I-Bonds Return to Favor!

A few months ago I was discussing with a client the fact that one of my favorite little tools, I-bonds, were not as effective as they once were. Over the last six months I-bonds were not attractive. The reason for the shortcoming was the negative inflation rate component of the composite return associated with I-bonds.

While I-bonds have struggled over the previous 6 month period, the new rate is appealing. The new annualized rate for the six month period from November 2009 to April 2010 is 3.36%, and that’s 3.36% tax deferred!

Why I like I-bonds:

1. They grow tax deferred! A taxpayer in the 25% tax bracket will receive an equivalent taxable return of 4.48% on the current I-bond six month annualized return.

2. I-bonds can be used tax-free to pay for certain college expenses. Although, there are income restrictions to use this feature.


3. I-bonds have an inflation component factored into to the composite (total) rate of return. If inflation creeps up, the total return of I-bonds will increase.

4. I-bonds can be used as emergency funding in a financial plan. There are redemption restrictions:
• I-bonds cannot be redeemed within one year of purchase (special provisions may apply)
• I-bonds redeemed in years 2-5 incur a three month interest penalty. This penalty may be tax deductible.
• I-bonds redeemed after 5 years incur no penalties.

5. I-bonds are a debt of the US government and are an extremely safe investment. Note: I-bonds have a composite rate, which is based on two components: 1. A fixed rate component, and 2. An inflationary component. While the fixed rate is locked over the life of the bond, the inflationary component varies based on inflation. This formula can create an interesting and rare situation where the inflationary component is negative and can reduce the composite rate to 0, but the rate will not fall below 0. In a nutshell, in the worst case scenario I-bonds will return little or even nothing, but you can’t lose money! Also, the rates change every six months, so the prospect of this happening over of long term period is very slim.

How I use I-bonds:

1. As part of a client’s emergency fund package.
2. As a tax-deferred savings vehicle.
3. College planning. This is an easy way for grandparents to gift small amounts for college without hassle.
4. Clients that hold large sums of cash can reduce their overall tax liability by moving money from a taxable money market type account into tax-deferred I-bonds.

The previous six month period was not idyllic for I-bonds, but rates have improved. The effectiveness of I-bonds have returned. While not sexy or designed to outperform stocks, I-bonds can be a nice addition to almost any portfolio.

If you would like to learn more about I-bonds, here are a couple good website suggestions:
http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm
http://www.savings-bond-advisor.com/

Oh My, You Don't Have a Will!

Many folks that walk into my office for the first time don’t have a will in place. Maybe I should rephrase that….the folks that walk into my office without a will they have created have a will as prepared by their state. Dying intestate (without a will) will move into action the state’s plan, which more than likely will not coincide with your plans or wishes.

Let’s look at a few examples of what a state’s will may include (or not include):

Guardianship Provisions

Since most of my clients have minor children, let’s start with guardianship provisions. While the state will try to get the children where they belong, if the relatives cannot agree, the state can appoint someone. Guess what? That someone can be a stranger! Guardianship provisions should be the primary focus of young couples with children. It’s important that you designate a guardian and not leave that up to the state. Don’t let the care of your children become a bureaucratic decision.

Estate Tax Reduction

Your state will more than likely forgo any opportunity to lower estate taxes. There are estate planning techniques that may reduce estate taxes, but the state may not implement any options unless stated in a legal document (will). In essence, the state will say that your money is better off going into the state or federal coffers and not to your spouse, children, or charity.

Division of your assets

Here in TN, the state may give your spouse only one-third of your assets and your children the remaining two-thirds. The state can appoint your spouse as the legal guardian of your minor children but may require a performance bond to guarantee the proper handling of the children’s assets. The living spouse may also have to produce a yearly account to the probate court of the monies spent on the children. These details will only compound a difficult situation (death) by making a simple task (spending money on your children) complicated and burdensome.

These are a few of the issues that can arise out of intestate death. The over-riding theme here is that while the state will try to do what is right with your children and assets, the letter of the state’s law may not be your wishes. If you have a will, make sure it conveys your wishes. If you do not have a will, speak with an attorney and have one drafted.

Disclosure: Troy Von Haefen is not an attorney and the above information does not constitute legal advice or the practice of law but is written for informational purposes only.

Purposeful Spending!

