Monday, December 29, 2014

Energy Sector Outlook

The recent fall in gas prices has been a direct effect of supply and demand trends in global crude oil markets.  A recent oversupply has been caused by the emergence of fracking in the U.S. and Canada.  This problem has been compounded due to the fact that OPEC (the Organization of Petroleum Exporting Countries) has been adamant about maintaining their current levels of production.  Some say they are choosing to do this in order to squeeze out some U.S. suppliers and uphold the market share of oil coming from the Middle East.  Slowing economies in the Eurozone and China are also causing many to believe that there will be pressure on the global demand for oil.

As for the effect on oil companies, this recent drop has caused broad negative performance in the sector.  During oil’s 47.8% tumble since 06/30/14*, the SPDR Select Energy Fund (NYSE:XLE), which broadly represents U.S. oil companies, has fallen 19.1%.  Moving forward, however, some companies will be able to adapt to these changes much better than others.  For example, smaller players in the U.S. fracking revolution are now being squeezed the hardest, as many did not anticipate selling crude oil at these levels.  Wade Financial Group has owned a number of energy related stocks in 2014. Recently, we transitioned out of some of these smaller, more volatile companies, into larger and more stable names in anticipation of further trouble in energy markets.  We continue to selectively hold some energy companies in our Paid to Wait® and Paid in Advance® strategies due to their strong financial position and durable competitive advantages. 

Moving forward, it would be nearly impossible to try and predict an exact bottom for oil prices.  We feel strongly, however, that current prices cannot be maintained for the long-term.  Some financial pundits have already declared that oil prices are nearing a trough.  We would need to see some stability in the oil markets first, but there will be a time when many of these companies can be purchased at a true bargain. Until that time, we have positioned our accounts to hold only companies that we feel are best suited to ride out the most recent wave of volatility.

Commodities are in bear markets.  No one can predict where the top is for the U.S. market or where the bottom is when an asset class like energy is in a bear market.  While self-directed investors are typically afraid to buy asset classes when they are on sale, 2015 may be a time that they should consider breaking their own rules and buying beat up asset classes at bargain prices.  Most notable to consider are commodity and energy sectors--emerging markets as well, but energy may potentially snap back quickly.

Bear markets are typically shorter than bull markets.  By many measures, oil is currently priced under the cost of production.  On a short term basis, this may continue (6-18 months).  On a longer-term basis, oil is potentially destined to rise significantly from current levels.

Over the short term, such contrarian investment positions still may experience further downside momentum and works against investors.  Our allocation to energy and commodity sensitive investments and asset classes may grow further as we enter 2015, as opportunities present themselves.

* As of 12/26/14

Monday, December 08, 2014

Many of Last Year's Tax Breaks - Extended

The major tax news at the end of last year was 55 tax breaks expired on December 31, 2013.  During all of 2014 tax planners and tax payers all were awaiting a final decision on whether or not many of these will be renewed or revised.  As the year draws to an end, Congress is backing off of revisions and proposing simply extending these breaks.

As a result those 55 tax breaks that expired last year will be extended.

Congressional Republicans on Tuesday said the measures would be renewed retroactively to Jan. 1, 2014 but only through the end of 2014.

In the next couple of weeks tax experts will be watching the Congressional action carefully.  Those 55 tax breaks are:
  • Tax-free distribution from individual retirement plans for charitable purposes.
  • Reduction in S corporation recognition period for built-in gains tax.
  • Credit for energy efficient appliances
  • Deduction for qualified tuition and related expenses
  • Employer wage credit for activated military reservists
  • Non business energy credits
  • Deduction for state and local general sales tax
  • Additional first year depreciation for 50 percent of basis of qualified property
  • Incentives for biodiesel and renewable diesel fuel
  • Credits for research and experimentation expenses
  • The remaining 45 are mostly business credits

Wednesday, October 29, 2014

End-of-Year Tax Planning

It’s time to start making your year-end plans even though this year’s tax rules are pending in Congress and not yet finalized.  Lawmaking tax writers are waiting until the last minute to revive a series of tax breaks that lapsed at the end of 2013.  These include the deduction for state sales taxes in lieu of income taxes and direct transfers from IRAs to charity up to $100,000 for people age 70 ½ and up.  Despite the lawmakers’ reluctance to take action until after Election Day (Nov. 4) we believe many of the tax breaks will be renewed for 2014 and 2015.

