Monday, February 20, 2012

Basic Tax Planning Tips

Benjamin Franklin said "but in the world nothing can be said to be certain except death and taxes.”
This year the deadline for filing your taxes is April 17th instead of April 15th, because April 15th is a Sunday and April 16 is the Emancipation Day holiday in the District of Columbia.

Tax Planning is simply taking advantage of all the tax laws and tools at your disposal throughout the year in order to pay less taxes. You should be taking any needed steps to qualify for the right tax credits and also to maximize tax deductions.

Two main ways to pay less taxes:
  1. Tax Deductions: lower your taxable income
  2. Tax Credits: lower your taxes dollar-for-dollar

 If you are high income earner, tax deductions are typically more valuable than a tax credit.

 Two Easy Steps:

1.)    Paycheck Withholding

Getting a tax refund isn't a good thing! Even though it may feel like it. A tax refund is nothing more than money you over paid in taxes. You should not view a refund as forced savings! If you are, you need a plan. Recent IRS statistics show that over 70% of all Americans get a tax refund check. Every month most taxpayers pay an average of $200 too much in income taxes.
To find out how much in tax you should be paying each paycheck, I have a calculator on my website. Go to 

2.)    Keep Great Records

The IRS recommends that you keep all tax records for 3 years in case of an audit.
Here are some examples of tax-related documents I suggest you should keep:
  • W-2 forms
  • Pay stubs for the year
  • Mortgage payment stubs and/or home purchase closing statement
  • Receipts from anything you might claim as a deduction
  • Receipts from any charitable donations (e.g. for church tithes, disaster relief donations, etc.)
  • Car mileage log if used for business
  • Any receipts for business travel expenses
  • Canceled checks (especially for IRA contributions and other deductions)
  • Credit card statements and bank statements
  • Medical bills

7 Easy Tax Planning Tips:
  1. Start a file folder at the beginning of each year to keep all of your receipts.
  2. Check your pay stubs against your W-2 to make sure they add up.
  3. Study last year's tax return. Are there any credits and deductions which you are you still qualified to take? Are there any you did not take, but for which you now qualify?
  4. Deduct the cost of last year's tax preparation.
  5. Work with a CFP to make sure your taxable investments are being managed efficiently.
  6. If you do get a refund, you should save it or pay off debt.
  7. Try your very best to itemize.

Other Tax Savings Tips:

Do you pay for parking at work? You may be able to deduct what you paid for parking at work.
Do you use your car for business?Your mileage may be a deduction.
Have you gone on work related trips? If you keep your receipts, you can deduct the cost of travel expenses, baggage handling, lodging, meals, business phone calls, and even dry cleaning.
Have you lost your job? Changed jobs? It costs money to look for a new job, and you may be able to deduct these job search related expenses.
Did you move to be closer to work or to take a new job? You may qualify for a deduction of your moving expenses.
Do you work from a home office? You may be able to deduct certain expenses, such as internet and cell phone service, furniture, insurance, and security.
Do you belong to a union? Union dues and initiation fees are deductible.
Do you make retirement savings plan contributions? You may be able to get a tax credit for your qualified contributions.
Did you make any energy efficient upgrades to your home? Some may qualify for a deduction or a credit.
Did you have a large amount of medical expenses? You may be able to deduct any medical expenses that exceed 7.5% of your income.
If you own Long Term Care insurance some of the premiums may qualify for a deduction.
Did you gamble and win? Lose? All gambling winnings must be reported as taxable income. But, gambling losses may be claimed as deductions, up to the amount of your winnings.

These are just a few of the many tax savings tips out there. Our tax code is over 72,000 pages! Taxes are very complex and you should never go at it alone. Work with a highly qualified Financial Planner and/or Tax Planner. For more go to

Monday, February 13, 2012

Estate Planning Basics

Estate Planning is not just for the wealthy. Even if your situation is very basic, you still need an estate plan. And if your situation is more complex, improper estate planning can cost your loved ones thousands if not millions. Today, I will cover wills, power of attorney, trusts, and that evil thing called the “death tax”! 

An estate plan has several elements. Includes: a will, assignment of power of attorney, and a living will or health-care proxy/medical power of attorney. For some people, a trust may also make sense. When putting together a plan, you must be mindful of both federal and state laws.

Take inventory
Your assets include your investments, retirement savings, insurance policies, and real estate and business interests. 

3 important questions
Who do you want to inherit your assets? Who do you want handling your financial affairs if you're ever incapacitated? Who do you want making medical decisions for you if you can’t make them for yourself?

Get a Will!
A will tells the world exactly where you want your assets to go when you die. It's also where you should name the guardians for your children. If you die without a will, this is known as dying "intestate". Die without a will, and the state where you live decides who gets what.

