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Taxbot
June 15, 2019

 

3 Benefits of Having a Financial Planner

Financial stress is a growing epidemic. While the prospect of having a cushy future entices most, many are inept when it comes to financial affairs. If you fit this description, don’t fret. There are numerous wealth management services available that aim to guide individuals down a road of prosperity. Hiring a financial advisor is a viable solution as well. If you’re flirting with the idea of employing a financial planner, the following benefits may influence your decision.

Accountability

If you’re a textbook over spender, tasking someone with overseeing your finances is prudent. If you’re constantly fighting the urge to spend money, a financial counselor can help. They’ll ensure that you spend your money wisely and according to their custom plans. Though it’s not necessary for you to relinquish all your financial rights, having someone there to keep you honest bodes well for saving. In addition to setting you up for financial success, your financial planner will also hold you accountable for ill-advised spending and, in turn, inspire you to alter your spending habits.

Advice

Above all else, your financial advisor serves to do just that: advise you on financial handlings. To a layman, money matters can appear quite daunting. A specialist, on the other hand, has profound insight into such affairs. With that said, you reap the benefits of unmatched industry expertise. You’ll glean substantial knowledge from your planner and find comfort in knowing that you’re receiving a professional opinion. The more trust you place in your financial advisor, the more willing you’ll be to avail yourself of their counsel.

Security

The primary purpose of a financial counselor is to equip you for the future. Whether that be retirement or planning for a family, your advisor will guarantee that your financial concerns are both heard and catered to. This added level of security offers much-needed peace of mind. The financial unknowns of life are stressful at best, but with guidance from a trusted industry professional, you can acquire the financial security you so desperately seek.

It’s all too easy to become overwhelmed by financial worry. If you’re prone to these stressors, hiring a financial planner may be in your best interest. There’s no shame in admitting that you need some financial guidance, and with a financial counselor, you receive just that with accountability, advice, and security to boot.

Emma Sturgis is a freelance writer based out of Boston, MA. She writes most often on health and education. When not writing, she enjoys reading and watching film noir. Say hi on Twitter @EmmaSturgis2

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Smartleaf
May 16, 2019

Loss harvesting gets all the attention, but it's gains deferral that does most of the work.

I recently defended tax loss harvesting against its critics. But there was a twist. I noted that while tax loss harvesting is well and truly valuable, it is not the star of tax management. That honor belongs to gains deferral. For many folks, this is a bit shocking, like learning that Sherlock Holmes has a smarter older brother (Mycroft Holmes). Loss harvesting gets the attention; gains deferral does most of the work. We thought we’d do our bit to bring gains deferral out of the shadows and give it the acclaim it deserves.

 

What is gains deferral?

Gains deferral is the act of holding a position that, but for tax considerations, you would otherwise sell. There are two types:

  1. Short Term Gains Deferral: You delay selling a short-term position until it’s long term. Roughly speaking, this cuts your tax bill in half. 
  2. Long Term Gains Deferral: You delay selling a long-term position, maybe for just a while, maybe indefinitely. If you sell eventually, you’re still getting value, in the form of a delayed (deferred) tax bill. It’s the equivalent of an interest-free loan. And if you never sell, either because you hold the position until death, or you donate the position to charity, you avoid capital gains taxes entirely. 

 

Why is gains deferral more valuable than loss harvesting?

One of the criticisms of loss harvesting is that, on average, markets and investment portfolios go up in value, so, eventually, you have no more loss harvesting opportunities. We’ve explained why this isn’t quite true. (There’s always stuff happening, like rebalancing and cash flows, that can create new loss harvesting opportunities.) But it’s not completely false either. In a portfolio that is properly managed for taxes, you will get lots of appreciated securities. That’s bad for loss harvesting, but good for gains deferral. After a few years, gains deferral becomes the dominant tax management strategy. We can quantify this. Smartleaf generates a Taxes Saved Report for every account managed in our system that breaks down taxes saved from loss harvesting and gains deferral. In 2018, 78% of taxes saved came from gains deferral, compared to 22% from loss harvesting.

 

Why is gains deferral hard?

Gains deferral sounds simple. After all, how hard is it to not sell something? But there’s more going on than just refraining from a sale. The challenge of gains deferral is to avoid selling appreciated positions while still ending up with the portfolio you want. The downside of holding onto a position for tax reasons is that you’re left owning more of the position than you want. And that means you're exposed to a particular stock’s performance more than you want to be. The key to competent gains deferral is keeping this risk under control.

