Perspective on Premiums

Investors may be tempted to extrapolate recent returns into the future, which can lead them to abandon their investment philosophy at potentially inopportune times. While negative outcomes are disappointing, investors should view them with the proper perspective and stay the course.

When you leave your server a tip, do you round it to a whole-dollar amount and often in multiples of $5? Does a 60th birthday seem more significant than a 59th? If you answer yes to these questions, you’re not alone. Most of us prefer round numbers. This preference leads many investors to review results by calendar year and to consider 10-year periods when evaluating long-term returns. People tend to place greater emphasis on the latest period due to recency bias and to extrapolate recent results into the future. For these reasons, we should put recent performance into the proper perspective.

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Perspective on Premiums

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Getting to the Point of a Point

A quick online search for “Dow rallies 500 points” yields a cascade of news stories with similar titles, as does a similar search for “Dow drops 500 points.”

These types of headlines may make little sense to some investors, given that a “point” for the Dow and what it means to an individual’s portfolio may be unclear. The potential for misunderstanding also exists among even experienced market participants, given that index levels have risen over time and potential emotional anchors, such as a 500-point move, do not have the same impact on performance as they used to. With this in mind, we examine what a point move in the Dow means and the impact it may have on an investment portfolio.

Impact of Index Construction

The Dow Jones Industrial Average was first calculated in 1896 and currently consists of 30 large cap US stocks. The Dow is a price-weighted index, which is different than more common market capitalization-weighted indices.

Click here to Read More:

Getting to the Point of a Point

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Diversified Asset Management, Inc. – 2019 2nd Quarter Newsletter

This quarter’s newsletter is filled with lots of great information. Here is a list of topics included in this newsletter.

Soaring Stocks Raises Importance Of Diversifying

The concept of diversification is vital to investors: Don't put all your eggs in one basket so they won't all get smashed if you trip and fall. It's better to spread your wealth over a broad financial spectrum of investments, but avoiding pitfalls isn't as intuitive as it may seem. Diversification neither assures a profit nor guarantees against loss in a declining market. This is especially important to remember when stocks are soaring and portfolios can get overloaded with stocks and human nature is to get greedy and overly optimistic about a continuation of the current trend.

 

If Family Is Wealth, Then Planning Is Immortality

Planning makes you immortal. It ensures the next generation will be just fine. This is something you may not learn or even understand until your 60s or 70s. If you're lucky, you come to hold a baby with dreams for the best things that could happen in the future.

In that moment, when you are feeling so blessed and generous, plan to make the next generation better. Think about how you can imbue the values you hold dear in them.

 

Your Alma Mater Or Your Family?

The new tax law doubles what you can leave loved ones' tax free when you die and that's really bad for your alma mater. Tax breaks for donations to your alma mater may no longer make the grade with you. Here's why:

Estate Tax Exemption Rises. The Tax Cuts And Jobs Act (TCJA) doubles a married couple's estate's tax-exemption to $22 million. Alums now want to maximize their exemptions by leaving $22 million to their children, nieces, nephews and other loved ones before even thinking about a donation to favorite old schools.

 

What Are The 3 R’s Of Roth IRAs?

It's not reading, 'riting, and 'rithmatic, but when it comes to Roth IRAs, it pays to know the three R's: Roth conversions, rechacterizations, and reconversions. Understanding the rules for all of these could save you thousands of tax dollars.

Unlike with traditional IRAs, for which some of your contributions could be tax-deductible, money that goes into to a Roth IRA never is. However, after five years, the money coming out of a Roth is tax free. To qualify for that benefit, withdrawals must be made after age 59Y, because of death or disability, or to buy a first home (up to a lifetime limit of $10,000).

 

Seven Steps To Get Ready For Your Retirement

Are you among the millions of Baby Boomers counting down the days to retirement? Before you move into the next stage of life, it's important to get all of your financial ducks in line. To prepare yourself, consider these seven practical suggestions.

Rebuild the budget. You've probably been living on a monthly budget that takes into account your usual expenditures and income. But that's about to change in a big way. For example, once you stop working, your expenses for a business wardrobe and commuting will also end, but so will the regular paychecks you've been living on.

Come up with a new plan. Identify what you expect to have coming in and going out. Remember that you won't be able to rely on 401(k) deferrals to reduce your taxable income after retirement, but you should still keep saving.

 

Paying Off A Mortgage And The New Tax Code

Among the most prized tax deductions to get trimmed by the Tax Cut And Jobs Act was the monthly mortgage interest. Should you pay off your mortgage, if your mortgage interest deduction is gone? The answer more often now is "Yes," providing you can afford to retire the debt. If you can't afford that now, aim to do it as soon you can.

Due to a large increase in the standard deduction, fewer taxpayers qualify for the mortgage interest deduction. The standard deduction under the new tax law almost doubled to $12,000 for single filers and $24,000 for married couples. Only people with deductions of more than those amounts can itemize and deduct their mortgage interest.

To read the newsletter click on the link below:

Diversified Asset Management, Inc. – 2019 2nd Quarter Newsletter

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Will I Avoid the Social Security Windfall Elimination Provision?

The Windfall Elimination Provision (WEP) applies to Social Security recipients who have their own retirement savings as well as a pension from an employer who did not pay into Social Security.  The purpose of WEP is to disallow for the collection of full Social Security benefits when a retiree has retirement savings and a pension from employers who opted out of Social Security (commonly local government).  Read on to see if you could have your Social Security benefits reduced by the Windfall Elimination Provision.

Have you worked for an employer that did not withhold for Social Security (such as a govt. agency)?

If you have not, then the WEP does not apply to you and will be eligible for full Social Security benefits.  If “yes,” then move on to the next question.

Do you qualify for Social Security benefits from work you did in previous jobs?

If not, then you will not be subject to the WEP.  If you have, move on.

Are you a federal worker in the FERS retirement system and first hired after 12/31/1983?

If you are a federal worker who meets the conditions outlined above, you will not be subject to WEP.  If you are not a federal worker or are a federal worker and do not meet the above conditions, you may be subject to the Windfall Elimination Provision.

The Social Security Windfall Elimination Provision is complicated and has a large influence on your retirement situation should it affect you.  Check out this flowchart to learn more.

If you would like to schedule a call to talk the Social Security Windfall Elimination Provision to see if it affects you, please give us a call at 303-440-2906 or click here here to schedule a time to speak with us.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Will My Roth IRA Conversion be Penalty-Free?

There are several situations in which a Roth Conversion could benefit your future tax situation.  Whether you have lower income this year or want to take advantage of low tax rates, you will want to make sure you avoid any penalties.  Let’s take a look:

Are you converting a Traditional IRA?

If your answer is “yes”, move on to the next question.  If you are converting a SIMPLE IRA, the answer is a bit more complicated depending on how long you have had the Simple IRA.  Check out our chart to learn more.

Are you expecting to take a distribution within 5 years of your conversion?

If you are far from retirement, then your answer to this will likely be “no”, then you can convert any amount.  Remember that any conversion amount is taxed as ordinary income and could increase your Medicare Part B & D premiums.  If you plan to take distributions within 5 years and are under 59.5, you may be subject to a penalty. If you are taking Required Minimum Distributions then you will have to take your RMD before any conversion.

Advantages of a Roth IRA

Roth IRA’s are particularly advantageous if there are changes (increases) in tax rates. Here are ways you could be subject to higher taxes in the future.

1.      The Government raises tax rates.

2.      One spouse passes away and now you are subject to single rates instead of married rates. When a spouse passes away, your expenses are not cut in half but the brackets are cut in half.

3.      Your expenses dramatically increase because you are in an assisted living facility or a nursing home.

If you’ve made it this far, there is a good chance you can make a Roth IRA conversion penalty-free.  Check out this flowchart to learn more.

If you would like to schedule a call to talk about the best strategy for converting a IRA to a Roth IRA, give us a call at 303-440-2906 or click here to schedule a time to speak with us.

Can I Delay the RMD from the Traditional IRA I Inherited?

Traditional IRAs allow the owner several tax advantages: it allows for an upfront tax deduction as well as tax-deferred growth.  Upon withdrawal of funds, the account owner is taxed at ordinary income rates. Inherited IRAs require the new account owner to begin taking withdrawals over their lifetime regardless whether or not they need the funds.  Why?  Because Uncle Sam wants to collect his share.  Here are some potential strategies for delaying RMDs from Traditional IRAs as long as possible.

Are you the beneficiary of a Traditional IRA from someone other than your spouse?