NFL quarterback Steve McNair died without a will and he was married at the time of his death. McNair had four sons, two from his current marriage and two from previous relationships. Under Tennessee law, when one spouse dies without a will, the surviving spouse is automatically entitled to at least one third of the estate, and the surviving children split the rest. It is possible that this division may have very well been what McNair intended, but without a will to express his final wishes, nobody will ever know. Making a will is extremely important for people with young children, because a will is the best way to transfer guardianship of your children. 

You can amend your will at any time. And I recommend reviewing it annually and especially when you have major life changes. At the same time, review your beneficiary designations for your 401(k), IRA, pension and life insurance policies. These accounts will be transferred automatically to your named beneficiaries when you die.

Living Will
Making your medical wishes known through living wills and medical power of attorney can save your family a lot of heartache later. A living will (also known as an advance medical directive) is a statement of your wishes for the kind of life-sustaining medical intervention you want, or don't want, in the event that you become terminally ill and unable to communicate.

You increase your chances of enforcing your directive when you have a health-care agent advocating on your behalf. You can name such an agent by by assigning what's called a medical power of attorney. You sign a legal document in which you name someone you trust to make medical decisions on your behalf in the event that you can't do so for yourself. Choose your health-care agent carefully. That person should be able to do three key things: understand important medical information regarding your treatment, handle the stress of making tough decisions, and keep your best interests and wishes in mind when making those decisions.

If you live in TN, here is a great FREE resource

Power of Attorney
When you can't control your financial life, make sure someone you trust can by assigning power of attorney. Granting someone you trust the power of attorney allows that person to manage your financial affairs if you are unable to do so. Your agent is empowered to sign your name and is obligated to be your fiduciary, meaning they must act in your best financial interest at all times.
There are different kinds of powers of attorney, but in estate planning there are two essential types you should know:
  • Springing power of attorney, which only goes into effect under circumstances that you specify, the most typical being when you become incapacitated.
  • Durable power of attorney, it is effective immediately, and your agent does not need to prove your incapacity in order to sign your name.
An attorney can help you decide which form makes the best sense for your circumstance. In any case, take care in choosing your agent. That person should be competent, trustworthy, willing to take on the burden of your affairs and financially secure. If you do become incapacitated without having assigned power of attorney, the court may step in to appoint a guardian. This process might cost your family hundreds if not thousands. Plus, the person the court chooses may not be someone you would have picked.
Do you need a Trust?
Trusts are legal documents that let you put conditions on how and when your assets will be distributed upon your death. They also can allow you to reduce your estate and gift taxes and to distribute assets to your heirs without the cost, delay and publicity of probate (proving your will). Any assets that are not retitled in the name of the trust usually are considered subject to probate. As a result, if you haven't specified in a will who should get those assets, a court may decide to distribute them. Trusts are flexible, varied and complex. Each type has advantages and disadvantages, which you should discuss thoroughly with your estate-planning attorney before setting one up.

There are many types of Trusts that serve different purposes. If you'd like to learn about different kinds of trusts, I’ll be posting an article on my website later this week.

Living Trust  
"Living Trusts" are very controversial in TN. Some salespeople sell living trusts so they can learn what assets you own. Many of these folks actually sell financial products for a living. They want to sell you an annuity or other financial products. Is it right for you? Work with someone who can provide you with objective financial advice, NOT someone trying to sell you a document or a product.

The Reality:
  1. For most estates in Tennessee and in many other states, probate is no big deal. It goes quickly, is private for the most part, and is not that expensive.
  2. Living trusts can be contested, just like a will. The living trust salesperson who claims that a living trust can’t be contested does not know the law.
  3. Living trusts are much more expensive to set up and maintain than a will.
  4. In many instances, the trustor fails to transfer all of his "probate assets" to his living trust. The estate winds up in probate court anyway. So you pay twice: first, to set up the living trust intending to avoid probate; and second, to go to probate court.
  5. Living trusts are no more effective than wills in saving state and federal estate taxes.
Some important reasons for having a living trust include:
  1. You own property in another state.
  2. Beneficiaries of your estate are disabled.
  3. You live in a state in which probate is time-consuming, burdensome, and costly.
The Estate Tax or Death Tax
For 2012, because the gift and estate tax exemptions are indexed for inflation, the $5 million lifetime gift and estate tax exemption limits rose to $5.12 million or $10.24 million per married couple. In 2012, families can also elect to take advantage of “portability.” “If dad predeceases Mom in 2012, she can use what remains of Dad’s estate tax exclusion.” Dad’s estate must make an election on his estate tax return. In other words, “Mom won’t inherit his unused exclusion unless a federal estate tax return is filed even if one is not otherwise required because Dad’s estate is” under the  $5 million exemption amount. Portability is not available for state estate tax exclusions. In 2013, the gift and estate tax exemptions are both scheduled to revert to $1 million, unless Congress acts. 

