Financial Self-Defense

The last several years represent turbulent times for investors. Between the Madoff scandal and bailouts in the financial sector, many investors are concerned about where to invest their money and whom to trust with planning for their financial future. It is important for consumers to have confidence in those who are providing advice and counsel in the realm of financial planning. To make informed decisions about their investments and those who are advising them, consumers must have the proper resources available to them.

The Certified Financial Planner Board of Standards, the non-profit organization that grants the Certified Financial Planner™ designation (CFP®), has published the “CFP Board’s Consumer Guide to Financial Self-Defense.” The Guide includes real life stories of consumers who have experienced abuse in dealings with unscrupulous financial advisors, including how many of them have recovered with the help of CFP® professionals.

Written by the CFP Board’s Consumer Advocate, Eleanor Blayley, CFP®, the Guide helps the public learn what they can do to protect themselves, take steps required to select a qualified financial advisor, and feel empowered when making financial decisions with the help of an advisor.

The publication also outlines 10 red flags that signal unethical or unqualified financial planning professionals and how to defend yourself properly against financial fraud and mismanagement. The Guide is available online at www.CFP.net/financialselfdefense/.

The Guide will be included in the Winter 2011 Consumer Information Catalog, published by the GSA Federal Citizen Information Center, and will be available to consumers in November 2010. Consumers may request a free printed copy from the CFP Board by calling 800-487-1497 or sending a request to mail@CFPBoard.org.

How Much Will You Lose Without Government Action?

Tax Law Changes on the Horizon

Below are the tax law changes currently scheduled to take effect January 1, 2011 if no action is taken by Congress:

• Expiration of the 2001 and 2003 Tax Relief Acts.
• The top income tax rate will rise from 35 to 39.6 percent. This is also the rate at which two-thirds of small business profits are taxed.
• The lowest marginal rate will rise from 10 to 15 percent.
• All rates in between will also rise.
• Phaseout of itemized deductions and personal exemptions for high wage earners.

The full list of marginal tax rate changes is below:

• The 10% bracket rises to an expanded 15%
• The 25% bracket rises to 28%
• The 28% bracket rises to 31%
• The 33% bracket rises to 36%
• The 35% bracket rises to 39.6%

Changes for Married Couples and Families

The "marriage penalty" (narrower tax brackets for married couples) will return from the first dollar of income. The standard deduction will no longer be doubled for married couples relative to the single level. In addition, the child tax credit will be cut from $1,000 to $500 per child, and dependent care and adoption tax credits will be cut.

The Return of the Estate Tax

This year only, there is no estate tax due upon death. For those dying on or after January 1, 2011, there is a 55 percent top tax rate on estates over $1 million. This could impact a large number of taxpayers. Even people with modest homes and retirement savings could be subject to estate taxes without proper planning. Landowners, especially farmers, must understand the consequences of this lower estate tax threshold. Without action by Congress, a death could cause the premature sale of a farm or other property to provide money to pay estate taxes.

Think about your own family’s assets. Maybe your family owns real estate or a business that is not generating much income, but the value of any land, buildings or equipment related to the business is $1 million. Upon the owner's death, you can inherit the $1 million business tax free, but any other assets they owned are subject to estate taxes. You may need to sell the real estate holdings, at a significant discount, to pay any estate taxes due.

Higher Tax Rates on Investors

The capital gains tax will rise from 15 percent this year to 20 percent in 2011. The dividend tax will rise from 15 percent this year to 39.6 percent in 2011. These rates will rise another 3.8 percent in 2013. Be sure to work with you investment advisers to determine how these changes affect your investment portfolio.

The Alternative Minimum Tax (AMT)

According to the Tax Policy Center , the number of families subject to the Alternative Minimum Tax (AMT) will rise from 4 million last year to 28.5 million next year. This is due to a lack of income indexing over the year, which has included more and more taxpayers in the AMT calculations. Talk to your tax adviser about how this change affects you.

Immediate Expensing Reduced

Currently, small businesses can expense, rather than depreciate, equipment purchases up to $250,000. This allows a business to take an immediate deduction in the year of purchase rather than spreading the deduction over a specified number of years.

In 2011, the expense limit is reduced to $25,000. Larger businesses can currently expense half of their purchases of equipment. In January of 2011, all of it will have to be depreciated.

Charitable Contributions from IRAs

Under current law, qualified IRA distributions may be contributed up to $100,000 per year directly to a charity from an IRA. This contribution also counts toward the taxpayer's annual required minimum distribution (RMD). In 2011, this will not be the case.

This post does not encompass all of the changes that are on the horizon but outlines a majority of them. The bottom line is to be prepared as much as possible, plan to minimize the potentially negative effects and protect yourself as much as possible.

Source: Americans for Tax Reform, http://tinyurl.com/atrSept3

The 1099 Revolution – Are You Ready?

Beginning January 1, 2012, virtually all payments by a trade or business aggregating $600 or more to any single vendor during any calendar year will have to be reported at the end of each calendar year to that vendor and to the IRS on Form 1099. Vendors include almost anyone a trade or business pays in the course of doing business other than its employees, whose compensation is already reported on Form W-2.

Currently, 1099 reporting applies only to amounts paid to unincorporated businesses, generally understood to be independent contractors for services. Implementing this change will require collaboration among businesses, software vendors, and CPAs to help correctly identify, characterize, and report these transactions.

NOW is an opportune time to start thinking about the massive increase in recordkeeping that will be required. Businesses will now be required to obtain tax identification numbers (TINs) for EVERY party with which they make a purchase. Valley Oak Financial encourages all businesses to begin preparing systems and procedures NOW to routinely obtain and record data for these transactions. Trying to do this after the fact would be extremely challenging and costly. Please ask us how we can help.