If you inherited a Traditional IRA from a spouse, you are likely able to delay taking RMDs until you reach 70.5 years of age.  Check out our “Should I Inherit my Deceased Spouse’s IRA?” flowchartIf you inherited the IRA from a non-spouse, move on to the next question.

Did the person pass away before their Required Beginning Date (April 1st, the year after turning 70.5)?

They have reached their Required Beginning Date

This allows you two options: electing the “5 Year Distribution Rule” or taking RMDs based on your life expectancy using the IRS Single Life Expectancy Table.  The “5 Year Distribution Rule” means all assets must be out of the account at the end of 5 years.  You could withdraw all funds immediately, spread them out over the 5 years, or take them all out just before the end of 5 years.  Keep in mind you will need to pay ordinary income tax on the whole amount distributed. 

If you take RMDs based on your life expectancy it will spread out the tax burden.

They have not reached their Required Beginning Date

You will be required to open an Inherited IRA and take RMDs based on your life expectancy according to the IRS Single Life Expectancy Table.  Depending if the deceased had satisfied their RMD for the year of their death, you may be required to take one this year.

If you’ve made it this far, you may be able to delay the RMD from your inherited IRA.  Check out this flowchart to learn more.

If you would like to schedule a call to talk about the best strategy for delaying RMDs from Inherited IRAs, give us a call at 303-440-2906 or click here to schedule a time to speak with us.

 

 

 Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

 

Time Is One of Your Most Valued Assets

Like any other asset you possess, you must be diligent about protecting it, managing it and sharing it

Key Takeaways:

·         Time management is a critical skill set required to achieve success whether you’re retired, in your peak earning years or aught in the Sandwich Generation.

·         Identify where you are spending your time each day that create the most success and happiness.

·         Identify and remove the time bandits that steal precious hours and minutes from the activities that create the most success and happiness.

·         Always heed the 4 D’s.

 

Overview


As many of you have just completed the annual rite of spring known as last-minute tax planning, procrastination and portfolio rebalancing, now might be a great time to hit the “pause” button for just a second.

Equity markets are at or near their all-time highs, interest rates are near their historical lows, inflation is in check and millions of Americans are expecting tax refunds. So why isn’t everyone racing out to purchase new yachts, cars and horses? Because they’re not all that secure, thanks to newfound uncertainty about trade wars, North Korea nukes the revolving door in the White House and interest rates poised to keep rising.

You probably don’t have time to go luxury good shopping anyway.

One of the most significant challenges we face in today’s fast-paced society is controlling our limited time. If you can develop better time management skills, you will have a leg up on your career, family relationships and/or retirement lifestyle. In addition to life coaches and time management experts, many wealth advisors can help you with time management as well—but it all starts with you.

Getting started on the right time management path

Good time management is a two-step process. First, you must clearly identify activities that only you can do and that add significant value to your day. Second, you must identify the time bandits that steal your limited time from the activities that really matter.

Top 8 time bandits


Here are some of the most common time bandits and remedies we see in our work among successful individuals and retirees.

1. Losing time due to lack of organization (specifically, prospect lists, meetings and personal calendars)
Plan and prepare for meetings, medical appointments media, even consultations with your tax and financial advisors with agendas, on-topic communication and hard stops for every meeting to respect everyone’s time.

2. Discussing market forecasts when all crystal balls are cloudy
As the old saying goes: “Everyone’s crystal ball is cloudy.” Why spend your limited time reading, viewing and participating in conversations related to forecasting?

3. Sending multiple emails instead of engaging in verbal communication
Ever notice a long chain of emails attached to one email? This is a great example of where a scheduled call could save time over a group of people typing email responses. Schedule the call and keep the time short. Avoid sending emails for every communication.

4. Losing time (and important information) to desk clutter
It is difficult to guess how much time is wasted by moving piles of paper around a cluttered office. Searching through piles of desk clutter for the critical information needed for a call or meeting requires time. The time-saver is to move toward an efficient paperless office with a system that still allows you to take files with wherever you go.

5. Browsing the Internet, including social media
Digital media usually starts out with a search for specific information, but it can quickly lead to a deep dark hole of distraction and procrastination. Instead, limit Internet browsing to a certain amount of time per day, much like a scheduled call or meeting. The way things are going, Facebook may be taking up less and less of your time.

6. Implementing technology tools before they are efficient
Attempting to use technology before it is fully installed or before your training is complete is a big time-waster. If it does not work properly, it is a time-waster. Using technology in this way could cause loss of data or excess data retrieval searching. This applies to everyone from busy professionals, to busy homemakers to retirees.

7. Completing administrative tasks
It is easy to drift away from your goals of the day by getting bogged down in administrative tasks that could be accomplished by someone else. I recommend avoiding these tasks by using the following four Ds:

  • Don’t do it if it is not worth anyone’s time.

  • Delegate it to someone else if it is worth doing, but not by you.

  • Defer if it can be done only by you, the wealth manager, but is also a task that can wait.

  • Do it now if it can be done only by you, but it must be done now.

The problem with administrative tasks occurs when we default to “do it now” without considering the other three options above.

8. Reading and replying to email on demand
Email has become one of our greatest tools—when it is properly used. If it is not properly managed, email becomes one of our greatest time-wasters. Successful people are not at their desks waiting to send the next email. I recommend setting aside scheduled time in the morning and afternoon to manage email. The same applies to text messaging. It doesn’t have to be instant! Also, I recommend the following approaches to managing incoming emails:

  • Delete the email without reading it if it is from an unwanted sender.

  • Scan the email if you are unsure of its content, then take the appropriate action.

  • Read the email and determine whether a reply is necessary.

  • Reply to the email only if required.

  • File the email only if it needs to be saved.

  • Save the email if it contains sensitive information.

Conclusion

There is a great deal of competition for your time and attention no matter what stage of life you are in. We have found that the happiest and most successful people determine the most valuable use of their time and avoid the time bandits that prevent their success.

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

 

This Powerful New Tax Strategy Is a TRIP

Key Takeaways

·         Total Return Pooled Income Funds (TRPIFs) can be powerful tools for gifting, estate planning and minimizing taxes.

·         TRPIFs allow you to make gifts of cash, publicly traded stock, closely held C Corps, unleveraged real estate, tangible personal property like art, cars, antiques and even LLC interests.

·         TRPIFs have many similarities to charitable remainder trusts, but it’s important to understand the differences. Always consult with your financial advisors before signing on the dotted line.

Now that your tax returns are hopefully completed I thought I’d share with you one of the best kept secrets in estate planning and tax mitigation. It’s been around since 1969, but most successful taxpayers and their advisors still don’t know about it.

How about a strategy that completely eliminates capital gains tax, provides a gigantic income tax deduction, distributes all its income (maybe for three generations) and is completely legal? Sounds too good to be true. Well it’s not. Here’s why.

The Pooled Income Fund (PIF), created in code section §642(c)(5) in 1969, and long the red headed step child of planned giving tools, has gone “beast mode.” Thanks to a perfect storm of low interest rates, technology and charities now understanding the need to be responsive to CPAs and other professional advisors (and donors) has ushered in a new type of PIF called the Total Return Pooled Income Fund (TRPIF). This vehicle is one of the most flexible, powerful and thought-provoking planning tools you can deploy.

Yet not many advisors and philanthropically-minded individuals know about them.

With a TRPIF, you may make gifts of cash, publicly traded stock, closely held C Corps, unleveraged real estate, tangible personal property like art, cars, antiques and even LLC interests. Income can be paid for one, two or three generations of income beneficiaries if they’re alive at the time of the gift. Competitive TRPIFs pay out all rents, royalties, dividends and interest as well as all short-term gains and up to 50 percent of post-gift realized long term gains.

Charitable beneficiaries are decided on by the donor, not by the TRPIF trustee. That means the donation goes to any charities the family feels are worthy.

If you know a little bit about CRTs you’ll find that TRPIFs are similar. However, you and your advisor should be aware of some important differences. For instance, a donor can’t be the trustee of his or TRPIF as they can with their CRT. That may be a drawback. However, young donors (couples in their 40s), for instance, can’t even qualify for a CRT as they won’t meet the 10 percent remainder test. With a TRPIF, there is no such test. That means an income beneficiary can be any age. The charitable income tax deductions of a TRPIF can be greater than a CRT’s by a magnitude of four or five times. The methodology by which a new TRPIF (less than three years old) calculates its income tax deduction is governed by a complicated formula based on the ages of the beneficiaries and the assigned discount rate (1.4% for 2018). This is what produces the large deductions.