TN Estate Taxes: 
$1 million exemption
Anything over the exemptions are taxed at the following rates:
First $40,000
Next $40,000 - $240,000
Next $240,000 - $440,000
$440,000 and over

Giving to reduce the size of your estate
You may give up to $13,000 a year to an individual (or $26,000 if you're married and giving the gift with your spouse). You may also pay an unlimited amount of medical and education bills for someone if you pay the expenses directly to the institutions where they were incurred.
Give more than 13k? Don't panic! You won't actually owe any federal gift tax unless your cumulative taxable gifts exceed your $5.12 million lifetime gift tax exemption for 2012. Unified Credit: A credit is an amount that reduces or eliminates tax. The unified credit applies to both the gift tax and the estate tax and it equals the tax on the applicable exclusion amount. $1,772,800 for 2012 (exempting $5,120,000 from tax).  This is done by filing IRS form 709.

If you donate to a charitable gift fund or community foundation, your investment grows tax-free and you can select the charities to which contributions are given both before and after you die.
Charitable gift funds permit you to make a tax-deductible donation, grow your investment tax-free, and then direct the contribution to the nonprofit of your choosing whenever you like.

Estate planning isn't just about how you want your assets distributed after you die. It's about deciding how much you want to give away while you're still alive. If you plan carefully, giving allows you to reduce your taxable estate and provide advance help to your beneficiaries.

For more go to

Wednesday, February 8, 2012

Investing for Good Times & Bad

Your investment strategy is about way more than not putting all your eggs in one basket. But how do most financial advisors create your investment strategy? They have you fill out a questionnaire that somehow magically determines your risk tolerance. That questionnaire is supposed to tell them if you’re Aggressive, Balanced, or Conservative etc. And if you came out balanced for example your money should be invested in 60% stocks and 40% bonds. They use big words like efficient frontier, beta, and standard deviation which more than likely they don’t even understand. But it makes them seem smart. You say OK, and now you a false sense of security believing that you are following some sort of sophisticated investment strategy.

If it were that easy, why not just train a monkey to do that and we could save everyone from paying these guys commissions and fees. That’s because it’s not that simple. And if your Advisor is handling your investments this way, now you know why you may not be getting the results you desire, especially in tough times. Anyone can make money in good times. Do you really believe that by answering 10-15 questions someone can create a viable investment strategy? I hope not.

Don’t feel bad. They are a lot of people out there that listen to the other financial talk radio show based out of Nashville, TN and believe that by only investing in 4 types of mutual funds with a 10 year track record is the end all be all. Simply Ridiculous!

So how do you create a viable investment strategy? We all basically face the same risks when it comes to investing: Deflation, Inflation, Taxes, and Market Volatility or Risk

If our strategy is going to worth anything, we must address each risk as much as possible. To do that we need to understand that there are 4 main types of asset classes to do this: Interest Earning, Real Estate, Commodities, and Equities. Each asset class serves a unique purpose or function to protect us from potential risks. Miss an asset class and you don’t cover a potential risk you will most likely face.

Can anyone tell you what income taxes will be next year, in 5 years? No. Can anyone tell you for sure where the market is headed? No. Lots of talk right now about inflation and deflation. Does anyone know which we will have or how much it will be? No

We have no control over any of those things. What do we have control over? Only 2 things: How much we save and where we put it. I used to say we could control how long we save, but we can’t. Anyone of us can drop dead tomorrow. What else do we know? How much time do we have before we want to reach our goal assuming we are around? Is college 10-15 years away for our children? Do we want to be financially independent in 10-15-20 years?

What else should we know? Our financial personality. Or your tendencies, thoughts, and fears about money. We covered that in the “Foundation” article, so I won’t go into to it here

Once we understand ourselves and our goals. We need to create a strategy that gives us the best chance to get from point A to point B. Then we start covering all the risks we could potentially face: Again: Deflation, Inflation, Taxes, and Market Volatility or Risk

And to do that you need to own 4 types of asset classes. Each type of asset or asset class inside your investment portfolio serves a very different function.

Assets should be divided into four main categories:

1.      Interest-Earning
2.      Real Estate
3.      Commodities
4.      Equities
Most advisers never even discuss commodities or real estate. I believe that all portfolios should contain all four categories. How much you should own of each category will depend on your unique situation. All four categories are important and serve totally different purposes.