How? First, actively “counterbalance” overweighted positions by underweighting securities that are most correlated with the security that is overweighted.  If you’re overweighted in Exxon, underweight Chevron. The idea is to keep core “characteristics” (e.g. beta, capitalization, P/E, sector, industry, momentum, etc.) of the portfolio unchanged.1

Second, don’t overdo it in the first place. If an appreciated security constitutes the majority of a portfolio, a deferral of all gains would be a case of the proverbial tax tail wagging the investment dog. How much is too much? It depends on 1) how volatile the security is, 2) your return expectations for the security, relative to alternatives, and 3) how well you can effectively undo the overweight risk through counterbalancing.

So, let’s put it all together. Well executed gains deferral means prudently holding onto overweighted positions with unrealized gains, and then minimizing the risk and return impact by carefully counterbalancing. It is an optimization problem. And, unlike loss harvesting, your work isn’t done in 30 days. You have to keep monitoring the overweighted positions and evaluating how to counterbalance the overweight for as long as you own the security.

And that’s why gains deferral is hard. Done well, it requires sophisticated optimization analytics.  It is exceedingly difficult to do well manually.2 And it’s an open-ended commitment — maybe even a lifelong commitment if you hold overweighted positions till death.

 

Why don’t we hear more about gains deferral?

Given gains deferral status as the core of efficient tax management, why don’t we hear more about it?

One reason seems clear: implementing gains deferral manually requires a level of attention and care that is only economical for high net worth — or perhaps ultra high net worth portfolios. The good news is that modern automation tools are changing this. Sophisticated gains deferral, like sophisticated loss harvesting, can now be implemented inexpensively and at scale.

But there may be another reason why gains deferral doesn’t get the attention it deserves: Clients may value it less. It appears to be doing nothing. What client wants to pay their advisor for doing nothing? This applies double for legacy holdings — positions that the client transferred in to be managed by the advisor. Why should the client pay an advisor for holding a security that the client bought? The reasoning isn’t sound. Risk-managed gains deferral is really valuable. And hard. But it may not be highly valued by clients.

 

Having conjectured on why gains deferral doesn’t get the credit it deserves, we’re still a bit puzzled. On this point, we’d especially like to hear from you. Leave comments or reach out to us directly. We’ll share what we learn.

 

 



1 Not everyone will focus on the same characteristics — also called “factors.” Some correspond to plain-English characteristics, like “sector” or “capitalization.” Others are purely mathematical constructs with no obvious real-world counterpart.

2 There are cruder approaches to counterbalancing, such as  just underweighting everything else pro rata, or just buying less of whatever you were planning to buy next, but these simple approaches will result in greater risk and performance drift.

Written by Gerard Michael on May 16, 2019

How to Win in Court
July 11, 2019

Q. Can you win without controlling the judge?

  1. No!

Control the judge or lose!

Laws, rules, testimony, and evidence count for nothing ... if you can't control the judge!

You must control the judge!

This is your #1 job... if you want to win!

Threaten appeal!

You'll get nowhere with internet legal mythology, demanding to see his oath of office, challenging his jurisdiction based on the color of the fringe on the courtroom flag. Absolutely nowhere!

Cite appellate court opinions ... and threaten appeal if the judge doesn't agree with those appellate court opinions!

It's stupid to march into court demanding one's "Constitutional Rights", expecting the judge to admit your evidence, deny evidence and tricks presented by your opponent, and award judgment in your favor.

It just doesn't work that way!

Show the judge you will win on appeal if the judge rules against you!

For information on the "How to Win in Court” self-help course, click HERE

Website:  www.howtowinincourt.com?refercode=SR0094

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Taxbot
July 1, 2019

 

Saving money is an art form. It’s not just about rock-bottom prices – it’s about avoiding purchases that will cost you in the long run. If you want to really start saving, you’ll need to look at these five instances in which spending less will end up costing you more. 

Cars

A cheap car can seem like a great deal at first. After all, you’re putting less money down and saving on payments. Cheap cars are cheap for a reason, though, and most don’t last. You’ll end up paying more in repairs and, perhaps most importantly, you’ll end up wearing out the car faster. A good car might cost more, but you’ll be able to keep it on the road longer.

Homes

There’s a huge difference in the market between starter homes and luxury homes. While the starter is undoubtedly cheaper, you’re going to have to put in more work. The upgrades and expansions you’ll need to get the most out of it are going to cost you, and most of that money won’t be recouped in a sale. A luxury home, though, will only appreciate in value over time. 

Clothing

You can often find a great shirt for twenty dollars at one store and something that looks almost exactly the same for just five. What’s the difference? In many cases, it’s quality. Cheap clothing cost less, but it falls apart more quickly. If you want to save money, you need to invest in clothing that won’t rip and tear easily and that can stand up to a standard wash cycle. 

