Stocks closed higher this week as the S&P 500 and Dow Jones Industrial Average both closed the week in the black for the year.  The S&P 500 gained 3.1% and the Dow Jones Industrial Average gained 2.33% for the week.  This comes in a week that showed better than expected employment numbers.  Nonfarm payrolls declined by 36,000 jobs despite severe weather in February, far less negative than the market forecast of a decline of 63,000 jobs.  The unemployment rate also surprised this week as rate remained unchanged at 9.7%, beating expectations of a 10% unemployment rate.  Stocks gains were also inflated late Friday by reports that consumer borrowing rose unexpectedly in January for the first time since in over a year.

In earnings this week, Joy Global Inc., Fuel Systems Solutions, Inc., and PetSmart, Inc. all beat analysts’ expectations.  U.S. pay-television provider, DISH Network Corporation also surprised investors this week as the company posted earnings of 40 cents per share, coming in 25% higher than analysts’ estimates of 32 cents per share. 

What opportunities are ahead?

As this week comes to a close and we approach next week’s anniversary of the bottom of the U.S. stock market, it brings me back to a year ago and reminds me of all uncertainty surrounding the U.S. economy.  Taking a jump back to today, the mood in the U.S. economy and investors is much brighter, the dollar is getting stronger, job losses are slowing down, and consumer borrowing made its first move up in a year.

Although we lost jobs in the overall economy, the manufacturing sector actually added jobs during February.  This indicates an upturn in manufacturing output may be in the near future and a buying opportunity for investors.

The increase in consumer borrowing may be the most important economic indication of the week.  The increase shows that consumers are beginning to poke their heads out of their shells and start spending.  The increase also shows that banks may be becoming more willing to lend as the economy continues to recover. 

As companies begin to hire, and consumers continue to feel more comfortable spending money, we may see even more growth in the overall economy and markets.

Market Returns

Next Week’s Economic Releases

March 11 – International Trade

March 12 – Retail Sales

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.