I was intrigued this morning as I met some friends at a local bagel shop for breakfast. After paying over $6.50 for a bagel with cream cheese and bottle of juice, I realized how expensive this establishment was for some of the regular patrons. I watched a father buy his sons breakfast before school, moms in workout clothes dropping in for quick jolt of caffeine before hitting the gym, and a few high school kids walk out with coffee mugs the size of milk jugs.

As I sat in astonishment at the number of people that patronized this local shop at 6:30am, I wondered how many of these folks came here everyday. From the familiarity of exchanges between the clerk and the customers, I supposed this was routine for many. I started to calculate the monthly outlay of the “average” bagel shop customer when it hit me that maybe I was missing the point.

I regularly speak to my clients regarding cash flow, and one of the most important elements we discuss is purposeful spending…..spending your hard earned money on things that really matter or bring joy into your life. By developing a budget that establishes joyful spending, we can create a healthy relationship with our money and not an angry, oppositional, or frustrating encounter every time we open our wallets.

Purposeful spending applies to all economic classes from the wealthy to those with little. The wealthy may enjoy purposefully spending through charitable giving, while those with less may simply enjoy the time together with the family at a local restaurant.

How it Works

Creating a purposeful spending philosophy has to work hand and glove with fiscal responsibility. Obviously, the necessities of life must be paid first followed by saving for the necessities and joys of tomorrow. What’s left over is often called discretionary funds. These are the funds in which purposeful spending evolve from. I feel it is important to understand that many of our purchases are choices, especially discretionary purchases. Focus on the areas of your spending that bring you joy and work on reducing spending in areas that do not. I often encounter families that over-spend in areas that are in opposition to their life goals or just can not be justified.

This brings me back to the bagel shop. Maybe I had the picture distorted, for I suppose the father may work long days and enjoy the focused time with his sons every morning. It could be their tradition rather than a financial drag to their monthly budget. Maybe the moms that walked in wanted someone else to make the coffee once in awhile and enjoy the time away from the hustle and bustle of their morning routine. These thoughts would certainly qualify for purposeful spending.

What about the teenagers? Well, I don’t pretend to imagine what their thoughts are…who knows? That’s above my pay grade and certainly fodder of a different professional.

The key to purposeful spending is to align discretionary outlays with sustainable joy and happiness (experiences with friends and family)…not purchases that generate short term bliss (keeping up with the Jones). Developing a spending mentality that enables you to feel good about what and where you spend your money can lead to a new level of financial freedom.

Financial Synergy

Synergy has become popular vernacular across boardrooms, conferences, and certainly touted by motivational speakers in the business community. So much so, that many books have been penned on the topic. There are books available on synergy relating to food, clothing, fitness, and physical and mental health to name a few, so the concept has certainly caught on!

I believe in the concept of synergy, and I am a firm believer in applying the theory of synergy to personal finance. As a holistic (one who sees the entire picture) financial advisor, I see the benefits in my clients’ progress because of synergic effects.

How to create personal financial synergy?

Financial synergy can only be achieved through connectivity. Think in terms of Sir Isaac Newton’s Third Law: every action has an equal and opposite reaction (My seventh grade teacher would be proud!). Personal finance is similar to the world of physics in this way. Every financial move or decision creates a reaction in another area of your financial life. The key is to create positive reactions and not negative.

For example, buying a home that is too expensive will create negative synergy to your cash flow. It will create a scenario that will produce a negative snowball of reactions that can lead to a deep financial hole and possibly irreparable financial damage…..maybe even bankruptcy.
While negative synergy can create a downward spiral, positive financial synergy can spur tremendous financial growth. A fine example we can all relate to is saving for retirement. Money contributed into a 401k is tax free; therefore, the contributions will reduce your tax bill. This is positive synergy. Let’s continue the example, the excess funds created by the tax reduction from the initial 401k contribution can now be contributed into the 401k. The more money contributed the greater the tax reduction. The greater the tax reduction the more cash is freed up. This is just one example of financial synergy between two areas of personal finance: taxes and retirement.

There are many areas involved in personal finance. Estate planning, retirement, taxes, insurance, cash flow, goal setting, investments, college planning, retirement planning are most of the topics involved with personal finance, but not all. Imagine the traction that can be generated by constructing a financial plan by integrating all of the pieces. Imagine the power and efficiency of a financial plan created using synergic strategies between the aforementioned topics. The positive momentum becomes exponential!

