05/28/2009
What Does The American Recovery and Reinvestment Act of 2009 Do For You
The $787 billion American Recovery and Reinvestment Act of 2009 contains many provisions that provide tax relief and financial assistance for individuals. Let’s look at the major points that could benefit you.
The Making Work Pay tax credit is a new refundable personal income tax credit available for 2009 and 2010 only. It is equal to 6.2 percent of your earned income, up to $400 or $800 if you're married and file a joint tax return. The credit is phased out for higher-income individuals who earn a modified adjusted gross income (MAGI) greater than $75,000 or $150,000 if married filing jointly. The credit is eliminated if your MAGI is $95,000 or $190,000 if married filing jointly. If you received the $250 economic recovery payment because you were eligible for Social Security, Railroad Retirement, or veterans benefits, your 6.2 percent credit will be reduced by that amount.
The Hope tax credit has been expanded and renamed the American Opportunity tax credit for 2009 and 2010. It increases the annual limit per eligible student to $2,500, extends the time limit to the first four years of post-secondary education, is partially refundable reducing your tax bill up to 40 percent of the $2,500 limit, and can now be claimed against alternative minimum tax (AMT) liability. The Hope credit phases out at increased MAGI levels of $80,000 and $160,000 if married filing jointly. It is eliminated if your MAGI is $90,000 or $180,000 if married filing jointly.
The first-time homebuyer tax credit has been extended through November 30, 2009. To qualify as a first-time homebuyer, you and your spouse must not have owned any other principal residence during the three-year period prior to your purchase date. The credit is 10 percent of the purchase price up to $8,000 for qualified home purchases made after 12/31/08 and before 12/01/09. If this home is your principal residence for the next three years, you do not have to pay the credit back. The credit is reduced if your MAGI exceeds $75,000 or $150,000 if married filing jointly and is not available to those whose MAGI is $95,000 or $170,000 if married filing jointly.
The alternative minimum tax (AMT) has temporary exemption limits for 2009 of $46,700 for unmarried, $70,950 if married filing jointly, and $35,475 if married filing separately.
The 2009 Act also includes provisions that provide:
- A one-time $250 economic recovery payment to most individuals receiving Social Security benefits, Railroad Retirement benefits, or veterans benefits.
- Up to $2,400 of unemployment compensation benefits received in 2009 will be excluded from income for federal income tax purposes.
- For individuals who lose their jobs on or after September 1, 2008, and before January 1, 2010, the Act offers subsidized COBRA premiums requiring those who qualify to pay only 35% of the COBRA premiums needed to continue their health coverage for up to 9 months.
- A new standard deduction for state sales and excise tax related to the purchase of a qualified motor vehicle after February 17, 2009, and before January 1, 2010.
- For 2009 and 2010, the refundable portion of the child tax credit is increased, and the earned income tax credit that benefits families with three or more qualifying children and married couples filing jointly has been expanded.
- The definition of qualified higher education expenses for 529 qualified tuition programs is expanded to include expenses for computer technology, equipment, and internet access if used while enrolled at an eligible educational institution for 2009 and 2010.
Contact your friendly home town banker for all of your tax planning needs.
05/20/2009
Income Taxes: Am I Withholding Enough?
Estimating your federal income tax withholding properly is important for many reasons. If you receive an income tax refund, you have given the IRS an interest-free loan during the year --- with your hard-earned money. In contrast, if you owe taxes when you file your return, you may have to fork up some cash at tax time. Determining the correct withholding amount for your salary or wages is primarily about having just enough taxes withheld to prevent you from incurring penalties when your tax return is due. This can be easily done by reading and understanding IRS Publications 505 and 919 and providing your employer with a properly completed and updated Form W-4. You must do this whenever your circumstances change significantly.
The amount you earn and the information provided to your employer on Form W-4 are the two factors that determine the amount of income tax that your employer withholds from your regular pay. Form W-4 collects three primary pieces of information:
- The number of withholding allowances you want to claim.
- Whether you want taxes to be withheld at the single or married rate.
- Any additional amount you might want withheld from your paycheck, which is optional.
If you withhold taxes at the married rate because you and your spouse both work, you sometimes end up with less taxes withheld than needed. You can remedy this by choosing to withhold at the single rate, or adding an additional amount to make up the anticipated difference each year.
