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Today’s yields can’t beat inflation.

 CD investors are effectively losing money. According to Market Rates Insight, a research firm tracking bank rates, annualized inflation has surpassed long-term certificate of deposit rates since February. In April, 12-month inflation hit 3.16% while the highest-yielding 5-year callable CD on the market offered a 2.4% interest rate. May’s Consumer Price Index put annualized inflation at 3.6%; as of mid-June, the highest-yielding nationally available 5-year CD was at 3.05% APY.^1,2,3

Still, the Federal Reserve found that almost $9 trillion of American wealth was held in CDs, bank accounts and various FDIC-insured products as of April.⁴

It’s a case of déjà vu. This is the second time in recent history that CD investors have been punished for assuming so little risk. During the period from January-July 2008, the negative yield on 5-year CDs was 1.8% according to MRI.⁵

They might come out ahead … should inflation diminish. As Bankrate.com senior financial analyst Greg McBride reminded Bloomberg, “Investing in a CD isn’t compensating you for last year’s inflation; it’s compensating you for next year’s inflation, which is unknown.” Will inflation ease in the long term? Many analysts aren’t betting on it.

The appeal of CDs remains strong. After all, not many investments are federally insured. MRI vice-president Dan Geller said it best to Bloomberg: “Right now, people are more concerned about the return of their deposits rather than a return on their deposits.

With 63% of Americans still believing the nation is in a recession (according to a recent Rasmussen Reports poll), there is still plenty of skittishness about equity investment. Even with the Fed’s bond-buying campaign sending yields on short-term Treasuries and CDs toward all-time lows, some investors really aren’t hungry for risk.

Are CDs still worth it? There is no pat answer. Your own answer will depend on your preferred investment style, your risk tolerance and your financial objectives. Many people choose to park some of their invested assets in CDs and other savings instruments as part of a diversification approach. The inflation-adjusted return is dismal at the moment, but knowing that your principal is safe certainly has its appeal.

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty.

Citations.

1 – bloomberg.com/news/2011-05-23/savers-lose-as-long-term-cd-yields-fall-below-inflation.html [5/23/11]

2 – bls.gov/news.release/cpi.nr0.htm [6/15/11]

3 – depositaccounts.com/blog/2011/06/highest-5year-cd-rate-in-the-nation-at-fort-knox-federal-credit-union.html [6/17/11]

4 – articles.philly.com/2011-06-13/news/29653033_1_inflation-rate-mutual-funds-stock-market/2 [6/13/11]

5 – online.wsj.com/article/BT-CO-20110523-712255.html [5/23/11]

6 – montoyaregistry.com/Financial-Market.aspx?financial-market=roth-ira-rules-and-regulations&category=1 [6/19/11]

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Spain Debt

• Is it a valid concern that the world’s 11th largest economy could bust? –> Not the same scenario as Greece
• Spain’s situation is manageable unlike Greece’s
• Is it contagious? What are the effects on US investments?
  • Like Asian debt crises, other economies bounced back.
  • Things insulating US from Europe:
    • Job losses in Europe come back to US.
    • Gasoline prices come down because demand for gas falls in Europe.
    • Natural gas production brought back to US

Play of the Week: The Household Budget

Things to include:

1.  Housing: Mortgage/ Rent + Taxes
2.  Insurance
3.  Car Payments
4.  Entertainment
5.  Personal Care Cash
6.  Education & Self Improvement/ Child Care
7.  Debt Payments
8.  Vacations & Holidays
9.  Charitable Contributions
10.  Savings
11. Be generous on estimates

Live within your budget. If you do not have enough income, make cuts. Do not pretend your income will drastically change.

Download your weekly update here and monthy update here.

Another downturn? Or something much less severe?

If Greece leaves the eurozone in the coming months, what kind of financial ripples could reach America?

Nobody can predict the endgame yet; Greece may even stay in the euro, although that is looking less and less likely. The big concern isn’t what happens in Greece – it is about what could happen in Spain or Italy as a result of what happens in Greece.

The effects from a Greek default (and eurozone exit) would likely be felt on four fronts in America – but first, an economic chain reaction would almost certainly play out in Europe.

A Greek default could imperil Spain & Italy. If Greece leaves the euro, then Greek bondholders lose their money. A crisis of confidence in the euro could prompt institutional investors to either walk away or demand even higher interest rates on Italian and Spanish bonds. The European Central Bank could then step up and provide emergency lending, bond buying and recapitalization efforts. If those efforts were to fall short, the worst-case scenario would be a default in Italy and/or Spain.

It could also hurt U.S. banks that aren’t sensibly hedged. If Italy and/or Spain default, a severe downturn could hit EU economies and U.S. lenders would be looking at a huge potential problem. If they are capably hedged against the turmoil in the EU, they could possibly ride through it without a lot of damage. If it turns out they have made foolishly speculative bets (cf. Lehman Brothers, JPMorgan), you could have a big wave of fear, which in the worst scenario would foster a credit freeze reminiscent of 2008. Would the Fed step in again to unfreeze things? Presumably so. Without its intervention, you could have a Darwinian scenario play out in the U.S. banking sector, and few economists and investors would see benefit in that.

