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July, 2013:

3 Reasons to use the new safe harbor home office deduction and two reasons not to

Home office workers! In case you hadn’t heard about it, the IRS made some changes to the way the home office deduction works for 2013.  Essentially, you are now allowed to deduct a flat $5 per square foot of dedicated office space, with a maximum of 300 square feet.  But this new “safe harbor” option isn’t for everyone.  Listed below are three reasons this may be good for you, and a couple of reasons that you might want to use the old method. 3 Reasons It’s a Good Thing Depreciation recapture not needed any longer – if you are just starting out taking the home office deduction, you can forget about this concept of “depreciation recapture”.  This is a required add-back (actually basis reduction) when you sell your home.  If you took the old-style home office deduction, including depreciation of your home office space, you’ll still need to keep records of […]

Book Review: A Random Walk Down Wall Street

Right from the start this book will be an excellent read for both financial advisors as well as their clients. Dr. Malkiel provides academic insight on the reasons why passive management works and some great commentary on the use of index funds as part of someone’s overall portfolio. This was the second time I read this book and certainly not the last. It’s great reinforcement on why we invest our clients’ money the way we do and provides solid academic evidence that doing anything to the contrary is counterproductive, more expensive and simply playing a loser’s game. Some of the bigger takeaways from the book are Dr. Malkiel’s thoughts and research on the different part of the Efficient Market Hypothesis or EMH. The EMH consists of three parts – the strong form, the semi-strong form and the weak form. The EMH essential admits that markets are efficient – meaning that current […]

Be Careful When Using Your Social Security Statement for Planning

Recently I received an interesting email from a reader (thanks, JRT!) that illustrates one of the problems with interpreting your statement from Social Security on a regular basis.  Part of the email follows: I am just reaching 66 and have been self employed for many years.  I have worked continuously for 30+ years reaching $100,000 or so per year  but have been slipping into retirement and last years income dropped to $70000. SS has already reduced my monthly payment estimate.  It appears that if I postpone beginning taking my SS retirement I will lose in the long term because each year I have reduced income before retiring my SS distribution will be less. For instance if I defer to 70 and have 4 years with zero income won’t I be hurting myself??? In the situation described above, what the reader is describing is the amounts he is seeing on statements […]

Tips When Renting Out Your Vacation Home

If you have a vacation home that you only use during for brief vacations throughout the year, you might have entertained the thought of renting out the home to defray some of your expenses.  Using a property for mixed purposes – that is, partly as personal and partly as a rental (business use) – can lead to some complications with regard to your income taxes. This is due to the fact that the income earned from renting out the property is likely to be taxable income, which you will need to report on your income tax return.  Of course, you’re allowed to deduct the expenses that are related to the production of income, and then you’re only taxed on the net income after the deductions. The IRS recently published their Summertime Tax Tip 2013-08, which provides some of the guidelines to keep in mind if you’re going to rent out […]

What a Mutual Fund Manager Won’t Tell You

Most people reading this article will have some experience with mutual funds. Whether part of your IRA, 401(k), or other savings vehicle mutual funds play a key role in helping people achieve their savings goals with access to a wide variety of companies and diversification along with professional management. By professional management we mean an individual or team of managers that run the day-to-day activities of the fund such as buying and selling of stocks and bonds as well as running financial analyses of the different companies whose stock they are looking at adding to or selling from the fund. Mutual funds and their managers vary and from the macro level you essentially have two types of managers – active and passive. Active management means that the managers of the fund actively trade securities in hopes of achieving higher than market returns or outperforming their respective benchmark, such as the […]

Financial Record Storage and Safekeeping

We’ve all got reams of papers, paystubs, receipts, sticky notes and possibly even old matchbook covers with important financial information stored on them.  It’s important to keep some of these documents safe, in order to provide proof of purchase, documentation for deductions, and the like.  You never know when a significant event could occur in your home that could put these documents at risk.  Fire, flooding, tornadoes, blizzards, and three-year-olds can emerge out of nowhere and could possibly destroy your important documents.  We’ve discussed how long to keep these documents in the past.  Recently the IRS published their Summertime Tax Tip 2013-04, which details some recommendations for safe storage of your documents.  The text of the Tip follows. Keep Tax and Financial Records Safe in Case of a Natural Disaster Hurricanes, tornadoes, floods and other natural disasters are more common in the summer. The IRS encourages you to take a […]

A Few Things for a Single Person to Consider When Planning Social Security Filing

