April 30, 2013

I Wanna Be a Billionaire

Credit: -Marcus-
Earlier this week, I spent a fair amount of time reading a very technical, highbrow article about many things someone could do with their wealth to build an enduring legacy. The article was very useful, and I even learned some new financial planning techniques and strategies I may mention to some of the clients I serve, but in the words of Ron Burgundy (Anchorman reference), it reeked of “leather-bound books and rich mahogany.”

I want to be clear - there is nothing wrong with a good leather-bound book or a rich mahogany bookshelf, but that article was simply not for everyone. I’d go so far as to say it was written for only a very small group of people. Now I always tell all of my clients the truth and try to give all of my clients the same advice I would give my mother if she were in their shoes, but the thing is, the clients I serve are very, very different from one another. Some have cufflinks, some have holey blue jeans. Some like beef wellington, some like a hamburger steak (I’d take the hamburger steak, myself!). There’s nothing wrong with being different, and quite frankly, I enjoy the daily challenge of being a financial planning “chameleon” as I tweak my approach, tactics, and explanations to try to provide the best advice I can in a manner that each, unique client can relate to and understand.

I tell you all this so you can hopefully appreciate my motivation behind today’s post. Today, I offer some financial thoughts and commentary for you to think about as you live your life and consider what type of legacy you want to build, and one day, leave behind. I’m attempting the same thing as the author of the aforementioned highbrow article, but I don’t think overly-technical speech and a rich mahogany vocabulary are always necessary when trying to help people financially. Here goes nothing, but let’s see what I can do with a slightly “PG-13ed” excerpt of Travie McCoy and Bruno Mars’ “Billionaire,” a reggae, pop rap song about what McCoy would do if he had a billion dollars. The song lyrics are italicized and green; my commentary is in parentheses and black.

I wanna be a billionaire so freaking bad
(You and me both!)
Buy all of the things I never had
(There’s nothing wrong with prudently spending some of your hard-earned money. You need to save, you need to pay down debt, and you need to invest, but it’s important to remember that when your time comes, you can’t take your money with you!)
Uh, I wanna be on the cover of Forbes magazine
(It’s true, with personal or financial success there often comes fame and public attention, so you need to be careful. Even if you don’t quite make the cover of Forbes, it’s probably a good idea to have a substantial umbrella policy like we discussed in "Surviving Mayhem," or one with liability coverage close to your total net worth.)
Smiling next to Oprah and the Queen
(As I’ve gotten older, I realize more and more that there is sadly some truth to the phrase, “It’s not what you know but who you know.” If that is indeed the case in this cruel world, at least try to leverage your contacts and relationships to do good and make a difference!)
Oh every time I close my eyes
I see my name in shining lights yeah
A different city every night alright
I swear the world better prepare

For when I'm a billionaire
(The world better prepare and so should you! Planning in advance and examining the pros and cons of a life or financial decision before you make it is absolutely crucial. You don’t want to start a business and then worry about the wording in the partnership agreement, you don’t want to begin thinking about saving up money to send your kid to college when they’re already a senior in high school, and you don’t want to weigh the impact of choosing an annuity pension versus taking a lump sum at retirement for the very first time on your last day on the job!)
Yeah I would have a show like Oprah
I would be the host of everyday Christmas
Give Travie your wish list

(You can currently give someone up to $14,000 per year without their being any gift tax consequences.)
I'd probably pull an Angelina and Brad Pitt
And adopt a bunch of babies that ain't never had stuff

(Adopting is a wonderful thing to do. If you want to help, but you’re not in a position to adopt, there are many, very good charities you can assist with your time or resources that benefit children in need.)
Give away a few Mercedes like 'Here lady have this'
(Please talk to your financial advisor, insurance agent, and family BEFORE you give away a Mercedes!)
And last but not least grant somebody their last wish
(Contributions to the Make-A-Wish Foundation are tax-deductible…)
…I'd probably visit where Katrina hit
And do a lot more than FEMA did…

(Once again, there are numerous charitable opportunities where you can make a difference. Oftentimes in the case of a major disaster, you can specifically direct your contributions with many national and international charities.)
…Toss a couple million in the air just for the heck of it
(Please don’t.)
But keep the fives, twenties, tens and bens completely separate
(It is critical that any money of substance you have accumulated be diversified and secured. Investments need to be properly allocated, too much cash in one bank account isn’t as secure as it could be and the interest isn’t going to keep up with inflation anyway, and having cash stuck under the mattress can be a huge security risk (theft, fire, etc.))
And yeah I'll be in a whole new tax bracket
(You got that right! The new top federal tax rate is 39.6%. Add in state taxes, payroll taxes, and the Medicare surcharge, and your overall tax rate is likely getting on up there. It’s always a good time for tax planning with your CPA or financial advisor.)
We in recession but let me take a crack at it
I'll probably take whatever's left and just split it up
So everybody that I love can have a couple bucks