Conclusion

From a planning standpoint, TRPIFs can allow you much more planning flexibility than many other trusts. When selling a low basis security, for instance, it may be possible to leave more shares in the seller’s hands and still pay no tax because of the larger income tax deduction. And, low-basis assets are only one of the many opportunities that you may applicable to the TRPIF strategy. There are only a small handful of charities offering this new, competitive, Pooled Income Fund. Therefore, it’s important that you ask a lot of pointed questions to the charity.

 

DISCLAIMER: The views expressed in this article do not necessarily express the views of our firm and should not be construed as professional tax advice.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

 

 

Am I Eligible for Social Security if I’m Divorced?

Social Security has a spousal benefit which is intended to provide payment for the spouse in a household in which there is only one income earner.  This is essential for couples who have one stay-at-home spouse, as it allows them to still collect some amount of Social Security.  Often times, divorcees are surprised to hear that they still may be eligible for Social Security benefits based on their ex-spouse’s earnings.  Read on to see if you qualify for Social Security benefits from a previous spouse.

Is your ex-spouse alive?

If you answered “yes”, move on to the next question.  If your ex-spouse is deceased, you may still be eligible for survivor benefits.  See the “Am I Eligible for Social Security Benefits as a Surviving Spouse?” flowchart here.

Were you married to your ex-spouse for at least 10 years?

If you answered “yes”, move on the next question.  If your marriage lasted less than 10 years, you will not be able to collect spousal benefits.

Did you have more than one marriage that lasted more than 10 years?

If you answered “yes”, you will be able to pick the ex-spouse that provides the greatest benefit.  If not, your benefits will be based off the ex-spouse you were married to for longer than 10 years.  Either way, move on to the next question.

Did the divorce occur at least two years ago?

If your divorce was less than two years ago and your ex-spouse has not filed for benefits, you will have to wait until they file for Social Security before you are eligible for benefits.  If the divorce was greater than two years ago and you do not have plans to remarry (remember you must not remarry to be eligible for ex-spouse benefits), then you can claim benefits if you are at least 62 years of age.

Collecting Social Security benefits from an ex-spouse is complicated, and there are a lot of different requirements.  Check out this flowchart to learn more.

If you would like to schedule a call to talk about the best strategies for Social Security, please give us a call at 303-440-2906 or click here to schedule a time to speak with us.

 

 Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

Future of Charitable Planning

Key Takeaways

  • Studies show that one in four affluent people (23%) consulted with at least one advisor about charitable donations last year.

  • A confused donor is an unhappy donor.

  • Always review your goals and check with your advisors before whipping out your checkbook

 

Generally planned giving CRTs (charitable remainder trusts) and CLTs (charitable lead trusts) immediately come to mind. We seldom think about charitable giving in the context of non-charitable trusts, but according to Al W. King III, co-founder and co-CEO of South Dakota Trust Company, the amount of wealth that high-net-worth individuals own in trusts is surprising.

·         “The top 1 percent currently have 38 percent of their assets in trusts, and

·         The next 9 percent have 43 percent of their assets in trust,” observed King.

Some families intentionally incorporate charitable planning and provisions into trusts they create. You can too by:

  • Setting a target value for the trust that will be available for family members with any growth and appreciation above that amount being directed to charity

  • Supplementing distributions to family members who work for a charitable organization

  • Matching beneficiaries’ personal charitable contributions

Families are also discovering strategies to incorporate charitable goals and objectives into trusts that were initially created with no charitable intentions. This is often achieved by changing the trust’s situs (legal jurisdiction), reforming or modifying the trust, or “decanting” in states with flexible decanting statutes that allow trustees to change the terms of an otherwise irrevocable trust, which may include adding discretionary charitable beneficiaries.

Common trusts and trust strategies that are increasingly incorporating charitable goals, objectives and planning include:

  • Dynasty trusts—Because of the long-term nature of these trusts, families often desire to make provisions and provide flexibility for both family and charitable goals and objectives.

  • Existing non-charitable trusts—Irrevocable trusts can sometimes be reformed or modified to allow for distributions to charitable organizations. Depending on the applicable state law governing the trusts, it may be necessary or helpful to change the situs of a trust to a state that has more flexible trust decanting laws.

  • Purpose trusts—Some trusts are created for a specific purpose, often to care for “something” rather than for “someone.” For example, a trust may be created to care for a pet; to maintain family property such as antiques, cars, jewelry or memorabilia; or to maintain a family residence or vacation home. Once the pet dies or the property is sold or otherwise disposed of, the remaining assets might pass to charity.

  • Health and education exclusion trusts—These trusts provide support to beneficiaries over multiple generations for certain education and health-related costs. As long as distributions to cover such costs are made directly to an educational or health care institution, then gift taxes and generation-skipping transfer taxes can be avoided indefinitely. However, in order for the vehicle to qualify as a health and education exclusion trust, one or more charitable beneficiaries must have a substantial present economic interest.

Laura Peebles, former tax director of the national office of Deloitte and a consultant to Charitable Solutions, shared these nuggets of wisdom gained from nearly four decades in the charitable planning arena:

  • The donor’s charitable intent determines whether a gift is made. However, the tax benefits can influence the fulfillment of the giver’s charitable intent in terms of the asset that is ultimately given, when the asset is given, and the manner and structure through which the asset is given.

  • A confused donor is not a happy donor.

  • Some tax aspects of charitable giving don’t have good answers, some don’t have inexpensive answers and some don’t have any answers at all.

Charitable giving with retirement benefits

According to author and attorney Natalie Choate, an estate planning and retirement benefits consultant, advisors and many charitably inclined people are well-aware of the substantial tax advantages of giving retirement benefits to charity, particularly in a testamentary capacity. In addition to avoiding any estate tax liability that might otherwise apply, the charity also avoids tax on “income in respect of a decedent” that would otherwise result in the imposition of income tax on retirement benefits received by the owner’s children or other heirs.

In some cases planning charitably with retirement benefits can be quite simple; for example, if a charity is named as the sole retirement plan beneficiary. However, other planning scenarios can involve complex issues and obstacles that must be carefully navigated. For instance:

·         When there are charitable and non-charitable beneficiaries of the same plan

·         When using formula bequests in beneficiary designations

·         When leaving retirement benefits to charity through a trust or estate, and

·         When using disclaimer-activated gifts to charity.

 

Conclusion


A recent study by U.S. Trust and the Philanthropic Initiative found that one in four wealthy individuals (23%) consulted with at least one advisor about charitable donations in the past year. In addition, nearly 70 percent of charitable remainder trust donors reported learning about the planning vehicle from their advisors.

These trends indicate a growing opportunity for investors and their advisors to have a regular dialogue about charitable methods that meet personal planning goals. Call us at 303-440-2906 if you or someone close to you would like to incorporate a strategic and regular giving strategy into your overall financial plan.



Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Should I Inherited My Deceased Spouse’s IRA?

When a spouse is the beneficiary of the IRA of their deceased spouse’s IRA, there are several options available. Each option has its own advantages, depending on the needs of the surviving spouse.  Read below to see which option benefits you best.

Are you the sole beneficiary to your spouse’s Traditional IRA?

If you are not the sole beneficiary, your situation is a bit more complicated.  Check out our “Can I Delay the RMD from the Traditional IRA I Inherited?” flowchart here If you are the sole beneficiary, move on to the next question.

What best describes your situation:

You plan to use all the assets in five years

Consider electing the 5 year rule if you expect significant expenses over the next five years that will deplete the account.  This allows you to take distributions at any time over the next five years of any amount, provided the account is depleted at the end of five years.  Keep in mind you will need to pay ordinary income tax on all distributions in the year they are taken.

You want income and are younger than 59.5 years old

Consider inheriting the IRA, which will allow you to take distributions from the IRA penalty-free.  You will be required to take RMDs based on the IRS Single Life Expectancy table.  Of course, you can take any amount of distributions that you need as long as the distribution is greater than or equal to the RMD.

You don’t want income and/or are younger than your deceased spouse

Consider rolling over the IRA into your own IRA.  This will allow you to avoid taking RMDs until the year after you turn 70.5.  If needed, you can take distributions as soon as you hit 59.5.

 

There are a lot of factors to consider when deciding which option is best for you.  Check out this flowchart to learn more.

If you would like to schedule a call to talk about the best strategy for an IRA you have inherited, give us a call at 303-440-2906 or click here to schedule a time to speak with us.

