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Book Gains In Your Portfolio in 2012, Defer Charitably Donations ‘Til 2013

My latest as INQUIRER COLUMN..

POSTED: Tuesday, November 13, 2012, 3:01 AM

Now that the presidential election is over, Wall Street and financial advisers are telling clients that taxes are going up. We rounded up a sampling of opinions about potential tax hikes now up for debate in Congress, and possible fallout from the budget-cutting, tax-raising consequences of the fiscal cliff, if it happens.

Ratings agencies may downgrade U.S. debt for a second time should Congress disagree about the debt ceiling and decide not to address long-term fiscal deficits, notes Barbara Novick, BlackRock Inc.’s vice chair and head of government relations.

U.S. Treasury bonds would be affected by another downgrade, as ratings firms specifically tied potential downgrades to progress on deficit reduction.

“This time, a downgrade may be more than a reputational issue,” Novick writes, as many mutual funds and pension funds are prohibited from holding assets that are single-A rated.

Those investors may have to dump Treasuries if the United States suffers a second downgrade.

Cash-rich companies that both pay and increase dividends remain among BlackRock’s picks – even with a possible dividend tax hike to between 20 percent and 25 percent, up from 15 percent currently. U.S. dividend payout ratios are at record lows, and are ripe for increases.

Most health-care stocks should do well if Congress strikes a deficit-reduction deal. Financials will struggle with low interest rates and lots of rules, but BlackRock favors mortgage lenders, due to the nascent U.S. housing recovery.

Municipal bonds might lose their tax-exempt status, even at a time when state budgets need help. However, BlackRock argues that the muni bond market could stomach a 28 percent cap on the munis’ tax exemption, if it applies to newly issued bonds only.

Morgan Stanley strategist Jeff Applegate expects that Congress will act to delay higher taxes, such as ending the popular tax cuts on capital gains and dividends that were put in place by President George W. Bush.

The existing Bush-era tax rates are still set to expire at the end of 2012, but Applegate thinks existing rates will be extended for most taxpayers for one year – with some compromise for upper-income brackets – to give politicians time to address them in 2013.

Come Jan. 1, higher-income-bracket investors will be subject to the 3.8 percent Medicare surtax on their portfolio gains.

Also, medical expenses in excess of 7.5 percent of a person’s adjusted gross income can be deducted as part of itemized deductions. Starting with the year 2013, the 7.5 percent threshold will increase to 10 percent of adjusted gross income.

Rick Rodgers, president of Rodgers & Associates in Lancaster, recommends that his clients accelerate any large medical payments in 2012, or prepay insurance premiums for 2013.

Personally, he has converted a traditional IRA to a Roth IRA, booking capital gains this year and paying the taxes.

“The mistake most people make is they defer their income. That’s not sound anymore,” he advises. Move assets into tax-free bonds, college savings plans, and other qualified nontaxable accounts.

As for charitable deductions, those can wait, he says: accelerate income this year and defer donations until next year.

Taxes on the sales of your homes could also be a lot higher next year, warns Scott Meyer, a partner at Montgomery McCracken, Walker & Rhoads L.L.P. in Philadelphia.

“For many of the people, that’s likely the biggest chunk of unrealized appreciation in their portfolio” of assets, Meyer said in an interview.

This one is worth your attention:

If you were to sell your home in 2013, instead of this year, the profit above the tax-free amount would be hit by a 20 percent capital-gains tax and might be subject to the 3.8 percent Medicare surtax, too. There are various thresholds on what amounts to tax free: your marital status, income, and the amount of gain you make on the sale. Check with your accountant or tax adviser to find out whether you are subject to the Medicare surtax. If you are, selling before 2013 would help you avoid the tax.

All of this sparks a remark by Bill Smith, CBIZ managing director, in Bethesda, Md.: “It’s never bad to be rich. But right now it’s a bad time to be rich.”

