For the rest of us it’s time to gather our tax information and hope we took enough deductions and withholdings to get a refund (or at worst write a very small check) from the IRS.   We become very aware of how effective our tax planning was at this time and frequently make a resolution to do better at it next year.  It’s our job here at Permanent Value to take the guess work out of tax time and help make effective tax planning a part of your financial routine.  We want you to be confident you did everything possible to minimize your tax bill.   We engage top tax experts to scrutinize your financial situation and give you the best tax advice when it makes sense for you, well before the end of the year.  This is what full-service comprehensive financial planning is all about.

You should also be confident your investment expert is being tax efficient with your portfolio, taking losses where appropriate to offset gains and income taxes and making sure retirement accounts are fully funded and deducted.  It’s amazing how many mistakes we see with new clients who have forgotten significant tax issues that could have saved them thousands of dollars.  Something as simple replacing one investment for something similar but better could save thousands of dollars.  That is why we feel it is so crucial to have planning meetings well in advance of the end of the year to identify potential tax savings and implement changes that could decrease the taxes you are paying year after year.  By having an open dialogue between your financial planner and your tax preparer, you keep your team on track and working for you to save you money and ultimately reach your goals. 

SHOULD AN ANNUAL REVIEW BE ANNUAL? 

Not necessarily.  This is the time of year we normally assess what happened last year and set out plans for the year ahead.  In order to make sure your financial house is always in order we strongly advocate a two meeting and oftentimes three meeting cycle for the year to fully implement all aspects of your comprehensive financial plan.   It takes a financial quarterback with the right qualifications (i.e. a Certified Financial Planner) and experience to navigate through the rough waters of the economy and your finances and sail into calm waters and stay there.  Expect a call from our office this quarter to set up your next review, so we can go over your comprehensive financial plan and start preparing for your 2010 taxes.

Some call the 2010 tax year the Sunset Year.  With the Bush tax cuts of 2001 and 2003 set to expire at the end of the year and a new administration taking the reins of fiscal policy, this year will offer little resemblance to a peaceful sunset over the dusty plains of the western frontier.  However contentious this year may be in Washington, there are ways individuals and businesses can plan ahead and get the most out of their 2010 tax return.  Below are a few of the largest and farthest reaching changes for this tax year.

The Good

Roth IRA Conversions-

Beginning in 2010 (and beyond) there will be no income limits for individuals that would like to convert their traditional IRA to a Roth IRA.  As an added bonus, if you choose to convert your IRA in 2010 you have the option to split the tax bill over 2011 and 2012.  Doing a conversion generally makes the most sense if you expect to be in the same (or higher) tax bracket in retirement and can pay the tax bill from funds outside of your Roth IRA.  We would be happy to illustrate the cost and benefit for you at your next meeting.

Phase Outs-

The phase out rules for itemized deductions and personal exemptions will go away in 2010.  This is especially beneficial to high income earners.  But act fast, the limits will come back with vengeance in 2011 as this is an area that President Obama is specifically targeting.

The Estate Tax-

Both the estate tax and generation-skipping tax (to the surprise of most estate attorneys) disappeared on January 1st, while the top rate on the gift tax dropped to 35%.  The downside of the estate tax repeal is that property that would normally receive a step-up in basis on the date of death is now subject to the descendants cost basis. These changes most likely won’t stay long and any updates to the estate tax could be retroactive to the beginning of the year.

Medicare Part B premium-

For about 75% of all Social Security beneficiaries the Part B monthly premium will remain at $96.40 for 2010.  This is due to a new law that prevents Part B premium hikes when there is no cost-of-living increase on benefits (as was the case in 2010).

The Bad

New vehicle sales tax-

Effective January 1st individuals will no longer be able to take the itemized deduction or increase in standard deduction for the sales tax on the purchase of a new motor vehicle.

Sales tax-

Also being removed from your federal itemized deduction is the ability to deduct state and local sales tax.

Unemployment income-

In 2010 you can no longer exclude $2,400 from your taxable income like you did in 2009.

Charitable distribution/contributions-

 Last year you were able to exclude from your income charitable distributions made directly from your IRA.  No longer in 2010.

Alternative Minimum Tax Exemption-

Unbelievably the AMT exemption which already affects a growing number of middle class taxpayers because it’s not indexed for inflation will actually decrease in 2010 to $33,750 for single filers and $45,000 for those married filing jointly.  Congress still has time to make changes to AMT like they did last year.

Retirement Contributions-

 There are no changes to the maximum contribution (or catch-up contributions) an individual can make to an IRA or qualified retirement plans from 2009.  Let us help you determine your limit and eligibility by giving us a call.

Mileage reimbursement rates-

For those that deduct their mileage expense for business purposes, the 2009 rate of $0.55 per mile will be falling to $0.50 per mile in 2010.

