2010 and the Year ahead

Life Happens, so enjoy it! Regularly you should track your finances BUT do enjoy and appreciate the wonders of life in the moment. Do remain centered on your family and personal goals and don’t keep up with the Jones’s or act on water-cooler investment advice.

Always work on understanding & visualizing your goals.Try to live within your existing budget even as your income improves. Consider using software like mint.com or Quicken to track your spending. Always save for a rainy day because when those days arrive you need to be well prepared to ensure you don’t drown.

Negotiate everything from cable bills to credit card fees to rent. You never know until you ask. Many service providers will work with you. Always be polite and ask for a reduced rate but don’t divulge your finances.

Employee benefits. Many firms have begun offering Roth 401Ks and Health Savings Accounts (HSAs), and firm equity. Review these benefits within your entire financial plan. Are these benefits part of your wealth building plan?

Tax rates. Capital gains and dividend tax rates are low in 2010, but are expected to rise in 2011. This may be a time to sell investments you are planning to sell in the next few years. Consider a Roth, it will likely benefit you to put some of your IRA money into it as long as you can handle the tax consequences all in 2010. Since we don’t know the tax rates in 2011 consider carefully any suggestions to defer Roth tax payments to 2011 and 2012.

Cash. Always evaluate your cash needs and only leave enough in cash that is not earmarked for shortterm uses or emergency savings. You might want to keep your cash in the best earning conservative vehicle and the remainder should be in bond or may even be better used to pay down mortgage – you’ll need to check your overall plan and do the numbers to make sure which is the best choice for you.

Rebalance regularly. The market continues to show us that we can’t predict when it will have sudden changes so don’t attempt to time the market, but do time your rebalancing to your portfolio allocation. This should give you opportunities to remove excess earnings from a winning security and buy those that are inexpensive.

Each year manage your credit report. If you have not already, implement a regular schedule of requesting your free annual credit report from www.annualcreditreport.com. When making this request make sure that you are NOT paying a fee. Carefully navigate the website and get one free report each year from each of the three main credit reporting agencies, make sure to request a different agency every four months. Always check the report for errors.

Keep an eye on fees and expenses. Pay attention to commissions, fund management and other expenses incurred on your investments, banking and other services/products. Make sure that the fees are appropriate with the service/results experienced. Watch for hidden fees that are not providing you with value.

Edi Alvarez, CFP®



Itemized or standard Deductions? – that is the question.

The ultimate test for when it is worthwhile to forget the no-questions-asked standard deduction and do the record keeping required to itemize is when the total itemized deductions surpass the standard deduction – an amount that is based on variables, such as filing status and age, and is adjusted upward each year to reflect inflation. So read on … do the numbers and decide! 2009 Tax time is here.

The Standard Deduction

The standard deduction for 2009 is $11,400 for joint filers and surviving spouse, $5,700 for singles or filing separately and $8,350 for heads of households. If a couple files separately they must BOTH file deductions the same way.

At age 65 and over you can add another $1,100 for married person and $1,400 for those filing single or head of household. You can also add another $1,100 for each blind person.

The standard deduction decreases for those who can be claimed as dependents on the returns of other people – can be as little as $950.

There is an inconsequential break that is in the books for 2008-09 that will benefit two types of clients – those who purchased homes late in the year and have NOT paid enough mortgage interest and taxes to make itemizing worthwhile OR those who have already paid their home mortgage. These home owners will not need to itemize but can claim extra deductions of up to another $1,000 for joint filers or $500 for other returns. The actual amount will be the same as the amount of the real estate taxes on Schedule A.

Another 2008-09 authorized addition to standard deduction (in place of Schedule A itemizing deductions) for those whose properties were damaged or destroyed in places declared federal disasters. The standard deductions is increased by the uninsured losses attributable to natural disasters like hurricanes, fires, floods, earthquakes and landslides without the requirement that it exceed 10% of AGI or exceed $500.

There is also an add-on for the standard deduction for those who bought a new motor vehicles between Feb 17 and Dec 31. The total of state and local sales and excise taxes will be added to the standard deduction up to $49,500 car purchase. The motor vehicle must be a new car, sport-utility, light trucks, motorcycles (at least 8,500 lbs) and mobile homes BUT NOT used cars or leases.

Many standard deduction extras are not available for those with AGI higher than $13K for individuals and $260K for joint filers.

On the other hand, itemizers will be able to have full deductions in charitable contributions, state and income tax or sales tax (not both), real estate taxes and interest on most home mortgages but only a limited write-off for medical expenses, casualty & theft losses and miscellaneous expenses.

AMT and Itemized/Standard Deductions

Whether using itemized or standard deductions all filers may have to deal with additional tax from the alternative minimum tax (AMT). AMT disallows standard deduction amounts and restricts several itemized deductions. It allows medical expenses only for the portion above 10% of AGI (not 7.5%). AMT also disallows deductions for interest on home equity loans (not used to purchase or improve home), state and local property and sales taxes, and most miscellaneous deductions.

Edi Alvarez, CFP®