The decision of when to begin receiving Social Security benefits can be a bit daunting, because there are many things to take into account when making this decision. The basic concept of the lifetime value of benefits taken at various ages is the most common thing to consider, when this is really not as important as you might think.  This is especially true for single person – since the benefit reduction and increase factors are designed to achieve a similar lifetime result for the average lifespan. In other words, if you are an average person with an average lifespan, it won’t make much difference at what age you file for benefits, as you’ll receive approximately the same amount by the end of your average life, whenever you begin receiving the benefits. However. Another factor that you need to keep in mind is how Social Security benefits are treated, tax-wise.  At […]

Holy Priceless Collection of Etruscan Snoods

Pretty weird title right? It actually comes from the classic Batman TV series starring Adam West and Burt Ward. Burt Ward’s character, Robin was notorious for his exclamations categorizing different objects or dilemmas as righteous. How does this relate to financial planning? We all have our snoods that we collect or have value to us. When we purchase renters or homeowners insurance, we often assume that our personal property is covered under the specified limits on the policy. Normally this is 50% of the home’s insured value. But it pays to read the fine print. Most policies will only allow for coverage for certain items and only for specific limits. For example, a typical home insurance policy will cover jewelry only up to $1,000 total – for all of the jewelry you own. In order to have coverage for a specific item of jewelry such as a wedding ring, engagement […]

What is WEP?

WEP, in Social Security parlance, is the Windfall Elimination Provision.  So, if that’s all you wanted to know, you’re good to go. You wanted more though, right?  Okay, here we go: WEP is the provision of the Social Security rules that provides for reduction of your Social Security benefit when you are receiving a pension from a job that was not covered by Social Security.  Usually these jobs are government-related, including state and federal government employees, teachers, and the like.  In addition, pensions from work done in other countries would also fit into this category, as long as the work was not covered by US Social Security. How it Works When your Social Security benefit is calculated, if you’ll recall from this earlier article on benefit calculation, your Average Indexed Monthly Earnings (AIME) factor is divided into three portions, bounded by bend points.  The first bend point is multiplied by […]

Stretching an IRA When There Are Non-Individual Beneficiaries

As we’ve discussed here previously, one of the requirements to enable an inherited IRA to be “stretched” over the lives of the beneficiaries is that all of the beneficiaries must be individuals.  That is to say, none of the beneficiaries can be something other than a person, such as a trust (specifically a trust that is not a see-through trust), a charity, or an estate.  If even one beneficiary is not a person, then all of the beneficiaries must take distribution within five years. But there’s a way around this, and it has to do with the timing of distributions. When an IRA owner dies, there is a key date to know: September 30 of the year following the year of death of the owner.  On that date, the beneficiaries are “set” for the IRA, and if available, the Designated Beneficiary is named.  It is on this date that the […]

Fees

What you see is what you get – or what you don’t see is what you get. As you start or continue to invest and save for college, retirement, weddings, vacations, and other goals it’s important to know the underlying fees and charges of the products and funds that you’re in. Very often these fees are buried in the minutia of a thick prospectus or in the fine print of your account statement. Fees are necessary, but excessive fees aren’t. You should be getting what you pay for – but that can be hard if you don’t know what you’re paying. Let’s take mutual funds for example. On one end you have fees and expenses going to the fund and the manager to try to do the best with your money – which is to earn a decent return (positive or negative) and hopefully beat their benchmark. This is typically […]

Important Ages for Social Security

There are many specific important ages to know as you’re planning your Social Security filing strategy. The ages can become quite confusing and jumbled together as you plan.  It’s important to know at what age you can take specific actions, as well as what the consequences can be if you take a particular action earlier than it is appropriate. These ages are pervasive throughout this blog and my book, but I hadn’t compiled all of the important ages into a single place, so listed below are what I have determined to be the most important ages with regard to Social Security, as well as what is important about that age.  Enjoy! Age Description 22-62 This is the forty years during which your monthly earnings are compiled to develop your initial Average Indexed Monthly Earnings (AIME).  This figure is then used to determine your Primary Insurance Amount (PIA) which is used […]

When is a RMD a RMD?

I receive quite a few questions from folks looking for clarification on the rules around Required Minimum Distributions upon reaching age 70½, so I thought I’d jot down a couple of facts about them that you may find interesting. When can I take the distribution? Looking through some notes from readers I found one where it was asked (this is paraphrased for clarity): My birthdate is April 10, 1943, so I will reach age 70½ on October 10, 2013.  Do I need to wait until October 10 or after to take a distribution so that it is counted as my RMD? I responded to this question by saying that, to be safe, I suggest the reader wait until after October 10 to take the distribution. However. (there’s always a however in life, isn’t there?) I subsequently received a message from a reader (thanks, TAM!) with the following updated information: It […]