The good news (relatively speaking) is that U.S. banks have cut their exposure to Greece by more than 40% as that country’s sovereign debt crisis has unfolded. Pension funds and insurers have joined them.¹

Stocks could fall sharply & the dollar could soar. The greenback would become a premier “safe haven” if foreign investors lose faith in the euro. At the same time, a crisis of confidence would imply big losses for equities (and by extension, the retirement savings accounts and portfolios of retail investors).

U.S. companies could be hurt by fewer exports to Europe. Right now, 19% of U.S. exports are shipped to EU nations. If a deep EU recession occurs, demand presumably lessens for those exports and that would hurt our factories. If institutional investors run from the euro, it would also make U.S. exports more costly for Europeans. Additionally, the EU is the top trading partner to both the U.S. and China; as Deutsche Bank notes, the EU accounts for 25% of global trade.²

Our recovery could be hindered. Picture higher gas prices, a markedly lower Dow, the jobless rate increasing again. In other words: a double dip.

In mid-May, economists polled by Reuters forecast 2.3% growth for the U.S. economy in 2012 and 2.4% growth in 2013. These economists also believe that were the fate of Greece not on the table, U.S. GDP might prove to be .1-.5% higher.²

If politicians play their cards right, we may see better outcomes. For example, Greece could elect a new government that decides to abide by the requested austerity cuts linked to EU/IMF bailout money. Greece could remain in the EU and banks in Spain, Italy, Germany and France could ride through the storm thanks to sufficient capital injections. Global stocks would be pressured, but maybe on the level of 2011 rather than 2008. (Maybe the impact wouldn’t even be that bad.)

In a rockier storyline, Greece becomes the brat of the EU – a newly radical government rejects the bailout terms set by the EU and IMF, Greece leaves the EU and starts printing drachmas again. The EU, IMF and maybe even the Federal Reserve act rapidly to stabilize the EU banking sector. Early firefighting by central banks results in containment of the crisis after several days of shock, with U.S. markets recovering in decent time (yet with investors still nervous about Italy and Spain).

Containment may be the key. If a Greek default can be averted or made orderly by the EU and the IMF, then the impact on Wall Street may not be as major as some analysts fear – and who knows, the U.S. markets might even end up pricing it in. Greece only represents 2% of eurozone GDP; our exports and credit exposure to Greece are minimal at this juncture. Our money market funds have mostly stopped investing in Europe. So with diplomacy and contingency planning afoot, a “Grexit” might do less damage to the world economy than some analysts believe.²                                 

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. Marketing Library.Net Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or a recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – www.csmonitor.com/USA/Latest-News-Wires/2012/0514/Greece-s-economic-woes-may-hurt-US [5/14/12]

2 – www.cnbc.com/id/47562567 [5/25/12]

Little details worth paying attention to as April approaches.

Every year, the IRS institutes big and little changes – and some don’t get as much notice as they should. This year is no exception. Here is a rundown of some of alterations and asterisks affecting taxpayers this year.

Don’t forget Form 8949. If you are reporting capital gains or losses for 2011, you must file this new form along with your return. Speaking of new paperwork, if you own foreign financial assets whose total value exceeds the applicable reporting threshold, you will need the new Form 8938.¹

Be sure to report Roth rollovers. Back in 2010, did you convert or roll over a traditional IRA to a Roth IRA or other Roth account? If you didn’t report the amount of the rollover on your 2010 federal return, you can report half the amount on your 2011 return 2011 and the remaining half in 2012.¹

 A select few can still take the first-time homebuyer credit. By 2011, the credit had disappeared for just about everybody … but select military personnel and intelligence agents are still able to claim the credit for 2011.¹

 If you’re deducting mileage, rates changed in the middle of 2011. The IRS is giving taxpayers a better break given the recent hikes in gas prices. So, if you’re deducting mileage driven while operating an automobile for business, the rate for the first six months of 2011 is $0.51 per mile, and the rate for the last six months of 2011 is $0.555 per mile. The standard deduction rate for medical or moving mileage was also raised: $0.19 a mile from January 1-June 30, $0.235 a mile from July 1-December 31. The mileage deduction rate for providing services for charitable organizations got no boost – for all of 2011, it is $0.14 per mile.²

Fewer cars qualified for the alternative motor vehicle credit last year. Only new fuel cell motor vehicles qualified for the tax break in 2011.¹

 Three healthcare changes to note. If you qualify for the health coverage tax credit (HCTC), that credit might be larger for 2011 thanks to recent law changes. Did you receive the 65% tax credit in any of the last 10 months of 2011? If so, you get to claim an additional 7.5% retroactive credit on your 2011 federal return – the HCTC was bumped up to 72.5% from 65%.³