Read more: http://www.philly.com/philly/business/20121113_Your_Money__How_financial_cliff_could_affect_your_wallet.html#ixzz2CE6ULLDu

We’re Due For Election Year Rally In Stock Mkt: Philly Inquirer

Your Money: Election year pattern holding so far

Hope trumps fear in election years. At least, that’s the stock-market adage: In American presidential election years, equities historically produce positive returns.

So far in 2012 the election year pattern is holding strong, according to Bespoke Investment Group. The benchmark index S&P 500 has closely followed the typical presidential election-year trading pattern: peaking in April, then falling in June. The coming months before the November election could produce a nice rally.

But does the U.S. economy actually support such an election year snapback? Right now, it’s a toss-up.

“President Obama chose his words poorly when he recently said that the private sector is ‘fine,’ but it is worth keeping in mind that U.S. companies are sitting on record levels of cash and earnings remain strong,” notes OppenheimerFunds chief economist Jerry Webman. “Borrowing is cheap for those with access to it, and we’ve seen commercial and industrial loans climb steadily since late 2010. Small-business optimism, as measured by the National Federation of Independent Businesses, is near its best level of the recovery, though still below precrisis levels, while small-business earnings are the highest they’ve been since 2006.”

With the election just four months away, our focus on economic data will sharpen. Under Obama’s administration, starting with January 2009, here are some numbers that define the state of the economy:

Total nonfarm payrolls have decreased by 1.3 million from December 2008 (134,379,000) to June 2012 (133,088,000). Source: St. Louis Fed.

Full-time jobs, based on the Household Survey, have decreased by 2.5 million from 117,039,000 to 114,573,000. Source: Bureau of Labor Statistics

Part-time jobs, based on the Household Survey, have increased by 1.6 million to 27,894,000 from 26,318,000. Source: BLS.

Food stamp recipients have increased by 14.6 million to 46,18,000 from 31.567 million (as of April 2012). Source: USDA

Disability recipients have increased by 1.3 million from 7.427 million to 8.733 million. Source: Social Security Administration

Over the same time period (42 months since Obama took office), total public debt-to-Gross Domestic Product has risen from 76.7 percent to 101.7.

Don’t trade on ruling

Joseph Costigan, director of equity research at Bryn Mawr Trust, says it doesn’t really make a lot of sense to play the Supreme Court decision on the Affordable Care Act “because it could get reversed.” Moreover, he argues that a lot of the sentiment surrounding the decision has been priced into the market.

Instead, his firm focuses on buying companies that it believes will benefit no matter what happens with the legislated health-care reform. “Even in down markets, good businesses go up.”

Bryn Mawr Trust’s Costigan holds shares of lab testing concern Bio Reference Labs (symbol: BRLI), which is a regional firm with expected earnings growth in the double digits, worth $27 a share, he believes. The investment firm also holds Amgen (symbol: AMGN) and Almost Family (symbol: AFAM) in client portfolios.

Almost Family is a roll-up of home health care businesses around the country, with locations in Florida, Kentucky, Connecticut, New Jersey, Ohio, Massachusetts, Alabama, Missouri, Illinois, Pennsylvania and Indiana, in order of revenue.

Leaving behind legislated health care, Costigan also has been buying international biotechnology concern Mindray Medical (NYSE: MR). The medical-device company recently paid $35.5 million for a controlling stake in Wuhan Dragonbio Surgical Implant Co., a Chinese company that makes trauma, spine, joint and other orthopedic products. Mindray’s traditional areas of business have been patient monitoring, in-vitro diagnostics, and medical imaging. Costigan said he started buying the stock over a year ago, and has a price target of $35 a share, expecting 17 percent annual earnings growth. The stock currently trades at $29.


Read more: http://www.philly.com/philly/business/personal_finance/20120710_Personal_Finance__Election_year_pattern_holding_so_far.html#ixzz20Ey65NUK

Investing Ahead of a Fiscal 2013 Cliff; Plus Alerian Stops Issuing Shares

Impending fiscal cliff has financial planners reviewing their options

America’s so-called fiscal cliff is making it hard for investors to plan ahead.