Often families may employ various professionals to handle their personal finances. A CPA takes on taxes, and a broker covers the investments, while an attorney handles estate planning. Unless these professionals communicate effectively the power of financial synergy is lost. The right hand must know what the left hand is doing! Whether a family uses various professionals or navigates the financial landscape solo, continuity, connectivity, and efficient synergic decisions are a must for financial success.

Effective financial planning increases efficiencies across all financial areas, which is synergy. If you feel you are leaving money on the table somewhere in your financial world or feel a lack of connectivity, you should contact a financial advisor. Some of the brightest minds in synergic financial planning can be found through The Alliance of Cambridge Advisors (an organization in which I am a member). Check out their website at http://www.acaplanners.org/ .

Internal Revenue Service (IRS) rules of practice require me to inform you that any tax advice included in this communication is not intended to be used, and cannot be used, for the purpose of avoiding tax penalties by the IRS.

Buyer's Remorse

Have you ever experienced buyer’s remorse? You bought something and later regretted making the purchase. I think we all have made this mistake. Hopefully, most of our regrets are for purchases with only a zero or two involved and not involving thousands of dollars.

Unfortunately, the financial world is an area that leaves many folks confused and misguided when it comes to fees and costs. As with any wise consumer, financial product/advice consumers should perform their due diligence to understand the cost of the product or advice to be purchased. Some financial products on the surface may come across as costing the consumer little or nothing, but, after closer inspection, the costs or fees may be exorbitant. For example, there are commissioned advisors who sell loaded funds (funds with a purchase fee attached), but some of these advisors may not disclose to the client that the fee may be withdrawn from their investment account balance. The client may only notice after opening their investment statement and learning their balance is immediately 3-5% lower or worse!

Why is it important to know the costs and fees?

Most often hidden charges are withdrawn from the underlying investment. The largest culprits are insurance and commissioned-based investment products. Let’s look at a hypothetical example: A client purchases a couple of mutual funds with $100,000 that dear Aunt Ida passed on in her will. The front load fee is 5%. This means the after-fee investment goes from $100,000 to $95,000 right off the bat! In essence, the cost to purchase those two funds is $5000! If invested at 8% a year for 20 years, $5000 would grow to almost $25,000!

The same scenario can be played out for insurance based products such as annuities, as well as investment-based life insurance products. For this reason, I rarely recommend insurance based products that are tied to investment returns. Why, because it is difficult to understand the true cost of ownership. Sometimes it is even difficult to understand the product itself, and, if you don’t understand what you are buying, maybe you shouldn’t own it.

As a consumer, knowledge is key! If you are confused as to the cost of doing business with a financial advisor or insurance agent, simply ask. What you don’t know could hurt you! Don’t let buyer’s remorse impact your ability to reach your financial goals. Understand the true cost of ownership, and make sure hidden fees won’t leave you in regret.

Goal Setting!

The title of this post may lead you to believe that I am going to deliver strategies pinned to outlining and achieving goals of fame and fortune. Not so, for this article will hopefully help you to see what is really important in your life.

One of the most exciting meetings that I offer to my clients is the goal setting meeting. During this appointment I have the privilege to hear my clients’ dreams, wishes, and desires. This is a wonderful opportunity to search for continuity between couples and their goals, as well as explore what people really dream about.

After years of listening to my clients’ goals and dreams, their responses always seem to pleasantly surprise me. The popular perception that real goals are lofty aspirations of wealth and riches is just not the case; at least not in my world. Most folk’s true desires are often very simple.

It has been fascinating for me to learn what really excites people is the connectivity to family and friends and not flashy cars or opulent mansions. Relationships and endearing memories are what people really desire! Money can certainly help facilitate relationships and create memories, but time is the only real solution to building relationships and creating lasting memories. Creating a portfolio of wealth is not something we can fully control. Sure we can and do develop investment strategies that are time tested and built on fundamentally strong ideas, but ultimately we cannot control what the market is going to do. What we can control is our time!

We all have responsibilities and obligations…many to our careers, but again we can still control what we do with our time. I encourage us all to take the time to explore what (or should I say who) is really important in our life. I often tell my clients to find their “it.” Find what really brings you joy. It could be as simple as walks with your spouse, coaching your child’s sports team, or golf with friends. Once you understand what really drives your dreams, we can then focus on getting you there. Again, money can help facilitate this, but often money is not the driving force.

We live in a society of over-indulgence and consumerism. We have seen firsthand the devastation created by greed with the collapse of the real estate market and this recent economic downturn. Don’t get me wrong, I enjoy the finer things in life as much as the next guy. Society programs us to want more when we often have what we want right in front of us.