To complete Form W-4 correctly, you must understand allowances. Think of allowances as cash in your pocket at the time that you receive your paycheck. The more allowances you claim, the less tax will be taken from your paycheck. For example, if you claim zero allowances, you ensure that you have enough tax withheld to cover your tax liability, but this reduces the amount of cash you take home in your paycheck. The following factors determine your number of allowances:
- The number of personal and dependency exemptions that you claim on your federal income tax return
- The number of jobs that you work
- The deductions, income adjustments, and credits that you expect to take during the year
- Your filing status
- Whether your spouse works
Use Form W-4's worksheets to help you determine the correct number of allowances to take. These include a personal allowances worksheet, a deductions and adjustments worksheet, and a two-earner/two-job worksheet.
To avoid surprises at tax time, periodically check your withholding. If your Form W-4 has been completed correctly, it's likely that your employer will withhold an amount close to the tax you'll owe on your return. Remember that Form W-4 does not include tax liability on non-wage income, like interest and dividends. Here are some circumstances when the Form W-4 worksheets alone won't guarantee that you'll have the correct amount of tax withheld:
- When you're married and both spouses work, or if either of you start or stop working
- When you or your spouse are working more than one job
- When you have significant nonwage income, such as interest, dividends, alimony, unemployment compensation, or self-employment income, or the amount of your nonwage income changes
- When you'll owe other taxes on your return, such as self-employment tax or household employment tax
- When you have a lifestyle change that affects the tax deductions or credits you may claim
If there are tax law changes, IRS Publication 919 can help you compare the total tax that you'll withhold for the year with the tax that you expect to owe on your return. If you find that you need to make changes to your withholding, you can do so at any time by submitting a new Form W-4 to your employer.
Consult your friendly home town banker for all of your tax planning needs.
05/14/2009
Long Term Stocks: Time vs. Timing
Investing with an eye to the long term is particularly important with stocks. Historically, stocks have typically outperformed bonds, cash, and inflation, though past performance is no guarantee of future results. It can be challenging for years like 2008, which was the worst year for the Standard & Poor's 500 since the Depression era. Times like those can frazzle the nerves of any investor. With stocks, having an investing strategy is only half the battle; the other half is being able to stick to it.
Your own definition of "long term" is most important, and will depend on your individual financial goals and when you want to achieve them. Your strategy should take into account that the market will not go in one direction forever and it's helpful to look at various holding periods for stocks over the years. Historically, the shorter your holding period, the greater the chance of experiencing a loss. Even though the S&P 500 showed a return of -1.38% for the 10 years that ended December 31, 2008, the last negative-return 10-year period before then ended in 1939.
Trying to second-guess the market can be challenging. Research has shown that stock investors who try to time the market typically experience lower returns than investors using a buy-and-hold approach. Historically, a handful of months or days account for the bulk of both market gains and losses. Forecasting exactly which days those will be could make you a millionaire. Miss it by just a little bit and you could lose your shirt.
You need to have strategies in place that build your financial and psychological readiness to take a long-term approach to investing in stocks. Even if you're not a buy-and-hold investor, a trading discipline can help you stick to a long-term plan. Having predetermined guidelines that anticipate turbulent times can remove emotion from your decisions. Your strategy may be to sell and take profits when the market rises by a certain percentage, and to buy when the market falls by a certain percentage. Or your strategy might be to put a large percentage of your portfolio under the buy-and-hold plan, while putting the smaller percentage of your portfolio in short-term, higher risk stocks.
Market downturns are a test of how well you've diversified your assets. Diversifying your portfolio can help you manage risk by spreading it among various types of investments, some of which may be performing better than others. And don't forget to look at how far you've come since you started investing. Keeping track of where you stand relative to not only last year but to 3, 5, and 10 years ago may help you remember that the current situation won’t to last forever. If you're retired and worried about a market downturn's impact on your income, think before you react. If you sell stock during a period of falling prices, you might not get the best price and that sale might also reduce your ability to generate income in later years.
Having some cash holdings can be as financially comforting as napping in your favorite recliner. It can enhance your ability to make thoughtful decisions instead of impulsive ones. An appropriate asset allocation strategy can help you prevent having to sell stocks at an inopportune time just to meet ordinary expenses. A cash cushion coupled with a disciplined investing strategy can change your perspective on market downturns and may increase your ability to be patient.
05/7/2009
Long Term Stocks: Time vs. Timing
With the wide variety of stocks in the market, figuring out which ones you want to invest in can be a daunting task. Even if you don't want to select stocks yourself, it can be helpful to understand the concepts that professionals use in evaluating and buying stocks.
There are generally two schools of thought about how to choose stocks. Value investors focus on buying stocks that appear to be bargains relative to the company's intrinsic worth. Growth investors prefer companies that are growing quickly, and with finding companies and industries that have the greatest potential for appreciation in share price. Either approach can help you better understand just what you're buying when you choose a stock for your portfolio.
