Category Archives: February

PATH Act Makes Many Tax Breaks Permanent An outline of PATH Act provisions that may be most helpful for individual taxpayers and small businesses.

In a welcome end-of-year surprise, the Protecting Americans from Tax Hikes (PATH) Act, signed into law on December 18, 2015, made many popular tax breaks permanent and retroactively extended others.

Most of these provisions had expired at the end of 2014, and — as has become typical of tax extensions — congressional action came too late for meaningful current-year planning, though you may still benefit on your 2015 taxes. More important, the provisions that were made permanent will help individual taxpayers and small businesses plan for future years.

The PATH Act is complex, but these are some of the most significant provisions for individuals and small businesses.

Tax Breaks for Individuals

These provisions are now permanent parts of the federal tax code.

Sales tax deduction — Taxpayers who itemize deductions on Schedule A of IRS Form 1040 can elect to deduct state and local general sales taxes in lieu of state and local income taxes. This is especially important for those who live in states without an income tax or for those who make large purchases during the year.

American Opportunity Tax Credit — A tax credit of up to $2,500 of qualified higher-education expenses (partially refundable, depending on income) is available for each of a student’s first four years of college, subject to income phaseout limits.

Classroom expense deduction — Teachers can deduct up to $250 in classroom expenses “above the line” (on Form 1040 before adjusted gross income) in 2015. Beginning in 2016, the amount is indexed for inflation and might include qualifying professional development expenses.

Qualified charitable distributions (QCDs) — Individuals 70½ and older can make tax-free QCDs from their IRAs (up to $100,000 in a year). The QCD counts toward the required minimum distribution.

Employer-provided mass-transit benefits — Employer pre-tax reimbursement is set at the same level as parking reimbursement and retro­actively increased from $130 to $250 monthly for 2015 ($255 for 2016).

Child tax credit — The $3,000 income threshold for calculating the refundable credit is now permanent.

Earned income tax credit — Both the credit for families with three or more children and the higher income phaseout range for couples filing jointly have been increased.

The following tax provisions were extended through 2016.

Qualified higher-education expenses — Up to $4,000 can be deducted above the line on Form 1040, subject to income phaseouts (not available for a student claiming the American Opportunity Tax Credit or the Lifetime Learning Credit).

Mortgage debt — The discharge of up to $2 million in debt associated with a qualified principal residence can be excluded from gross income. This allows “underwater” homeowners to execute a “short sale” without being taxed on the forgiven debt.

Mortgage insurance premiums — Premiums paid for qualified mortgage insurance can be deducted as qualified residence interest on Form 1040, subject to income phaseouts.

Energy credit — A credit for 10% of certain energy-efficient home improvements remains available, up to a lifetime cap of $500.

Section 529 Plan Changes

The law includes more flexible distribution rules for Section 529 savings plans and adds computers and tech equipment to the list of qualified higher-education expenses.

Tax Breaks for Small Businesses

The following tax provisions were made permanent.

Section 179 expensing — Up to $500,000 in qualifying equipment can be expensed, with phaseout at $2 million in total purchases (indexed for inflation after 2015). Computer software and qualified real property may also be expensed, with the $250,000 limit on real property eliminated after 2015.

Research credit — The tax credit for qualified research and development expenses, which dates back to 1981, is finally permanent. Beginning in 2016, new provisions provide additional benefits for some small businesses.

Exclusion of gain on qualified small-business stock — Capital gains from the sale or exchange of qualified small-business stock held for more than five years can be excluded from income; this applies to the alternative minimum tax and to the regular income tax.

The following tax provisions were extended as indicated.

Bonus depreciation — Companies can deduct 50% of the cost of new capital purchases through 2017; the deduction falls to 40% in 2018 and 30% in 2019 for most property types. Bonus depreciation is typically applied after Section 179 expensing.

Work Opportunity Tax Credit — The credit for hiring veterans and candidates from other “targeted groups” is extended through 2019 and expanded (beginning in 2016) to employers that hire qualified long-term unemployment recipients.

Looking Forward

Further tax legislation seems unlikely until a new administration and Congress take office in 2017. Taxpayers may have to wait some time to learn about the fate of provisions set to expire after 2016. However, after years of fiscal gridlock, the PATH Act shows that politicians can find common ground regarding taxes.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2016 Emerald Connect, LLC.

The Appeal of ETFs The total trading value of exchange-traded funds on world stock exchanges increased 35% over the previous year.

Exchange-traded funds (ETFs) represented 28% of the total trading value on world stock exchanges at the end of June 2015, a 35% increase over the previous year.1 In the United States, 1,502 ETFs held more than $2 trillion in assets at mid-year, up more than 10% and 13%, respectively, over the same period in 2014.2

Why the increased interest in ETFs? The primary factors may be trading flexibility and relatively low costs.

Built Like Mutual Funds, Traded Like Stocks

An ETF is a portfolio of securities assembled by an investment company, similar to a mutual fund. Yet these two types of funds are traded very differently.