Take the time to review your goals and dreams. Explore what really brings you joy. Focus your efforts, including financial efforts, in this direction and you cannot miss. Again, it is important to view your financial life as a giant puzzle where the individual aspects (taxes, investments, insurance…etc.) create your big financial picture. Your goals should be driven by what brings you true joy and not by consumerism or society.

Four Do's During Open Enrollment Season!

As we move into fall, open enrollment season is starting. For those of you that are employees, you may have already received information from your employers outlining the benefits available to you. Some benefits may be offered on a pre-tax basis. Most often health insurance is offered in this manner. Here are four do’s to get you through this season’s open enrollment.
1. Do the reading!
While many folks simply peruse the information provided, benefits and tax savings are often left on the table. Understanding your benefit package is an important part of your overall financial health….as well as your physical health! Don’t rely on your co-workers for information. It’s your responsibility, so, if you don’t understand what is being offered to you, simply ask a human resource representative. This is part of their job!
2. Do the Math!
Does it make sense to use a FSA(Flexible Spending Account)? Do you usually incur a large amount of out of pocket medical expenses? If so, the medical portion of a FSA could be a home run for you! Don’t forget dependent care benefits care be big tax savers as well. The combination of medical and dependent care FSAs can save hundreds and possibly thousands of tax dollars. If you have to pay for these expenses anyway, why not make them tax-free and save money? Remember that FSAs are use it or lose it monies, so you may want to underestimate your first year FSA contributions. The bottom line is that FSAs do require your attention throughout the year, so make sure the savings generated are worth the time you spend administrating your account.
Also, when doing the math, compare the cost of benefits provided to you by your employer to those you can acquire on the open market. Most of the time the economies of scale work in favor of the employee provided benefit, but not always. So, do the math and compare!
3. Do the right thing!
Many plans offer additional benefits to spouses and children, such as group life insurance. If a spouse has an underlying medical condition that would impede their ability to acquire life insurance at an individual level, group life insurance offered as an employee paid benefit is a simple way to add some protection. Obviously, it’s important to understand how much insurance is really needed, and the amount of insurance offered as a benefit may not be enough……but, that’s a topic for another day!
Another wonderful benefit that is often offered and is a real value is disability coverage. Often the most valuable asset a person owns is their ability to earn an income. Disability coverage can offer protection of that asset. The ole insurance axiom of “don’t risk a lot for a little” applies here. Most disability policies offered through employee benefit packages are affordable, so do the right thing!

4. Do Enroll!
After you do the research and determine what options are the right fit for you and your family, make sure you actually enroll. With our busy lives, it’s quite easy to miss the due date. This can be a costly mistake. Mark your calendar, set a reminder in your outlook, mail yourself a letter, or whatever it takes to complete the task.
Open enrollment is the time to understand and take advantage of the benefits your employer offers to you. Many of these benefits are just that: benefits! They are offered as a perk for your employment, so don’t miss out!

Four Things To Do Right Now!

With the recent up-side movement in the stock market, many folks are wondering what to do. Should I sell some of my positions? Should I buy more? These questions a based on two feelings that can destroy your portfolio: Fear and Greed! Timing the market has never been a productive venture, at least not for me, and I feel that I am smarter than the average bear when it comes to investing.
So what can we do during this up and down market that is prudent for our future?
1. Dollar cost average.
This is the single most important strategy that an investor can implement. This can be accomplished either through your retirement plan at work or in a taxable brokerage account.
2. Invest Tax Efficiently.
This suggestion runs in tandem with point #1. If you are contributing to a retirement plan such as a 401k or 403b, you are saving money pre-tax, which reduces your tax liability. Taxes can erode investment returns, so tax efficiency is paramount to long term growth.
3. Adjust your w-4 withholdings.
The more you contribute to your 401k, 403b, or other tax deferred retirement plan, the less taxable income you will show on your tax return. In a nutshell, increase your retirement contribution, decrease your tax withholdings, and you may not notice much change in your take home pay. But, you’ll be doing yourself a big favor….taking care of your future.
4. Remain committed to balance.
With the recent surge in equities (stocks) many folks may be tempted to invest more than they should into equities. This could be a dangerous proposition. Even thought the market has had a terrific run over the last couple of months it certainly doesn’t assure future stability. A commitment to balance through proper portfolio diversification will allow for portfolio growth while offering downside protection.

