Tax Relief For Recent Disaster Victims

The Internal Revenue Service (IRS), a branch of the U.S. Treasury Department in which we are all familiar, issued a news bulletin today that described the tax relief provided Oklahomans whose lives were significantly disrupted by recent snow and winter storms. President Biden declared the State of Oklahoma a disaster area availing the leaders of our state, counties and municipalities to receive Federal Emergency Management Agency assistance for housing and other human needs. Taxpayers are entitled to relief, too!

To avail yourself to the relief granted by the IRS, you must live or have a business in the affected disaster area. All of Oklahoma’s seventy-seven counties were declared disaster areas allowing all citizens that need tax relief may receive it. The declaration permits the IRS to postpone certain tax-filing and tax-payment deadlines. For example, any business or individual tax returns, and related payments, required between February 8, 2021, and April 15, 2021, will now be due on June 15, 2021.

This relief will generally apply to most types of tax returns and payments. For example, if you are an individual or joint filer, your return would typically be due on April 15, 2021. Considering the relief granted by the IRS, your return is now due on June 15, 2021, without the filing of an extension of time to file or the payment of any tax owed. For those individuals subject to estimated tax payments, primarily self-employed or those with non-wage income, you will not be required to remit your first quarter tax payment until June 15, 2021. 

One word of caution. Quarterly tax payments are due on April 15, June 15, September 15, and January 15 for calendar-year filers such as individuals. This would mean that your estimated tax payment due on April 15 and the second quarter tax payment due on June 15, 2021, are both due on the same day. Therefore, you are liable penalties should both payments fail to be remitted timely. 

Some good news is found in the emergency relief declaration! For individuals who wish to contribute to an Individual Retirement Account (IRA) or Roth Individual Retirement Account (Roth IRA) they have until June 15, 2021, to make their contribution for a possible 2020 income tax deduction. This is the time to take advantage of the two-month period for reducing your taxes and contributing to your future for qualified individuals!

For those taxpayers who suffered a casualty loss caused by the disaster, the option to claim the loss on the return in the year the casualty occurred or claim on the preceding year (2020) is available. This election, which must be claimed on a timely filed return, and may help relieve the tax burden some taxpayers would otherwise have been required to pay on June 15, 2021.

Should you receive a notice of penalty for late payment of your 2020 income taxes or estimated tax payments for those filed on June 15, 2021, the IRS will provide abatement of the penalties by calling the telephone number provided on the notice. It is wise to consult with your CPA or tax preparer to determine what steps should be taken to achieve the relief sought from this declaration.

Other types of taxpayers are allowed additional time to file returns, too. For example, if the entity is a corporation, partnership, trust or exempt organization, with an original due date for the 2020 tax return between February 8 and April 15, the due date is now June 15, 2021. However, any Forms W-2 or 1099 that are due by February 28, 2021, should be filed in a timely manner or an extension of time filed with the IRS. 

If your records were destroyed during the disaster, the IRS will provide, free of charge, copies of previously filed tax returns for affected taxpayers. What can be better than that?

For two consecutive years our state, and its wonderful citizens, have been subjected to significant disruption caused by natural disasters. Let us hope Mother Nature is not serving up a trifecta! 

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When to Claim SSA Benefits

When the economy takes a downward trend and the retirement you planned did not quite work out in the manner you thought, what can you do? Most of us look at this scenario as an opportunity to engage in the workforce. Much confusion exists about working while claiming your Social Security Benefits. 

“Can I work and receive my SSA benefits?” This is the typical question we receive when planning for retirement with our clients. I look the client straight in the eye and answer “depends”. Well, that wasn’t very helpful. However, the SSA regulations applied to this scenario are complex and may be confusing to many of us. To properly apply the rules, think in terms of life sections: 1) before reaching your full retirement age (FRA) as defined by law; 2) the year you reach FRA; and 3) the period after you reach FRA.

