How do we continue to learn ourselves and embrace teaching future generations?  If you have kids of your own or other young people in your life, you may feel a sense of responsibility to teach and make sure your kids learn, so they can be independent and ready for that next step in life to make healthy financial decisions on their own.  Here are a few ideas to teach and make sure future generations have a good base knowledge of financial matters.

Just as we say in the investing world, It’s never too early to start!  It’s also never too early to start teaching, as well.  The earlier good financial habits are started, the more likely they will stick as well.  It’s important for young kids to learn that they don’t always need a new toy from the store when you are there to get groceries and other things that you and your family really need.  Establishing a good understanding of wants vs. needs helps everyone learn the important of budgeting, living within your means and not overspending.

When opportunities present themselves, take a few moments those into teachable moments for your children and involve your children in financial decisions, when appropriate.  If an allowance is given, help your child or children understand the important of saving for something.  This also helps them learn the value of money and that different things take more/less money to buy.  Encourage young ones to save and perhaps explain to them why you can’t buy a “want” item, but instead are giving to a charity in need — this is something that they will not likely learn anywhere else.

If you work with a financial advisor, it’s also a great idea to bring your next generation along to a meeting or at least introduce them to your financial advisor.  I think it’s great to see clients who want their next generation to see what a financial advisor is doing for them and also provide the continuity when the unforeseen happens.  Your children could potentially be left behind handling all of your financial matters, which can be very burdensome if the younger generation is unexpectedly thrown into the situation.  Communicating and sharing your financial wisdom and values is an important step for future generations to continue to be successful.

No matter if you have a lot of money or just a little, the conversations about personal finance and money management are essential for all of our younger generations to know and learn.  It’s more critical than ever as the days of pensions or long-term company benefits are gone.  It’s now up to individuals to save and plan for their Tomorrow as no one else is going to provide it for them!

If you have studied the last 40 – 100 years of U.S. Federal Reserve Policy and the U.S. dollar history born out of its casual maneuverings, you’ll find that the highest confidence, hiring and consumption periods in post-WWII history were 1983 – 1989 (Reagan) and 1993 – 1999 (Clinton).  Ironically, both of these periods were also the strongest for the U.S. dollar.

Fed Chairman Ben Bernanke under both the Bush and Obama administrations has devalued the dollar to the lowest levels since the 1970s when we had another dovish Fed Chairman by the name of Arther Burns.  History has shown that a weak dollar creates an additional tax on the consumer, in the form of “inflation.”  Many politicians argue that dovish policy (easy money, i.e. QE) leads to lower interest rates that in turn spur U.S. consumption.  We choose to ignore these compromised politicians and instead look at the historical market data, which tells us that the U.S. consumer and economy wins when the dollar is strong.

In recent years, we have heard all types of scare tactics and end of world threats as to why we need to print money and devalue currency.  As a result, the Fed unleashed a fury of QE programs that devalued our currency to historically low levels and sent gold to all-time highs, as people worried about the collapse of our currency.

In September 2012, the printing presses finally slowed and other parts of the world (Japan and Europe) accelerated their devaluation policies which have led to the recent rally in the dollar and an all-time high in the stock market.

So why do we support a strong dollar?  It provides one of the biggest tax breaks to the U.S. consumer via lower prices at the pump and grocery store.  In other words, it deflates the inflation and provides more money for the U.S. consumer to spend on discretionary items, which by the way drives 71% of U.S. GDP growth.

Don’t expect the media or politicians to attribute the recent rally to a strong dollar.  It could be that they don’t understand the correlation or it may be that they are so set in their beliefs that they ignore what is truly best for our country.  We will remain bullish on America and the U.S. economy if the dollar continues to accelerate higher.  Unfortunately, this rise will likely be attributed to other countries devaluing their currencies as opposed to our Fed actually tightening via monetary policy.  Either way, we will remain bullish on America as long as the dollar keeps strengthening.

Obviously, this can all change overnight if the Fed decides to fire up the printing presses and roll out a new QE program, but we think the probability of this happening becomes less and less likely as the economic data signals continue to improve.

As you plan for retirement, it’s important to factor in your healthcare costs.  Fortunately, a portion of your medical bills will likely be paid by Medicare — a government-run health insurance plan for people aged 65 and older.  Medicare covers many medical costs, but it doesn’t cover all expenses, such as long-term care.

Prior to turning age 65, it’s important to do your own research and figure out the best Medicare plan to meet your healthcare needs.

Who is eligible for Medicare?

• Individuals age 65 or older
• Individuals under 65 with certain disabilities
• Individuals of any age who suffer from end-stage renal disease

How do I enroll in Medicare?

You are not automatically enrolled in Medicare when you turn 65.  Instead, you must apply for Medicare benefits and it’s recommended that you start the application process at least three months prior to your 65th birthday.  It’s wise to sign up for Medicare even if you don’t start collecting Social Security at age 65.  You can enroll online or by calling 1-800-MEDICARE.

What is the difference between Medicare and Medicaid?

