Wednesday, September 10, 2014

Fall is Tax Time

It’s the end of summer, the best time of the year to think about your income taxes. Seriously! 

Granted, there are some last minute moves that can and must be made at year-end, by December 31. Why wait until December?  More than halfway through the year is great for planning. You have a good idea of what your earnings will be, and you have time to take steps that could cut the taxes you will have to pay.

If you have not filed your 2013 tax return because it is on extension (you have until October 15, 2014), get it done now. Rushing through it in October is not a positive move.

For 2014, will you owe or get a big refund? You probably should adjust your withholding if either is the case.  Payroll withholding should provide “just enough,” not too much and not too little. Changing your withholding is easy. Just submit a new W-4 to your payroll office.

Do you pay estimates?  Now is a great time to reassess your estimated tax situation. You can adjust your 3rd quarter, (due September 15) and 4th quarter payments.

Is your 2014 tax-filing material building up in a pile? Straighten it out now. It will make it filing your return next year much easier.

Your favorite non-profit organization will happily pick up unwanted household items and clothing any time of the year. So help out the charities now. Just be sure to get a receipt and put it in your newly created tax filing system. Household goods, furniture, clothing and nick-knacks can add up to very meaningful contributions. List them out with the following information:  Description of item, approximate acquisition date, original purchase price or original value, date of donation, organization receiving donation, condition of item, (excellent, good, fair, etc.), estimated value (10% - 30% of original).  You will be surprised at the amount of the donation. If any item exceeds $5,000 in value you must obtain an outside, independent appraisal.

Earlier is better when it comes to retirement plan contributions. 

There are many other moves and ideas you can make or do. Contact your Wealth Advocate for more tax planning ideas.

Wade Financial Group is on your side for tax planning.

Monday, September 08, 2014

Reminder: Third Quarter Tax Payments Due

The 3rd payment of your estimated individual income tax is due on September 15, 2014.

If you mail your payment and it is postmarked by the due date, the date of the U.S. postmark is considered the date of payment.  If your payment is late or you did not pay enough, you may be charged a penalty for underpaying.

If you are paying an estimated payment based on your prior year total tax, you are paying a “safe harbor” estimate.  This safe harbor estimate allows you to have significant increases in income and will not incur a penalty if all your estimates are paid on time.  If you are not paying an estimate based on your prior year tax and if you need to change your estimated tax payment we are available to assist you or you may call your tax preparer for assistance.

There are several methods to pay your estimated income tax:

  • Pay by check using the US mail.  Be sure to enclose the estimated payment voucher with your check and write your social security number on your check and note that it is for the 3rd quarter of 2014 taxes.  The IRS prefers you to not staple your check to the voucher.  The mailing address for Minnesota residents is:
    • Internal Revenue Service
    • P.O. Box 802502
    • Cincinnati, Ohio 45280-2502
  • Pay online at  You can pay using either of the following electronic payment methods:
    • Direct transfer from your bank account
    • Credit or debit card
  • Pay by phone: for the latest details on how to pay by phone, go to
    • To pay by phone by direct transfer from your bank account call EFTPS Customer Service at 1-800-555-4477
    • When paying by phone using a debit or credit card the IRS charges a “convenience” fee which varies by provider, card type and payment amount.  The providers to call for paying by debit or credit card are:

Wednesday, September 03, 2014

Save the Date: October 16-25

Wade Financial Group has teamed up with the Twin Cities Film Festival for 2014 and as a Wade Financial Group Client, you can get the best seats in the house! 

We are proud to announce that we are the Red Carpet Sponsor for the festival, which means that we can offer our clients complimentary tickets.

The events and film schedule is not yet published but we'll keep you updated and let you know how to reserve tickets. We hope you'll be able to join us for one or more events next month.

This Friday, September 5 is the first event leading up to the film festival: the End of Summer Sneak Preview & Member Drive.  It is $15 with a Twin Cities Film Festival membership or $20 to the public and will feature a silent auction, cocktails and appetizers, and a sneak preview of the 2014 Twin Cities Film Festival's most anticipated films. Tickets can be purchased here

Stay tuned for more updates.

Wednesday, July 09, 2014

Covered Call Writing

When reading articles on the topic of covered calls, talking to others and analyzing various options, be sure to really understand the pros and cons of your decision.  Below we discuss several of the most important topics.

Shorter Term or Longer Term?