 

 Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

Well-Traveled? Don’t Get Tripped Up on Tax Day

Cross-border issues to remember while filing U.S. taxes (first in a series)


Key Takeaways:

·         The IRS takes the definition of “global” seriously. All global income, including employee stock option plans, must be reported.

·         There is an increased focus on offshore income tax compliance.

·         The IRS also expects to hear from all U.S. citizens and green card holders living overseas.

·         Taxpayers might be failing this compliance simply because they are not aware of the rules.

·         Make sure your advisors are staying up to date on offshore income rules. 

 

As you get ready to put the final touches on your tax return, here are some important things that you and your financial advisors should remember with respect to global income compliance.

All global income must be reported

If you are a U.S. resident or U.S. citizens (whether NRI, PIO or OCI), you must pay taxes in the U.S. on all global income. A U.S. resident is a green card holder and/or someone who has been physically present in the United States for at least 31 days during the current year and for at least 183 days during the three-year period that includes the current year and the two preceding years. To satisfy the 183-day requirement, count all the days that you were present in the current year, add one-third of the days you were present in the first year before the current year, and then add one-sixth of the days you were present in the second year before the current year.

Global income will include:

  • Any salary partly received in another country.

  • Any income received overseas for freelance or consulting work.

  • Interest on bank deposits and other securities held overseas.

  • Dividends from shares and mutual funds.

  • Capital gains from sale of assets.

  • Rent from property.

Remember, your global income will be taxed in the U.S. as per rules that apply to similar income in the U.S. For instance, while dividends may be tax-free in India, they are taxed in the U.S., and hence your dividends from India will be taxed in the U.S. The same goes for capital gains. According to U.S. law, the definition of “long term” is one year for all assets, but it may be different in other countries. When you file tax returns in the U.S., you must take into account this difference and treat overseas capital gains as per the time period specified in U.S. law.

If you have paid tax in the overseas country from which the income described above is derived, you must check the Double Taxation Avoidance Agreement to see if you are eligible to claim a foreign tax credit.

Tip: When you fill in Schedule B of your tax return Form 1040, pay close attention to line 7. Line 7 asks if the taxpayer had, during the tax year, held any financial interest in or signature authority over a foreign financial account (such as a bank account, securities account or brokerage account). Make sure you confirm that you indeed had overseas investments.

ESOP taxation

Did you exercise an employee stock option plan (ESOP) in 2017? If so, that’s one more thing you must declare on your U.S. tax return. In the U.S., the value of ESOPs granted is taxed at the time when the employee exercises the option.

You must add the total value of their ESOP compensation to your total income in the U.S. Since you may have also paid tax in the country where the ESOP originated, you will be eligible to claim a tax credit in their U.S. tax returns. You must refer to the Double Taxation Avoidance Agreement.

Tip: You can disclose this as other income in Form 1040. You can claim foreign tax credit using Form 1116.

U.S. citizens and green card holders living overseas

In this connected world, you may be constantly on the move. This is a red flag.

Regardless of where you live, all U.S. citizens and green card holders must file tax returns in the U.S. based on their total global income. You must pay taxes on such foreign income unless a treaty or statutory exclusion or foreign tax credit applies to reduce your U.S. tax liability to zero.

In such cases, if you are a U.S. citizen or a green card holder residing overseas, on the regular due date of your return, you are allowed an automatic two-month extension to file your return and to pay any amount due without requesting an extension. So this year, the automatic two-month extension goes to June 15. But remember, while no penalty is charged, interest is still charged on the balance due between April 15 and June 15.

If you are unable to file a return by the automatic two-month extension date, you can request an additional extension to October 15 by filing Form 4868 before the automatic two-month extension date. However, any tax due payments made after June 15 will be subject to both interest charges and failure-to-pay penalties.

Tip: Filing U.S. tax returns from overseas can be quite a challenge. Not all software is equipped to handle foreign tax issues such as earned income exclusions—Form 2555, foreign tax credit—Form 1116, Form 8938, Form 8833 and so on. In such cases, you and your advisors will need to file a paper return.

Conclusion

Foreign income compliance is becoming increasingly important to the IRS. As the Foreign Account Tax Compliance Act (FATCA) gathers steam, opportunities to come into compliance without harsh penalties will diminish. The sooner you act the better.

In the next installment of this article series, we’ll look at the various additional forms that must be included with the 1040 to be compliant with global income reporting.



DISCLAIMER: The views expressed in this article do not necessarily express the views of our firm and should not be construed as professional tax advice.

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Home Office Deductions

“Safe harbor” option may be easier, but number crunching is still worth it for many

 

Key Takeaways:

·         The IRS simplified option for home office deductions five years ago and million or taxpayers are taking advantage. Just be careful if you do.

·         This option can significantly reduce paperwork.

·         However, the annual limit is $1,500, and those with higher home office expenses may still be better off slogging through the detailed Form 8829.



According to the IRS, more than 3.4 million taxpayers claimed deductions totaling just over $9.6 billion for business use of a home, commonly referred to as the “home office deduction.”

Introduced in tax year 2013, the optional deduction is designed to reduce the paperwork and recordkeeping burden for small businesses. The optional deduction is capped at $1,500 per year, based on $5 a square foot for up to 300 square feet.

Back in 2013, the IRS announced a new, simplified method for claiming home office deductions. According to the IRS, this safe harbor method is an alternative to the existing requirement of calculation, allocation and substantiation of actual expenses, including mortgage payments and depreciation that is done in Form 8829.

Moreover, there is an annual limitation of $1,500 under this new method, thus making this a viable option for those with offices in apartments or smaller homes. Still, there is merit to understanding this option now and evaluating the best course for your business deductions.

Which method is best for me?

Before we look at the new option, let’s run through the existing method. The existing method involves several steps before you can arrive at the total for a home office deduction.

Step 1: Figure the percentage of your home used for business
Divide the total square footage of your home that you use for business by the square footage of your entire house. That percentage is what you’ll need for Step 3 below.

Step 2: Sum up all the expenses
This step involves the most paperwork. You need to list the various expenses such as rent and utilities or—in the case of ownership—mortgage interest, real estate taxes, insurance, repairs, utilities and the big one—depreciation. Lines 36 to 41 on Form 8829 involve going back and forth between the instructions several times to arrive at appropriate depreciation numbers.

Step 3: Apply the percentage from Step 1 to Step 2
You will use the percentage from Step 1 to figure the business part of the expenses for operating your entire home.

Now the new safe harbor option lets you claim a flat deduction of $5 per square foot of the home office, up to 300 square feet. That means if you use this method and have a home office of more than 300 square feet, you will be able to claim a maximum deduction of $1,500.

Some of the benefits of this method are:

  • You drastically reduce paperwork and compliance burden.

  • If you itemize deductions and use the safe harbor method, those expenses related to your home, such as mortgage interest and real estate taxes, can be itemized without allocating them between personal and business expenses.

  • You can choose either method from year to year depending on which one is beneficial in a particular year. A change from using the safe harbor method in one year to actual expenses in a succeeding taxable year or vice versa is not a change in your method of accounting and does not require the consent of the IRS.

Some of the limitations of this method are:

  • You are limited to claiming $1,500 per year irrespective of actual expenses incurred on the home office.

  • If you have a loss and cannot claim the entire deduction of $1,500 in a year, you cannot carry forward the home office expense to the following year. This would be possible if you claim actual expenses. Moreover, if you choose the safe harbor method, you cannot set off office expense carried forward from an earlier year.


The definition of what qualifies as a home office has not changed. In short, the home office

·         Must be used as your principal place of business.

·         It must be used “regularly and exclusively” for business

·         It cannot double as a place that you use for business as well as for personal purposes.

If you’re a professional, you may face various scenarios. You might be working from home for the most part of your practice, or you might be working from an office location but sometimes doing work at home. Each scenario is dealt with differently from a home office deduction point of view.

·         Home as your principal place of business: If you work from home for the most part of your business or practice, that is, you perform all important activities at this place and spend relatively more time there, then your home would be your principal place of business. In such a case, you can claim a deduction for the portion of your home that you use regularly and exclusively for your business.

·         Business at office location while doing some work at home: If you have separate office premises for conducting your business, then that would be your principal place of business. You cannot claim a deduction for use of your home during weekends or after office hours.

However, there is an important exception for professionals who also use their home for client meetings.

