While it still feels very much like winter here in the Northeast, weather forecasters and the calendar assure us that Spring will, indeed, get here soon. With the arrival of the first robin in the front yard also comes a day that many Americans dread, or at the very least loathe: April 15, the deadline for filing Federal and state taxes. Tax season can be stressful under even the best of circumstances. Adding to the unease for many people is the possibility of an arbitrary investigation of their tax returns, known as an audit, that the IRS sometimes performs. While most Americans will fortunately never have to deal with the tax man showing up at their door, there are some well-established red flags that make certain returns more likely to be audited. I’ve listed 3 of the most common below; your tax professional or accountant can discuss the rest with you. (Don’t have an accountant? Give us a call…we can refer you to one of our many local and national tax attorneys or CPAs.)A quick note: Historically, the IRS audits less than 1% of the tax returns it receives every year. Given the recent scandals, budget cuts and staff eliminations, it’s likely that that percentage will drop for the ~250 million returns the agency receives in 2014. The scenarios I discuss below are the ones that raise the the likelihood your lucky number will be chosen.You might be more likely to face an IRS audit if you:1. Earn a well-above-average income. The median household income in the United States is currently a little over $51,000 per year. If you’re a “one percenter” with an income over $200,000, you are about 3 times more likely than the average person to be audited by the IRS. If you make over $1 million per year, your chances of being audited go up to 1 in 8. Obviously, we’re not going to counsel you to earn less income! But if you’re in a higher income bracket, be aware that you face more scrutiny.2. Claim excessive deductions on Schedule C. The IRS has been cracking down on self-employed taxpayers who over-report deductions on the Sole Proprietorship Profit and Loss form, otherwise known as Schedule C. This is due mostly to “paraprofessionals” like part-time real estate agents, day traders and others reporting rental and trading losses on Schedule C instead of the appropriate forms. We encourage honesty, obviously, but be wary that you might be paying for others’ sins if you are self-employed as a sole proprietor. Word from the wise, there is a fine line between tax avoidance and tax evasion – evasion however is still illegal.3. Take a lot of charitable deductions. Auditors pay close attention to charitable deductions, and they specifically scrutinize how the amount of charity giving or gifting you report stacks up against your income. If there’s a large disparity, your return is more likely to spur unwanted interest. If you do a lot of charitable giving, understand the regulations, and relentlessly document everything.These are just a few examples of the types of issues that can raise the likelihood of an IRS audit. As noted above, we’re happy to share our experience in this area with you, or refer you to a qualified CPA for more information.
As we’ve discussed in previous articles, there is no shortage of investment advice for maximizing portfolio returns using techniques that range from “cutting-edge” to “downright crazy.” Timing the market, chasing high yields, speculating in precious metals…all of these strategies are utilized on a daily basis by DIYers (Do It Yourselfers) and professionals alike in an effort to “beat the markets.” At Atlantic Capital Management, we don’t chase returns with faddish techniques. We advocate a much different solution for our clients and DIYers; think of it as a “base hit” approach vs. a “home run” approach.
Diversify…and stay invested.
It’s that simple. If financial security is your long term goal, stick with an approach that leads to success over the long-run. The foundational principle of this strategy is leaving your money where it is and riding out the inevitable market downturns. This doesn’t mean ignoring reality; it means you (or your investment advisor) should start with the end in mind and make changes to your portfolio that are driven by your long-term goals. The underpinnings of this approach are simple: allocate assets across markets for breadth and within market sectors for depth. This focus on diversification will instill confidence rather than lead to the impulse to “bail out” when things look bleak.
And it’s inevitable that things will look bleak. For example, consider the global financial crisis of 2008. Many people ran for the hills when the markets hit bottom in 2009, either dumping or converting their investments on a large scale. It’s hard to fault this reaction; after all, if it were possible to accurately predict a market’s bottom, most people would be doing it!
