Taxes

We have only 2 weeks left to the end of the year, my how time flies. This means that we are 4 months away until we have to pay our taxes on April 15th. Our government has given us ways to reduce our tax obligation if we act before December 31st, more on this in the middle section. The first section is from Vanguard. The last part is a link that tells the Christmas story in social network language, just copy and paste.


Vanguard

The U.S. economy is showing enough momentum to keep the Federal Reserve in wait-and-see mode, though risks from abroad continued this past week. Europe's drift back toward recession and signs of slowing in Asia remained potential stumbling blocks for the U.S. recovery. Meanwhile, the sovereign bond market's cool reaction to a plan to enforce fiscal discipline in Europe kept alive concern that nations could default—with uncertain repercussions for the fate of the Eurozone and the global economy. For the week ended December 16, the S&P 500 Index fell 2.8% to 1,220 (for a year-to-date total return—including price change plus dividends—of about -1.0%). The yield on the 10-year U.S. Treasury note fell 21 basis points to 1.86% (for a year-to-date decline of 144 basis points).


Common Ways to Reduce Your Taxes

Here are few actions for your consideration that can reduce your tax obligation:

1) Sell assets like stock that have gone down in value in a non-retirement account. It is important to avoid the wash sale rule if you repurchase it within 30 days so wait 31 days. A similar asset can be purchased during this 31 day period to keep a portfolio in balance.

2) Contribute to a traditional IRA or 401(k). A contribution to a traditional account is tax deductible while a contribution to a Roth IRA or Roth 401(k) is not tax deductible.

3) Make a donation to a charity. A church or charity can always use your support.

4) Make your January house payment in December to deduct the interest.

5) Contribute to your medical expense account if you have one, either a FSA or HSA.

I would be glad to review this you on an individual basis if you have a question.


A Social Network Christmas - You Tube Link

http://www.youtube.com/watch?v=sghwe4TYY18

Tax Cut Plan

I hope this finds you safe, warm, and dry. Winter has arrived early before the official start date. This is a lot like what happened this past week on the tax cut plan, it got started before the official start date of the next group of US House of Representatives and US Senators. This blog will include information from Vanguard, and the proposed tax cut plan that has people really talking. Just as the weather has changed this past week so has the investing climate.

We now have fiscal policy that is attempting to grow the ecomony at the same time the Federal Reserve has monetary policy that is also attempting to grow the economy. We have both feet on the gas pedal and we are going into the first turn on the track. Any NASCAR driver or fan knows the real pickup in speed will occur on the back straightaway. This means that it will take awhile for this action to have an impact on the economy.

Vanguard

While Washington buzzed contentiously over tax rates and other domestic policy items, this week's activity suggested the economy is still trying to sound a positive note. Consumer sentiment improved and new jobless claims dropped, but unusual short-term volatility in the fixed income markets depressed bond prices and bumped mortgage rates to their highest level since June. For the week ended December 10, the S&P 500 Index rose 1.3% to a 2-year high of 1240 (for a year-to-date total return of about 13.4%). The yield on the 10-year U.S. Treasury note jumped 26 basis points to 3.29% (for a year-to-date decline of 56 basis points).

Tax Cut Plan

This past week the news of the Obama compromise plan with the Republicans has really gotten people talking. I am going to avoid any political comment and focus on the impact for investing. I view this as positive for stocks and neutral to negative for longer term bonds.

Stocks go up and down with future growth rate. Since growth rate increases with this move so does the price of stocks. I have stated that we have been in a trading range with stocks. This move in my opinion changes things and allows stocks to go higher. We still have some end of year selling for tax reasons so some volatility will exist for awhile. It will be interesting to see what happens going into 2011.

Bonds are another story and they are in a tug of war. The 10 year treasury bond rose 0.26% last week based upon the news, a significant move. This tells us that the lower rates of about 1 month ago, when I wrote that it was a good time to re-finance your mortgage, are probably gone. While investors are selling long term bonds and driving prices up the Federal Reserve is buying them to keep prices down in a classic tug of war. This means that any rise in longer term rates should be muted. The significant move occurs next year when the Federal Reserve unwinds their position and sells these bonds.

This means that now is a good time to fund your IRA or savings account as we have a new buying opportunity. Do not let fear of the future keep you from enjoying life and investing today.

I understand the statements of growing our national debt. Remember that debt is measured as a function of GDP. The people who drafted this legislation is looking at the annual level of debt as well as long term level of debt relative to GDP. The growth of GDP for the longer term is the current focus.

Taxes and Social Security Benefits

Do I have to pay income tax on my Social Security benefits?

The answer is no if below a base income amount. Some people who receive Social Security benefits will have to pay taxes on their benefits. Less than one-third of our current beneficiaries pay taxes on their benefits.

You will have to pay federal taxes on your benefits if you file a federal tax return as an "individual" and your total income is more than $25,000. If you file a joint return, you will have to pay taxes if you and your spouse have a total income that is more than $32,000. For more information review IRS Publication Number 915.

Many states and local authorities do not tax Social Security benefits. You should contact your state or local taxing authority for more information

Can I have state or local tax withheld from my Social Security benefit?

No. The Social Security Administration has no authority to withhold state or local taxes from your benefit.

What should you do if you are required to pay tax federal income taxes on some or all of your social security benefits? Be thankful that you make enough money that this is a concern.