The IRS altered the definition of qualified medical expenses for HSAs, MSAs, FSAs and HRAs last year. As IRS Publication 969 now notes, “a medicine or drug will be a qualified medical expense only if the medicine or drug 1) requires a prescription, 2) is available without a prescription (an over-the-counter medicine or drug) and you get a prescription for it, or 3) is insulin.” Another asterisk worth noting: if you took a distribution from an HSA or MSA last year that wasn’t used for a qualified medical expense, the tax penalty for that has increased to 20% for 2011.⁴

Also, a note about the self-employed health insurance deduction for 2011: if you are looking at Schedule SE and wondering where it went, it has migrated over to line 29 of Form 1040.¹

The AMT exemption amount got another COLA. Thanks to this adjustment, you are subject to the AMT for tax year 2011 only if you earned more than $48,450 as a single filer, $37,225 if married filing separately, or $74,450 if filing jointly.¹

Don’t send your return to an obsolete filing address. Some of the filing locations for federal tax returns have recently changed. Visit www.irs.gov to see where you should send your return this year – it is probably the same address as always, but check and see as it may be different.¹

Finally, you get two extra days. Procrastinators, take heart: once again, the federal filing deadline this year falls on Tuesday, April 17. That’s because April 15 is a Sunday and April 16 is a holiday within the District of Columbia (Emancipation Day).¹

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. Marketing Library.Net Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or a recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – www.advisorone.com/2012/03/05/irs-top-12-tax-law-changes-for-2012 [3/5/12]

2 – www.irs.gov/newsroom/article/0,,id=240903,00.html [6/23/11]

3 – www.irs.gov/individuals/article/0,,id=109960,00.html [2/24/12]

4 – www.irs.gov/pub/irs-pdf/p969.pdf [1/13/12]

Right now, there are dozens of mutual funds and ETFs devoted explicitly to investing in China’s impressive emerging market. Even with the risk of asset bubbles, the promise of China is simply too tantalizing to ignore for many.

The question is whether its economy can maintain its powerful momentum in 2012. If not, the impact on global investors could be significant.

Is China headed for a soft landing… or a hard one? Recent data out of the PRC has given economists pause. China’s official manufacturing index fell to 49.0 last November, indicating sector contraction; since then, it has barely crept above 50 (51.0 in February, 50.5 in January). Its red-hot GDP cooled slightly to 8.9% in Q4 2011 following a series of interest rate hikes by the People’s Bank of China to try and rein in inflation. Still, consumer prices are on the rise in China – the inflation rate rose 0.4% in January to 4.5%.¹

Other troubling signs emerged in January: a 23.8% monthly drop in auto sales, a fifth consecutive monthly dip in property prices, a third straight monthly decrease in foreign direct investment, and month-over-month declines in exports and imports.²

While China has one of the best debt-to-GDP ratios in the world – 16.3% at the end of 2011 – that ratio may reflect the “official story” rather than the reality of its “hidden liabilities”.

What if the yuan appreciates? Until recently, this was the trend. The People’s Bank of China elected to loosen the yuan from the dollar about two years ago, and the currency now “floats” within a narrow band. In February the yuan reached an all-time high versus the U.S. dollar (6.3287). The PBC projects about 3% appreciation for the currency in 2012.⁴

An even stronger yuan would alter the exchange rate between China and the U.S. and theoretically lessen American consumer demand for Chinese imports. If the yuan continues to appreciate against the dollar, there may be three macroeconomic effects. One, American firms would have to pay more for Chinese goods they buy. Two, American companies might try to source out new suppliers and cheaper factories in nations like India, Thailand and the Philippines – or they might even direct some dollars back into our own manufacturing sector. None of this can be done overnight, so in this scenario our trade balance with China could worsen before showing any long-run improvement.

A fast-appreciating yuan would mean more purchasing power for the rising Chinese middle class, less emphasis on exports in China’s economy, and some deflation – and a little price deflation might be welcomed by China’s citizenry. However, a gradually appreciating yuan (on the level of 2-3% annually) might amount to the best-case scenario for the global economy and investors.

What if the yuan depreciates? China is poised for political change in late 2012 – a Communist Party congress will occur and Vice President Xi Jinping is in line to become the nation’s new leader. Will the new administration elect to reverse any yuan appreciation? ²

For some time, China has bought dollars in the forex markets to keep the yuan undervalued, and that has served as a tonic to its export-driven economy. A weak yuan policy (and low labor costs) also helped to encourage direct foreign investment in China. Weakening the yuan again would drive up the cost of imports for the Chinese consumer, and China would be prompted to boost exports anew – implying more economic growth, less unemployment and renewed price advantage in global markets – in other words, an antidote to a slowdown.⁴

The cloudy near-term future of the yuan makes investing in China something of a wild card. While some economists think a stronger yuan would be good for the world economy in the long run, the fear of a hard landing (and its impact not only on the Chinese economy but the world economy) may prompt the nation’s leaders to move in a different direction.