Mutual funds are typically purchased from and sold back to the investment company and priced at the end of the trading day, with the price determined by the value of the underlying securities. By contrast, ETFs can be traded throughout the day on stock exchanges, like individual stocks, and the price may be higher or lower than the value of the underlying securities because of supply and demand.

The trading flexibility of ETFs is part of their appeal, but it might lead some investors to trade more frequently than may be appropriate for their situations. And while you can usually trade between two mutual funds in the same fund family directly at the end of the trading day, if you want to move assets between two ETFs (without using additional funds), you have to sell the first ETF and then purchase the new ETF.

ETFs typically have lower expense ratios than mutual funds, but you must pay a brokerage commission whenever you buy or sell ETFs, so your overall costs could be higher, especially if you trade frequently. Most ETFs are passively managed and track an index of securities, which helps keep fees low. However, a growing number of actively managed ETFs assemble a specific mix of investments reflecting the fund’s objectives. They may have higher fees than passively managed funds.

Because ETFs are available across a broad range of indexes, they can help provide cost-efficient diversification. As with any investment, consider the potential risks before making a decision to include ETFs in your portfolio. Diversification is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss.

The principal value of mutual funds and ETFs fluctuates with market conditions. Shares, when sold, may be worth more or less than their original cost.

Exchange-traded funds and mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

1) CNBC.com, July 2, 2015
2) Investment Company Institute, 2015

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2016 Emerald Connect, LLC.

A Guide on the Road to Retirement A recent industry study found that 17% of retirement plan participants did not seek any retirement advice at all.

The title of the Beatles’ song “The Long and Winding Road” could apply to the journey toward a comfortable retirement. For those who have the foresight to start preparing in their 20s, the journey could take 40 years or more. Even those who procrastinate might have 20 or 30 years to prepare.

No matter how long the road, there are sure to be plenty of winding turns along the way. A survey conducted after the 2008–09 recession found that nine out of 10 people aged 50 to 70 had experienced at least one “derailer” that knocked them off the track to retirement. Although the broader economy played a part, many challenges were more personal, such as starting late, balancing college and retirement savings, and experiencing a traumatic event.1

Where Do You Turn for Advice?

A recent industry study found that 17% of retirement plan participants did not seek any retirement advice at all. The most common source of advice — cited by 29% of plan participants — was the official information provided by their retirement plan providers.2 This may be a good place to start, but such information is typically broad and impersonal, aimed at the group rather than tailored to individual circumstances.

There is also a seemingly endless stream of information available online. Some of it can be useful, too, but you have to be careful when listening to self-appointed “experts” who may or may not have the appropriate experience for the opinions they express. And online information is also aimed at the crowd.

So where do people turn for more personal advice? The study revealed a clear generational divide. Younger Americans tend to ask family, friends, and colleagues, but older Americans who are closer to retirement or already retired are more likely to work with a financial professional (see chart).

On one level, it makes sense that younger people might turn to those they already trust rather than establish a new relationship with a financial professional. But considering the long road ahead, it might be just as important to take advantage of professional insight earlier in one’s career. In a survey of baby boomers, 86% who worked with a financial advisor said they were better prepared for retirement because of the help they received.3 Even if retirement is still in the distance, why not take a tip from the boomers and establish a solid, well-considered foundation now, so that you can progress more confidently toward your long-term goals? If you’re closer to retirement or already there, you may have an even more immediate need for guidance.

Of course, there is no assurance that working with a financial professional will improve investment results. But by focusing on your overall objectives, a professional can provide education, identify strategies for taking control of many financial situations, and help you consider options that could have a substantial effect on your long-term financial situation.

1) BusinessInsider.com, May 16, 2013 (most current data available)
2) ThinkAdvisor.com, July 23, 2015
3) Insured Retirement Institute, April 13, 2015

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2016 Emerald Connect, LLC.

Writing a Letter of Instruction A letter of instruction has no formal legal status, but it could be just as important as a will to help loved ones settle an estate.

A will is an essential legal document that describes how your estate should be distributed upon your death. It is the basis for the probate process and can serve as a guide for your heirs.

A letter of instruction has no formal legal status, but it could be just as important to help your loved ones settle your estate and move forward with their lives. Unlike a will, which must follow legal guidelines for your state and may require an attorney, a letter of instruction can be written yourself in any way you choose. Here are some topics you may want to address.

A list of financial accounts and account numbers. You might include online user names and passwords, but if you feel uncomfortable about having these written down or expect to change them often, the executor of your estate should be able to access accounts with the account numbers and your Social Security number.

A list of documents and their locations, including (but not limited to) your will, financial accounts, insurance policies, tax returns, real estate deeds and mortgage documents, vehicle titles, Social Security and Medicare cards, marriage and/or divorce papers, and birth certificate.

Contact information for professionals who handle your financial and legal affairs, such as your attorney, financial advisor, insurance agent, and accountant. Also include others who may be helpful, such as a business partner or a trusted friend.

A list of bills and creditors, including when bills and payments are due.

Your final wishes for burial or cremation, a funeral or memorial service, organ donation, and charitable contributions in your memory.

