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Archive for December, 2007

It’s Now or Never

December 27th, 2007 at 11:17 pm

As 2007 comes to a close, your still have time to take actions that could save you taxes either now, or in the future. Some ideas to consider include:

1. Last minute charitable gifts. If you use a credit card to provide a gift to a charitable organization, as long as the charge is made by December 31, you may deduct the charitable gift in 2007. This allows you to take a year end tax deduction without paying for it until 2008.
2. Roth conversions. If you have an IRA and a Roth IRA with the same brokerage house, they can usually make an immediate conversion from on account to the other. If your income was lower than usual in 2007, you may find that a Roth conversion is in your best interests. If so, this must be completed by December 31.
3. Capital losses. If you have stocks or mutual funds that have experienced a loss since you bought them, you may want to sell them by December 31. The loss can offset realized capital gains and may be used to lower your total 2007 income by up to $3,000.
4. If you have a large estate and are worried about paying “death taxes,” provide year end gifts of up to $12,000 ($24,000 for a couple) to your heirs. Your family members will appreciate receiving the gifts now and you will keep these gifted funds from possible future estate taxes.

If any of these ideas are appropriate for you, do them now, before the year ends and you have missed the opportunity.

The Magi’s Gift

December 23rd, 2007 at 05:28 pm

In the biblical story of the birth of Christ, the Magi gave Jesus gold, frankincense and myrrh. As many of us celebrate the Christmas season, perhaps we should consider giving ourselves one of these gifts, the gift of gold.

While I have never been a gold enthusiast, gold can be an excellent hedge against insipient inflation. In the 1970’s gold was a good investment during the extended “stagflation” that the US experienced.

The nominal price of gold has increased by approximately 75% over the past five years and is now trading at approximately $800 per ounce. However, the Euro has also increased in value against the dollar by approximately 40% over the same 5 year period. Thus, more than ½ of the increase in the price of gold can be attributed to the declining value of the dollar.

With the recent recognition that the CPI is dramatically increasing, it is possible that the US economy may soon face an extended period in which the economy is flat to negative and inflation is above the historical 3% average. If this occurs, it is likely that gold will once again become more valuable as a hedge against increased inflationary pressure.

You may be thinking that gold is already near its all time high of $850/oz. (reached in 1980), so where is the upside of buying gold at $800/oz. ? While in nominal terms that thinking is correct, in inflation adjusted dollars, the $850/oz in 1980 is actually $2145/oz. in 2007 dollars. Thus, on an inflation adjusted basis, gold is now trading at $317/oz. in 1980 dollars.

I am not suggesting that anyone sell all of their stocks and bonds and use the proceeds to buy gold. However, proper asset allocation requires us to look at present economic conditions. If inflation does increase in 2008 and if the dollar remains weak, the odds are high that the price of gold in US dollars could increase. Thus, it may be prudent to put a small amount (5% or less) of your liquid assets into gold, until economic conditions change.

If you decide to add gold to your portfolio, one of the easiest ways of owning gold is through Exchange Traded Funds (ETFs). One such ETF is the streetTRACKS Gold Shares ETF, with the call symbol GLD. This ETF is traded like a stock and is easy and inexpensive to buy and sell through a discount brokerage house.

Gold investments are not for everyone. However, if you think that inflation will rise in 2008 and the dollar will remain weak, adding to your portfolio the “Magi’s gift” may increase your portfolio returns in 2008.

I hope that you have a joy filled Christmas and a Happy and Prosperous New Year.

Time to Refinance ?

December 20th, 2007 at 11:02 pm



With the turmoil in the mortgage industry, many people think that this is the worst possible time to consider refinancing their home. However, if you have good credit and if you have an adjustable rate mortgage (ARM) that is scheduled to adjust in the next 2 - 3 years, now might be a perfect time to consider refinancing your home.

The November CPI was recently shown at .8% over October and 4.6% higher than November 2006. The Fed is admitting that they must get serious about curbing the increasing inflationary pressures. If inflation continues to increase over the next one to two years, interest rates and mortgage rates will rise to reflect this increased inflationary risk.

Currently, if you have good credit, a 30 year fixed rate mortgage can be found with an interest rate of 6% or less. A fifteen year mortgage can be found with interest rates as low as 5.625%. If you have a $200K mortgage, the 30 year loan payments will be $1200 and the 15 year payments would be $1650.

With an ARM that will reset in 2009, if increasing inflation persists, fixed mortgage rates could easily hit 7.5%. By waiting to refinance in 2009, you could end up paying $1,400 per month for he same $200k mortgage that you could get for $1200 per month now.

If your finances allow, consider a 15 year mortgage. Not only will you pay less than 1/2 of the total interest paid on a 30 year mortgage, in 15 years you will completely own your home. When you no longer are paying $15,000 -$20,000 per year in mortgage payments, you will be surprised at the flexibility you have in your career and retirement choices.