Let’s address the first section of life which is before you reach FRA. The earliest a person can receive SSA benefits, without being a survivor or disabled, is age 62. To determine your FRA, you must consider the year of your birth. For example, if you were born in the period of 1943-1954, your FRA is 66. The amount of SSA benefits you are entitled to at age 62 is reduced permanently to 75% of your projected full retirement benefits. For example, if you would have been entitled to $2,000 a month of SSA benefits at FRA, by claiming your benefits at age 62, your lifetime initial benefit will be reduced to $1,500 per month. The loss of $500 per month of lifetime benefits, depending upon your longevity, may become a significant amount. By working and delaying your claiming of benefits closer to your FRA, you will have opportunity to receive a larger percentage of your benefits. For example, if you claimed your benefits at age 64, you would be entitled to 86.7% of your full retirement benefit. The closer your age to your FRA, the greater percentage you may claim of your full retirement benefit.

The next section of life is the year of reaching your FRA. Let’s assume you were born July 1, 1955. Your FRA would be 66 years and 2 months. Therefore, you could work in your full-time position earning up to $50,520 in the period of January 1 to June 30, 2021. You would be allowed to claim your SSA benefits and receive the full retirement amount even though you worked more than that allowed for those beneficiaries who wish to retire before FRA. This is where the confusion lies. Think about the individual who decided to retire early at the age of 63. This person may earn only $18,960 in 2021 without impacting their SSA benefits. However, for every $2.00 earned over the $18,960 limit, their SSA benefit will be reduced by $1.00.

Lastly, let’s explore the impact on the SSA benefits and the amount of earnings an individual may earn initiating with the month after reaching FRA. A person who has delayed claiming SSA benefits until reaching FRA, may continue to work full-time and not subject their SSA benefits to any reduction. There are some tax implications that will be imposed on your SSA benefits when you file your individual income tax return but we will address this issue in a future column.

Thinking about the three phases of before, reaching and after retirement age will help you make a better decision on the timing of your SSA benefits. We typically perform an analysis that helps you understand the economics and the qualitative issues of claiming your benefits at the proper time. This complex set of laws can be difficult to grasp. Seek out a complimentary consultation to determine the date of claiming your SSA benefits and maximizing your retirement income. See you on the golf course!

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Predict Your Future By Creating It

Many of you will read the title of this article and wonder what it means. President Abraham Lincoln once said, “The best way to predict the future is to create it.” One of the roles I relish, when working with our clients, is the ability to help people reach their goals in life. Often clients will look at me during the planning process and possess only two items of information: 1) where she currently resides financially; and 2) where she wishes to be at retirement. The chasm between these two points of life may seem bottomless and unreachable. Before you shake your head that you agree with the previous statement, let me share a proven method of predicting your future.

First, you must clearly define your desires for your future. It is often said that “no archer can hit a target that doesn’t exist.” The process of future design begins with your imagination. Do you wish to relocate in retirement? Do you dream of a second career? What about your volunteerism you wish to enhance during retirement? Will you need specialty medical assistance and support in retirement? What type of home do you wish to reside in retirement? There are many considerations and you should list all of them that you wish. There are no wrong answers! 

A plain piece of paper and your favorite writing instrument will open your mind to the world you want to develop. Once the list is completed, for now, you should breathe a sigh of relief. You have now performed more planning for your future than most people. More time is spent by individuals planning their vacation than planning their future!

Second, you should evaluate your current financial statement. What have you saved for the future? Do you possess an emergency fund? One of the quantitative misunderstandings by most people is that your life in retirement will cost you less than your current lifestyle when working. This is not necessarily true. Think about it. Your medical costs may rise due to age or you may locate where you wish to spend most of your day in your hobby. These types of activities require funds and it is a fact that most retired individuals will continue to require 90% – 95% of their currently living expense in retirement.

When planning for our clients’ future, we assume the same lifestyle in retirement as experienced in their career. Why? It is better to assume more income is required and save more than enough for a lifetime than to be deficient. No one wants to simply exist in their retirement. Therefore, it is critical that a projection assuming taxes, cost of living increases, medical needs, housing costs, etc. be developed into your plan for the future. Success in retirement depends on the ability to weather any financial storm that may arise.

