Dollar-for-Dollar AZ Tax Credits

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Wednesday, 30 November 2011 21:27 Written by Sharlee Cretors

Dear Valued Clients, Family and Friends,

It is not often we are given the control of where our tax dollars are spent. Before year-end, you should take advantage of the many excellent dollar-for-dollar tax credits available to Arizona taxpayers. This means you can give your money to worthy causes, and you will get every penny back, up to your 2011 Arizona income tax liability. There are several ways you can use these tax credits to help out others this year, it is permissible to make donations to all three categories listed below in the same year. To qualify for the private school tax credit a contribution made prior to filing your taxes, no later than April 15, 2012, may be treated for purposes of this year’s tax credit as if it was made on December 31, 2011. To qualify for the public school tax credit or “Working Poor Tax Credit” checks must be postmarked by December 31, 2011.

Categories: 

1. Give to a private school tuition organization and help a child get a private, secondary education who otherwise may not be able to afford the tuition. The limit for the credit is $500 for an individual or $1000 for married couples filing a joint return. You can even recommend your gift go towards a scholarship for a specific child, as long as the child is not a member of your household. 

2. Give to a public school district. Children in lower-income districts often do without the basic supplies that children in affluent districts take for granted. Individuals can claim a credit of up to $200 and married couples can claim $400 in a dollar-for-dollar tax credit. These donations should be sent directly to the public school of your choice.  

3. Give to an organization that has been certified as eligible for the “Working Poor Tax Credit”. This tax credit allows those filing as a single to claim $200 and married couples filing jointly to claim $400 credit.  

Go to www.AZdor.gov and click TAX CREDITS to get a complete list of agencies that qualify, or contact your tax advisor. We highly recommend this unique opportunity. 

Special thanks to William Anthony, CEO of Scottsdale Bible Church for providing much of this concise and helpful information. 

Happy Holidays and Wonderful New Year! 

Sharlee and Kurt

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Market Comment

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Wednesday, 05 January 2011 09:11 Written by SC Financial

 

As the equity market has been giving us things to smile about, we have been focusing on the other side of the investment tool box, looking at bond holdings. With government stimulus and media discussions on the credit worthiness of municipalities, the bond market has experienced dramatic swings of late. We are reviewing our portfolios for duration (sensitivity to interest rates) as well as possible opportunities to hedge an existing portfolio for what we see as a potential soft spot for bond prices. That being said we are reducing our bond fund holdings and opting for individual bonds where appropriate. Where we do hold bond funds, in smaller accounts or for liquidity, we like PIMCO Unconstrained Bond Fund (PFIUX), which allows the manager to think globally and holistically about where to invest the funds in a bond allocation.

When considering a hedge, we actively managed to effectively reduce the duration of our client’s bond holdings, while maintaining our focus on credit quality and opportunities in the yield curve. This can be done by using a Treasury Short ETF fund like ProShares UltraShort 7-10 yr Treasury (PST) or ProShares UltraShort 20+ year Treasury (TBT), allowing our clients to hold their individual bonds, yet not suffer as much market depreciation if the rates do go up. Utilizing these hedges is an active strategy and due to the risk of a double hedge, we suggest employing an active manager for this strategy.

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Health Care Reform and IRAs, an Interesting Twist

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Monday, 01 November 2010 21:06 Last Updated on Monday, 01 November 2010 21:09 Written by SC Financial

In a recent article of one of our trade magazines the IRA expert, Ed Slott, highlighted an interesting twist to the Health Care reform. Not that we are not already confused enough, but now he gave us one more thing to think about, our IRA accounts. Ed Slott is a CPA in Rockville Centre, NY who believes that much of the hoopla in Washington regarding Health Care actually has a significant effect on how you should be looking at our IRA account.

Let’s step back a moment with another change in the law, the Roth IRA conversion. Starting this year, anyone is eligible to convert their traditional, pre-tax IRA, to a Roth IRA. Of course there is a tax consequence, as any amount beyond your basis is taxed as ordinary income. That being said, many are taking advantage of this opportunity as they believe their tax rates now are lower than what they might face in later years. Conversion of the Roth makes a lot of sense for many, especially the individual who is not planning on needing the funds in their lifetime, rather they want to allow it to grow for the next generation.   With the Health Care reform, there may be another reason to consider the Roth.

The affect is somewhat indirect, but worth considering all the same. According to the Mr. Slott, the part of the new law most likely to affect individuals is the 3.8% levy on investment income. Income from retirement plans are excluded from the list of investment income items, which includes taxable interest, dividends, capital gains, rents, royalties, passive activity income and taxable payouts from annuities. But distributions from traditional IRAs and Roth IRA conversion income (when you convert) will increase the modified adjusted gross income (MAGI) and may increase your exposure to the 3.8% surtax.

