb 15th, 2009
by jblankenship.
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As I write these lines, it is Friday, February 13. Now, for many folks, the very prospect of a Friday the 13th is a frightening thing to behold. But from my perspective, looking out on a beautiful pre-Spring sunlit day, I am reminded that TODAY, for the Cubs and Cardinals, pitchers and catchers report for Spring Training. Before long, we’ll (or at least I’ll) be glued to the radio, listening to every pitch of opening day. So, on a day with this kind of promise, how can you be afraid?

And just like the baseball season comes around again, so comes the promise that we’ll soon see some improvement in the markets. As you may have noted, I have no crystal ball, but nevertheless I am pretty certain we’re going to begin to see signs of recovery soon. As the markets get the opportunity to digest the concepts laid out in the Stimulus Plan, we should begin to see real improvements. Soon enough we’ll look back on this past few months – and shudder, yes – but it will be an interesting story to tell our kids and grandkids about.

This month, being up to my knees in tax preparation, I thought I’d point out a few wrinkles in the tax law that you may find helpful. And something that I hadn’t mentioned specifically on these pages: last year I finished jumping through the hoops and the like with the IRS to become an Enrolled Agent. What this means is that the IRS recognizes me as “eligible, qualified and certified as authorized to represent another in practice before the IRS.” In layman’s terms, this means that if you have conflicts with the IRS, I can help by representing you before the IRS, regardless of who prepared your return. Please let me know if you’d like to learn more about this service.

If you haven’t been to my blog yet – don’t let the term “blog” intimidate you, it’s really just a sort of online journal – you’ll find lots of articles that don’t make it into this newsletter, along with some other useful information. In addition, you’ll find all of the back-issues of this newsletter out there as well. Just click on this link to access the articles. And you can still follow me at twitter.com/BlankenshipFP if you like!

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Taxing Issues for 2009

Feb 15th, 2009
by jblankenship.
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As occurs every year, several new tax laws come into effect at the beginning of the year.  And this year, there is a high probability that we’ll have massive changes (if only temporary) as the Stimulus Plan comes into focus.  Since we don’t have the details on that plan just yet, I thought I’d highlight a few of the issues of interest to many folks I talk to.

RMD Suspended for 2009

In case you missed the announcement late last year, Congress has decided to suspend the Required Minimum Distribution requirement for IRA account holders who are age 70 1/2 or older for 2009.  The reasoning behind this change is that many IRA accounts suffered massive losses in the market downturn late last year, and so if you don’t wish to take the Required Distribution from your account, you don’t have to, allowing your account time to recover.  Unfortunately this has caused quite a bit of confusion (see this blog post and the attached article for more on the confusion).

If you fit into that category, that is, subject to RMD requirements, and would like assistance to understand how this law affects you, please don’t hesitate to call.

Recovery Rebate Credit

To make a long story short (click here for the longer story): if you did not receive the maximum Stimulus Check last year (remember the $600 checks?), and if circumstances have changed for you (change in income, marital status, being claimed as a dependent), you MAY be eligible for additional credit when you file your 2008 return, in the form of a Recovery Rebate Credit.  This one has also caused a boatload of confusion – see here for additional information if you have questions, and give me a call if it’s still unclear.

Estate Tax Changes

For 2009, the Federal Estate Tax Exemption has increased to $3,500,000.  However, the State of Illinois has not followed suit, and so the State Estate Tax Exemption is only $2,000,000 in 2009.  This disparity between the two laws is expected to continue, as the Federal amount will change again next year and the following year for certain.  Quite possibly we’ll need to be reviewing the impacts of the differences for some time to come.  If you have your estate documents set up to maximize use of the exemption, it makes good sense to review your plans and trust arrangements with your estate attorney, to make sure that you don’t leave a major financial issue to your spouse.  If you’re subject to another state’s estate tax laws, give me a call and I’ll look up the information for you.

Those aren’t all of the tax issues I’ve been hearing about lately, just a few highlights.  Hopefully this has been helpful for you.  As always, give me a call if you have questions about anything I’ve brought up here, or anything else of a financial nature.

Or, call me if you’d just like to talk baseball!

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Suspended RMDs Causes Confusion

Feb 13th, 2009
by jblankenship.
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Late last year, Congress passed a law that allows folks to suspend the Required Minimum Distribution from their IRAs for 2009.  The idea is that, given the market free-fall that occurred late last year, if you would prefer to not take a distribution (since presumably your IRA balance is reduced dramatically), you would not be required to take that distribution for 2009.

Attached here is an article from the WSJ that explores many of the issues that have cropped up with regard to this law.  It’s amazing how a seemingly simple provision can cause so many problems – but then again, it is the US government, and specifically the IRS, that is interpreting the law (and not offering much guidance so far).

As always, let me know if you have questions relative to your own situation.

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Stimulus Checks + Recovery Rebate Credit = Confusion

Feb 7th, 2009
by jblankenship.
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I doubt if Congress knew what kind of a mess they were creating when they included the 2008 provision for the Recovery Rebate Credit (RRC) in the tax law, but this provision has really tossed a spanner into the works.  If you’ve started working on your tax return for 2008, you’ve probably already dealt with this.  If you haven’t started on your return yet, be prepared, because it can be confusing.

Here’s the deal:  If you did not receive the maximum amount of your Economic Stimulus check last summer, and the circumstances have changed since that point in time, you have another opportunity to recieve a similar amount or complementary amount with your 2008 income tax return.  The key point to remember is this:  The Stimulus Check was not taxable income.  Repeating – THE STIMULUS CHECK WAS NOT TAXABLE INCOME.  Having said that, it is still necessary to report the amount of your stimulus check with your tax return, primarily to determine if you are eligible for the RRC.

If you use tax preparation software (you know the packages) it will guide you through the process – but here’s where the problem comes in: One of the most popular packages shows you your potential refund throughout the process, and this can be very misleading.  Your potential refund will reflect the Recovery Rebate Credit if you would otherwise be eligible for the credit (if you had not received a Stimulus Check).  However, as soon as you enter the amount of the Stimulus Check you received in 2008, your potential refund automatically reduces by the same amount.  

In my opinion, the software package is at fault, because the RRC is not a part of the refund until the taxpayer and return are complete, and for whatever reason, call it the video game component of the tax prep software or what-have-you, the tax prep software thinks it’s necessary to give you the “in-game score” and cause a lot of confusion.

So, the moral of the story is – remember that the Stimulus check is not taxable, but you have to report it, and don’t believe the running tally on your tax prep software until all of your information is entered.  Here’s another article about the confusion in case you’d like to read more.

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