The fiscal cliff is the paradox that Congress and the White House now face: If they pass measures to slice the country’s massive budget deficit — potentially raising taxes and cutting spending — the very austerity measures helping to reduce a government budget crisis could ultimately plunge us into another recession.

What’s an investor to do in a portfolio?

The fiscal cliff is prompting consternation among financial planners, some of whom warn their retirement-age clients to avoid the stock market. “The U.S. is where Greece was four years ago,” opines Dan White, a financial planner in Glen Mills, founder of Dan White & Associates L.L.C. “Retirees can’t afford to lose money in the market. It’s great [to invest] when you’re working. But you can’t when you’re withdrawing” money from retirement accounts. He advises older clients to stick with index annuities.

Long-dated Treasuries have risen so much in price that many investors are either selling out of them slowly or shunning them. Yields on Treasuries (which move down when prices go higher, and vice versa) are pitiably low — and likely to stay that way. That amounts to a tax on savers who place money in U.S. government bonds. With yields at a historic low around 1.4 percent, Treasuries aren’t even keeping up with inflation.

“I don’t own them,” said David Pottruck, former chief executive of the Charles Schwab discount brokerage, on the sidelines of the 2012 Milken-Penn GSE Education Business Plan Competition at the University of Pennsylvania’s Annenberg Center last week. Pottruck, a Penn graduate, is now cochairman of HighTower Advisors, which oversees about $30 billion in assets.

“At a 2 percent to 2.5 percent inflation rate annually, that means essentially if you leave your money in cash for the next few years, you lose 2.5 percent of that every year. And that’s a tough principle for people to understand. They’re worth 2.5 percent less each year by doing nothing,” says Chris Millard of JPMorgan’s Philadelphia office.

Adding to the uncertainty, the Federal Reserve surprised the market last week when it failed to implement a new round of quantitative easing despite signs that the world is slipping into another recession. Although the Fed cut its U.S. economic growth forecast and said unemployment will remain above 8 percent, our central bank chose only to extend its so-called Operation Twist program.

Operation Twist means the Fed sells short-term while buying long-term bonds in an effort to “twist” the yield curve. Under the program, the Fed has been buying longer-dated Treasury bonds and selling Treasury bills and notes maturing up to three years, but its inventory of securities in that short-term band is down to about a two-month supply.

Investors wary of the impact of Jan. 1’s looming fiscal cliff, when the Bush-era tax cuts are due to end, could put a portion of their wealth into precious metals to hedge against the market’s volatility — either in exchange traded funds or gold mining shares, which have lagged the bullion price.

The United States could see consumer purchasing power fall substantially, notes investment bank Fairfax in a letter to clients. “We expect the Fed to take further action before this event to avert yet another potential crisis,” writes Fairfax. It advises investors to allocate money to gold as “we see the potential for further QE in the United States, China and Europe as leading gold higher this year.”

What else is working now in portfolios? Strangely enough, sectors benefiting from the historically low prices in U.S. natural gas, Millard says. He points to utilities switching over from coal to natural gas. They should benefit from lower fuel costs over the long term.

Speaking of natural gas, JPMorgan has stopped issuing new shares in its popular $4.27 billion Alerian MLP (symbol: AMJ), the master limited partnership exchange traded note. The fund reached 129 million shares last week, the maximum number allowed. By no longer issuing shares, the Alerian MLP essentially changes into a closed-end fund — and could trade at a premium or discount to its net asset value.

There are other options for natural gas exchange-traded funds, such as the ALPS Alerian MLP (symbol: AMLP), with $3.7 billion in assets. However, its structure as a C-corporation opens it up to corporate-level taxes, according to Investment News’ Jason Kephart. Master limited partnerships don’t pay corporate taxes.

Says Abbot Downing’s Thomas Raymond Jr., of the Alerian MLP: “It’s unfortunate as the menu of legitimate MLP investment vehicles is limited to begin with. As an owner, I wouldn’t mind a scarcity element creating a premium to [net asset value]. That said, AMJ could just as easily trade at a significant discount. It creates execution risk.”