Value investors look for stocks with share prices that don't fully reflect the value of the companies, and that are effectively trading at a discount to their true worth. A value investor believes that eventually the share price will rise to reflect what he or she perceives as the stock's fair value. A stock's price-earnings (P/E) ratio--its share price divided by its earnings per share--is of particular interest to a value investor, as are the price-to-sales ratio, the dividend yield, the price-to-book ratio, and the rate of sales growth.
Contrarian investors are perhaps the ultimate example of a value investor. Contrarians believe that the best way to invest is to buy when no one else wants to, or to focus on stocks or industries that are temporarily out of favor with the market.
The challenge for any value investor is figuring out how to tell the difference between a company that is undervalued and one whose stock price is low for good reason. Value investors who do their own stock research comb the company's financial reports, looking for clues about the company’s management, operations, products, and services.
Growth investors look for companies that are expanding rapidly. Stocks of newer companies in emerging industries are often especially attractive to growth investors because of their greater potential for expansion and price appreciation despite the higher risks involved. A growth investor would give more weight to increases in a stock's sales per share or earnings per share (EPS) than to its P/E ratio. A growth investor's challenge is to avoid overpaying for a stock in anticipation of earnings that eventually prove disappointing.
Momentum investors look not just for growth, but for accelerating growth that is attracting a lot of investors and causing the share price to rise. Momentum investors believe you should buy a stock only when earnings growth is accelerating and the price is moving up. If a stock falls, momentum theory suggests that you sell it quickly to prevent further losses, then buy more of what's working.
Day traders are the most extreme momentum investors who may hold a stock for only a few minutes or hours then sell before the market closes that day. Momentum investing obviously requires frequent monitoring of the fluctuations in each of your stock holdings, and is best suited to investors who are prepared to invest the time necessary to be aware of those price changes.
Growth stocks and value stocks often alternate in popularity. A company can be a growth stock at one point and later become a value stock. Some investors buy both types, so their portfolio has the potential to benefit regardless of which is doing better at any given time. Investing based on data can assist you as you evaluate a possible purchase and also help you know when to sell because your reasons for buying are no longer valid.
Consult your friendly home town banker for questions you have in structuring your investment portfolio.
Back to President's Articles
05/28/2009
What Does The American Recovery and Reinvestment Act of 2009 Do For You
The $787 billion American Recovery and Reinvestment Act of 2009 contains many provisions that provide tax relief and financial assistance for individuals. Let’s look at the major points that could benefit you.
The Making Work Pay tax credit is a new refundable personal income tax credit available for 2009 and 2010 only. It is equal to 6.2 percent of your earned income, up to $400 or $800 if you're married and file a joint tax return. The credit is phased out for higher-income individuals who earn a modified adjusted gross income (MAGI) greater than $75,000 or $150,000 if married filing jointly. The credit is eliminated if your MAGI is $95,000 or $190,000 if married filing jointly. If you received the $250 economic recovery payment because you were eligible for Social Security, Railroad Retirement, or veterans benefits, your 6.2 percent credit will be reduced by that amount.
The Hope tax credit has been expanded and renamed the American Opportunity tax credit for 2009 and 2010. It increases the annual limit per eligible student to $2,500, extends the time limit to the first four years of post-secondary education, is partially refundable reducing your tax bill up to 40 percent of the $2,500 limit, and can now be claimed against alternative minimum tax (AMT) liability. The Hope credit phases out at increased MAGI levels of $80,000 and $160,000 if married filing jointly. It is eliminated if your MAGI is $90,000 or $180,000 if married filing jointly.
The first-time homebuyer tax credit has been extended through November 30, 2009. To qualify as a first-time homebuyer, you and your spouse must not have owned any other principal residence during the three-year period prior to your purchase date. The credit is 10 percent of the purchase price up to $8,000 for qualified home purchases made after 12/31/08 and before 12/01/09. If this home is your principal residence for the next three years, you do not have to pay the credit back. The credit is reduced if your MAGI exceeds $75,000 or $150,000 if married filing jointly and is not available to those whose MAGI is $95,000 or $170,000 if married filing jointly.
The alternative minimum tax (AMT) has temporary exemption limits for 2009 of $46,700 for unmarried, $70,950 if married filing jointly, and $35,475 if married filing separately.
The 2009 Act also includes provisions that provide:
- A one-time $250 economic recovery payment to most individuals receiving Social Security benefits, Railroad Retirement benefits, or veterans benefits.