All indicators are pointing toward significantly increased inflationary pressures in the coming years. When inflation increases, interest rates, including mortgages, increase. If you have an ARM, you are at risk of paying much higher mortgage payments in the future. It may be in your best interests to refinance your ARM with a long term, fixed rate mortgage now.

Fund Your HSA with Your IRA

December 11th, 2007 at 01:00 am

As discussed in the Financial Abundance Guide, if your marginal federal income tax rate is 25 percent or higher, on an after tax basis, you will save money with a High Deductible Health Plan (HDHP), when you fully fund your Health Savings Account (HSA). In 2007, if you are single and your Adjusted Gross Income (AGI) is over $31,850 or filing jointly with an AGI over $63,700, an HDHP/HSA combination will save you money, as long as you fully fund your HSA.

For many people, the ability to fully fund their HSA may be a challenge. “Fully funding” requires that a single person deposit $2,850 or that a family deposit $5,650 into an HSA. To help solve this problem, the Tax Relief and Health Care Act of 2006 allows you to do a one-time funding of your HSA by rolling over IRA funds into your HSA.

This rollover is similar to doing an IRA to Roth IRA conversion. However, with an HSA rollover, you are not required to pay taxes on the funds transferred to your HSA (as long as you maintain your HDHP for at least 12 months). Like a Roth IRA, all HSA funds grow on a tax free basis and can be withdrawn tax-free, as long as the funds are used to pay for health care related expenses.

Another one time funding source for your HSA is a rollover from an employer-sponsored flexible spending account (FSA) or health reimbursement account (HRA). Your rollover is limited to the account balance on the date of transfer or on September 21, 2006, whichever is less. The rollover must also be made before January 1, 2012. If your yearly FSA contributions will not be consumed, this approach may keep you from losing the remaining FSA funds.

If you have a High Deducible Health Plan (HDHP), fully fund your Health Savings Account (HSA). By doing this, your total after-tax health care costs are virtually guaranteed to be lower than they would be with a comparable “low deductible” health care plan.

Flexible Spending Accounts

December 7th, 2007 at 10:32 pm

If your company offers a Flexible Spending Account (FSA), consider signing up for it in 2008. With an FSA, you request a “salary reduction” to fund the FSA. The FSA funds can be used to pay for qualified medical expense and/or for dependent care. Dependent care is usually used for child care expenses, but may also be used for adult day care for senior citizen dependents, such as parents, if they live with you.

The advantage of using FSA funds to pay for qualified expenses is that the amount used to fund your FSA is not subject to federal, state or payroll (FICA) taxes. If you are in the 25% federal tax bracket, with a state income tax of 5% and a payroll (FICA) tax of 7.65%, you will effectively be able to buy your health care and dependent care services at a discount of 37.65%.

The maximum funding amounts allowed by the IRS are $5,000 for medical care and $5,000 for dependent care. Assuming you are in the 25% federal tax bracket and have 5% state taxes, $10,000 total funding would yield a tax savings of $3,765, providing a 37.65% “discount” on the purchase of these services.

Be careful not to overestimate your FSA requirements. Any funds remaining in your FSA, at the end of the benefit coverage period, will be forfeited back to the company.

Donor Advised Funds

December 3rd, 2007 at 11:26 pm


If you are planning on making charitable gifts at the end of the year, to support your favorite charities and be able to claim a 2007 tax deduction, now is the time to consider setting up a Donor Advised Fund.

You may already know that giving appreciated long-term capital gain stock to a charitable organization gives you a double tax savings. You may deduct the full market value of the stock as a charitable deduction plus you are not required to pay capital gains taxes on the stock’s appreciated value. However, to give stock directly to multiple organizations can be both cumbersome and time consuming.

To overcome the problems of directly gifting appreciated stock, you can create a Donor Advised Fund. These are qualified, private, non-operating foundations that pool their donations and allow donors to select qualified charities for gifts.

Donor Advised Funds are simple to establish. Fidelity, Schwab, Vanguard and other brokerage firms offer these accounts. You may even deduct more in a given year than you actually grant to your chosen charitable organizations, with any excess available for future charitable gifts.

Donor Advised Funds are similar to having your own charitable foundation, without the overhead and legal expenses required to establish a foundation. If this approach seems appropriate for you, either visit on-line or call your brokerage firm today.

Spousal IRAs

December 1st, 2007 at 08:28 pm


Did you know that you could earn no income and still contribute up to $4,000 ($5,000 if you are over 50) to an IRA in 2007?

With a “Spousal IRA,” if either spouse has earned income during the year, both spouses may be able to use the income to fund their own IRA. Even if the income earner has a company sponsored retirement plan, the other spouse may fully contribute to an IRA.

The only limitation with a spousal IRA is that the Modified Adjusted Gross Income (MAGI) on the joint tax return must be less than $156,000 to be fully deductible. The IRA is partially deductible if the MAGI is between $156,000 and $166,000.

If you or your spouse have little or no income in 2007, consider contributing to an IRA. As long as your joint income exceeds the total amount contributed to both of your retirement accounts and your MAGI is below the maximums mentioned above, you may fully fund and IRA with no personal income.