Computers

A good computer is an investment. Even if you’re not looking to play high-end games or doing graphic design work, you’ll still likely need to invest a bit into a good machine. There are cheaper machines out there, of course, but they can cost you more over the long run. Not only are they more likely to develop problems because of the quality of parts used, but you’ll have to update them sooner because they are already on the verge of being out-of-date. 

Home Appliances

The key to buying good home appliances is being able to amortize the cost over time. Paying more up front makes sense when paying less will leave you with more costs. Cheaper appliances tend to be more power-hungry and also tend to need more repair work done. If you really want to save, buy something that lasts. The key to saving money isn’t to buy cheap, but to buy well. Do your research and find products that are likely to stand up to the ravages of time. Doing so will let you save money because you won’t have to worry about buying new quite as often.


Meghan Belnap is a freelance writer who enjoys spending time with her family. She loves being in the outdoors and exploring new opportunities whenever they arise. Meghan finds happiness in researching new topics that help to expand her horizons. You can often find her buried in a good book or out looking for an adventure. You can connect with her on Facebook right here and Twitter right here.

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Taxbot
July 19, 2019

Here is an idea that I would bet that you never considered. If your grandchildren are working this summer, give them a jump start on feathering their retirement nest egg. A grandparent can contribute to a Roth IRA for a grandchild who has earned income.

The maximum contribution for 2019 is the lessor of $6,000 or the child’s earned income. You can make a contribution as late as April 15, 2020 for this year. Thus, if your grandchild earns $3000 this Summer, for example, and you put $3,000 into the Roth IRA on their behalf, it could grow to about $55,000 by the time they hit 67, assuming a conservative 6% rate of return. While the contribution can be taken out tax free anytime, the earnings can be withdrawn tax-free once they hit age 59 1/2 or older and has had the Roth IRA for at least five years.

By the way, this technique also can be used with your own kids.

Sandy Botkin
CPA, Tax Attorney, and former IRS trainer
Co-founder at Taxbot

Sandy is a CPA, Tax Attorney, and former IRS trainer. He has authored many helpful books on the subject of taxes, including 7 Simple Ways to Legally Avoid Paying Taxes ( Click Here ), Lower Your Taxes: Big Time ( Click Here ), and Real Estate Tax Secrets of the Rich ( Click Here ).

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Taxbot
July 31, 2019

 

Many investment savvy individuals and couples are looking overseas for rental income properties, vacation homes, and even retirement homes. The tax benefits of owning both residential and rental property overseas are similar to the benefits of owning a home in the United States, with a few exceptions.

Continue reading to understand how tax law in the US handles citizens owning foreign property.

Foreign Residential Property for Personal Use

If your foreign property is used as a second home, you may deduct the mortgage interest just like you would if it were a second residential home in the states. You can deduct 100% of the mortgage interest on your overseas second home for up to $1.1 million of secured debt. The debt should be secured by the combined value of your first two homes. You can also deduct the foreign property taxes on your overseas home, as well as any other properties you own. Of course, you will also need to pay property taxes overseas. This can often be done online, for example, you can make property tax online payments in Belize.

Just like your primary US residence, you can’t deduct expenses such as maintenance, utilities, or insurance unless you claim it as a home-office deduction.

Foreign Rental Properties

Tax rules become more complicated if they make rental income on overseas property. Different tax rules apply, depending on the number of days each year the house is used for personal use rather than as a rental. Your foreign rental property will fall into three categories:

  • The house is rented for 14 days or less: You can rent the house out for up to 14 days each year and not report the income to the IRS. You can even rent it for $10,000 a day, and not report that rental income if it wasn’t for more than two weeks. The home is officially considered your personal residence, which allows you to deduct property taxes and mortgage interest under the usual second-home rules.
  • The house is used personally for more than two weeks or 10% of the total number of days it was rented: Your foreign property is considered by the IRS as a personal home, and the tax rules for a personal home apply. You can deduct property taxes and mortgage interest, but you can’t deduct any rental expenses. Likewise, if someone in your family uses the home this counts as personal use unless they pay you to rent at a fair price.
  • The house is rented for 15 or more days. Likewise, you use it for less than two weeks or 10% of the number of days the house was rented out: The IRS considers this a rental property; rentals are considered a business. In this case, you need to report the income to the IRS. However, you can also deduct certain rental expenses, like property taxes, mortgage interest, advertising expenses, utilities, insurance, and the cost of property management. One big difference for a rental property abroad is overseas property is depreciated over a 40-year period, rather than the 27.5 years for U.S. residential property. However, whether the home is on U.S. soil or abroad, you can only depreciate the building’s value. You cannot depreciate not the value of the land.

Anica Oaks is a professional content and copywriter who graduated from the University of San Francisco. She loves dogs, the ocean, and anything outdoor-related. You can connect with Anica on Twitter @AnicaOaks.

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