Remember that we are long term investors. This is not a sprint, for life’s financial journey is more of a marathon (hopefully without the heavy breathing and cramps!). Short term ups and downs are insignificant to our portfolio. We are in it for the long haul, and our focus should remain on our future goals.

Government CARS Program....Winner or Clunker?

The auto industry is jumping for joy over the “Cash for Clunkers” program. The program has dealerships across the country scrambling to find supply to fill the demand. The Wall Street Journal recently reported that Ford Motor Company expects its first year-over-year monthly increase since 2007. It’s no doubt that this program is bringing out the buyers, but is it good for the consumer?
While this cash incentive can really help stimulate auto sales, it may not be stimulative for some folks’ bottom line. The reason for my concern is that the program may incent a buyer to overspend. Overspending and greedy behavior is what drove us into the economic mess in the first place.
I recently had a client take full advantage of this plan. He found a car that satisfied the CARS requirements and stayed within his budget. It worked wonderfully, and he saved $4500. I love it! But, problems can occur when the opposite happens. A buyer looking to pick up a $15,000 car but walks away with a $35,000 car over bought. No matter how you draw it up, sugar coat it, or justify it, overspending is overspending.
I often tell clients not to purchase something just for a tax deduction. I can now tell clients not to buy something just for a rebate. If a new car is needed and the funds are in place, this is a wonderful deal! Be careful though, the last thing you want is a clunker wrapped around your financial neck.

Know Your Limits (Part II)

Back in January I wrote about the new financial limits that were ushered in with the new year. While it’s important to understand the limits that impact our savings and taxation, there is another set of limits that everyone should know: your automobile insurance limits.
Auto liability limits protect us from financial harm when we are involved in an accident, at least if we are properly insured. Most states only require minimal liability limits. The minimum limits are usually too low and offer inadequate financial protection if you are involved in a major accident….or sometimes only a minor accident.
Unfortunately, today’s litigious world finds lawsuits occurring at a breakneck pace. Many suits are filed over auto accidents. When an underinsured driver finds himself involved in a wreck that produces damages beyond his limits the litigation begins. Once the insurance limits are exhausted and paid out the insurance company is not required to pay out any more damages.
The State of TN requires 25k/50k/15k as a minimum. The first number (25K) represents the amount of damages paid per person due to a claim. The second number (50K) is per accident. For example, if three people in another car are involved in an accident in which you are at fault and each person requires 25k worth of medical care, you could get sued for the remaining 25k of medical care. If one person in the other car requires 50k in medical care, you could be sued. The last number (15k) represents property damage. This one is easy to see why low limits can put you at financial risk. If you’re involved in an accident that totals another driver’s car and they happen to drive a car valued at more than 15k, you could be sued.
The old insurance adage of don’t risk a lot for a little is certainly in play when it comes to auto insurance. If you are not sure about your auto limits, ask your agent…..or better yet, ask a fee-only financial advisor. Take the initiative to know your current limits. Determine the proper limits for your situation. Review the possibility of an umbrella policy. You and your family could be at financial risk!

Costs Matter! Mutual Fund Expenses Part II

In the first part of this series, I discussed the basics of mutual fund expenses. In this section I would like to explore the reality of how mutual fund expenses will impact your bottom line.

As of May 11, 2009, Schwab announced that it will reduce its expense ratio on several mutual funds. One in particular caught my eye: The Schwab S&P500 fund (SWPIX). This fund lowered its expenses from .36% to .09 %. This is a big jump!

As the Schwab S&P 500 Fund is a passive fund or index fund, the expense ratio has a big impact on your bottom line. Also, the Schwab S&P 500 fund should hold the same assets as any other S&P 500 fund, so now that the expenses are lower it could save you money.

Here’s an example of how fees will impact you bottom line. Since the Schwab fund just lowered its fees we can not use it as a historical example. The Vanguard S&P 500 fund currently has an expense ratio of .16%, while the Dreyfus S&P 500 fund has an expense ratio of .50%. The difference of these two fund’s returns on an annualized basis for 10 years is .39%. This difference is essentially the spread in their expense ratios over the last ten years since the fees do change over time. If the funds more or less hold the same assets, why buy the fund with the higher expense ratio and pay more money for the same product?