The key to end-of-year tax planning is to weigh your options for both 2014 and 2015.  You want to minimize the tax impact for both years, not just one.

Some taxpayers can accelerate income into 2014 to take advantage of a lower income and tax bracket, while other taxpayers may be able to defer income into 2015 for the same reason.
State and local income tax are itemized deductions.  The decision to pay, underpay or overpay can affect either year depending on your situation.

There are a number of other deductions such as interest, charitable donations, and medical expenses that need to be considered.
Knowing your tax position before the holidays is always a good idea. Contact your Wealth Advocate to discuss your income tax concerns and end the year with a reliable plan.

Tuesday, October 21, 2014

Carl Richards on Happiness and Success

In the past, WFG has used ideas and images from to promote financial literacy to clients and investors through our website and other materials.  You may recognize some of them:

The man behind is Carl Richards, a well-known author and international speaker.  We like to use some of Mr. Richards’ ideas because he is often able to present complex, albeit important, financial ideas in an easily understandable way.  Below is a copy of the most recent newsletter, on success and happiness:

Are You Chasing Happiness or Success?

For the next few minutes, I want you to focus on the most successful person you know (and yes, it may be you). What makes this individual successful in your mind? Professional accomplishments? Personal wealth? Now, I want you to think of the happiest person you know.

Did you come up with the same name?

No doubt some of you did. However, I suspect many more of you ended up with two different people. We often ignore it, but we live in a world that doesn't always make it easy for success and happiness to coexist. My sense is that the problem comes back to something fairly basic.

How we currently define success and real happiness overlap very little. It may seem counterintuitive. After all, what successful person wouldn't be happy? But go back over the mental list you made for the individual you consider a success. How many of your qualifications are connected, at least in part, to owning tangible, material things?

Now, think about the happiest person you know. What makes them happy? I'm willing to bet it's because of their relationships and the things they do, not because of what they have. But why isn't there a greater alignment between what we consider success and happiness?

One of the best examples of this disconnect is the greater happiness we feel when we're living an experience versus buying a possession. Even though it seems counterintuitive (e.g., your vacation only lasts a week), people are happier both before and after an experience compared to how they feel after buying a physical product. But think about how we define success. Very often it comes back to what someone buys and owns.   

These visible reminders of success become a measuring stick, and like any measuring stick, it can be hard for some of us to measure up. Case in point, I've had more than one person tell me about how they'd like to slow down and live a different life. These are often people who would easily qualify as successful.

But as we walk through the reasons why they can't slow down, they invariably hinges on those signs of success. For instance, don't tell me you wish you had more time to coach your kid's soccer team if you just bought a luxury car that requires working overtime to make the payments. While success may come with happiness, sometimes we'll need to walk away from what everyone else defines as success to find our own happiness.

Yes, this may sound incredibly abstract and maybe even a little New Agey. But time after time, I've had conversations with clients in which they will share their goals, and their goals will be based on the idea of having "something." They focused on visible success and skipped over the happiness part. They just assumed success meant happiness. As a result, these clients were surprised to discover that after all their hard work, and despite all the possessions they'd accumulated, they weren't always happy with the outcome.

What might happen if we reordered happiness and success? What if we instead said our decisions would be based on what makes us happy? Of course, we'd be thrilled if those decisions also led to success, but our primary focus was now happiness.

How would that change the decisions you've made in the past week? Would anything be different? If not, then you've managed to find a balance between success and happiness. But if you find that more than one or two decisions would be different, then maybe it's time to ask yourself why.

Do you really think success will bring you happiness, or do you just hope that's the case?


If you would like to read more from Mr. Richards, visit and/or subscribe to the Behavior Gap newsletter for more insight.  If you would like to see Carl’s archives in the New York Times, click here