Medicare is a health insurance plan run by the federal government for people age 65 and older.  Many services are covered by Medicare, but individuals have to pay part of the costs for certain medical services.

Medicaid is an assistance program for low-income people of any age.  Medicaid is run by the states, and payments for services are sent directly to your healthcare provider.

What do the various parts of Medicare cover?

There are four parts – Parts A, B, C, and D.

Part A is hospital insurance, which helps pay for inpatient hospital stays, home health agency services, a skilled nursing facility and hospice care.  Part A is provided free to individuals eligible to receive Social Security or Railroad Retirement benefits.  Ineligible individuals (those who haven’t worked and paid Social Security taxes for at least 40 quarters) can pay a monthly premium for coverage.

Part B is supplementary medical insurance (SMI), which helps pay for physician visits, outpatient hospital benefits, laboratory tests, x-rays, etc.  There is a monthly premium charge to receive Plan B coverage.

Part C is the Medicare Advantage program, which allows people to get health coverage from HMOs or other private healthcare plans.  This program includes the services offered by Parts A and B (except hospice care), but it comes with different rules, costs and coverage restrictions.  These plans might provide extra benefits (such as vision or hearing) or reduced cost-sharing or premiums.

Part D helps pay for prescription drugs not covered by Part A or Part B.  Most individuals have to pay a monthly premium for this coverage from private healthcare plans.  Like other insurance, if you decide not to enroll in a drug plan as you are eligible, you may pay a penalty if you choose to join later.

Which parts are optional, and what should I consider as a retiree?

Part C (Medicare Advantage) and Part D (prescription drug coverage) are optional Medicare benefits.  Forgoing these benefits may save you monthly premiums, but your out-of-pocket healthcare expenses may also increase if you choose not to sign up for coverage.

So as you near retirement or are considering early retirement, it’s important to look at all benefits, including your Medicare and Social Security options.  If you have any questions, talk with a trusted financial advisor who can help steer you through the application process and ensure you are making the best long-term decision to cover your healthcare costs.  You can also visit the Centers of Medicare & Medicaid Services website for more information.

• Is your income going up in 2013?
  • If you have over $250,000 as a married couple ($200,000 for single filers) in earnings, there is:
    • An additional 0.9% in Medicare tax due on wages or self-employed earnings.
    • An additional 3.8% tax imposed on net investment income of single taxpayers with AGI above $200,000 and joint filers over $250,000.  Net investment income is interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business).  Net investment income is reduced by property allocable deductions to such income.  This new tax will only apply to income in excess of the $200,000/$250,000 thresholds.
  • Itemized deductions and personal exemption phase-outs are in effect for a little higher income levels of $300,000 (joint filers) and $250,000 (single filers).
    • The floor on medical expense deductions is also raised from 7.5% of AGI to 10%, unless you are age 65 or older.
  • If you have over $450,000 in earnings:
    • Tax rates of 10%, 15%, 25%, 28%, 33% and 35% tax brackets from the Bush tax cuts will remain in place and are made permanent.  This means that for most Americans, tax rates will stay the same.  However, there will be a new 39.6% rate, which will begin at the following thresholds:
      • $400,000 (single)
      • $425,000 (head of household)
      • $450,000 (joint filers and qualifying widowers)
      • $225,000 (married filing separately)
    • You are subject to the 39.6% tax bracket and your capital gain rate will increase to 20% (which does not include the 3.8% surtax).  For lower income tax brackets, the 0% and 15% rates are still intact.
• You can still take a tax-free distribution from an individual retirement plan for charitable purposes.
• The estate exemption level is set at $5,000,000 (as indexed for inflation) and the portability feature that allows the estate of the first spouse to die to transfer his/her unused exclusion to the surviving spouse is still in effect.

If you are a high income earner, it is especially important to be working with your tax and financial advisor(s) in the coming months to plan strategically for tax law changes that take effect in 2013 and to help lower the “surprise” factor when you’re filing your 2013 next year.

As promised at the end of the post, here are the answers to some common questions about tax filing for college students as well as some information about record retention and what to consider when planning for 2013.

If you have children in college you might be trying to determine:

Do my dependent children need to file their own tax return?
Dependent children are required to file a return in any of the following situations:

• Your dependent has gross income from investments of more than $950
• Your dependent has earned income of more than $5,950
• Your dependent has more total income than earned income +$300

Who benefits from college expenditures?
College expenses are claimed by the individual who claims the federal exemption for the student.

• When determining the amount of credit, you will need the following amounts:
  • Tuition reported on Form 1098-T and net of scholarships (also reported on Form 1098-T)
  • Required fees and course materials other than those reported on Form 1098-T (you’ll find these in the bursar bill and on receipts from textbooks)
• When determining whether earnings that are reported as part of a 529 account distributing on Form 1099-Q are taxable, you will also need to know the amount of out of pocket expenses for room and board.

Should I gift assets to my children?
Dependents pay tax at their own rates on the first $2,000 of their investment income.  If you find yourself in the higher income bracket, it may be wise to strategically gift a mix of securities to your child(ren).