Some investors, however, stuck to their long-term focus knowing that their portfolios reflected their need for liquidity, their personal tolerance for risk, and an appropriate time horizon. Investors who structured resilient, diversified portfolios hung on to their positions. The results of this strategy are telling, and fundamental to why we advocate staying invested. According to data from Morningstar, $100,000 invested in the stock market in January 2007 (the beginning of the slide) was worth only $54,000 in February 2009 (the bottom point). Investors who pulled out at the bottom obviously suffered significant declines. More importantly, those who pulled out at the trough and let things cool off for a year and then reinvested ALSO saw a net loss on their investment. Only those investors who stayed invested and rode out the storm with a long term goal in mind saw the value of their investments grow. For those investors, that $100,000 was worth $143,000 at the end of 2013.
As predicted by many market-watchers, the Federal Open Market Committee announced on January 29 that it would continue to cut its monthly bond purchases. Citing the continued moderate expansion of the U.S. economy, Fed Chairman Ben Bernanke moved to trim the bond-buying program (known commonly as “quantitative easing” or “the Fed taper”) from $75 billion per month to $65 billion. Bernanke additionally announced that the Fed’s policy of supporting near-zero short-term interest rates would continue indefinitely. Short-term interest rates, which govern the rates at which financial institutions borrow from one another, have a cumulative effect on all loans; in deciding to keep the federal funds rate target rate between 0% and 0.25%, the Fed reiterated its focus on stimulating the economy through availability of capital.Several things came to mind as I read through the announcement:
At ACM, we’re inclined to follow the Fed’s lead and “stay the course” with our traditional focus on breadth and depth across markets. We’ll certainly be paying attention to the next rounds of tapering as they take place, but for right now, we’re taking it in stride.
As we discussed in last year’s article on the growing increase in life expectancy (“Financial Security for Longer Life Expectancy” ), Americans are living longer. Women in particular are living well past the average life expectancy benchmarks. Recent longevity statistics tell us that women will generally outlive men by 5 to 7 years; the promise of a longer life is even better for those that are married.
Most women of the “Baby Boomer” generation seem to realize that their life expectancy will exceed that of their parents' generation. Less obvious are the financial consequences of extended longevity. Boomer women have embraced living longer, but remarkably few of them have done the kind of retirement planning necessary to address that possibility. Studies indicate that less than one-third of women age 55 or older have enough retirement money to match income projections based on their average life expectancy and beyond.
So, what does all this mean for women in terms of graciously living out this expected and predictable extension of life? Our many years of experience tell us this: having a retirement plan that addresses this scenario is a necessary, and fairly simple, requirement! Here are three suggestions that will help you get off to a good start:
1. Be brave. Not having enough money for later life is a scary thought, and can be emotionally paralyzing. Instead of letting that fear lead to procrastination, take an objective and creative look at your situation. Explore your options…all of them, no matter how daunting or trivial. Simply being aware of the options for reducing your lifestyle can be empowering. For example, you may need to consider “downsizing” out of your family home. Getting through the emotional aspects of this decision is hard. But being brave, and being proactive about the idea of making a change, will help to strengthen feelings of being in control of your financial future.
2. Don't wait. Procrastination isn't an option. The planning and decision-making processes take time. Take one simple step right now: determine how much cash flow your current lifestyle is requiring each month, and make the necessary adjustments to your spending and saving habits with your retirement goals in mind. Get started now. It won't be easier or better or more comfortable if you wait to begin your planning process.
If you are like most Americans, you probably don’t have a good sense for how you actually spend your money on a month-to-month basis. Sure, you probably know the precise amount of your mortgage payment and your car payment, and you probably have a good idea of what your “regular” bills like your cell phone or your cable TV bill add up to every month. But do you really know how much you’re spending on your morning latte, sneakers for your kids, that lunch you grabbed at the deli between meetings, or those last-minute trips to the big-box store or the mall?
Discretionary income is loosely defined as the portion of your income that is spent on goods and services that fall outside of the “necessities” like food, shelter and utilities. Discretionary spending is the natural result of having discretionary income. Having discretionary income is certainly not a bad thing, but not keeping a keen eye on your discretionary spending CAN be. Undisciplined discretionary spending can negatively impact your overall financial situation in two very important ways:
a. Accumulation of unexpected and unplanned-for debt;
b. Less money to fund your investments and long-term financial goals.