If you meet or deal with clients or customers in your home in the normal course of your business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business if you meet both of these tests:

  • You physically meet with patients, clients or customers on your premises.

  • Their use of your home is substantial and integral to the conduct of your business.

The part of your home that you use exclusively and regularly to meet clients or customers does not have to be your principal place of business. Using your home for occasional meetings and telephone calls will not qualify you to deduct expenses for the business use of your home.

You and your tax advisor can make a decision regarding which method to choose, depending on a few pointers:

  • Do a back-of-the-envelope calculation of your home office expenses under both methods. Calculate the deduction under the safe harbor method by multiplying the area of your home office by $5 (limited to $1,500). If that is significantly less than the amount you claimed as a deduction in your most recent tax return, it might make sense to go through the trouble of filling out Form 8829.

  • If you have a loss from your business and would like to carry forward the home office expense, choose the actual expense method. If you have home office expenses from an earlier year that you would like to set off, use the actual expense method.

Conclusion

Claiming home office deductions is widely believed to be a common cause for an IRS audit. At the same time, genuine use of your home for business purposes can hand you a valuable deduction. The new method can significantly reduce paperwork and compliance burden for those with small home offices. But those with bigger spaces may want to choose the actual expense method. Cumbersome as it may seem, it might well be worth the effort.

DISCLAIMER: The views expressed in this article do not necessarily express the views of our firm and should not be construed as professional tax advice.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Can I contribute to my Roth IRA?

Roth IRAs were created with the Taxpayer Relief Act of 1997 as an alternative to the Traditional IRA.  Although they share contribution limits, they differ in tax-treatment.  Traditional IRAs are tax-deferred, similar to a 401(k) plan.  This means that pre-tax money is contributed to the plan, and is taxed at ordinary income rates as it is withdrawn.  The Roth IRA gave taxpayers a different choice: pay tax now and avoid paying tax on future growth.  Read below to see if you can contribute to a Roth IRA. 

Do you or your spouse have earned income?

“Earned income” means income from wages, salaries, or bonuses.  An example of “unearned income” would be investment income or an inheritance.  If you have earned income, move on to the next question.  If you do not have any earned income, you are not eligible to contribute to a Roth IRA.  Note that if you only contribute to IRAs up to your earned income.  For example, if your earned income is $3,000 then your maximum contribution is $3,000.

Did you make a contribution to a Traditional IRA for the tax year?

If you have contributed to a Traditional IRA this tax year, the amount contributed will count against your $6,000 (2019) allowed IRA contribution for the year.  If you have not contributed to a Traditional IRA or have not contributed the full allowable amount, then you will be able to contribute to your Roth.

What is your tax-filing status?

Married

If your Modified Adjusted Gross Income (MAGI) is less than $193,000, then you and your spouse can make a full contribution.  If your income is between $193,000 and $203,000 you will be subject to the contribution phase-out.  You will be able to make a partial contribution to your Roth IRA.  If your income is $203,000 or greater, you are above the income limit and allowed no Roth IRA contribution.

Single

If your Modified Adjusted Gross Income (MAGI) is less than $122,000, then you can make a full contribution.  If your income is between $122,000 and $137,000 you will be allowed a partial contribution.  If your income exceeds $137,000, no Roth IRA contribution is allowed.

If you’ve made it this far, there is a good chance you can contribute to a Roth IRA.  Check out this flowchart to learn more.

If you would like to schedule a call to talk about contributing for a Roth IRA, give us a call at 303-440-2906 or click here to schedule a time to speak with us.

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

 

Buy-Sell Agreements

20-plus issues for every closely held business owner to consider


Key Takeaways:

  • Buy-sell agreements come in three basic forms but must be individually tailored to suit the specific needs of your business.

  • Make sure the agreement meets your ongoing needs, including tax, retirement, insurance and funding issues.

  • Without appropriate “exit” plans in place, ownership changes can be worse than Hollywood divorces—bitter, expensive and devastating to all involved.



Almost all owners of closely held businesses put all of their time, effort and money into launching and growing their businesses. Tragically, they put little effort into protecting what they have built from devastation caused by one or more of the owners leaving the business. Without an appropriate “exit” plan in place, changes in business ownership can be worse than a Hollywood divorce—bitter, expensive and devastating to all involved.

Don’t be fooled! Changes in ownership happen every day in all types of businesses for a multitude of reasons: death, retirement, disability, divorce, voluntary and involuntary termination of employment, lawsuits, financial and economic setbacks, bankruptcy, and selling and gifting interests, just to name a few. The disruptions caused by these events usually result in severe financial consequences for everyone involved, including collateral damage to customer, supplier, banking and employee relationships as well as to long-term company goodwill.

Consider a buy-sell agreement from Day One


Perhaps the biggest tragedy is that most, if not all, of the aforementioned problems can be avoided by putting a well-drafted buy-sell agreement in place right from the start. That’s when all the owners are still in the “honeymoon” stage of the business and relations are most amicable. However, it is never too late to put a buy-sell agreement in place, and some honest thought and open communication will strengthen and protect the business and bring peace of mind to everyone involved. Remember, ownership changes are bound to happen, but having a plan in place to deal with those changes will always smooth out the road ahead.

Next steps


Now that you are convinced that a buy-sell plan is critical for the health and well-being of both the business and the individual business owners, where do you go from here? First, consult with an experienced business lawyer who can walk you through the process and help craft a plan that fits the specific needs of both the business and the individual owners. Second, understand that no two agreements are ever the same, although they generally fall into one of three categories:

1.      Cross-Purchase Agreements, which can be ideal for a business with a small number of owners. When a triggering event occurs, the remaining owners directly purchase the departing owner’s interests in the business.

2.      Stock Redemption Agreements, which can be simpler and easier to structure. Generally they can be better-suited for entities with more owners. With these types of agreements the entity purchases the ownership interests of the departing owner. The remaining owners receive an increase in the value of their interests, not in the number of interests they own.

3.      Hybrid Agreements, which are a combination of cross-purchase agreements and redemption agreements. Generally the entity has the obligation to redeem the interest of the departing owner, but the remaining owners have the option of directly purchasing the departing owner’s interests if the entity is unwilling or unable to do so.

In order to determine which type of agreement will best suit your needs, consider the following issues:

  1. How many owners does the business have today and will have in the future?

  2. Is the business family-owned or are third parties involved?

  3. What type of business is involved, and are there specific issues that need to be addressed relating to the entity’s business, such as professional licensing or trade issues?

  4. What is the legal structure of the business: corporation, S corporation, partnership, limited liability company?

  5. What is the age and health status of each business owner?

  6. Is each of the owners insurable?

  7. What percentage of the business does each owner hold?

  8. What is the value of the business, and how is that value determined?

  9. What are the tax implications of each type of agreement?

  10. What are the transfer implications of each type of agreement?

  11. What restrictions will be put on the transfer of interests?

  12. Will the interests be subject to rights of first refusal?

  13. How will the business be valued and the purchase price determined? How often will the business be revalued? Will the interests be valued differently depending on the specific transfer event?

  14. Will there be penalty provisions for violating the terms of the agreements and/or conduct damaging the business?

  15. How will the transfer of interests be funded? Will insurance such as life insurance and disability insurance be mandated, and if so, how will premiums be paid?

  16. How will the transfers be paid, all upfront or over time? If the payments are over time, what are the terms and the arrangements to secure payment?

  17. Is the agreement aligned with other important legal documents such as the entity organizational documents, employment agreements, business agreements and contracts, banking agreements, and the estate planning documents of the individual owners?

  18. Coordinate the agreement with related property that may be owned by each of the business owners. Examples include affiliated businesses, insurance policies, land and personal property, intellectual property, and leases.

  19. How will termination of the business be handled?

  20. How often will the agreement be reviewed? Doing so annually is a good idea.

  21. How will disputes related to the agreement be handled—litigation, mediation or arbitration?

The foregoing is not a complete checklist of every issue that needs to be considered, but it will give you a good platform to begin discussions between you and your legal counsel.

Conclusion


First, properly structured buy-sell agreements are critical to the survival of any closely held business; they are not an option. Second, these agreements must be tailored to the specific needs of the business. One size doesn’t fit all. Finally, businesses and relationships constantly change; consequently, buy-sell agreements must be reviewed and updated regularly. An out-of-date agreement is next to worthless.

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.



Start Your Own Charity

Don’t let a lack of available charities stymie your charitable passions (and tax savings opportunities)


Key Takeaways:

·         If you are passionate about a particular cause and there is no charity that supports it, you can start your own charity.