Lastly, you must bridge the chasm with an active savings plan that allows you to maximize growth for the future. Time is your friend when investing. Start early and be consistent in the savings process. If you are starting a little later than intended to save for retirement, there is hope for you. With a proper review of your current circumstances, you can make strategic changes in your savings plan that will give you the most probable opportunity for success. As retirement planning specialists, we have witnessed the fear people experience when the vision for the future is not clear. 

Seek out a complimentary consultation to see if you qualify for a “second opinion” of your plan for retirement. If you don’t have a plan, lets get one started. Live for today but plan for your future. Might as well, that’s where you will be spending your time in retirement. See you on the walking trail!

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Difference Between Economy and Markets

What is the driver of our economy in the United States? Is it labor? Not entirely because our nation is suffering one of its highest unemployment rates in recent history based on a report by the U.S. Bureau of Labor Statistics dated January 8, 2021, and the world keeps spinning. The current United Stated unemployment rate of 6.7% is not the actual number that concerns me. When you understand the factors that compute the unemployment rate in our country, you must also consider those individuals who have simply dropped out the job market and resigned themselves to remaining unemployable. The true number of unemployed and underemployed individuals in the United States, the quoted unemployment rate would easily double.

Is our economy built on industries? Yes. The five most productive industries in the United States, for 2019, are healthcare, technology, construction, retail and durable goods. Each month the Bureau of Economic Analysis, an official agency of the United States Department of Commerce, reports on the various components of the economy both domestic and internationally. Due to the lack of business operations in the second quarter of 2020, caused by the impact of COVID-19, the gross domestic production in our country fell by more than 31.4% but rebounded sharply when businesses reopened and employees went back to work in the third quarter of 2020.

If the economy has been so volatile, why have the markets been so robust? The answer is not a simple one but allow me to offer a response. Based on a report in Barron’s published on January 2, 2021, the Standard & Poor’s 500 Index (S&P 500) returned 18.4% for the calendar year 2020. This index is representative of the overall economic condition of the United States. Consider the fate of smaller, less capitalized companies primarily based in our country. The return of the Nasdaq Composite for 2020, based on the same Barron’s report, was 45%. Smaller companies have the ability to adapt to economic conditions but may not have the funding necessary to survive economic downturns.

One word of caution when considering any investment is to think long-term. In the past couple of weeks, I have received requests from individuals for the “hottest” stock or “one that is priced low and guaranteed to rise in value in a short time”. The answer I provided each of these individuals is to think long-term, diversify to lower risk and consider your current needs. One of the individuals commented that he “didn’t have much time until he wants to retire” and intimated that he would have to earn excellent returns over the next two years to meet his goals. I am not one to trample on others’ goals but I can assure you that one should not expect the markets to behave in a predictable manner for the short-term to payoff big investments.

The most probable method of reaching your goal for investing is to start early, invest consistently in good and bad markets and stay focused on the long-term. It will reward you to discount the suggestions of those that promise “no risk” and “excellent returns” when the real world of investing contains no such attributes. All investments have risk. One of the safest investments you can make is to place cash in a savings account. However, that investment has significant purchasing power risk. Your money’s ability to buy goods and services in the next ten years will be impaired due to the impact of inflation. Think about it in an economic sense, your money is earning less than 1% and inflation is greater than 2%. Not a good outcome for your future.

To provide yourself peace of mind, it is critical you stress test your portfolio by measuring performance during market cycles that are not at the peak. If I had a crystal ball, I could inform you of market movements and the world would be swimming in butterflies and unicorns. That is not reality. What is real is financial advice given you in a fiduciary manner that addresses your needs, goals and risks. Wouldn’t you sleep better if you knew you could weather a financial storm? Seek out a Certified Financial Planner™ professional for a complimentary consultation and analysis. Sleep well, my friends.