Exploring this further will illustrate the impact on your portfolio. A $100,000.00 investment in the Vanguard fund for the last 10years would produce a return almost $3400 higher than the Dreyfus fund based on historical data. While every S&P 500 fund will produce slightly different results (regardless of expenses), it’s important to be cognizant of the impact expenses can have on your portfolio. $3400 here and there can make the difference in your ability to reach your goals, so make sure you know where your money goes and what it costs you!

Understanding Costs! Mutual Fund Expenses Part I

One of the aspects of investing that is often over-shadowed by investment returns is the importance of expense ratios in mutual funds. These expenses can erode returns and are often misunderstood by investors. Expense ratios are the fees paid to the fund itself by investors like you and me. These fees are expressed as a percentage and go to cover the costs of running the fund.

The expense ratio of a mutual fund wraps several fees into one number making it somewhat easy to understand. The number is expressed as a percentage of assets under management. For example, if you own $10,000.00 of a mutual fund with a 1% expense ratio, your yearly costs would be $100.00. That $100.00 is used to pay the fund’s manager(s), administrative costs, and possible 12b-1 fees. 12b-1 fees are used for marketing, advertising, and the costs of selling the fund (commissions paid to brokers). Yes, part of the expenses you pay every year goes to advertise the fund, as well as compensate brokers who sell the fund and receive commissions. Now, not every fund carries a 12b-1 fee, and I strive to stay away from those that do!

There are two general types of mutual funds: Actively managed and passively managed. An actively managed fund is a fund who’s manager strives to outperform a market index. These funds, on average, have expense ratios in the 1.4% range. It’s higher for international funds and lower for fixed income funds. Passively managed funds are funds who’s manager strives to mimic or capture the returns of an index. These funds on average have much lower expense ratios. Why? Well, the guess work is taken away from the fund’s manager. If a fund’s job is to follow the S&P 500 index, the stock picking is already done. The fund doesn’t need to pay a fund manager to go out and find investment opportunities because the fund’s objective is set….replicate the S&P 500 index.

While the above paragraph may be a bit difficult to grasp, the understanding of expense ratios should not be. It’s very simple…..the higher the expense ratio, the more you pay!
Some funds may be worth the extra costs, but you should at least know what you are paying in expenses before you buy! Stay tuned for Part II, as I will explore an example and illustrate the affects of expense ratios on long-term returns.

Why Tax Planning is Important


Tax planning is an integral piece of a proper financial plan. The fact is many people do not do any tax planning. I have seen this truth in my practice through new clients who often tell me, “My tax guy never talked to me about how to lower my tax bill through tax planning.” Most folks handle their taxes in a reactive manner versus a proactive approach. They dump their tax documents on the CPA’s desk and hope for the best. This is a recipe for disaster.

Now that tax season is over it’s time to start planning for your 2009 tax year, especially if you are self employed. There is plenty of time to make adjustments that will work in your favor to swing the tax momentum to your side. There are new laws in place, many of which are quite complicated, that will work for you, but you must implement them in 2009. This illustrates the importance of proactive tax planning.

Getting control of your taxes and saving tax dollars is what tax planning is all about.
Some of the biggest savings associated with tax planning can come from ideas that are very simple, such as saving a percentage of your income to cover estimated taxes or retirement contributions (if you are self employed), or increasing your 401K/403B contribution while adjusting your W-4 so your paycheck is not affected (for those who are employees).

Like many other aspects of your financial life, through knowledge and understanding can come clarity. Take control of your taxes. Remember that taxes are the single largest recurring expense that we will have throughout our lifetime. The tax code is quite complicated, so talk with your Financial Advisor or CPA about helping you plan accordingly for your 2009 tax year.

Why it may not be deductible!

So you bought a painting at a charitable auction only to be told by your tax preparer it’s not deductible. You even paid the charity directly. You even have a receipt. What gives?

Rather than cite tax code lingo, let’s talk in understandable terms. If you buy something at a charitable auction, it’s only deductible if you pay more than the value of the goods or services you received.

Example 1. A $50 gift certificate to a local favorite restaurant purchased for $40 is not deductible.

Example 2. The same $50 gift certificate purchased for $60 generates a $10 charitable deduction.

Example 3. You purchase a box of fruit to support a local high school band program for $30. The equivalent fruit at your local grocer would cost you $15, so you receive a $15 tax deduction.