Chinese government researchers have told Reuters that the PRC has set a target of 7.5% growth for 2012; the PRC usually sets GDP targets it can comfortably meet, so results might exceed projections. Even so, growth might not approach the 9.2% GDP China saw in 2011. In February, Standard & Poor’s gave China a 10% chance of a hard landing in 2012 (5% GDP) and a 25% chance of a “medium landing” (7% GDP).^2,5

Which way in? If you are thinking about investing in China, keep in mind that its economy has a relatively high inflation rate. This may encourage Chinese companies to overstate or overestimate factors like sales growth, operating margins, debt-to-asset ratios and fixed asset turnover. So while an individual investor may at first be enticed by a large-cap international Chinese company, he or she may opt for an ETF or index fund after further consideration. Quite a few stock market analysts think these vehicles provide sensible entry into China for the small investor.

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. Marketing Library.Net Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or a recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – www.chinadaily.com.cn/china/2012-03/02/content_14735838.htm [3/2/12]

2 – www.forbes.com/sites/gordonchang/2012/02/20/rearranging-the-deck-chairs-on-the-ss-chinese-economy/ [2/20/12]

3 – www.forbes.com/sites/gordonchang/2012/02/26/how-will-china-pay-off-its-debt/ [2/26/12]

4 – www.cnbc.com/id/45788856/Yuan_at_Record_High_vs_Dollar_On_Track_for_4_Gain_in_2011 [2/9/12]

5 – www.nasdaq.com/article/sp-sees-china-soft-landing-as-most-likely-scenario-20120202-00090 [3/2/12]

CAN THE LAST QUARTER OF 2011 LIVE UP TO HISTORICAL AVERAGES?

Presented by Rick Gardner

Is a rally ahead? You may have heard that stocks tend to do well in the fourth quarter. History affirms that perception: while past performance is no guarantee of future results, the last quarter of the year has historically been the best quarter of the year for U.S. equities. As data from Bespoke Investment Group notes:

• The S&P 500 has averaged a +2.44% performance in fourth quarters since 1928.
• In the last 20 years, it has averaged +4.57% in fourth quarters.
• In the last 30 years, it has advanced in 24 of 30 fourth quarters with an average price return of better than 7%.¹

Will the Street put its anxieties aside? Right now, you have a lot of uncertainty. Many analysts see a stock market unimpressed by tepid domestic growth and waiting fearfully for the other shoe to drop (meaning Greece).They see more pain ahead for U.S. investors. On the other hand, there is also talk of when a point of capitulation might be reached, i.e., is Wall Street simply ready to rally even in the face of the debt troubles in Europe and the slow recovery here.

You could argue that certain Wall Street psychologies (and tensions) aid 4Q rallies. After all, the pay of money managers relates to performance and there is renewed pressure on them to come through as the end of a year looms.

Could new optimism surface? Perhaps it is surfacing now. As the third quarter wrapped up, Reuters polled 350 stock market analysts worldwide. Their consensus forecast was that 18 of 19 major world stock indices would either advance or suffer insignificant losses in the fourth quarter (Taiwan’s TAIEX was the lone exception in the forecast).²
They also felt that two indices would achieve 2011 gains: South Korea’s Kospi, and the Dow Jones Industrial Average. They think the Dow will end 2011 up about 2%. The Dow was at -5.74% YTD at the closing bell on September 30.^3,4

On a particularly bullish note, Bloomberg surveyed 12 Wall Street strategists in early October and found them collectively forecasting the greatest 4Q rally in 13 years. They think that the S&P 500 will rise 15% this quarter, which would mean a push to 1,300 by New Year’s Day.⁵
Stocks certainly are cheap. Bloomberg data also indicated that when the S&P nearly closed at bear market levels in early October, it was down to 12x reported earnings; valuations were lower than they had been at any point since 2009. At the end of September, the MSCI World Index was trading at just above 10x its 12-month forward earnings, well under its average of 14.3x earnings since 2001.^2,5

Some analysts are optimistic about the coming quarters. Indeed, the 350 analysts surveyed by Reuters are envisioning some impressive bull runs. They think Russia’s RTSI will advance 32% between now and mid-2012; they feel Brazil’s Bovespa will rise approximately as much in the next three quarters. If you follow emerging markets, forecasts like these may not surprise you much. However, they also see double-digit advances for the Dow, Nikkei 225, All Ordinaries, CAC 40 and DAX by mid-2012.²

Historically, stocks have had impressive resilience. Here are two other encouraging statistics in the wake of the Dow and S&P’s double-digit third quarter drops:

• The Dow had 14 quarterly losses of 10% or more in the period from 1962-2009. In 79% of the ensuing quarters, the Dow pulled off a quarterly gain.
• The S&P suffered 11 quarterly losses of 10% or more during a stretch from 1981-2009. In 80% of the following quarters, it posted a quarterly gain.⁶

Another 4Q rally depends on many variables, but if Greece avoids default and 3Q earnings don’t disappoint, we might see a better end to 2011 than the bears anticipate.