The second point is more straightforward than the first; if you’re spending discretionary income on “stuff,” you’re not using that income to fund your investment portfolio, or your retirement account, or your rainy-day fund. Curbing unnecessary spending leaves you with more money to invest, and having more money to invest will, in all likelihood, provide better long-term results than the “stuff” that you acquire haphazardly.
The first point is more ominous. These days, it’s too easy to rack up high-interest debt one unnecessary purchase at a time. Credit card debt is the most obvious issue in this scenario; it’s very easy to fall into the trap of “pulling out the plastic” for those “little things” that we need or want on a daily basis. The end result is accumulation of debt, a little at a time, that puts a further damper on your ability to contribute to your financial future. Instead of getting returns on your investments, you’re paying down interest. Your money is effectively working against you in that scenario, not for you.
If you want to get your discretionary spending under control, and manage your debt effectively in the process, we suggest taking two critical steps right now:
1. For a pre-defined period of time (at least a week; a month is better), keep track of everything you spend money on, from your major bills and expenses to those “little things” like lunches and haircuts. At the end of the time frame, add up your fixed expenses (mortgage, rent, food and utilities, etc.) and your discretionary expenses (all of those “little things” you spent money on). Chances are, once you see in black and white how the discretionary expenses add up, you’ll have a good idea of where you can start cutting back on discretionary spending. For further insight, determine what percentage of your monthly income is taken up by discretionary spending. We bet it will be an eye-opening number.
2. Once you’ve made a plan for trimming back your discretionary spending, make the savings work for you, and stick to it. The first riskless strategy is to pay down high-interest debt. So is putting money into an investment vehicle of your choice, even if it’s just an interest-bearing savings account.
Taking stock of your discretionary spending and resolving to make that money work FOR you, rather than against you, will go a long way toward helping you manage your debt and strengthen your financial future.
For most people, the concept of “estate planning” at its most basic level is usually associated with the process of drafting a last will and testament, which governs the disbursement of assets to beneficiaries after the decedent has passed on. In reality, estate planning often involves more complex scenarios such as the establishment of trusts, which serve two functions: first, trusts generally avoid the probate process, giving beneficiaries faster access to the assets; second, trusts allow for greater control of specific dispensations and access to wealth. Trusts are administered by a third party, called a trustee. Trustee selection is extremely important because the trustee holds the fiduciary responsibility for the trust both during, and after, the benefactor’s life.
As the word itself suggests, there is a significant element of loyalty -- to the beneficiaries, and to the benefactor – involved in being a trustee. In our experience, many people default to naming a family member as a trustee, usually under the assumption that “blood is thicker than money,” and that family members are inherently trustworthy. While this may be true in many cases, we’ve found that like business and pleasure, sometimes fiduciary responsibilities and family members shouldn’t be mixed! If you’re considering a family member as a trustee, think carefully about the following questions.
Does he or she have the expertise to do the job?: The administration of a trust requires specialized skills. Does your family member have the legal, financial, and administrative background to manage the trust effectively during your lifetime, and after you’re gone.
Can a family member be truly impartial AND compassionate?: Will a family trustee have the wherewithal to make the tough, impartial decisions regarding management and dispensation often required of third-party trustees? If you’re leaving behind a lot of assets to a lot of beneficiaries, the answer is probably “no,” and that can sometimes be a recipe for acrimony, lawsuits, or worse. A truly neutral third party, such as an attorney or trust company, can administer the trust without taking a personal interest in the outcome.
Will a family member have the time to do it all?: Administering a trust, particularly after the benefactor’s death, can be a complicated, time-consuming process. It’s reasonable to ask whether family trustees, who have lives of their own (and are likely grieving the loss, as well), have the bandwidth to effectively manage a post-decedent trust. If you leave a small estate…maybe. If not, it’s probably best to name a professional trustee who can devote impartial time and attention to effective administration.