Section 179 Expense Deduction-

 A very popular deduction, the section 179 deduction allows businesses to accelerate their equipment expense.  This deduction will drop from $250,000 to $135,000 if congress doesn’t step in!

The Ugly

The (ugly) truth in the tax world is that at some point tax revenue will have to rise in order to help pay for the economic stimulus and wars abroad.  With news on the 2011 budget proposals coming out almost hourly the last few weeks, there might still be some hope that these deductions get revived before they going riding off into the sunset.

Reveals a year ripe with contradictions.   The Dow Jones Industrial Average surrendered over a third of its value in the first ten weeks of the year, while the S&P 500 gave up 31%.  Thankfully, on March 9 both indices reversed course, and except for a few minor mini corrections, headed higher for the remainder of the year… finishing 2009 with our benchmark, (the S&P 500) ahead by 23.45%.  These musings are written in the first hours of the first trading day of the New Year, and the market bias continues to point higher.

The economy will be facing problems galore, and our challenge will be to anticipate trouble, and react.  Fortunately, even the most daunting problems often conceal enormous opportunities.  For instance… Federal spending is at the highest level since World War II, and the Congressional Budget Office suggests that US government debt will approach 70 percent of GDP over the new decade.  Undoubtedly, the US dollar will continue to fall.  Producers of natural resources (oil, gas, steel, aluminum, copper, gold, etc.) will raise their prices to compensate for the fall in the value of the US Currency.  That should translate into enormous profits for investors in Natural Resources.  We most certainly plan to be among them.

KEEPING A GLOBAL PERSPECTIVE

As the dollar falls, key overseas currencies will have to rise in value.  Our research has led us to Australia, China, and Brazil, arguably, the strongest economies in the world at this time.  We are currently invested in all three, and look to increase our positions as 2010 unfolds.

Here at home, the economy will most likely be suffering from higher interest rates as lenders seek to protect themselves from the crumbling dollar.  Welcome to the world of TIPS (Treasury Inflation Protected Securities).   As we outlined in our October letter, TIPS are US Treasury long-term bonds that are pegged to the official rate of inflation.  Every six months the face value of the bond, as well as the interest rate of the bond, is adjusted upward in sync with the inflation rate.  As we wrote earlier, trouble is often packaged with opportunity.  For the moment, prices are stable, and inflation is sleeping.  It will have its day soon enough, and TIPS will serve as our first line of defense.

BELIEVING IN OURSELVES

It saddens us to see the US’s industrial base gradually eroded away by foreign producers and uncompetitive domestic wage standards, but we suspect that as the economy revives, American ingenuity will stage a revival, and we’ll witness more and more factory doors swinging open.  Admittedly, these statements are based more on hope than any concrete evidence, but aren’t hope and hard work a cornerstone of our country’s history?

Be that as it may, there are a number of sectors in our economy that are demonstrating enormous resilience.  Technology is probably the best example.  Innovation is rampant.  Productivity advances are breathing new life into major companies.  Ever smaller components with infinitely complex capabilities are spawning new industries. (nanotechnology)  Major new product development is still, for the most part, a product of American ingenuity.  The recession slowed things somewhat, but the word is out… America is back.  Whether we’re talking about IBM, or a Missoula start up, we’ve got the knowhow… we’ve got the imagination.  The world comes to us for new ideas.  We go to it for less costly production.  Technology is definitely a place to be.  The rush has already started.

ALSO OF INTEREST

Oil is back to $80, and threatening to go higher.  That comes under the heading of good news/bad news.  Higher energy prices could trip up a recovery, but enrich investors.  We are over weighted in the sector, and still adding to our positions.  Our most recent addition is the Brazilian oil giant Petrobras… our intention being to profit from the company’s huge deep water discoveries, while also benefiting from Brazil’s strengthening currency.  And parenthetically, the only way the Petrobras folks are going to get that oil up from the wells that must be developed thousands of feet below the ocean’s surface, is to employ American or Norwegian deep water drillers.  We (you) own a couple of those as well.

ANYTHING THAT HELD US BACK THIS PAST YEAR?

For sure!  When the present administration took office, their first order of business was a stimulus package that would focus on rebuilding the country’s failing infrastructure.  We were excited by the prospect of blending an infusion of cash into a troubled economy via an upgrading of our highways, domestic water systems, and electrical grid.  These systems had been built out way over sixty years ago and are obsolete at best.  We celebrated what we considered the administration’s wise commitment by purchasing two or three well known, and well financed, construction companies.  i.e. Fluor, Jacobs Engineering Group.

The bill that came out of Congress had little resemblance to what the public had expected.  At best there was the likelihood of 8% to 10% of the appropriation being directed to infrastructure.  It would appear that only a dollop of those monies have been put to work. Bottom line:…the companies we had bought in anticipation of the build out suffered substantial losses.  What might have been a brilliant year, turned into a damn good one.  Such is the nature of our labors.