(It’s important to have an up-to-date estate plan in place. The current estate exemption amount is $5.25 million per person, so many people will not face estate taxes, but with as many tax laws that have changed in recent years, you need to make sure your money is still going where you want it to go!)
And not a single tummy around me would know what hungry was
Eating good, sleeping soundly

(It is more blessed to give than to receive.)
I know we all have a similar dream
Go in your pocket, pull out your wallet
And put it in the air and sing…

We can’t all be billionaires, but it is fun (and important) to think about what we can do with what we have. I’ve got a meeting later this week with a couple, and we are going over their estate plan to do just that. Perhaps, I’d better split the difference and go with something between rich mahogany and reggae lyrics. Either way, if you feel like your life and your purpose are bigger than just you, I encourage you to think about what fingerprints you’re leaving behind. Please keep in mind that your actions and your finances can be powerful tools in leaving a legacy that you can be proud of.


April 23, 2013


Credit: audfriday13
You know all those acronyms you see scrolling across buildings in Times Square? What about those acronyms that just keep coming across the bottom line of your television on those financial channels like some sort of endless “follow the ball” sing-a-long? What are those things? Many people know that when the arrows are pointed up, the font is green, and the person ringing the bell at the end of the day is smiling that those acronyms have done well, and when the arrows are pointed down, the font is red, and the person ringing the bell at the end of the day is frowning that those acronyms haven’t done so hot. But really, what are those things? Let’s talk about some of those acronyms, what makes them different, and how I would propose you think about indices (the fancy plural of index) relative to your own investment accounts.

  • DJIA - The Dow Jones Industrial Average (DJIA) is a popular U.S. market index that was created in 1896 by The Wall Street Journal editor, Charles Dow, and named after statistician, Edward Jones. The index is designed to gauge how 30 large, publicly owned companies based in the United States have fared during a trading session. The companies are primarily made up of industrial and consumer goods manufacturers, and the editors of The Wall Street Journal (who choose the companies that make up the DJIA) have historically chosen companies that have been around for a while, have a proven reputation, and will likely be around for a lot longer. Despite being made up of only 30 stocks, the DJIA is widely considered to be a useful market indicator in the U.S.
  • NASDAQ - The National Association of Securities Dealers Automated Quotation (NASDAQ) was created in 1971 and was the world’s first electronic stock market. The NASDAQ is a computerized system that allows investors to trade more than 5,000 stocks, many of which are technology companies. While the DJIA is simply an index, the NASDAQ is an actual exchange like the New York Stock Exchange (NYSE) where buyers and sellers can trade securities. Although not always the case anymore, most NASDAQ stocks have ticker symbols (abbreviations representing a company) of four letters or more whereas most NYSE stocks have ticker symbols of three letters or fewer.
  • S&P 500 - The Standard and Poor 500 (S&P 500) is a popular U.S. market index based on 500 large cap (large market capitalization) U.S. companies. A committee of analysts and economists selects the companies that become components of the S&P 500 based on size, liquidity, earnings, stock price, and industry. The S&P 500 was first published in 1957 and, because it includes more companies than the DJIA and is less skewed towards technology than the NASDAQ, many people regard the S&P 500 as the best representation of the overall U.S. market and U.S. economy.
  • MSCI EAFE – The Morgan Stanley Capital International Europe, Australasia, and Far East (MSCI EAFE) is an international index that attempts to represent large and mid-cap companies across the developed world, excluding the United States and Canada. The index was created in 1969 by Morgan Stanley and is made up of more than 1,000 stocks in more than 20 countries. The MSCI EAFE is probably the most famous international market index in the world.
While I could go on and on about many of the other relevant and useful stock indices out there, I would like to also share with you a few thoughts on how I wish I could convince my friends, family members, and clients to view stock indices. You see, one of the many hats I wear as a financial planner is that of an investment advisor, meaning that many of the clients I serve have questions for me relative to their investment performance versus the performance of the indices they constantly hear about by newspaper, television, radio, and smartphone. It’s perfectly natural for someone to want to analyze their investment performance relative to a benchmark of some type, but it’s important to also realize an index is just an index. If you have a lot of cash or bonds in your portfolio and the DJIA has a huge rally, your overall return will probably lag the index because you’re not solely invested in 30 stocks. If the technology sector has a dot-com bubble burst and the rest of the market remains fairly flat, your diversified portfolio investment performance will probably outperform the NASDAQ because you are more diversified. If you’re all in on Greek shipping stocks, your performance probably won’t match the returns of the S&P 500 because it’s not even comparing companies based in the same country!
Your investment return versus the returns of indices is not apples to apples; it’s apples to oranges. If your investment return is substantially and repeatedly different than the direction of appropriately comparable indices, you may need a new investment strategy or maybe even a new investment advisor. If your investment return versus the returns of appropriately comparable indices are in the same direction, reasonably close, and you can understand how your allocation or risk tolerance is different than that of the index you are comparing your return to, then normally, I wouldn’t be too worried. Someone gloating over how their international small cap stocks outperformed the DJIA’s 30 U.S. large cap stocks makes no more sense to me than someone bemoaning that their conservatively balanced portfolio made up of cash, bonds, and diversified stocks underperformed the all-stocks S&P 500.
Indices are good points of reference and can be decent benchmarks, but so are exit signs on the interstate. I hope the next time you see something that resembles DJIANASDAQS&P500MSCIEAFE-like gibberish you will remember a few things from this post about what a few, common indices represent, and will think of them as relative - not absolute - performance benchmarks to your own investment portfolio.