Monday, September 29, 2014

Establishing Legal Residency in a New State

  • Locate a place to live in the new state of choice. Purchase a home if you can, although it is not required.  You must spend at least 6 months and 1 day at this new home to claim residency in your new state.  The new state must be your “Domicile” (generally meaning "permanent home").
  • Spend substantial time in the new “home” state during vacations and holidays.
  • Next, establish a home address with the U.S. Postal Service by going to the nearest post office and filing a change of address form.  The new home must be your primary mailing address.
  • Have your important documents transferred to your new home address (insurance, memberships, licenses, etc.).  
  • Obtain a driver's license and car registration in your new home state, or apply for a non-driver's state ID card if you do not drive.
  • Register to vote in your new home state.
  • Register motor vehicles in your new home state and make sure insurance rates are based upon your new state residency.
  • Establish a banking relationship in the new state.
  • Establish new professional relationships such as an accountant, lawyer, dentist and doctor. 
  • Establish social groups and relations in the new home state, such as joining a health club, country club, civic, or business groups.
  • Become a member of a local church.
  • If you have professional licenses, have them transferred to your new state. Do this by contacting the governing board of your occupation in the new state (nurses, physicians, social workers, attorneys, etc.). Temporary licensing can often be granted immediately while you are waiting for the permanent license.
  • Purchase a resident hunting or fishing license in the new home state, and if you continue these sports in your previous state purchase a non-resident license there.
  • If retaining any property in your previous state, make sure it is “non-homestead” (if applicable) property for property tax calculations.

NOTE FOR MINNESOTA RESIDENTS:  Minnesota courts have recently demonstrated in their rulings a reluctance to let the taxpayer establish a residency change while maintaining a “presence” in Minnesota.  The court cases suggest that a complete break with Minnesota must be established in order to evidence a taxpayer’s intent to change residency from Minnesota to another state.  Not all states have been as aggressive as Minnesota in establishing difficult rules to comply with.  Check your home state rules for specific requirements.

IF YOU CHANGE STATES FROM MINNESOTA- RECOMMENDATION:   Stay out of Minnesota (well) over half the year.  OVERDO residency changes related to intent factors!  Keep excellent records!  If you receive a residency audit notice from Minnesota, we recommend you retain a Minnesota tax attorney.

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.

Tom's Tax Tips: Stretch IRAs

What is a Stretch IRA?

A stretch IRA refers to an individual retirement account that is inherited by a beneficiary who is eligible to take the required minimum distributions from the account over the beneficiary's own life expectancy. This includes any type of individual beneficiary such as children, grandchildren, nieces, nephews, even friends, but not charitable beneficiaries since they do not have a life expectancy. It also does not apply to surviving spouses, who can simply elect to take an IRA inherited from a deceased spouse and roll it over into their own IRA.

Benefits of a Stretch IRA

The advantage of stretch IRAs from an estate planning perspective is that if a grandparent leaves the IRA to a grandchild or grandchildren, then the IRA can continue to grow tax-free for the benefit of the grandchildren since the grandchild's life expectancy will require the grandchild to withdraw relatively small required minimum distributions over many years leaving the principal and much of the tax-free growth inside the IRA.

Tom's Tax Tips: Alternative Minimum Tax

How does the Alternative Minimum Tax Work?

The Alternative Minimum Tax (AMT) is a separate, independent tax calculation completed on a separate tax form (#6251).  AMT uses its own set of rates and its own rules for deductions which are generally less generous than the regular tax rules. Because of these separate, complicated rules, the only way to determine if you owe the AMT tax is by filling out the forms (essentially doing the tax calculation a second time).  Thank goodness for professional tax software made available to everyone at an economical cost (and of course qualified professionals who complete your tax return for a fee).

If your gross income is above $75,000 and you have write-offs for personal exemptions, taxes and home-equity loan interest you most likely fall into an AMT tax category.   Ditto if you exercised incentive stock options during the year, or if you own a business, rental properties, partnership interests or S corporation stock. If you earn more than $100,000, AMT calculations are pretty much required.

Alternative Minimum Taxable Income

AMT rules require adding back some tax deductions and income exclusions to your regular taxable income to arrive at your alternative minimum taxable income. Here is where the most everyone making over $75,000 gets hit!

First, add back the personal and dependent-exemption deductions ($3,900 each in 2013).   Then, if you do not itemize, the standard deduction is added back ($12,200 for joint filers in 2013; $6,100 for singles in 2013).  The state, local and foreign income and property tax write-offs, as well as your home equity loan interest, if the loan proceeds are not used for home improvements also get added back.

The AMT also ignores some itemized deductions, such as investment expenses and employee business expenses, and some medical and dental expenses. AMT rules add the interest from some private-tax-exempt activity bonds to income. Finally, AMT rules force you to pay taxes on the “spread” between the market price and the exercise price of incentive stock options granted by your employer. For example, if you exercised an option to buy 1,000 shares of stock for $3 a share and the stock was trading at $15, the spread would be $12 a share, or $12,000. Under the regular rules, you wouldn't pay current taxes on this amount, but under the AMT, it’s considered income.