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New Year, New Opportunities, New Tax Laws

If there is one thing in life you can count on, that would be income tax changes! Over the past few months, we have seen changes in our world that create anxiety for many people – elections, natural disasters, COVID-19, etc. One of the best methods of understanding the factors of anxiety is to acknowledge who controls the process – you. I’ve said it many times, but it is most important that you invest in yourself by taking care of your mental health. By feeding on a diet of negative news on the TV, you implant in your brain the thoughts that control your psyche for the day. Rather than listening to or watching these events that cause you to be anxious, consider reading a good book or walking in the park to gain a fresh perspective about life.

We can’t totally ignore life because we do owe a duty as citizens of the greatest country on the planet. Annually you are asked by the federal, state and local governments to report certain assets, income and other activities for purposes of paying your fair share of the burden to live in a civilized society (well, somedays it may not seem civilized, but it is). Former Justice of the Supreme Court, Oliver Wendell Holmes, coined the phrase applying taxation as the price for a civilized society but, as citizens, we are owed a duty by those elected to represent us to utilize our taxes in a meaningful way that brings order to our world.

Before you file your 2020 individual income tax return, you may want to consider these important changes that may help your family. President Trump signed the Consolidated Appropriations Act, 2021on December 27, 2020. The law impacts individuals in a manner that helps provide family support and small businesses with additional payroll assistance.

No doubt you have watched the news lately and determined that your bank account may contain $600 more than you originally noted. For those individuals who filed electronic returns for 2019, and whose bank information was on the return, many received their stimulus payments the first week of January. One misunderstanding about the Recovery Rebate Credits of $600 is that the payment is a credit against 2020 income taxes. Individuals with adjusted gross income in excess of $75,000, or joint filers with adjusted gross income in excess of $150,000, are not eligible to receive the stimulus payment.

Teachers also receive additional relief for personal protective equipment costs that may be deducted as qualified educator expenses. This above-the-line deduction is helpful to reduce adjusted gross income which lowers the overall hurdle of other expenses the family may incur such as medical expenses that are deductible as itemized deductions.

If you are unable to itemize deductions but wish to continue to support your local qualified charitable organization, you may do so. The law changes in 2020 allows an above-the-line deduction for qualified charitable donations in the amount of $300. 

As we begin a new year for our lives to enjoy, it is critical that we recall the reasons for the founding of the United States of America. The preamble to our constitution provides us a goal for which we must, in a collective manner, strive toward: 1) establish a system of laws and justice equally applied to all citizens; 2) create and maintain a defense of our nation from enemies; 3) promote the general welfare of our citizens; and 4) secure the blessings of liberty. We are a nation of people with one common interest – freedom. Our nation is the beacon to all other nations on the planet as an example for true independence and the opportunity for every citizen to be successful on their own terms. Happy New Year! 

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Change Your Philosophy About Money and Change Your Life

One of the greatest powers of wealth is your philosophy toward money. This year has been a challenge to many of us and you may have not met your savings goal or some other type of goal. However, our philosophy of life doesn’t change whichever way the wind blows economically or otherwise.

Think about your deepest convictions about life – personal, professional, marital, charitable, etc. Most likely these deeply rooted philosophical beliefs came from someone in your family or a close friend or an author of a book you read. My beliefs about money came to me early in life from my parents and, surprisingly perhaps, Jim Rohn and Zig Ziglar. Philosophy is what keeps you grounded during times like this that we are currently experiencing.

One of the greatest habits you can foster is the creation and continuance of your philosophy of money. Too many of us are chasing wealth and overlooking diamonds on the way. What I am referring to is the fact that money doesn’t define us in life but rather it affords us the opportunities we receive and the freedoms to enjoy them. Let’s analyze the thoughts of the billionaires of the United States, a very small group, and attempt to understand their philosophy about wealth. Wealthy individuals view money in long-term time horizons. There are no “get rich quick” schemes to lasting wealth. By diligently and consistently working toward their goals for success every day, the billionaires of our country amass great fortunes that last far beyond their lifetimes.

Another philosophy upheld by billionaires is their optimistic attitude. Do you believe that positive people attract opportunities? It certainly does! By maintaining an attitude of positivity and optimism, the people you meet during your day will notice your demeanor and reward you with a smile or kind gesture in return. This is another means of billionaires discovering the next great investment that will continue to grow their wealth.