- Up to $2,400 of unemployment compensation benefits received in 2009 will be excluded from income for federal income tax purposes.
- For individuals who lose their jobs on or after September 1, 2008, and before January 1, 2010, the Act offers subsidized COBRA premiums requiring those who qualify to pay only 35% of the COBRA premiums needed to continue their health coverage for up to 9 months.
- A new standard deduction for state sales and excise tax related to the purchase of a qualified motor vehicle after February 17, 2009, and before January 1, 2010.
- For 2009 and 2010, the refundable portion of the child tax credit is increased, and the earned income tax credit that benefits families with three or more qualifying children and married couples filing jointly has been expanded.
- The definition of qualified higher education expenses for 529 qualified tuition programs is expanded to include expenses for computer technology, equipment, and internet access if used while enrolled at an eligible educational institution for 2009 and 2010.
Contact your friendly home town banker for all of your tax planning needs.
05/20/2009
Income Taxes: Am I Withholding Enough?
Estimating your federal income tax withholding properly is important for many reasons. If you receive an income tax refund, you have given the IRS an interest-free loan during the year --- with your hard-earned money. In contrast, if you owe taxes when you file your return, you may have to fork up some cash at tax time. Determining the correct withholding amount for your salary or wages is primarily about having just enough taxes withheld to prevent you from incurring penalties when your tax return is due. This can be easily done by reading and understanding IRS Publications 505 and 919 and providing your employer with a properly completed and updated Form W-4. You must do this whenever your circumstances change significantly.
The amount you earn and the information provided to your employer on Form W-4 are the two factors that determine the amount of income tax that your employer withholds from your regular pay. Form W-4 collects three primary pieces of information:
- The number of withholding allowances you want to claim.
- Whether you want taxes to be withheld at the single or married rate.
- Any additional amount you might want withheld from your paycheck, which is optional.
If you withhold taxes at the married rate because you and your spouse both work, you sometimes end up with less taxes withheld than needed. You can remedy this by choosing to withhold at the single rate, or adding an additional amount to make up the anticipated difference each year.
To complete Form W-4 correctly, you must understand allowances. Think of allowances as cash in your pocket at the time that you receive your paycheck. The more allowances you claim, the less tax will be taken from your paycheck. For example, if you claim zero allowances, you ensure that you have enough tax withheld to cover your tax liability, but this reduces the amount of cash you take home in your paycheck. The following factors determine your number of allowances:
- The number of personal and dependency exemptions that you claim on your federal income tax return
- The number of jobs that you work
- The deductions, income adjustments, and credits that you expect to take during the year
- Your filing status
- Whether your spouse works
Use Form W-4's worksheets to help you determine the correct number of allowances to take. These include a personal allowances worksheet, a deductions and adjustments worksheet, and a two-earner/two-job worksheet.
To avoid surprises at tax time, periodically check your withholding. If your Form W-4 has been completed correctly, it's likely that your employer will withhold an amount close to the tax you'll owe on your return. Remember that Form W-4 does not include tax liability on non-wage income, like interest and dividends. Here are some circumstances when the Form W-4 worksheets alone won't guarantee that you'll have the correct amount of tax withheld:
- When you're married and both spouses work, or if either of you start or stop working
- When you or your spouse are working more than one job
- When you have significant nonwage income, such as interest, dividends, alimony, unemployment compensation, or self-employment income, or the amount of your nonwage income changes
- When you'll owe other taxes on your return, such as self-employment tax or household employment tax
- When you have a lifestyle change that affects the tax deductions or credits you may claim
If there are tax law changes, IRS Publication 919 can help you compare the total tax that you'll withhold for the year with the tax that you expect to owe on your return. If you find that you need to make changes to your withholding, you can do so at any time by submitting a new Form W-4 to your employer.
Consult your friendly home town banker for all of your tax planning needs.
05/14/2009
Long Term Stocks: Time vs. Timing
Investing with an eye to the long term is particularly important with stocks. Historically, stocks have typically outperformed bonds, cash, and inflation, though past performance is no guarantee of future results. It can be challenging for years like 2008, which was the worst year for the Standard & Poor's 500 since the Depression era. Times like those can frazzle the nerves of any investor. With stocks, having an investing strategy is only half the battle; the other half is being able to stick to it.
Your own definition of "long term" is most important, and will depend on your individual financial goals and when you want to achieve them. Your strategy should take into account that the market will not go in one direction forever and it's helpful to look at various holding periods for stocks over the years. Historically, the shorter your holding period, the greater the chance of experiencing a loss. Even though the S&P 500 showed a return of -1.38% for the 10 years that ended December 31, 2008, the last negative-return 10-year period before then ended in 1939.