1.   Interest-earning assets such as cash and bonds give you access to capital on a short-term basis. If you need access to liquidity, bonds and cash are the first place you should look. Bonds are also hedge against deflation.
2.   Real Estate is one of the best ways to protect you from inflation. It is one of the most inflation sensitive assets you can own. Inflation decreases your purchasing power as the prices of goods and services increase, and it is a major risk to your long term financial goals. Usually owning your primary residence is enough to have at least a third of your assets in real estate. However, if you have built up a bit more wealth, you might need to purchase real estate beyond your home in order to keep your portfolio balanced.
3.   Commodities are actual physical goods like corn, soybeans, gold, crude oil, etc. In years past, using this asset class was done only by professionals. But since the addition of commodity based mutual funds and exchange traded funds, this is no longer the case. Recently we have all been hit by rising prices at gas stations and grocery stores. By adding commodities to your mix, it provides a hedge against rising prices of goods.
4.   Equity Investments should be held long term, and typically outperform all other asset classes during periods of economic growth. Equities are broken down into large cap, small cap, international stocks, and emerging markets. Each area of equities also serves a different purpose and amount of ownership should be based on you and your goals.
As I mentioned earlier, most Financial Advisors do NOT understand functional asset allocation. Understanding the function of each type of asset is critical to tailoring your investment strategy to your specific needs, rather than using a one- size-fits-all approach. If you need a second opinion on your investments from someone who understands risk and asset functionality, call me at 615-878-2134 or click

Basics of Retirement Planning & Saving for College

Last week I covered the 5 initial steps you must take before you can develop a real financial plan which were:
  • ·        Get organized
  • ·        Know your spending habits
  • ·        Understand your Financial Personality
  • ·        Create a realistic budget
We also covered how to protect your plan by addressing ALL the worst case scenarios. In other words, risk management: cash reserve, must have insurance protection, and of course proper debt management. 

Today, we move up the ladder on to how to accomplish your major financial goals. Which are typically: Saving for retirement and saving for your children’s college. But remember, real financial planning is a process, NOT an event. You can’t put the cart before the horse. The info in last week’s post is just as important to your success as the topics we will cover today. I know, I know, retirement planning and saving for college are a little bit sexier, and more exciting to talk about. But I want you to have real game plan, not a piecemeal strategy. 

Retirement Planning Basics:

Key Questions: 

What do you want to do in retirement? Retirement is not a one size fits all deal. Each person has a unique idea of how to spend time in retirement. Do you want to start a new career? Go back to school? Will you work part time, or volunteer?

How much will you need? A 2009 Phoenix Wealth Survey found that 43% of retirees will need 100% or more of their current income. And prepare to live a long time. There is a 65-75% chance you’ll live to age 80, and a 25-35% chance to age 90. Lastly, your income need will likely reduce over time. We will not be “on the go” at age 75 like we were at age 60.

What will your expenses be? Health insurance coverage is likely to be one of your highest costs. Get an estimate on what they will be. Plan ahead!

How much will inflation be? No idea! The Federal Government has more control over this than you might realize. It’s all basically supply and demand. They control how many dollars are in circulation chasing the same goods and services. Just Google “inflation during retirement” and you’ll see how many different opinions there are. Most advisors use 3%. I think that is too low. The truth is no one knows. Gather the data and make an assumption you feel comfortable with.

What will your Tax Rate be? Another really difficult one to estimate. I would say you’ll be in the same tax bracket or higher at retirement. But understand you are likely to be paying payroll taxes since you are no longer working. And, if your age 65 you get a higher standard deduction.

Where to Save Basics?

401k plan up to employer match.
Max out Roth IRA’s: I can show you a negative with almost every investment vehicle out there, but the ROTH really doesn’t have many, if any!
Taxable Accounts: Putting money into taxable accounts can give you options at retirement. Trust me, liquidity will give you options. These assets must be managed effectively to minimize taxes along the way.

Annuities: They are usually never a fit for most. But they can make some sense in rare cases. Work with someone that doesn’t get paid to sell you financial products if you considering these products.
Retirement Spending:

Be careful! Most advisors use a withdrawal rate of 4-5%. Many experts now say that is way too high. 

Where to spend money from 1st: Your plan should consider taxes, liquidity needs, and your estate plan.

Saving for College Basics:

How will you pay for it: Loans, Savings, or Income? All of the above?

Many young parents think about college before retirement. It is my belief that retirement is more important than college. Kids can borrow for college if need be, but you can’t borrow for retirement.

Coverdell Educational Savings Account: Max annual contribution is only $2,000, Income phase out starts a 190k per year,  The best thing about this plan is that the money can be used for primary or secondary school NOT just college.

529 Plan: Basically no max annual contribution if under gifting rules, No income phase outs, Only for college or 10% penalty, Can make the beneficiary anyone you want.

Using the ROTH IRA for College: 10% penalty is waived, One major downside: income withdrawn works against you for financial aid, Unused funds go towards your retirement.

My goal here is to just cover some basic concepts to increase your overall knowledge. To ensure you are on the right track work with a Fee-Only Financial Life Coach by clicking