The philosophy of “pay yourself first” is evidenced by the lifestyles of the ultra-rich. This approach to life is to invest your money toward your long-term goals first and then use the remainder for your current lifestyle. The key to balancing this philosophy is to clearly articulate and write down your goals. By focusing on the bigger future, you will not frivolously waste your resources today. One method you can demonstrate this philosophy is your current retirement account. Instead of instant gratification for a new vehicle or boat, be deliberate about funding your future and save for the asset you desire. To illustrate the opposite of this philosophy, many people will utilize debt to purchase their “toys” and when retirement or an emergency arises, they are ill prepared and sink further into debt.

Lastly, money is nothing more than a ticket to freedom. Your choices that are availed to you through your preparedness for life are considerable. Think about your freedom of choosing a place to live, the freedom to choose the type of car you drive, the freedom to support the charity you believe is making a difference, etc. These freedoms are critical to the state of happiness you enjoy in life.

During my speeches across the United States, I often state, “Money has never purchased happiness but it can lease joy on a long-term basis”. I am amazed this statement continues to confuse people by its simple inference. It’s Christmas and time to think about your goals for 2021. Give some thought to changing your philosophy about money and life. The rewards you will gain are impactful and world-changing. If you wish to learn more about goal setting and other philosophical approaches to life and money, go to www.compasscapitalmgt.com.

Wishing each of you a wonderful Christmas and a Happy New Year!

Note: The “Invest in Yourself” column will not be published for the next two weeks. We will resume publication the week of January 4, 2021.)

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Last-Minute Strategies To Lower Your Taxes

It’s that time of year when the sand has almost passed to the bottom of the hourglass. Most individual taxpayers are calendar-year filers which means that many opportunities to reduce your 2020 income tax bill will lapse after midnight on December 31, 2020. To help you achieve your goal of paying the least amount of income tax as possible, you may want to consider some simple, yet effective strategies

Taxes for personal property and real estate may be deducted on your individual income tax return if you elect to itemize for 2020. If you own property, you will have received a notice of taxes due on the property from the previous assessment by the County Assessor’s Office. You may wish to pay the full amount of taxes every other year to “bunch” up the deduction allowing you to accumulate deductible expenses in excess of the standard deduction. 

Income taxes paid to state and local governments are included in your itemized deductions. If you are self-employed, or receive income from sources that do not withhold taxes for you, you may be required to remit income taxes on a quarterly voucher. Typically, your fourth and final state income payment for 2020 is due on January 15, 2021. However, you may elect to remit payments in December to the state and local governments and claim the expense in 2020. The Tax Cuts and Jobs Act of 2017 limited the amount of state and local income taxes for deduction to $10,000.

Charitable contributions to qualified charities will increase your itemized deductions for 2020. Consider those charities that you typically support and be generous this year. As long as the charity is a qualified exempt organization and you remit payment before December 31, you should be allowed to include the deduction on your return. Don’t forget that you should request a receipt to document your charitable intent and the receipt of the payment by the organization.

Have you thought about cleaning out your closet or gifting your old car to a worthwhile charity? Good news! You may qualify for an in-kind donation. Additional rules and requirements must be followed to document the deduction but you will have helped a great cause and your closet or garage may look better, too.

Another easy method of lowering your tax bill is to defer any income that is possible. If you are self-employed, you may delay your billing for services until January, 2021 and, thereby, deferring payment to be earned income until the next tax year.

Remember in 2020 that personal exemptions are no longer allowed. Instead, a much larger standard deduction is availed to individuals and married filing joint taxpayers of $12,400 and $24,800, respectively. If you are a single parent with a child in your household, you may qualify for a little larger standard deduction of $18,650.

The key to tax reduction is to be proactive. Don’t procrastinate on this important task. By spending a few minutes planning, you may significantly reduce your tax bill for 2020. One statement we share with our clients is that “you should always seek to pay the least amount of income tax you legally owe”. 