Like most topics, there is often lively debate as to which is better: longer or shorter calls. We generally prefer writing options that have a shorter time to expiration; usually a year or less.  We do this for several reasons.

When you write covered calls further out in expiration, you lose control over your money.  It gives you much less flexibility if something in the marketplace or the company changes.  What if volatility changes, the stock market crashes, the company does great or terrible?  If any of these scenarios occur, you are “locked” in to that expiration date.

Additionally, the benefit of receiving more income by going further in expiration decreases exponentially. When you sell an option, you want the price of that option to decline.  Because time decay happens more quickly closer to expiration, we prefer to sell shorter term calls to take advantage of this.

Here is a chart and link that explains the issues with using longer-term options.

Take a look at this article, which goes on to further explain that for each option a “sweet-spot” exists with the optimal time to expiration/option price. We agree!

What is the Best Strike Price to Go After?

Answering this question is more of an art than the previous question.  A very generic answer depends on how much income you want from the covered call and at what price are you comfortable “selling” the stock if the stock did go above your strike price.  The more complex answer may start to sound Greek to many investors.  That is because options have various metrics which they are measured by: Delta, Vega, Gamma, Theta, and Rho.  All of these are important for different types of options. Some of our clients receive ongoing solicitations from other advisors who do not understand these concepts. We do! This knowledge and experience is why it is great to have WFG as your advisor! We analyze all that for you before we make a suggestion.


The last issue is timing.  Think back to the day you met your significant other.  How amazing was that timing? We all know, timing is everything. Though it is nearly impossible to predict accurately, the best time to write options is when volatility is higher relative to its average.  Option prices are directly related to the volatility.

For example, this Bloomberg graph shows the historical volatility for CHRW (C.H.Robinson) over the previous year (this graph is for illustrative purposes only).

The yellow line is the volatility over 30 days and the white line is over 10 days.  This type of graph helps to determine the best time to write covered calls, regardless of expiration or strike price.


Although writing covered calls are an easy exercise to execute, it still requires a lot of attention to detail. Make sure you are analyzing these variables when you write calls.

Thursday, June 19, 2014

Emerging Market Opportunities

In our continuous search to improve upon our emerging markets success in the beginning of 2014, we would like you to consider another demonstration of country-wide performance, the 2014 World Cup.  The World Cup occurs every four years, and showcases the most talented soccer players from around the world.  For the preliminary round, countries are split into eight groups, each consisting of four teams.  We have taken these same groups, and used them to display financial, rather than physical, performance metrics.  Each group has been sorted by year-to-date return.

Group A-D
To demonstrate present and projected valuation, the current and forward price-to-earnings ratios are also listed.  As a reminder, price-to-earnings ratio is defined as current price divided by trailing 12-month earnings per share.  Greece, for example, would be the only country in this list with negative earnings, given their negative P/E ratio (-3.3). Italy’s P/E ratio is so alarmingly high (287.1) because the country has just recently generated positive, albeit still very low, earnings.
Group E-H
Forward P/E is the ratio of a country’s current price over its projected earnings for the next four quarters.  The best way to use this information is to compare the forward P/E ratio with the current P/E ratio, keeping in mind that lower is better.  Since the bulk* of these countries have forward P/E ratios that are lower than their current P/E ratio, a vast majority would be expected to see increased country-wide earnings over the next year.

As we have recently mentioned, we currently see a much greater opportunity in emerging markets as opposed to developed markets.  Developed markets, for the most part, performed very well in 2013 while emerging markets lagged far behind.  Based on historical evidence, we feel that this performance gap will continue to shrink throughout the rest of the year.  Each emerging market carries with it a different set of economic circumstances, however, which is why we are continuously focusing on selecting emerging market countries for our Alternative (ALT) strategy that we feel are most poised for future off-field success.

*Excluding Belgium, Argentina, Russia, and the special circumstance of Greece.

Tuesday, June 17, 2014

Summertime is a good time to refresh gift planning ideas

Charitable Trusts

As interest rates change, certain types of trust gift planning change.
Charitable Remainder Annuity Trusts: These trusts pay an annuity to the donor or another person for a set term, with the remainder going to a charity.  The donor gets an up-front deduction for the value of the charities remainder interest, which is larger when a higher interest rate is used.
Charitable Lead Annuity Trusts:  These trusts pay an annuity to a charity for a set term, with the remainder passing to the donor or someone such as a family member.  The donor gets to claim an up-front deduction for the present value of the charities annuity interest, which decreases as interest rates rise. Grantor-retained annuity trusts, where the person who sets up the trust gets an annuity for a set term are also hurt by higher rates.  Any balance left after the term expires goes to whoever the grantor originally named. Higher rates boost the potential gift tax bill.