COULD YOUR SOCIAL SECURITY INCOME BE TAXED?

A CLOSER LOOK AT THE PROVISIONAL INCOME RULES.

Presented by Rick Gardner

Many new retirees assume that Social Security income is tax-free. That is not always the case. The Social Security Amendments of 1983 opened the door to taxes on some SSI, depending on the amount of income someone earns in a calendar year.⁷

How much of your SSI is potentially taxable? As much as 85% of it, under certain conditions. Four factors determine how much of your SSI will be taxed:

• The total amount of income that you earn.
• Where it comes from.
• Your taxpayer filing status.
• Your provisional income – a MAGI calculation which you can figure out by using Worksheet 34-1 in IRS Publication 915 or the Social Security Benefits Worksheet in the instruction booklets for IRS Form 1040 and Form 1040A.⁸

How is provisional income determined? In simple terms, this is calculated using your AGI, minus one-half of your Social Security benefits. (Tax-free interest from investments such as muni bonds also becomes provisional income.)⁹

How much income can you earn before your SSI is taxed? The 2011 limits are pretty straightforward:

• Single person: up to 50% of your SSI can be taxed if your provisional income is greater than $25,000, and up to 85% of your SSI can be taxed if your provisional income exceeds $34,000.
• Married/head of household: up to 50% of your SSI can be taxed if your provisional income is greater than $32,000, and up to 85% of your SSI can be taxed if your provisional income exceeds $44,000.⁹

Who doesn’t have to worry about this? If your only source of income is Social Security or equivalent retirement railroad benefits, it is unlikely that your SSI will be taxed and you may not even need to file a federal return. In 2011, Social Security benefits are tax-exempt for single taxpayers with provisional incomes under $25,000 and married/head of household taxpayers with provisional incomes under $32,000.^10,12

What can be done to reduce (or avoid) the tax? If you are close to hitting either the 50% or 85% tax levels, you may want to think twice about moves that could take your provisional income over the threshold – for example, receiving a sizable chunk of profit from selling a stock, or converting a traditional IRA to a Roth IRA. Here are some common moves people make with the input of a qualified tax or financial professional:

• Delaying some investment income, rental income or pension income until the following tax year
• Shifting assets from accounts or investments producing reportable income (like CDs) into tax-deferred alternatives
• Working less
• Ramping up pre-tax contributions to an IRA, 401(k) or 403(b)
• Lowering interest income (such as income from CDs)
• Lowering tax-exempt interest income (from muni bonds, federal tax refunds, veteran’s benefits, gifts and other sources).^11,12,13

Before April rolls around, it might be wise to consider the different ways to manage taxes on your Social Security benefits. Some new SSI recipients may be taken aback by the tax they end up paying; alternatively, you can plan to reduce it.

———————————————

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. All indices are unmanaged and are not illustrative of any particular investment. The S&P 500 is a market-capitalization weighted index of 500 Large-Cap common stocks traded in the United States on the NYSE, AMEX and NASDAQ. The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the NYSE and the NASDAQ.

Citations:

1 – moneywatch.bnet.com/investing/blog/investment-insights/stocks-ready-for-fourth-quarter-rally/2833/ [10/3/11] 2 – reuters.com/article/2011/09/29/us-markets-stocks-poll-idUSTRE78S4EK20110929 [9/29/11] 3 – montoyaregistry.com/Financial-Market.aspx?financial-market=an-introduction-to-the-stock-market&category=29 [10/7/11] 4 – cnbc.com/id/44729786 [9/30/11] 5 – bloomberg.com/news/2011-10-07/stock-index-futures-in-u-s-rally-after-employment-growth-beats-forecasts.html [10/7/11] 6 – cnbc.com/id/44677114/Third_Quarter_Pain_Fourth_Quarter_Gain [9/29/11] 7 – ssa.gov/history/InternetMyths2.html [3/22/11] 8 – investopedia.com/terms/p/provisional-income.asp#ixzz1ZTtLY5zk [9/30/11] 9 – www.house.leg.state.mn.us/hrd/issinfo/sstaxes.htm [2/11] 10 – www.irs.gov/taxtopics/tc423.html [9/23/11] 11 – montoyaregistry.com/Financial-Market.aspx?financial-market=what-is-tax-efficiency-and-why-does-it-matter&category=31 [9/30/11] 12 – kiplinger.com/features/archives/krr-strategies-to-reduce-taxes-on-social-security.html [9/1/10] 13 – investopedia.com/articles/pf/08/social-security-tax.asp#axzz1ZTpgvAFu [2/14/08]

The Budget Control Act of 2011 is poised to become law – just in time to meet the August 2 Treasury deadline and reassure world financial markets. The framework of the new law is complex and shows that both Democrats and Republicans can claim some victories.