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Gifts, Charitable Donations and Taxes

It is the time of year that we think of others. By “others” I am referring to our favorite charities, loved ones and the IRS. Sounds interesting to place the IRS in the same sentence as charities and love ones, doesn’t it? I offer that this particular government agency should always be a part of any discussion for gifts and donations.

Many people confuse the requirements that qualify charitable donations for deductibility purposes. A particular section of the Internal Revenue Code specifies the types of recipients (donees) that qualify for charitable deduction. Typically, a contribution to your local church may qualify for a charitable deduction in the year it was given. This means that you can generally contribute to your church’s building fund or other designated use funds for your church and claim the contribution on your individual income tax return for the year. Substantiation should be received from the charitable organization, in written form, that discloses the date of receipt of the gift, the amount received as a gift (unless it is other than a check or cash which would require the donor to assign a reasonable fair market value), the name and address of the charitable organization and a statement as to no services or goods given to the donor for the donation.

Unique for most taxpayers, that do not itemize deductions on their individual returns, the tax law changes signed by President Trump in March, 2020, allows for a deduction of $300 of charitable deductions for cash contributions to qualified charities. This deduction is claimed “above the line” which will lower the adjusted gross income of the filer resulting in lowered taxes owed. Highly recommend everyone to take advantage of this opportunity to help qualified charities during this difficult pandemic.

You may not realize but your Christmas gifts to loved ones actually fall within the requirements for reporting purposes to the IRS. You guessed it – gift taxes may apply! Talk about Scrooge, right? Consequently, the IRS wishes to know of any transfers of property for less than full value to another party to determine the amount of gift given to the party. Good news is that the IRS doesn’t require that you report the clothing, toys or other gifts given to your children if the total given for the year is less than $15,000 per donee for 2020. 

If you add up all of your gifts to Cousin Eddie, a reference to one of my favorite Christmas movies, and the amount is greater than $15,000 for 2020, you will need to consult with your tax advisor as to the filing of a gift tax return by April 15, 2021. Although a gift tax return may need to be filed, you will, generally, not remit any tax due to a unified gift and estate tax exemption of $11,580,000 per person. So, be generous this year!

Individuals are typically calendar-year taxpayers. This means that you lose some opportunities to lower your 2020 income taxes after December 31, 2020. It is critical that you review your current tax deductions for 2020 and accumulate those needed receipts to provide your tax preparer. Be proactive this year and contact your tax preparer now to book your appointment for receiving tax preparation services.

Lastly, remember those that have suffered during the pandemic. Families in our community may have little to enjoy the basic living needs of life much less Christmas with their loved ones. Disregard the IRS for a moment and let’s focus on our community. Reach out to families that may need a hand up, not a hand out, this Christmas Season. Put some joy in your life by giving to those in need.

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Do You Qualify For A Penalty-Free Distribution From Your IRA?

Many people possess an Individual Retirement Account (IRA) or employer plan that holds assets for their future financial security. Due to the substantial economic impact caused by the coronavirus, the IRS provided relief to individuals in the form of more liberalized distribution options for these types of accounts.

However, the misunderstanding of many citizens is that anyone under the age 59½ can take a distribution from their IRA without incurring the typical 10% additional tax (or penalty) for premature withdrawals. This misunderstanding could cost you a significant amount of money, including additional penalty and interest, if you fail to pay the correct amount of tax on the distribution.

To qualify for relief from the premature distribution penalty, you must be a “qualified” individual as defined in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) enacted on March 27, 2020. A qualified individual is one that has met one of the following criteria:

  • You have been diagnosed with COVID-19 or SARS-CoV-2 by a test approved by the Centers for Disease Control and Prevention (CDC);
  • Your spouse or dependent is diagnosed with one of the above viruses;
  • You suffered adverse financial consequences as a result of being quarantined, furloughed, laid off or had work hours substantially reduced due to the pandemic;
  • You have been unable to work caused by a lack of childcare due to the pandemic; or
  • You suffered adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to the pandemic.