Read more: http://www.philly.com/philly/business/homepage/20120626_Impending__lsquo_fiscal_cliff__has_financial_planners_reviewing_their_options.html#ixzz1yv9RJtZz


You Win the Lottery…Then What?

 FILE - In this Jan. 6, 2012 file photo provided by the Maryland State Lottery Agency, a man dressed as a Powerball stands by a couple who did not want to be identified as they hold a large prop check showing their winnings at the lottery

In cases in which simple dumb luck suddenly changes someone’s fortunes…my latest for the Philadelphia Inquirer. (AP Photo/Maryland State Lottery Agency, File)

We all dream about it – but what if it actually happened? What if, like those winners of the $656 million Mega Millions lottery, we actually had to wonder now what to do with the money?

What financial planners and people of means advise is that lottery tickets are just that – a lucky win. But there are real issues associated with planning for a sudden windfall.

The Mega Millions winners will now be targets of both legitimate and illegitimate financial advisers, says securities attorney Andrew Stoltmann, who has represented lottery winners who have been defrauded out of the entire amount.

“Jackpot winners are immediately deluged with offers from financial planners, scammers, friends and family to invest,” says Stoltmann. “Unfortunately, these instant millionaires often lack experience with managing money and basic investing skills, making them perfect targets for financial scammers.”

Here are the steps he advises taking immediately after a newfound fortune is won:

  • Keep the ticket safe. The winner is not a true legal winner until the ticket is presented to lottery officials. If the ticket is lost or destroyed, the winner is, as a matter of law, out of luck. Mirlande Wilson, one supposed winner from Maryland who refused to share her portion of that $656 million Mega Millions jackpot with McDonald’s co-workers, said last week that she lost the ticket.
  • Assemble a team of financial professionals. This should include a certified accountant, a lawyer, and a financial adviser licensed by professional associations, background-checked, and recommended. Few lottery winners have the infrastructure in place to manage a lottery windfall – a team must be put together. And learn some basics yourself, some core financial knowledge. It becomes easier to weed out “professionals” or others that might want to scam you.
  • Don’t take the lump sum. More than 90 percent of winners do, but it’s better not to. Spreading the payments out lets the winner learn investment lessons and apply them over time. Making a mistake with the first year’s winnings is not catastrophic if a winner is going to receive another 25 years’ worth of payments.
  • Keep the money safe. Because a sum in the hundreds of millions of dollars is too large to be covered by FDIC bank-deposit insurance, the winnings should be deposited in a brokerage account of a major broker-dealer, and it should be initially invested in short term U.S. Treasuries until more concrete investing decisions can be made.
  • Make no major decisions for six months. It’s tempting for a lottery winner to quit his or her job or immediately splurge on a mansion or other large purchase. Don’t!
  • Set up an estate plan. A winner is likely going to start hearing from family members asking for handouts. Multiple sets of eyes should be controlling everyone who has access to the funds, and a beneficiary or multiple beneficiaries should be set up immediately in case something happens to the winner.

According to the Institute for American Values, based here in Philadelphia, lotteries are not a retirement plan.

Neither are payday lenders – just one of many anti-thrift institutions that take advantage of the working class. Subprime credit-card issuers, rent-to-own merchants, auto-title lenders, private student-loan companies, some franchise tax-preparers, check-cashing outlets, and state lotteries are swamping consumers with the promise of easy money.

In short, America’s working class has become its “lottery class,” says the institute. The Pennsylvania Lottery system, which relies on heavy taxpayer expenditures for advertising, shows that 50 percent of lottery purchases come from lower-income earners, according to the institute’s data.

Long-term investors like local Philadelphia philanthropist John Templeton Jr. recommend that if you want to save, and you haven’t won yet, stop buying lottery tickets. “Take that money and open a savings account. If you spend about $2 a day on lotteries – not impossible, right? – instead open a small savings account and compound that over two decades to $25,000.”

Yes, I did the math, too. For a nifty calculator that shows the magic of this compounding, check out http://www.bankrate.com/.