·         Charities can be set up to support overseas causes as well.

·         Self-started charities can be especially beneficial for those planning to donate over $10,000.

 

Let’s say you are at the stage in life when you want to start giving back in a more consistent and meaningful way. The only hurdle: There is no existing charity that supports the exact causes or initiatives you feel most strongly about. In the past, you’d have to take your checkbook elsewhere.

The good news: With the right planning, you can start a charity to support exactly the causes you care most about--anywhere in the world. There are many charities that are registered in the U.S. that support overseas causes. For instance, Help for Animals India, a charity based in Seattle, was started to help the animals of India. Many alumni groups also set up nonprofit organizations to support the educational institutes at which they studied.

Having said that, while such nonprofit organizations can be formed, the ultimate use of funds is determined by the board of trustees. Under U.S. rules, a domestic charity can’t be committed to give to a particular foreign organization. It can be formed with the intention of supporting a specific organization, but the U.S. board of trustees must make an independent determination that the overseas organization in question qualifies under U.S. rules.

So what does it take for you to set up your own U.S.-based charity, and what should you look out for?


Types of organizations that qualify
According to IRS regs, an organization may qualify for exemption from U.S. federal income tax if it is organized and operated exclusively for one or more of these purposes:

  • Religious.

  • Charitable.

  • Scientific.

  • Testing for public safety.

  • Literary.

  • Educational.

  • Fostering national or international amateur sports competition.

  • The prevention of cruelty to children or animals.

Examples include:

  • Nonprofit old-age homes.

  • Parent-teacher associations.

  • Charitable hospitals or other charitable organizations.

  • Alumni associations.

  • Schools.

  • Red Cross chapters.

  • Boys’ or girls’ clubs.

  • Churches.

To qualify, the organization must be a corporation, community chest, fund, foundation or other entity with articles of association. A trust is a fund or foundation and will qualify. However, an individual or a partnership will not qualify.

Set-up process

Step 1: The basics
The basics include:

  • Identifying a cause.

  • Selecting a name and checking with the state corporation office to see whether the name is available.

  • Formulating the mission statement.

Step 2: Incorporation
You and your advisor(s) will need to draw up articles of association and bylaws. The organization must be set up under a state not-for-profit statute. Experts strongly recommend using an attorney experienced in the formation of nonprofit organizations to do this. File the articles of association with the state corporation office.

Step 3: Tax formalities
First the charity will need to get an employer identification number (EIN). This ID is similar to an individual’s Social Security number.

Then you must apply for federal and state/local tax-exempt status as a private foundation. You will also need to fill out Form 1023 or 1024, depending on the type of organization you wish to form. This is by far the toughest and most expensive part of the process. The form runs up to 26 pages with questions that require detailed answers. All the correct documents must be attached to the application to make sure the process runs smoothly.

The user fee per application is $400 for organizations with gross receipts that do not exceed $10,000 annually over a four-year period and $850 for organizations with gross receipts that exceed $10,000 annually over a four-year period.

Further, it takes about a year to be approved. The organization must figure out how to operate while waiting for approval from the IRS. Most organizations say, “IRS tax-exempt status is pending.” The donor shouldn’t claim a tax deduction until IRS status is approved. Also, the organization needs to understand the documentation rules it must follow when other people give contributions.

Conclusion

Again, the upfront time and effort might be best for those considering donating amounts upward of $10,000. There is also an ongoing commitment of time and expense to comply with annual filing requirements at both the federal and state levels. Make sure you and your advisors have all your paperwork in place before getting started. But, most who’ve gone through the process will tell you it’s worth the effort to get it right from Day One. Once you do, you can focus your energies on what you do best—funding causes you believe in, not wrestling with tax rules and regs.

Contact us any time if you or someone close to you is thinking about taking their philanthropic game to the next level.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Saving for College

There are a myriad of factors to consider, but one thing’s for sure--the earlier you start saving the better. Just don’t neglect your own retirement savings

By Robert J. Pyle, CFP®, CFA, AEP®

This is the time of year when high school seniors and their families are sweating out college acceptance letters. Study after study shows that a college degree is still worth it despite the skyrocketing costs. For starters, the pay gap between those with a four-year degree and those with a high school degree is at a record high according to the Bureau of Labor Statistics. Not only are college grads significantly less likely to be unemployed, but on average, they out-earn those without degrees by about $1 million in lifetime wages.

So, while a college education remains the American dream, it is becoming less and less affordable. An Edward Jones study found that only one in six Americans (17%) feel they can afford the cost of a college education for themselves or a family member. In fact, only one in three respondents who earned six-figure incomes felt they could afford the cost of college today.

College tuition at public universities has nearly quadrupled over the past 35 years. The reasons are too complex discuss in detail in this article. Among the leading reasons:

·         High increase in public subsidies for higher education

·         Sharp rise in percentage of Americans who go to college

·         Enormous expansion of the federal Pell grant program

·         Expansion of University administration. Large growth rate in administrative positions – 60% increase between 1993 and 2009.

Suffice it to say, attending college is a lot more expensive than it used to be in both real and inflation-adjusted terms. That’s why we build a 6-percent annual tuition increase into our clients’ college savings plan-- i.e. about 3% MORE than the historical rate of inflation.

The average cost of public four-year university is about $25,000 for in-state tuition, $41,000 for out of state tuition and $51,000 for a private university.

SCENARIO 1: If you earn an average of 5% per year on your college savings plan and college costs increase by 3%, you need to save the following annually:

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SCENARIO 2: If you earn an average of 5% per year on your college savings plan and college costs increase by 6%, you need to save the following annually:

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SCENARIO 3: If you earn an average of 5% per year and college costs increase by 5%, you need to save the following annually:

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Also, many students and families neglect to account for all the “hidden fees” of college beyond tuition, room and board. These can include: Fraternity/sorority dues, clubs, trips, meals outside the cafeteria, and travel to and from school, especially if airfare is required.

How to close the saving gap

Most experts say a 529 plan is the best option for saving for a child’s or grandchild’s education.
The earnings generated in a 529 plan are not subject to federal income taxes, allowing the investments to grow without being depleted annually by taxes. Additionally, when the money is used for qualified education expenses, the distributions from the 529 plan are not subject to federal or state income taxes. Here are seven more key benefits of 529 plans.

What to look for in a 529 plan

For starters, you want low cost and good diversification options. The Colorado 529 Plan has Conservative Age Based, Moderate Age Based and Aggressive Age Based.  For example, age 0-4 it’s 100% stocks in Aggressive vs. 87.5% stocks the Moderate and 62.5% stocks in the Conservative. Each portfolio becomes increasingly more conservative as the child/beneficiary gets older:

Also look at:

·         Past state performance

·         Investment options

·         Asset protection

·         Relative investment fees

·         Any “in-state” advantages of establishing a 529 in your state of residency

You are free to invest in the 529 plan of any state, but the Colorado plan, checks off the boxes for most Colorado families. What’s more, in many states including Colorado, you will also get a state income tax deduction for contributions made to your in-state 529 plan.  If you don’t get a deduction for investing in your own state’s plan, then we recommend the Utah Educational Savings Plan to many of our clients. Here is a helpful chart outlining state tax deductions by plan.


Why a 529 is better than UTMA

I sometimes get asked if The Uniform Trust to Minors Act (UTMA) is better than a 529 plan. There’s really no reason to go with an UTMA since it counts against your financial aid chances five times more than your 529 plan savings do.  Since an UTMA is counted as an asset of the student, then 20% of the money is expected to be used versus 2.6% to 5.6% of the parent’s assets (including 529 plans owned by the parents). One way circumvent this rule is to transfer the UTMA assets to a 529 plan owned by the student and the asset is reported as a parental asset

Here’s another drawback to UTMA: Once a child is no longer a minor (age 21 in Colorado) he or she will take ownership of the account and can spend the money on anything they want, not necessarily for college. By contrast, a 529 account remains with the adult who set up the account and only withdrawals used for education purposes remain tax-free.

Should we start taking risk off the table as my son or daughter gets closer to college age?

In most cases yes, and the “glide path” for college savings is similar to the glide path you would follow for your retirement plan.  As mentioned earlier, you want to maximize the account’s appreciation when your child is young and get increasingly conservative as you get closer to withdrawing from the account for college costs. Most plans allow you to do the reallocations yourself, but I recommend letting the plans do it for you—they’re the pros and they do this all day long.

Should we continue to fund a 529 plan after our student begins college?