April 16, 2013

Alternative Minimum Tax

Credit: renjith krishnan
First of all, let me wish a happy end of “busy season” to all my Certified Public Accountant brethren out there who just finished the most stressful time of their year! Secondly, let me ask you: Did you have to file Form 6251?

Unless you have an incredible memory or were frighteningly thorough in reviewing your tax return, you may have already forgotten. If by some unfortunate twist, you, your tax software, or your accountant determined you actually owed Alternative Minimum Tax on Form 6251, you probably do remember that wretched form. Either way, even I, as a former tax preparer, have a white, hot hatred for the Alternative Minimum Tax, because it is an entirely parallel tax system that, in my opinion, has overreached its original intent.

You see, this mess all started when a predecessor, “Minimum Tax,” was enacted in 1969 when the federal government noticed that around 150 high-income taxpayers were not paying any taxes due to massive deductions and tax breaks. Congress addressed this national outrage by passing a bill that subjected around 19,000 taxpayers to an additional tax. The potential additional tax liability began in 1970, and was calculated as 10% of a taxpayer’s special tax preference items (certain deductions and tax breaks that had previously been allowed) that exceeded $30,000 in addition to their originally calculated tax liability. As most tax laws do, the “Minimum Tax” changed multiple times over the course of the 1970s and 1980s, and the most dramatic change occurred in 1982 when the “Minimum Tax” went away and the Alternative Minimum Tax (AMT), that we currently know and love, came into existence.

Whereas the “Minimum Tax” was an additional tax, AMT is a second tax system. To calculate AMT, you essentially start with your regular taxable income and add back quite a few deductions, credits, and exemptions, and then multiply your new AMT income by a rate between 26% and 28%.  In a nutshell, AMT is less generous than the normal tax system, and even according to the Internal Revenue Service, AMT is supposed to "limit the benefits that can be used to reduce total tax.” I wouldn’t begin to try to walk anyone through an entire tax system in a few paragraphs, but if you took fairly large deductions when compared to your income for state and local taxes, medical expenses, miscellaneous expenses, investment expenses, or mortgage interest to name just a few potential AMT-triggering items, you are going to want to be careful. In some cases, if you have passive income or passive losses, a net operating loss, foreign tax credits, or incentive stock options, you, too, could face AMT. The bottom line is that most individual filers with more than $50,000 worth of income and most married filing jointly taxpayers with more than $75,000 worth of income will need to figure out their tax liability under the normal tax system and the AMT system and be prepared to pay whichever is greater. (This surprisingly nice tool provided by the IRS can also help you decide if you will be required to pay AMT.)

Now as I’ve said before, I don’t do politics on 2MuchCents. However, I did make the “loaded” comment earlier that I believe AMT has overreached its original intent. What I meant is relative to the fact that in 1969, the government was going after 150 taxpayers; in 2011, around 4,000,000 taxpayers paid AMT and an estimated $39 billion was generated for the government by those taxpayers' additional liabilities. Don’t get me wrong, I’m for people earning their share and paying their share; I’m just not sure that the AMT that has evolved over the years (or could evolve in future years) is what the Congress of 1969 had in mind.

Not everything about AMT is doom and gloom, though. There are a few brighter spots. First, while the American Taxpayer Relief Act did not do a lot of things many people hoped it would do, it did permanently index some of the AMT parameters for inflation. While this will supposedly keep around 4 million taxpayers paying AMT annually, it is an improvement over the historical practice of always needing eleventh-hour congressional “patches” to increase AMT paramters for inflation that were annually reverting to their original 1982 amounts which, if left unchanged, would have caused millions more of Americans to face AMT consequences. Second, while AMT may not feel fair to you if you have to pay it, you are earning an AMT Credit. If you have ever previously had to pay AMT, and in the future you find your regular taxable liability is calculated to be higher than your AMT liability, then you could be allowed to reduce your regular tax liability down to the lower AMT liability, or by an amount equal to as much AMT as you have previously paid. It’s also worth mentioning that AMT credits are carried forward for an unlimited number of years.