The federal deficit will be reduced by at least $2.1 trillion. That figure comes from the non-partisan Congressional Budget Office. The savings will be realized over a decade … although it isn’t yet clear where the bulk of the cuts will be made.¹

More than $900 billion will be saved through the first wave of cuts.

• Discretionary spending on defense and non-defense programs will be reduced by $741 billion over a 10-year period. This includes a $350 billion cutback in defense spending at the Pentagon (a Democrat goal in the negotiations).
• Another $156 billion in savings will emerge as a result of shrinking interest costs on the national debt.
• Another $20 billion will be cut from education loan initiatives and through efforts to identify fraud and abuse in other mandatory federal programs. (Student loan funding will be reduced to $22 billion by 2021, but Pell Grant funding will increase by $5 billion by 2015.)^1,2

A bipartisan committee of 12 will have to recommend between $1.2 trillion and $1.5 trillion in additional federal budget cuts by November 23.

This committee will likely propose cuts to Social Security, Medicare and Medicaid and perhaps further reductions to the defense budget. Its membership will be handpicked. House Minority Leader Nancy Pelosi (D-CA) and Senate Majority Leader Harry Reid (D-NV) each get to select three Democrats; House Speaker John Boehner (R-OH) and Senate Minority Leader Mitch McConnell (R- KY) each get to pick three Republicans.

Congress has to vote on their recommendations by December 23. If the bill is defeated, then automatic budget cuts will kick in on January 2, 2013 – at least $1.2 trillion worth, divided almost evenly between defense and domestic spending. (Social Security, Medicaid, military pay and veteran’s benefits would be exempt; Medicare would not be, according to House Speaker Boehner.)

In addition, a Congressional vote on a balanced budget amendment to the Constitution will occur before the end of 2012. An approved balanced budget amendment would have to be ratified by two-thirds of the states. (This was a key victory for Tea Party Republicans.)^2,3,4

The debt ceiling will be raised by up to $2.4 trillion. It will be raised incrementally from the current $14.3 trillion level, dependent on a series of triggers:

The first trigger: the bill’s passage. Congressional approval amounts to a formal declaration that the federal government is less than $100 billion away from hitting the debt cap. Once the Budget Control Act of 2011 is made law, President Obama may immediately raise the debt limit by $400 billion.

The second trigger: the initial $400 billion increase. This move initiates another formal request to hike the debt ceiling by another $500 billion dependent on Congressional authorization. It is widely assumed that Congress will disapprove this request, with President Obama vetoing the disapproval and Congress failing to override the veto. The probable outcome: the debt limit rises by the desired additional $500 billion.

The third trigger: what Congress does by December 23. Here are the possibilities that could play out during the holiday season:

• If Congress fails to pass the deficit-reduction bill generated by the bipartisan committee of 12, then President Obama can formally request another hike in the debt limit – a $1.2 trillion increase. Congress would likely reject this request, President Obama would use his veto power in response, and Congress would likely fail to override the veto.
• If Congress passes the deficit-reduction bill, then President Obama gets automatic authority to raise the debt cap by an amount equivalent to the budget cuts defined in the new law.
• Alternately, if Congress passes a balanced budget amendment and sends it to the states, President Obama immediately gains the authority to raise the federal debt limit by $1.5 trillion.³

Tax hikes for the rich? Not immediately. In a key Republican victory, the two-step bill does not include tax increases or new levies for those in the highest tax brackets. House Speaker Boehner said July 31 that the forthcoming 12-member committee could not approve tax hikes – it would be “impossible” under current federal budgeting rules. Yet with the expiration of the Bush-era tax cuts increasingly probable in 2013 and the possible elimination of some deductions and exemptions in the tax code to generate additional revenue, there is a good chance many Americans will pay out more to the IRS in the near future. The White House says $1 trillion could be saved alone by not extending the EGTRRA/JGTRRA cuts further.⁵

December isn’t that far away. Expect more drama on Capitol Hill as 2011 ends, with a chance of added volatility in our financial markets.

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The Best and The Worst

Rounding up the rankings of places to be (and not to be) financially.

Presented by Rick Gardner

Do you live in one of the worst tax states for retirees? Are you fortunate enough to live in one of the best states to do business? Here is a roundup of the miscellaneous, fascinating rankings offered by leading magazines and websites.