Generally, I recommend that clients keep contributing to a 529 plan after their child has enrolled in college as long as they’re in a plan that provides a state tax deduction—in Colorado, it’s 4.625% of what you contribute each year. Plus, you will still earn some appreciation on your principal over the four-plus years that your child is enrolled.

Changing asset allocation based on market conditions

If the markets are going crazy when your child is young—i.e. when your account is likely to have a higher exposure to the stock market—it’s tempting to move into the safer fixed income options your plan may offer. I don’t recommend this approach. Essentially, you’re trying to be a “market timer” and it’s very difficult to know when to “get back in” to the higher growth options your fund offers. Not only do you risk missing out on significant market upside, but many 529 plans have strict limits on the number times you can make asset allocation changes each year. That being said, if the market takes a big drop, it might be a good time to add more money to your 529 plan. Why? Because you’re buying units at relatively low cost.

Asking grandparents for help


Many grandparents are at a point in life when they can make generous gifts to grandchildren, especially if the money is to be used for something as worthwhile as college tuition vs. just buying junior a new car. Just make sure the grandparents’ gift is put in the name of the student/beneficiary’s parents—not the grandparents. That’s because funds in the grandparents’ name are more likely to count against you if your child is applying for financial aid. A withdrawal from a 529 plan owned by a grandparent or other third party is required to be “added back” when reporting income on the FAFSA financial aid form. The amount of the distribution will reduce eligibility for need-based aid by as much as 50% of the amount of the distribution. It counts as untaxed income to the beneficiary.

Don’t count on athletic scholarships

According to this CBS Moneyline report, the odds of getting a scholarship is less than 2 percent and the average scholarship is less than $11,000. Playing high level college sports can still be fun, but just know that if your child or grandchild is among the lucky few to land an athletic scholarship, make sure they absolutely love their chosen sport. It will be at least a 40-hour per week commitment and competition for playing time is extremely fierce since nearly everyone on the roster was captain of their high school team and earned All-League/County/State, etc. honors.  Not to be a dream dasher here, but think about all that money you are putting into your kids’ travel sports teams and private coaching. Suppose instead you invested those thousands of dollars a year in a 529 plan where it could compound for 10 to 15 years?

Retirement savings vs. college savings

One of the toughest challenges many of our clients face is finding the right balance between saving for their childrens’ education and saving for their retirement. If you have two children, the numbers can be overwhelming. If you are thinking about a private four-year college, the amount you need to save for two children is more than maxing out a 401(k) contribution for one person (($30,422 for two kids vs. $19,000 for a 401(k) under 50 or $25,000 over 50.))

There are no quick and easy answers, but we have tools to help our clients model many different scenarios. For instance: “If I save $X for retirement and $Y for my child’s education, is this going to get me to my goals for both?” Then we can look at alternative scenarios in which you save twice as much for your child and look at how much longer you would have to work. Is that acceptable to you and your spouse? That’s a tough balance for most people and requires careful consideration of your timeline, your goals and your aspirations for your children.


Conclusion

In a future article, I’ll discuss the importance of choosing employable majors, additional savings tactics, what to do with unused 529 after your children complete college and whether or not the cost of elite private schools is worth it.


Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Using Office Antiques to Boost Net Worth, Cash and Aesthetics

Just make sure you know the rules before claiming tax deductions for fair business use

Key Takeaways:

  • Antiques can generally be expensed and deducted when a small business owner uses them to conduct business and subjects them to wear and tear.

  • Because antiques typically appreciate over time, while non-antique versions of the same asset diminish in value, owning antiques can significantly increase your net worth.

  • All kinds of antiques can be used as business equipment and furniture, including cabinets, bookcases, rugs, conference tables, paperweights, clocks, cars and musical instruments.

  • However, Plain Jane versions of those same items may not be deductible, even if you paid top dollar for them.


What did the small business owner do wrong?

Ned Worth, an avid antique collector, is sorely tempted to bid $5,000 for an 18th-century Chippendale piece and use it as his office desk. But, alas, Ned needs to depreciate and expense his office desk for tax-deduction benefits. So he doesn’t bid. Ned winces when the auctioneer’s hammer comes down. The next day he spends $5,000 on a pedestrian desk from Office Depot-- the same $5,000 that he would have spent at auction.

What did Ned do wrong?

Answer: Ned could have deducted and expensed the antique desk. He’d have gotten the same tax deductions and Section 179 expensing benefits with either desk. But while the Plain Jane desk will decline in value over time, the Chippendale desk will increase. By not buying the Chippendale desk, Ned now has three strikes against him:

  • Strike 1: Doesn’t result in increased tax deductions;

  • Strike 2: Takes a chunk of money out of his pocket; and

  • Strike 3: Makes him sad.

Grab some pine, Ned, yer’ out!

Deductibility of office antiques

Desks are among the many antiques that small business owners can actually use to carry out their businesses. But what you may not be aware of is that these antique desks may be just as deductible as are desks that are not antiques.

Historically, the IRS has taken the position that antique desks and other business furnishings and equipment are not eligible for Section 179 expensing and/or depreciation. Why? Because they don’t have a determinable useful life. The IRS still feels that way, or so they said many years ago. But a number of federal courts have overruled the IRS.

The Liddle and Simon cases

Let’s go back to 1984 when a professional violinist named Brian Liddle walked into a Philadelphia antique shop and purchased for $28,000 a 17th-century bass violin made by the famous Italian craftsman Francesco Ruggieri. Mr. Liddle didn’t simply display his Ruggieri. He played it during performances.

Over time, the violin began to wear down. When the neck of the violin began pulling away from its body, Liddle had the instrument repaired by expert artisans. Alas, the Ruggieri never did recover its “voice.” So, in 1991, Liddle traded it for an 18th-century bass with an appraised value of $65,000.

On his 1987 tax return, Liddle had claimed a $3,170 depreciation deduction on the Ruggieri under the Accelerated Cost Recovery System (ACRS), as per IRC 168. The IRS denied the deduction and Liddle appealed.

While all of this was going on in Philadelphia, an eerily parallel series of events was unfolding up the New Jersey Turnpike in New York City. Richard Simon, a violinist for the New York Philharmonic Orchestra, purchased a pair of 19th-century French Tourte bows with an appraised value of $35,000 and $25,000, respectively.

Like Liddle, Simon actually used his bows to perform. And like Liddle’s Ruggieri, Simon’s Tourte bows began to wear out. Although “played out” musically, the bows appreciated in value on the antique market during the time Simon owned them, just as Liddle’s Ruggieri had appreciated despite losing its musical “voice.”

On his income tax return, Simon claimed ACRS depreciation deductions of $6,300 on one bow and $4,515 on the other. The IRS said “no.” The Liddle case reached the U.S. Court of Appeals for the Third Circuit; the Simon case went to the Second Circuit. The courts treated them as companion cases and issued one ruling covering both.

In both cases, the IRS claimed the instruments weren’t depreciable because they actually increased in value over the time they were used. But previous court cases allowing depreciation deductions on assets that had appreciated in market value forced the IRS to back down from that argument.

So the IRS argued that the instruments were “works of art” that didn’t have a determinable life and thus couldn’t be depreciated. In fact, the IRS’s determinable life theory disallowing depreciation of antiques had been the law of the land until 1981.

Unfortunately for the IRS, things had changed since then. In 1981, Congress enacted a law called the Economic Recovery Tax Act of 1981 (ERTA) allowing for ACRS depreciation of business assets. As both federal courts noted, the purpose of ERTA and ACRS was to stimulate investment by making the rules governing deductions for depreciation of business assets easier for taxpayers to understand and apply. Accordingly, ERTA was meant to de-emphasize the complicated concept of determinable life. Assets would qualify for ACRS depreciation, the courts explained, as long as they were actually used in a trade or business and had suffered wear and tear.

Liddle’s Ruggieri violin and Simon’s Tourte bows met both tests, the courts reasoned. The taxpayers didn’t treat the instruments as mere show pieces or collector’s items; they actually used them as tools to earn their livelihood. And such use caused the instruments to wear down. In this way, the antiques were considered the same as any other business asset that wears down as a result of use.

Bottom line: Liddle’s antique violin and Simon’s bows were business assets subject to ACRS depreciation.

Current law on deducting and expensing antiques

According to the Liddle and Simon cases, antiques can be expensed and deducted under two conditions:

  • The taxpayer physically use them to conduct business; and

  • Such business use subjects the antique to wear and tear.