Other Gifting Strategies

Do not waste the annual gift tax exclusion of $14,000: 
You can give up to $14,000 each to a child, grandchild or other person free of gift tax and it does not count against your “life-time” exemption.  If you’re married, your spouse also can give $14,000, doubling the tax free amount.
The 2014 “life-time” estate and gift tax exemption is $5,340,000.  You will not owe any gift tax on gifts over $14,000 as long as you do not use up your $5.34M exemption.
Pay a Donee’s tuition or medical costs directly:
The payments made directly to the educational institution or medical facility do not count against the $14,000 annual gift tax exclusion.
Give Appreciated Assets When Donating to Charity:
The appreciation escapes capital gains tax and you get to deduct the full value if you’ve owned the asset for over a year.
Keep Receipts and Records for Personal Property Donations:
Donations of gently used household items, clothing, furniture, etc. can add up to a substantial sum.  Keep a list of the items donated and note the condition of the item (e.g. excellent, good, fair).   An acceptable value for most items donated is 15% to 25% (or more) of the original cost.

Wednesday, February 26, 2014

Tom's Tax Tips: Vacation Property

Renting the Vacation Property:

If you rent your vacation home for less than 15 days a year, the rental income is tax-free and you can deduct interest and property tax payments (and casualty losses) on the house, but not the rental expenses, for the entire year.

You do not deduct the following:
  • Personal use days
  • Any days that you stayed at the rental property to perform routine repairs and maintenance including:
    • repairing the bathroom toilet
    • shampooing carpets, floor cleaning
    • painting, caulking
    • shopping for furniture or supplies 
    • d├ęcor changes
  • Meetings with property managers 
  • Meetings with association boards

Maintenance days are not counted as personal days, even if your friends or relatives joined you for recreational purposes. These type of days should not be considered personal days and should be documented on a calendar or written document including receipts.

If you rent your vacation home out for 15 days or more during the year, and personal use does not exceed the larger of 14 days or 10% of the rental days, you must include the rent in income.  You get to deduct 100% of any property management fees in addition to rental expenses and it gets complicated because you need to allocate rental expenses between the days the property is rented and those used for personal purposes.  If personal use is 30 days and rental use is 120 days, 80% (120 divided by 150) of your mortgage interest, property taxes, insurance premiums, utilities and other rental expenses.  You can claim depreciation of 80% of the value of the house (no depreciation on the land part of the purchase).

If you limit your personal use to 14 days or 10% of the rental days, the vacation home is considered a business and up to $25,000 in losses may be deductible in each year.  I say losses “may” be deductible because real estate losses are considered “passive losses” by the federal tax law.  Passive losses can be used to offset taxable profit when you ultimately sell the vacation property.

Selling the Vacation Property:
Although the rule that allows home owners to take up to $500,000 of profit tax-free applies only to your principal residence, there is a way to extend the break to your second home: make it your principal residence before you sell. That's not as crazy as it might sound, nor is it as lucrative as it used to be.

Historically, retirees were selling the family home and moving full time into what had been their vacation home. Before 2009, this had a very special tax appeal. Once you live in that home for two years, up to $500,000 of profit could be tax free — including appreciation in value during the years it was your second home. Any profit attributable to depreciation while you rented the place, though, would be taxable. Depreciation reduces your tax basis in the property and therefore increases profit dollar for dollar.

In 2008 Congress cracked down on this break for taxpayers who convert a second home to a principal residence. Now a portion of the gain on a subsequent sale of the home is ineligible for the home-sale exclusion of up to $500,000, even if the seller meets the two-year ownership and use tests. The portion of the profit that's subject to tax is based on the ratio of the time after 2008 when the house was a second home or a rental unit to the total time you owned it.

This can still be a great deal if you've owned your second home for many years before the law changed. Let's say you have owned a vacation home for 18 years and make it your main residence in 2014. Two years later, you sell the place. Since the six years after 2008 the place was your second home (2009 and 2010) is 30% of the 20 years you owned the home, only 30% of the gain is taxed. The rest qualifies for the exclusion of up to $500,000.