To be completely honest, I always saved AMT calculations for last, like some rancid dessert, when I prepared individual tax returns and corporate tax returns. (Oh yes, there’s a corporate AMT as well, but I spared you from that!) AMT calculations could be complicated, confusing, and I never seemed to make anyone happy when I had to deliver the bad news that they faced Alternative Minimum Tax…

It’s my hope that you will look at Form 6251 a little closer next year. If you are an overachiever and look at your 2012 return and find that you are facing AMT or were pretty close, I would urge you to reach out to your CPA (or financial advisor) before their next “busy season” and after they’ve had a few weeks off because there are some planning strategies available that could save you from the dreaded AMT.


April 03, 2013


Credit: imagerymajestic
Have you ever had one of those Snickers “Wanna get away” moments? I know I have. There was the time when I was playing the White Rabbit in a comical version of Alice in Wonderland, and right in the middle of my solo, I looked over and realized my nice, fluffy, white tail had become detached from my pants. There was also the time when I complimented the beauty of someone’s relative’s cremation urn. Most recently, there was that moment when I came downstairs to see my “angelic” dachshund playing in the confetti of what used to be my wife’s work time sheet and to-do list for the week that she had asked me to move a little earlier in the day if I was going to let the puppy out. Uh-oh!

Uh-oh moments are a part of life, but some can be prevented. Part of my job as a financial planner is helping clients try to prevent financial uh-ohs, and the most common areas where I see blatant financial uh-ohs are actually estate planning and beneficiary designations. Today, I want to talk about a few common estate planning uh-ohs that you will want to make sure you and your loved ones avoid.

  • Whose Name is Where?
    • Many people are surprised to learn that their designated beneficiaries on retirement accounts and life insurance policies trump any designations in their wills. If a husband was suddenly killed and left everything in his will to his second wife, but the most recent beneficiary designation on file with his company’s 401(k) plan still lists his first wife as the beneficiary, the first wife will walk away with the 401(k) plan proceeds. If a grandmother’s relationship has fallen apart with one of her three grandchildren, and in her will she states her wishes to transfer assets to only two of her grandchildren, but the most recent beneficiary designation on file for her life insurance policy lists all three, the grandchild who has fallen out of favor will still receive his/her share. Wills and estate plans are not worth the paper they are written on if you do not make sure your beneficiary designations are properly coordinated with your wishes!
  • Are Your People Still Your People?
    • I’m not naive enough to think that most people enjoy updating their estate plan, but it really is necessary to periodically examine what you have in place to ensure that your wishes are actually fulfilled. Are your children’s named guardians still the people who you would like guarding your children? Have you even named a guardian for your children? Do you still want to give your uncle who has developed that gambling problem a share of your earthly wealth? At his age, is your older brother still mentally and physically capable to serve as your executor? Is your daughter who has now moved across the country still the best person to be your financial and health care power of attorney should something happen? Life changes and people do, too. If it’s been awhile since you looked at your will, there is a chance someone has passed away, someone has moved, someone is no longer capable to act in the capacity you formerly intended, or someone is no longer an individual who you would like to benefit through your final wishes. If any of these possibilities are the case, it’s probably worth dusting off your old estate plan to make sure there is no stone unturned.
  • Is It Still Going Where It is Supposed To Go?
    • Attorneys often use relatively flexible language in their client’s wills so that every time Congress slightly tweaks the tax law, their clients don’t have to come running back to rewrite their wills to match the new laws. While this is a great practice and an idea appreciated by all parties involved, the estate tax law has changed a good bit over the past few years - enough that I would urge you to take a look at your estate plan if it’s been awhile. For example, let’s say a lady has $3 million, and she specified in her 2003 will that she wanted to leave the maximum estate tax exemption at the time of her death to her son and the remainder to her husband. Well at the time the will was written in 2003 that meant $1 million to her son and $2 million to her husband. However, in 2013, that means $3 million to her son and not a dime to her husband because the current estate tax exemption is $5.25 million. I know this example has a lot of zeroes, but the point is the same - if the lady with the $3 million dies without reading this post and updating her will, her surviving husband will probably be saying more than “Uh-oh!”
Death is one of the two certainties in life according to Benjamin Franklin, and it is often a big enough burden on the deceased’s friends and family without a nasty financial surprise. If this post has given you the slightest doubt in your current estate plan’s ability to fulfill your wishes, I urge you to please make time to take a look.