The risk of IRS opposition…

Caveat: In 1996—just a year after the cases were decided—the IRS issued a formal non-acquiescence, stating that it believed the cases “were wrongly decided” and that “the issue should be pursued in other circuits.” ACRS was meant to accelerate depreciation, not convert assets that weren’t previously depreciable, the notice argues.

...And why you shouldn’t worry about it

This may sound ominous, but there are good reasons not to allow the risk of IRS denial to scare you expensing and deducting antiques you use for business purposes.

First, the Liddle and Simon cases are binding in the states of the circuits where the cases took place, including:

  • The Second Circuit, which includes New York, Vermont and Connecticut; and

  • The Third Circuit, which includes Pennsylvania, New Jersey, Delaware and the Virgin Islands.

Further, very few, if any, cases have been reported in which the IRS has actually challenged Liddle and Simon and gone after a taxpayer for deducting and expensing an antique since the IRS issued its non-acquiescence way back in 1996.

Conclusion

Long story short, you can deduct and expense your antique office furnishings and equipment as long as they actually use them for business purposes and subject them to wear and tear.



Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

 

Don’t Be Your Own Worst Enemy

Understanding behavioral finance can give you the edge


Key Takeaways

·         Behavioral finance uses theoretical and empirical academic research to explain why investors often fail to act rationally.

·         Understanding both the “how” and the “why” of irrational investor behavior can save you millions over a lifetime.

·         Research shows that many individuals are overconfident, under-diversified, short-sighted and easily swayed by the media.



If the world were full of “rational” individuals who could maximize their wealth while minimizing risk, there would be no need for wealth advisors. Rational individuals would assess their risk tolerance and then determine an investment portfolio that met their ideal level of risk aversion. However, we know that most individuals are not capable of being 100-percent rational, especially during times of stress. That’s why it’s so important to have a trusted coach, guide, consigliere or voice of reason to prevent you from being your own worst financial decision-making enemy.

Behavioral finance encompasses a body of theoretical and empirical academic research that seeks to explain why people, especially investors, do not act in a rational manner. Understanding behavioral finance can be invaluable to your investing and wealth building success. Think of the moniker “behavioral” as describing how and why individuals behave the way they do.

First let’s look at the “how.” Here are some findings, based on empirical research, that explain how investors tend to behave when they don’t have expert guidance to help them:

  • They invest in under-diversified portfolios.

  • They trade actively with high turnover and high transaction costs, which causes a significant drag on returns.

  • They are influenced by where they work and live. They invest heavily in the stock of their employers, and they tend to invest in stock of companies based in their home country, and even in companies located near where they live.

  • They are often influenced by companies that receive lots of media attention.

  • They tend to buy, rather than sell, companies that are mentioned positively in the news.

  • They tend to sell their winning investments, while holding on to their losing investments way too long in the inevitable chase to get back to “breakeven.”

  • Men tend to trade more often than women do. The turnover and costs associated with active trading explains why men tend to achieve lower absolute returns on their money than women do.

Now let’s look at why individuals behave a certain way, which is based on theoretical research. Here are some theories:

  • Psychological research supports the theory that individuals are generally overconfident. This hubris explains why investors tend to trade too actively and to have dangerously under-diversified portfolios.

  • Research supports the theory that most investors believe they are “better than the average” investors, which makes about half the population delusional, not to mention overconfident.

  • Psychological research supports the theory that investing in stocks is a sensation-seeking activity for many individuals. It’s a form of entertainment and it provides many individuals with an adrenaline rush that’s akin to the thrill people get from gambling.

Conclusion
Behavioral finance literature serves as a reminder of why it is so important to protect yourself from your ego and emotions. That’s where a truly objective advisor with your best interests in mind comes in. The appropriate stewardship of your wealth is a responsibility to yourself, to your family, to your house of worship, your community and your country.  As with so many things in life, enjoy your wealth, but do so responsibly. Don’t try to do it yourself.


If you or someone close to you has concerns about their financial decision-making process, please don’t hesitate to contact me. I’m happy to help.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

Don’t Sell Your Business--Downsize It

Key Takeaways:

  • You don’t have to sell your business all at once.

  • You can keep 80 percent of your income and work one day a week.

  • You will end up with a lot more money at the end of 5 to 10 years.

  • You will be working only with clients and customers that you enjoy and value.

    

Succession planning is a hot topic today. The problem is that the only solution in most cases is either to sell or close your business. But, I want you to consider another option for the business you’ve worked so hard to build: the “wind-down strategy.” With a wind-down strategy, you essentially downsize your business.

How great would it be if you could keep your finger on the pulse of your business while reducing the amount of time you actually work by 80 percent or more! Just one important caveat: The wind-down strategy works best for professional service firms, but elements of this concept can work for all types of businesses.


Focus on the best 20 percent of your customers or clients


The first step is to take is look at your book of business. Who are you best 20 percent of customers or clients? This doesn’t necessarily have to be your largest clients, but many of the larger clients tend to be your best clients, too. After you put your list together, add up how much of your firm’s revenue these top clients account for. If you’re like most firms, it will be at least 80 percent of the total revenue.


If you are servicing 100 clients that produce $750,000 per year in revenue, then your wind-down will probably account for $600,000 in annual revenue. Think about this for a second. Eighty percent or more of your revenue probably comes from a very small group of clients or customers. How great would it be to spend your day taking care of only your best and most profitable clients?

It’s not a dream.

Put together a pro forma statement of what your downsized firm would look like


Now look at your business and see which types of expenses would remain if there were only 20 clients to service instead of 100. I bet you would cut a huge chunk of the costs out.

Overhead would go way down, as would the hassle of trying to take care of 80 so-so clients. You no longer have to put in 60-hour workweeks. Now you can work 10 or 15 hours and make a greater profit with 20 clients than you used to make with 100. That means you can take weeks of vacation at a time. Having a smaller business or practice allows you to do other things while keeping the lion’s share of the income from the former business or practice.

Compare this to selling


Let’s say you find a 10 to 15 hour-workweek attractive. Who wouldn’t? If this became your reality, guess what? You might not be so anxious to unload your business.

Let’s say you could sell your business for $1 million to a buyer that agreed to put 40 percent down in cash and would finance the remaining $600,000.

Don’t you think you would enjoy having something fulfilling to do one day per week? Suppose you could take home $400,000 per year instead of hoping you might get paid the money you’re “owed” from the complete sale of your business?

Let’s think about this for a second. You can earn $400,000 in cash and then hopefully the remaining $600,000 over seven or eight years with a lot of risk involved. Or, you can get $400,000 per year for as long as you want--with almost no risk. How? The wind-down should produce about $400,000 per year in profits. That means the business would take in $800,000, have $400,000 in costs and leave $400,000 for salary and profits. Remember, there are only 15 or 20 clients left to worry about. That means you’ll have little or no administrative costs. You could even find an outsourced solution for your administrative and overhead help

Isn’t getting $400,000 per year for working 10 to 15 hours a week an attractive idea?

Find a new home for the lower 80 percent


Of course, you need to figure out what to do with your B and C list--the remaining 80 percent of customers or clients who have relied on you for advice for years? Some of them may have started with you when you first opened your business. Can you just stop servicing them?

No. You’re not going to neglect them. You are going to find a good new home for them at another well-suited firm. And, you’ll do the right thing by offering to backstop those transferred customers or clients if there’s a problem at their new firm.

Over time, reduce the 20 percent


If you adopt this 20/80 wind-down strategy, you are likely to continue working way past normal retirement age. When you reach 70, you might want to work even less than the 10 to 15 hours per week that you’re working now.

Not a problem. Just follow the same winnowing down process. From your Top 20 percent list, be willing to let go of a few more clients—perhaps they’re on you’re A-List, but not the A+ List.  Find a good new home for them. Eventually you’ll get to the point where you have just five very, very good customers or clients. You love them and they love you.

The key here is to understand how your overhead works. Instead of having full-time staff, your business will be moving to part-time staff. You might even be able to find another similar business that’s willing to let you operate under their roof if you help them pay for their overhead.

If you do this, not only have you reduced the amount of time you must spend working,  but you’ve eliminated staffing and other fixed overhead.

Conclusion

Let’s say you only use this wind-down strategy for 10 years, starting in your late 50s or age 60. Instead of selling your business and hopefully getting $1 million over seven years, you’re going to earn $4 million over 10 years while working part-time.

What’s not to like? If you have any questions, please feel free to email us or give us a call at 303-440-2906.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

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