What are the best (and worst) states for business? Well, CNBC has ranked all 50 states based on 43 criteria including quality of work force, cost of doing business, quality of life, state economies and access to capital. Coming in at #1: Virginia. Number two is Texas, number three is North Carolina. The state with the lowest cost of doing business – Iowa – ranked 9th. The bottom three? Hawaii (48th), Alaska (49th) and … Rhode Island? Yes, it was dead last. CNBC cited its 10.9% jobless rate and a corporate tax rate nearly as high.^6,7

What are the best (and worst) tax states for retirees? Kiplinger sees four “tax hells” in the Northeast. Vermont is ranked #1 (high property taxes along with state levies of up to 8.95%) and Maine, Connecticut and New Jersey also make the bottom ten. Minnesota is #2, Nebraska #3, Oregon #4 and California #5. As to the best, Wyoming ranks #1 among the “tax heavens”, followed by Mississippi, Pennsylvania, Kentucky and Alabama. Wyoming has no estate tax, no state income tax, and only a 4% sales tax; the state collects abundant revenues from oil and mineral firms.^8,9

What cities may be especially attractive for a retiring baby boomer? Fortune offers 4 “great places”, citing ideals among four types of retirement destinations. It ranks Athens, GA as the best college town, Seattle as the best big city, St. George, UT as the best town for outdoors lovers and San Rafael, Argentina as an ideal foreign city for retirement.¹⁰

Where could I live well and prosper in my career or business? Kiplinger has ranked its Best Value Cities – metro areas featuring “vibrant economies, a low cost of living, and plenty of lifestyle amenities.” The #1 place to be is … Omaha. Then we have Charlotte at #2, Nashville at #3, and respectively 4th-10th we have Colorado Springs, Knoxville, Lexington, Little Rock, Wichita, Cedar Rapids and Cincinnati. It also identifies the metro areas with the largest household income growth between 2005- 09: Midland, TX (+31.3%), Grand Junction, CO (+24.8%) and Jacksonville, NC (+21.8%) came in 1-2-3, while the three biggest household income declines were in St. George, UT (-11.2%), Muskegon-Norton Shores, MI (-11.4%) and Albany, GA (-11.9%).^11,12

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This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty.

Citations.
1 – money.cnn.com/2011/08/01/news/economy/debt_ceiling_deal_cbo/ [8/1/11] 2 – npr.org/2011/08/01/138885258/congress-to-move-quickly-on-debt-spending-deal [8/1/11] 3 – blogs.abcnews.com/politicalpunch/2011/07/debt-ceiling-framework-where-they-landed.html [7/31/11] 4 – theatlantic.com/business/archive/2011/08/congress-needs-a-kinder-gentler-balanced-budget-amendment/242871/ [8/1/11] 5 – foxnews.com/politics/2011/08/01/tax-hikes-impossible-under-debt-deal-think-again/ [8/1/11] 6 – cnbc.com/id/41666602 [7/29/11] 7 – advisorone.com/2011/06/29/top-10-best-states-for-business?t=marketing-technology [6/29/11] 8- finance.yahoo.com/focus-retirement/article/112987/tax-unfriendly-states-retirees [6/24/11] 9 – finance.yahoo.com/retirement/article/113021/5-tax-friendly-states-retirees-kiplingers [7/1/11] 10 – advisorone.com/2011/06/03/4-great-places-for-baby-boomers-to-retire?page=2 [6/3/11] 11 – kiplinger.com/guides/best-cities/ [7/31/11] 12 – kiplinger.com/tools/bestcities_sort/index.php?sortby=salary&sortorder=ASC [7/31/11]

You’ve probably heard that you should retain copies of your federal tax returns for 7 years. Is that true, or a myth? How long should you keep those quarterly and annual statements you get about your investment accounts? And how long should you keep bank statements before throwing them away?

Your age, wealth and health might shape your answer.
If you are not yet retired, then you may wish to follow the general “rules of thumb” presented across the rest of this article.

On the other hand, if you are retired and there is any chance that you might need to apply to Medicaid, then you should keep at least five years’ worth of all financial records on hand (including credit card statements).

Why? Medicaid has a five-year “look-back” period in many states. To be approved for benefits in those states, you have to prove that you didn’t give away funds during that five-year period. To prove this, you must product complete records from every bank and brokerage account to which you have access, including those held jointly. With all the Wall Street mergers and bank closings in the last five years, these financial records can be really hard to obtain if you don’t have them.

Another special circumstance: if someone you love ends up under court supervision via guardianship or conservatorship, all financial records must be kept from date of that guardian’s or conservator’s appointment until the court gives final approval to the fiduciary’s financial account.

All that said, many people do not need to retain all financial statements “forever.” Here are some suggestions on what to keep and when to purge.

Tax returns
The Internal Revenue Services urges you to keep federal tax returns until the period of limitations runs out. The period of limitations= the time frame you have to claim a credit or refund, or the time frame in which the IRS can levy additional taxes on you. (This is a good guideline for state returns as well.)

If you file a claim for a credit or refund after you file your tax return, the IRS would like you to keep the relevant tax records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later. If you claim a loss from worthless securities or bad debt deduction, you are advised to hang onto those records for 7 years. If you…us…filed a fraudulent return or no return, you should keep related/ relevant documents for 7 years. The IRS also advises you to retain employment tax records for at least 4 years after the date that the tax becomes due or is paid- again, whichever is later.

Some tax and financial consultants advise people to keep their tax returns forever, but concede that canceled checks, receipts and other documents supplemental to returns can usually be safely discarded after 3 years. (The standard IRS audit goes back three years.)