Alternative Minimum Tax Benefits

AMT rules allow a couple of small benefits you do not receive under the regular tax rules. For example, while you can’t deduct state, local and foreign taxes under AMT rules, you can exclude the refunds, which are considered income under the regular tax rules. And because you’re taxed on the spread on your incentive stock options, your tax basis for the option shares you bought is higher under AMT rules, meaning your future AMT tax bill will be lower when you sell those optioned shares.  This stock basis adjustment, of course, requires good record keeping.

The AMT form has quite a few other rules that are pluses and minuses related to rental properties, partnerships, and other business entities. My intention is to give you a glimpse of the complicated rules so I will limit the rules explanation to the above paragraphs.

Exemption Parameters

Lastly, the AMT exemption is deducted from the recalculated AMT taxable income -- $80,800 for 2013 joint filers; $51,900 for unmarried persons; $40,400 for those who use married filing separate status. However, this exemption is reduced by 25 cents for each dollar of AMT taxable income above the applicable annual threshold. For 2013, the thresholds are $153,900 for married joint-filing couples, $115,400 for singles, and $76,950 for folks who use married filing separate status.  After the exemption (if any) has been deducted, the result is subject to the AMT rates:

  1. 26% on the first $179,500 for 2013 or $89,750 for if you are married and file separately from your spouse and
  2. 28% on the excess. If the AMT exceeds your regular tax, you have to pay the greater amount. 

Technically, the AMT is shown on your federal income tax return as just the liability over and above the regular tax, and this figure is entered on page 2 of Form 1040.

ALERT:  There may be a recovery of some of the AMT paid.  It’s possible to be eligible for the so-called minimum tax credit, which allows taxpayers to claim a credit on their tax return in future years for some or all of the extra AMT tax you paid.  Another tax form, 8801, is necessary to determine if you are eligible. For whatever reason, the tax rules say that exercising incentive stock options is one of the few things that qualify you for the AMT credit, so if that’s the reason or one of the reasons you paid an AMT tax, make sure this credit calculation form is included in your tax return.

Monday, February 03, 2014

2014 Market Slide - Humbles Aggressive Investors

Just as many people thought it was looking easy and were clamoring for more risk and equity exposure; it seems the market, once again, continues to remind investors it is never as it seems.  Today alone, the S&P 500 fell -2.28%.   The S&P 500 is down approximately -5.66% Year-To-Date, as of February 3rd 2014! 

As we recently published in our emails and The View Forward bulletins, the rocky start that we had predicted for 2014 has come to fruition for the stock market.  We still feel it is a prudent decision on your part, not to get too aggressive with stocks.  As a reminder, at Wade Financial Group, we emphasize diversification along with our Con-Val® approach.  We feel this approach should help guide you through these turbulent markets.  

As an update, last week we performed the annual rebalance of our Lifestyle Income Bond and Foundation portfolios. 
This week, we will be rebalancing our Paid In Advance® and Paid To Wait® model portfolios.

Give us a call if you have any questions. 

Friday, January 03, 2014

2014 Tax Planning

2014 Tax Planning Difficulties
Fifty-five tax provisions expire on Dec. 31, 2013. This doesn't affect your 2013 tax return, but tax planning for 2014 will be a different story. Consideration of extenders has been complicated by possible overall tax reform and budget considerations. Uncle Sam could bring in billions by letting some or all of the extenders fade away. That would mean, however, that individual taxpayers would lose such popular tax breaks as the itemized deduction for state and local sales taxes, the above-the-line deductions for tuition and fees and educators' out-of-pocket classroom expenses. The consensus is that Congress will take up the extenders in 2014, but whether that will be before or after the Nov. 5 midterm election is unclear. The longer lawmakers wait, the harder it will be to plan and implement your 2014 tax strategy.

Take Advantage of Inflation Tax Adjustments

One thing we do know for sure for 2014, inflation had a nominal effect on around 40 tax provisions. Most notable is that income brackets were widened a little, meaning you can earn a bit more next year without being bumped into a higher tax bracket. Most people claim the standard deduction, and those amounts for each filing status in 2014 were increased slightly, as was the personal exemption amount, going from $3,900 to $3,950. However, the amounts you can contribute to your workplace pension plan and individual retirement account in 2014 have stayed the same as in 2013.