Trying to second-guess the market can be challenging. Research has shown that stock investors who try to time the market typically experience lower returns than investors using a buy-and-hold approach. Historically, a handful of months or days account for the bulk of both market gains and losses. Forecasting exactly which days those will be could make you a millionaire. Miss it by just a little bit and you could lose your shirt.
You need to have strategies in place that build your financial and psychological readiness to take a long-term approach to investing in stocks. Even if you're not a buy-and-hold investor, a trading discipline can help you stick to a long-term plan. Having predetermined guidelines that anticipate turbulent times can remove emotion from your decisions. Your strategy may be to sell and take profits when the market rises by a certain percentage, and to buy when the market falls by a certain percentage. Or your strategy might be to put a large percentage of your portfolio under the buy-and-hold plan, while putting the smaller percentage of your portfolio in short-term, higher risk stocks.
Market downturns are a test of how well you've diversified your assets. Diversifying your portfolio can help you manage risk by spreading it among various types of investments, some of which may be performing better than others. And don't forget to look at how far you've come since you started investing. Keeping track of where you stand relative to not only last year but to 3, 5, and 10 years ago may help you remember that the current situation won’t to last forever. If you're retired and worried about a market downturn's impact on your income, think before you react. If you sell stock during a period of falling prices, you might not get the best price and that sale might also reduce your ability to generate income in later years.
Having some cash holdings can be as financially comforting as napping in your favorite recliner. It can enhance your ability to make thoughtful decisions instead of impulsive ones. An appropriate asset allocation strategy can help you prevent having to sell stocks at an inopportune time just to meet ordinary expenses. A cash cushion coupled with a disciplined investing strategy can change your perspective on market downturns and may increase your ability to be patient.
05/7/2009
Long Term Stocks: Time vs. Timing
With the wide variety of stocks in the market, figuring out which ones you want to invest in can be a daunting task. Even if you don't want to select stocks yourself, it can be helpful to understand the concepts that professionals use in evaluating and buying stocks.
There are generally two schools of thought about how to choose stocks. Value investors focus on buying stocks that appear to be bargains relative to the company's intrinsic worth. Growth investors prefer companies that are growing quickly, and with finding companies and industries that have the greatest potential for appreciation in share price. Either approach can help you better understand just what you're buying when you choose a stock for your portfolio.
Value investors look for stocks with share prices that don't fully reflect the value of the companies, and that are effectively trading at a discount to their true worth. A value investor believes that eventually the share price will rise to reflect what he or she perceives as the stock's fair value. A stock's price-earnings (P/E) ratio--its share price divided by its earnings per share--is of particular interest to a value investor, as are the price-to-sales ratio, the dividend yield, the price-to-book ratio, and the rate of sales growth.
Contrarian investors are perhaps the ultimate example of a value investor. Contrarians believe that the best way to invest is to buy when no one else wants to, or to focus on stocks or industries that are temporarily out of favor with the market.
The challenge for any value investor is figuring out how to tell the difference between a company that is undervalued and one whose stock price is low for good reason. Value investors who do their own stock research comb the company's financial reports, looking for clues about the company’s management, operations, products, and services.
Growth investors look for companies that are expanding rapidly. Stocks of newer companies in emerging industries are often especially attractive to growth investors because of their greater potential for expansion and price appreciation despite the higher risks involved. A growth investor would give more weight to increases in a stock's sales per share or earnings per share (EPS) than to its P/E ratio. A growth investor's challenge is to avoid overpaying for a stock in anticipation of earnings that eventually prove disappointing.
Momentum investors look not just for growth, but for accelerating growth that is attracting a lot of investors and causing the share price to rise. Momentum investors believe you should buy a stock only when earnings growth is accelerating and the price is moving up. If a stock falls, momentum theory suggests that you sell it quickly to prevent further losses, then buy more of what's working.
Day traders are the most extreme momentum investors who may hold a stock for only a few minutes or hours then sell before the market closes that day. Momentum investing obviously requires frequent monitoring of the fluctuations in each of your stock holdings, and is best suited to investors who are prepared to invest the time necessary to be aware of those price changes.
Growth stocks and value stocks often alternate in popularity. A company can be a growth stock at one point and later become a value stock. Some investors buy both types, so their portfolio has the potential to benefit regardless of which is doing better at any given time. Investing based on data can assist you as you evaluate a possible purchase and also help you know when to sell because your reasons for buying are no longer valid.
Consult your friendly home town banker for questions you have in structuring your investment portfolio.
Back to President's Articles