Tax records relating to real property or “real assets” should be kept for as long as you hold the asset (and for at least 7 years after you sell, exchange or liquidate the asset). These records can help you figure appreciation, depreciation, amortization, or depletion of assets with regard to the property. You also might want to keep receipts and tax records related to major home improvements- if you sell your home, you can show tomorrow’s buyer how much you put into the house.

Mutual fund statements
The annual statement is the one that counts. When you get your yearly statement, you can toss quarterly or monthly statements (unless you really want to keep them). You might want to quickly glance and make sure your annual statement truly reflects changes of thee past four quarters.

You want to keep any records showing your original investment in a fund or a stock, for capital gain or loss purposes. Your annual statement will tell you the dividend or capital gains distribution from your fund or stock; as you may be reinvesting that money, you have a good reason to keep that statement.

IRA and 401(K) statements
You get a new one each month or quarter; how do you really need? The annual statement is the most relevant. Additionally, you want to hang onto your Form 8606, your Form 5498, and your Form 1099-R.

Form 8606 is the one you use to report nondeductible contributions to traditional IRAs. Form 5498 is the one your IRA custodian sends to you- it is sometimes called the “IRA Contribution Information” or “Fair Market Value Information” form, and it usually arrives in May. It details a) contributions to your traditional or Roth IRA and b) the fair-market value of that IRA at the end of the previous year. Form 1099-R, of course, is the one you get from your IRA custodian showing your withdrawals (income distributions).

If you are 59 ½ or older and have owned a Roth IRA for 5 years or more, the assets in your account become tax-free, lessening your need to save these forms. However, you will want to keep a paper trail before then- if you somehow need to make early or tax-free withdrawals or write off a loss, you need the documentation.

Bank statements
The rule of thumb for most people is 3 years, just in case you are audited. Some people shred bank statements after a year, or immediately, fearing that such information could be stolen.

In some cases, it is wise to hang onto bank statements longer. If you are going through a divorce, if someone tries to take you to court in the future, or if a creditor comes knocking, you may want to refer to them. Your bank may provide you with archived statements online or on paper (but it may charge you a fee for hard copies).

Payroll documents
Most financial and tax consultants advise you to retain these for 7 years or longer if you are a are a small business owner or sole proprietor. The IRS would like you to keep them around at least that long. Again, should there be a lawsuit or a divorce or any kind of potential legal dispute involving your company or one of its employees, a detailed financial history can prove very useful.

Credit card statements
You don’t need each and every monthly statement, but you may want to keep credit card statements that contain tax-related purchases for up to 7 years.

Mortgage statements
The really crucial records are most likely on file at the County Recorder’s office, but it is recommended that you retain your statements for up to 7 years after you sell or pay off the mortgaged property.

Life insurance
Keep policy information for the life of the policy plus 3 years.

Medical records and medical insurance
The consensus is 5 years from the time treatment ends (or from the time medical services are rendered, with regards to insurance). Do you think you can claim medical expenses on your tax return? Then follow the IRS suggestion and retain records for 7 years following the end of the year in which they are claimed.

I won’t lie…having a never-ending supply of cash that would allow me to buy whatever I wanted to would be lovely. It would definitely be better than incurring debt. But until and unless you find a way to have a never-ending supply of cash, debt is likely a part of your life. So how can you tell “good debt” from “bad debt”?

To put it simply, bad debt is any debt you incur when buying something that will lose value.  Worse debt (or really bad debt) is debt incurred when purchasing something consumable (meaning it will have NO further value).  This seems logical, right?  You with me?

If bad debt is buying something that loses value, then it stands to reason that good debt involves purchasing something that will gain, retain, or create value.  A home mortgage is a prime example of good debt.

Many people assume bad debts because “that’s just how it is”.  But that’s not necessarily how it has to be.  For example…vehicles.  Many Americans buy cars via automobile loans.  But a new or late-model car loses value the moment you drive it off the lot, and it continues to lose value with every mile it travels.  So why incur bad debt for this?  Well, for many a vehicle is simple a necessity and a loan is the only means they have available to obtain it.  But a large percentage of Americans purchase more car then they really need or can afford.  It’s important, when facing bad debt, to keep that debt in check.  Purchase what you need, with a plan to pay it off as quickly as you can.

Can bad debt turn into good debt?  Yes!  Let’s say you purchase a vehicle by taking out a loan for a portion of the cost- that’s bad debt.  But if the vehicle is a hybrid or electric vehicle that typically has a high resale value and saves you a substantial amount of money on gasoline, your bad debt could turn into good debt.

There are exceptions.  For example…what about student loans?  Your education is only used by YOU and cannot be re-sold.  So is that bad debt?  Not exactly.  As I mentioned before, if a debt creates value, then it can be considered good debt.  A student loan definitely falls into this category, as higher education creates increased earning potential.

We all want to be debt-free.  That takes time.  Until that time, try to get a handle on which kind of debt you are incurring.