Keep your letter of instruction in a safe, yet accessible place and tell your loved ones where it can be found. It might be wise to give the letter to the executor of your estate and other trusted friends or advisors.

Be sure to review the letter regularly and update it as appropriate. Your heirs will thank you for your foresight.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2016 Emerald Connect, LLC.

Assessing Portfolio Performance The purpose of asset allocation and why it’s important for investors to have realistic performance expectations.

You can’t help but hear about the frequent ups and downs of the Dow Jones Industrial Average or the S&P 500 index. The performance of both major indexes is widely reported and analyzed in detail by financial news outlets around the nation.

Like the Dow, the S&P 500 tracks the stocks of large domestic companies. With 500 stocks compared to the Dow’s 30, the S&P 500 comprises a much broader segment of the stock market and is considered to be representative of U.S. stocks in general. Both indexes are generally useful tools for tracking stock market trends, but some investors mistakenly think of them as benchmarks for how well their own portfolios should be doing.

However, it doesn’t make much sense to compare a broadly diversified, multi-asset portfolio to just one of its own components. Expecting portfolio returns to meet or beat “the market” is usually unrealistic, unless you are willing to expose 100% of your life savings to the risk and volatility associated with stock investments.

Asset Allocation: It’s Personal

Just about every financial market in the world is tracked by one or more indexes that investors can use to look at current and historical performance. In fact, there are hundreds of indexes based on a wide variety of asset classes (stocks/bonds), market segments (large/small cap), and styles (growth/value).

Investor portfolios are typically divided among asset classes that tend to perform differently under different market conditions. An appropriate mix of stocks, bonds, and other investments depends on the investor’s age, risk tolerance, and financial goals.

Consequently, there may or may not be a single benchmark that matches your actual holdings and the composition of your individual portfolio. It could take a combination of several benchmarks to provide a meaningful performance picture.

Keep the Proper Perspective

Seasoned investors understand that short-term results may have little to do with the effectiveness of a long-term investment strategy. Even so, the desire to become a more disciplined investor is often tested by the arrival of your annual financial statements.

The main problem with making decisions based on last year’s performance figures is that asset classes, market segments, or industries that do well during one period don’t always continue to perform as well. When an investment experiences dramatic upside performance, it may mean that much of the opportunity for market gains has already passed. Conversely, moving out of an investment when it has a down year could mean you are no longer in a position to benefit when that segment starts to recover.

There’s really nothing you can do about global economic conditions or the level of returns delivered by the financial markets, but you can control the composition of your portfolio. Evaluating investment results through the correct lens may help you make appropriate adjustments and effectively plan for the future.

Keep in mind that the performance of an unmanaged index is not indicative of the performance of any specific security, and individuals cannot invest directly in an index. Asset allocation and diversification are methods used to help manage investment risk; they do not guarantee a profit or protect against investment loss. All investments are subject to market fluctuation, risk, and loss of principal. Shares, when sold, may be worth more or less than their original cost. Investments that seek a higher return tend to involve greater risk.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2016 Emerald Connect, LLC.

The Status of Women-Owned Businesses Women-owned businesses employed almost 9 million people and added more than $1.6 trillion annually to the U.S. economy at last count.

According to the U.S. Census Bureau’s Survey of Business Owners, the total number of U.S. businesses grew just 2% between 2007 and 2012, while the number of women-owned businesses grew about 27% to 9.9 million. At last count, women-owned businesses employed almost 9 million people and added more than $1.6 trillion annually to the U.S. economy. Even though this demonstrates a certain amount of progress, female-owned businesses are still considerably smaller and generate less revenue, on average, than male-owned businesses.1–2

One reason for the gender gap is that women-owned firms tend to be concentrated in service industries that are crowded and less profitable. Many of these are sole proprietorships with low start-up costs but limited growth potential.3

Secondly, women might be satisfied with smaller firms because their business objectives are often different from their male counterparts. Being your own boss provides the opportunity to balance work life with family responsibilities, and women may be more likely to prioritize autonomy and flexibility over money.

Aiming for Growth

It’s exciting to discover an opportunity to expand the size or scope of your business, but you may need to invest a fair amount of time and money. Unfortunately, studies and statistics suggest that women-owned businesses with plenty of growth potential are often held back by a lack of access to credit.4

Here are some tips for entrepreneurial women who hope to build a larger and more lucrative enterprise.

Set higher goals. Focusing on growth planning from the early stages can make it easier to expand later. Banks often require significant collateral and several years of stable profits. Owners who track and analyze information on operations, sales, and financial performance will have thorough financial records and more convincing projections for potential lenders or investors down the road.

Build a good team. If customer demand for your company’s goods or services is steadily increasing, or you would like to act on attractive growth opportunities, you may want to hire a person (or people) with a particular skill set to help.

Join a network. Seeking out other women business owners and learning from their experiences may help you adopt the best practices and avoid costly mistakes.

1) U.S. Census Bureau, 2015
2, 4) National Women’s Business Council, 2015
3) Gallup, 2014

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. Copyright 2016 Emerald Connect, LLC.