When the tax takes effect in 2013, it will not affect everyone, just individuals with MAGI over $200,000, or $250,000 for married couples filing joint returns. What is important to consider in the planning of this event is that your IRA distributions will be used in the calculation of your MAGI. If your MAGI exceeds the thresholds, the surtax will be 3.8% of your investment income or the amount of MAGI over the threshold, whichever is less. So what can you do? Consider converting your IRA to a Roth before 2013.

Converting your IRA avoids the surtax on the conversion. In 2010, if you elect to pay all of the income tax in 2010, the income will be taxed no higher than 35%. If rates remain unchanged, a conversion after 2012 might be taxed as high as 43.4% according to the article. In addition, the Roth IRA does not have mandatory distribution requirements each year, allowing for income to be taken when needed , tax free, and it will not be used in the MAGI calculation.

As with most planning opportunities, each individual’s situation will be different and should be looked at given their particular circumstances. We welcome the opportunity to discuss this information with you and how it relates to your financial freedom.   In typical fashion, it is difficult to know what this means to you today, but we can help illustrate it as well as discuss planning opportunities to minimize the effects of this new tax as it applies to you and your family.
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Municipal Bonds and the “New Normal”

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Saturday, 17 July 2010 09:44 Last Updated on Saturday, 17 July 2010 09:54 Written by Sharlee L. Cretors

I recently participated in an educational call sponsored by Pimco, one of the largest bond managers in the world.  I respect their opinion not only because of their leader Bill Gross but the entire Pimco team is like a who’s who in the bond world. They manage some of the largest bond funds in the marketplace as well as recently offered to manage bond ladders with advisory services such as ours for a fairly reasonable management fee.  That being said, when they offer to share their perspective in an area we specialize in, municipal bonds, we wanted to listen. 

Many of you may have heard the term “new normal” which was coined by none other than Pimco themselves.  In defining the new marketplace and the “new normal” they believe that we as investors and citizens will be seeing much slower growth than we have in the past, higher unemployment rates and new economic conditions for our municipalities never seen before.  In the past the municipal market was equated as one step away from the safety of a Treasury Bill and the real risk with Municipal Bonds was that of interest rate risk, having a bond that pays lower interest than what may come available in future years.  Credit risk, or credit worthiness was seldom a great consideration when buying Municipal Bonds.  After all, insurance companies like AMBAC were insuring these bonds so if the municipality couldn’t make their payments, the insurance company would step in..right? Wrong!  Since the financial meltdown of 2008, those same insurance companies are battling for their own survival and most savvy bond buyers disregard them as a viable replacement for good sound fundamentals of the issuing municipality.  In addition we have 48 out of 50 states running budget deficits, many states have pension plan liabilities that are not funded and with the upcoming elections you can be sure there will be plenty of finger pointing as to who is most at fault for the current state of affairs. 

This leads us to today, what should an individual be considering when buying Municipal Bonds?  Credit quality.  Let me repeat, Credit quality, that is right, it is most important today to make sure when you are buying a bond that you do the appropriate diligence and investigate the municipalities ability to repay you before you decide to lend it money.  Credit is the most significant risk an investor faces in today’s bond market. Municipalities are more like corporations now and must be reviewed on their ability to pay, independent of insurance, government bailouts and the like.  This makes what was once a simple investment something much more complicated and difficult to navigate.  As an advisor we have resources and tools from which we can perform this type of diligence as well as employing the management expertise of companies like Pimco in managing our client’s bond allocation.  We would recommend anyone looking to invest in municipal bonds to seek the advice of a professional as this isn’t your father’s municipal market anymore. 

Some recommended rules of thumb to use when investing in bonds:

  • Consider your time frame for needing the funds, having to sell before maturity can mean a loss of principal
  • Understand the risks you face in bonds, credit, interest rate and inflation risk
  • Bond funds are a good alternative for smaller amounts as they provide diversification but no principal return guarantee
  • Keep with higher rated bonds, at a minimum Investment Grade (BBB) or better, we prefer A rated or better given the current environment
  • Defaults are going to occur more often as well as municipalities claiming bankruptcy, do the research up front and monitor on an ongoing basis
  • Do not depend on the Federal government to bail out these municipalities, there is not even an implied guarantee for these bonds
  • If you find a bond that yields more than others of the same time frame, then you are looking at a riskier bond.  Remember risk for returns works in bonds too.
  • Consult a professional when considering bonds, either with a bond fund manager, or investment advisor who specializes in these instruments.
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