How do you support your favorite charity and walk away with a nice tax deduction?
Go for the items that have low intrinsic values but sell for big dollars. I’ve attended charity auctions where progressive dinners held by teachers sold for $500 a couple. This is a win win! The charity receives a great donation and the buyer receives a nice tax deduction. The intrinsic value of the dinner may be only $50, but the buyer receives a $450 tax deduction.

Remember that it’s important that we continue to support charitable causes, and it’s not always about the tax deduction. Understanding these guidelines will help you avoid any tax confusion the next time you attend a charitable auction.

Internal Revenue Service (IRS) rules of practice require me to inform you that any tax advice included in this communication is not intended to be used, and cannot be used, for the purpose of avoiding any tax penalties imposed by the IRS.

Know Your Limits!

2009 ushers in a new wave of financial limits that can impact your bottom line. Every year we get a new set of limits based on the guidelines presented by Congress and the IRS. The important point of understanding these limits is to have the ability to take full advantage of them. If you only contribute 1% of your pay to your 401k, then you probably will not need to know that the 2009 401k limit for an employee under age 50 is $16,500. Remember it is how you use this information that’s important!

Useful 2009 Limits:
401k, 403b and 457 contributions limits - $16,500
Catch up provision for those 50 and older - $5500
IRAs and Roth limits - $5000 (under 50) - $6000 (age 50+)
SIMPLE IRA and SIMPLE 401k - $11,500
Catch up provision for those 50 and over - $2500
Social Security Maximum Earnings - $106,800
Annual Gift Exclusion - $13,000 Federal (TN has 2 donor classes that impact the exclusion….$13,000 for class A donees and $3000 for class B).
Standard Deduction – Single $5700, Married Filing Joint $11,400
Personal Exemption - $3650
Federal Estate Tax Exclusion - $3,500,000

The above list includes most of the commonly used limits that impact the majority of society, but this is certainly not an exhaustive list. Use these limits to your financial gain. Maxing out your retirement options reduces your tax burden, which puts money back into your pocket.

Know you limits and use them wisely!

“Help Me Help You!”

I recall the locker room scene in the movie Jerry McGuire where Tom Cruise was struggling to keep his only sports management client, Rod Tidwell. Jerry was pleading with Tidwell, “Help Me Help You!”

Tax preparation is an area where tax preparers need your help to help you. Sometimes items can fall through the cracks and end up costing you tax dollars. The way to prevent this is by proactively talking with your tax preparer. While I work very hard to know my clients, sometimes CPAs don’t have the luxury, due to the enormous number of returns prepared, to know the goings on in most of their clients’ lives. Due to the time constraints in a normal client –CPA tax meeting, information can get overlooked. This can be costly!

The most important thing you can do as a tax client is to communicate with the preparer. It’s also important that the preparer communicate with you. If you feel you are not getting the communication you deserve, then it is time to find a new tax preparer.

One of the best ways to communicate with the preparer is by asking questions. Most folks don’t understand the IRS tax code, so by asking questions you can stimulate conversations that may lead to the discovery of a deduction.

If the lines of communications are open between you and the preparer, and the preparer knows and understands your situation, the preparer should be able to “Show You The Money!”

When Buying or Refinancing a Home You Should…

Make sure you understand the fine print!

It’s a great time to buy or refinance a home. Interest rates are extremely low (As of Jan 2009 a no points, 30 year fixed, mortgage rate of 5% is very common). While this great interest rate opportunity creates a terrific chance to lower your monthly payment, it also can create confusion. The confusion lies in understanding the good faith estimate (GFE) and the HUD closing statement.

The GFE is the proposal the lender sends to you outlining your projected closing costs and the new mortgage payment amount. So often people will only look to the bottom line of their GFE to determine their new monthly payment and disregard the closing cost and fees. This can be a big mistake!

You must read the fine print, or have someone who understands these documents read it for you. Once you are comfortable with the information on your good faith estimate, you should request to review the actual closing statement a day or two before the closing. If you find mistakes, ask to have corrections made.

Closing costs and fees make buying or refinancing a home a very expensive process. The costs and fees associated with the transaction are thousands of dollars. You are paying these costs, so make sure you understand what you are paying for. If you don’t understand, ask for clarification.

Welcome!

Welcome to The Financial Minute. This blog is designed for clients and friends of Von Haefen Financial Management. It is my intention to write about topics that you will find useful and interesting. I will also strive to write about timely topics, such as tax information during tax season. Since I know all of you are extremely busy, it is my goal to only take a minute or two of your time. I encourage topic suggestions, so feel free to let me hear your opinions.