As an individual with evidence of one of the criteria applying to your situation, and the proof would be required of you, the 10% additional tax on early distribution would not apply. However, federal and state income taxes would apply in this instance. Relief is provided by the IRS in the payment of the income tax due on the distribution by reporting one-third of the income on your individual return over a three-year period beginning with 2020 or the year you receive your distribution. For example, if you requested and received a $12,000 distribution from your IRA, you may include $4,000 of the distribution in each of the next three tax returns filed beginning with your 2020 return. Of course, if you wish to report the entire distribution in the year of receipt, you may do so and pay the total amount of tax due.

Lastly, what happens if you decide to return or repay the distribution to your account? Additional relief is provided in this instance. If you have reported one-third of the distribution on your tax return for 2020 and 2021 but decide to return the funds to your IRA in 2022, you may file an amended income tax return for 2020 and 2021 to receive your refund of taxes paid in these years associated with the pandemic relief. The repayment of the funds would be treated as if they were repaid in a direct trustee-to-trustee transfer and no federal income tax would be due on the distribution.

In most cases, the perception of relief is far different than its actual purpose. Too many people hoped that a carte blanche relief approach would be offered and anyone, for any reason, could take a penalty-free distribution and that would be the end of the matter. Our tax code is not an area of law that is easily amended or comprehensive enough in its nature that revenue generation may be left out of the analysis.

Tax law is not simple to understand. To help your family and you make sense of these complex laws and regulations, seek out the advice of a CERTIFIED FINANCIAL PLANNER™ professional for an analysis and planning meeting to reduce your tax burden. Judge Learned Hand remarked, “Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that platform which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” Now, that alone should help you enjoy a Happy Thanksgiving! 

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Choosing the Proper Benchmark

What a difference a week makes in the stock market! I thought we were in a pandemic. The lessons to learn from the current economic cycle are: 1) Markets don’t function with emotional bias based on the current state of the population; and 2) You shouldn’t try to time the markets based on “one-off” instances of change in the governance of our country.

Too many offerings of unfiltered and unverified reporting of market trends, expected apocalyptic tax changes and, overall chaos, fail to consider the market makers and buyers of large numbers of trading shares who do not make decisions based on a whim. You should approach your long-term investing strategy in the same manner. Make sound decisions based on facts and evidence while clearly focusing on your future needs.

How do you know if your portfolio is performing well? One method we recommend is the use of a proxy benchmark. There are many indices to choose from, but the proper application is to utilize a benchmark that meets your ideal portfolio allocation. If you are investing your retirement savings in a 60/40 equity to bonds allocation, you will not want to use the Standard & Poor’s 500 Index (S&P 500) as the lone index. Instead you may wish to use a blended index that provides for consideration of bond performance in the same percentage as your portfolio.

Let us explore how benchmarks are constructed so that you will understand their application to your planning process. For example, the S&P 500 Index is a market-capitalization weighted index of the 500 largest U.S. publicly traded companies. This means that the companies within the index are weighted based on their market capitalization and shares traded. Another common benchmark is the Dow Jones Industrial Average (DJIA) which is a price-weighted index. To understand how the DJIA is weighted, think about the individual share prices of the thirty (30) companies included in the index and the higher priced stocks receive a greater share, or weight, of the allocation to the index. By using daily share prices, the index seeks to account for stock splits, dividends paid or corporate divestitures (spinoffs) in its performance reporting.

When reviewing the performance of an asset class such as bonds, within your portfolio, consider a broad-based benchmark such as the Barclays U.S. Aggregate Bond Index (Barclays Agg). This benchmark index includes the entire universe of domestic, investment-grade, fixed-income securities traded in the United States. As a broad index including government securities, mortgage-backed securities, asset-backed securities, and corporate securities, it serves as an appropriate comparison to well-diversified bond portfolios.

There is a great deal of expertise, time and knowledge required to invest in markets. If you are concerned about the performance of your retirement assets, seek out a complimentary consultation with a CERTIFIED FINANCIAL PLANNER™ professional. You may be glad you did. See you on the golf course!

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