Should I consider establishing a Roth IRA account for my children who have earned income?

• Roth contributions can be withdrawn at any time, and earnings can be withdrawn for education and the purchase of a first home (subject to some limitations).
• If you have not discussed this with your advisor and are already maximizing your own tax deferred account contributions, this may be something you want to explore.  However, keep in mind the impact such holdings could have on need-based financial aid.

Now that you have all of your documents together for your taxes (or are in the process of collecting them), you may be wondering…

“How long should I retain my documents?”

Income and expense records should be retained for 7 years after the last day of the tax year in which the item was included on your tax return.

Records that support the cost of assets should be retained for the entire time when the assets are held and then for 7 years after the date of disposal. This type of asset and records would include:

• Securities (unless cost is tracked by your brokerage firm)
• Personal residence (original HUD closing statement, and receipts for significant improvements)
• Other Real Estate holdings
• Non-cash items received from an estate (records showing the valuation of the asset at the time it was passed through the estate)

As you start planning for the year, you may also be wondering…

“What is new in 2013?”

Long Term Capital Gain Rates for individuals will be:

• 0% for individuals whose ordinary income is taxed at a rate below 25%
• 15% for individuals whose ordinary income is taxed at 25% of higher
• 20% for individuals whose income exceeds $400,000 ($450,000 for married individuals)
• Medicare surtaxes will apply in 2013 to at least a portion of the income of individuals whose income is more than $200,000 ($250,000 for married individuals)
  • 3.8% surtax on investment income, which includes income from:
    • Interest, dividends and capital gains
    • Rental income
    • Passive income from partnerships/S-corporations, where the individual is not active in the business
  • 0.9% on earned income

These changes remind us that the best investment strategies are developed in light of tax planning, and must be individualized in response to a particular client’s personal situation.  We welcome opportunities to assist our clients in developing holistic financial plans.

Clients often begin a relationship with us by entrusting their tax planning or their wealth management to us and then see an increasing need to couple these two services together.  If you haven’t considered doing so in the past and would like to discuss the advantages of doing so, please contact us.

Here is a list of some of the most common items and sources:

• Forms W-2 related to your job and/or your spouse’s job
• Investment documents, including:
• Interest and Dividend income, reported on 1099-INT and 1099-DIV
• Your brokerage firm’s 1099-B, including accompanying gain/loss reports
• Government agencies, including:
• State tax refunds, reported to you on Form 1099-G
• Unemployment benefits, reported to you on Form 1099-G
• Social Security benefits, reported to you on Form 1099-SSA
• Tax-Deferred Accounts/Retirement Accounts (1099-R), which will include:
  • Pension and other distributions from tax deferred accounts
  • Rollovers from one tax deferred account to another, including Roth conversions
• Health Savings Accounts:
• Form 5498-SA will provide you with information about contributions to your account
• Your W-2 will show the amount of pre-tax contributions to the account
• Form 1099-SA shows distributions from the account
• This information is needed to prepare Form 8889, which must be included in your return in years when distributions are taken from the account.
• Proof of expenditures for:
• Medical expenses, including insurance premiums paid with after-tax dollars, are substantiated by receipts and cancelled checks (these provide a tax benefit only if the total amount exceeds 7.5% of your income)
• Interest payments that are deductible include:
• Mortgage interest for no more than two personal residences, reported to you by your lender on a Form 1098
• Investment interest related to margin accounts are generally included in the brokerage firm’s 1099-B attachment
• Student loan interest is reported on Form 1098-E
• State/County tax payments:
  • Real estate taxes paid out of escrow are typically reported by the lender on Form 1098, and those paid personally by the taxpayer are evidenced by your cancelled check.
  • Auto excise taxes will appear on your Bureau of Motor Vehicles receipt.
  • State taxes paid out of your pocket are evidenced by your cancelled check or bank records.
• Charitable contributions require specific documentation:
  • All cash contributions that are less than $250 require a bank record or a written acknowledgement from the organization.
  • Cash/Non-cash contributions of more than $250 in a single day to a single organization require written acknowledgement from the organization.
  • Non-cash contributions in excess of $500 require additional documentation.
• Itemized deductions that provide a tax benefit only when the total amount of these deductions exceeds 2% of the taxpayer’s income:
• Employee expenses, evidenced by receipts and mileage logs, with the deduction for meals limited to 50% of the amount spent
• Investment advising fees, tax prep fees, and safe deposit rental
• Professional and Union dues
• Classroom teachers can deduct the first $250 paid out-of-pocket for classroom supplies on page 1 of their return, without considering the 2% limitation for employee expenses

If you have a child in college, be sure to check back on our blog next week!  We will answer common questions regarding your child’s need to file his/her own return, who benefits from college expenditures and more.  We will also address the common questions about record retention and changes for 2013.

It’s that time again.  Time to reflect on the successes and failures of the past year and determine how we can build on the successes and avoid repeating the failures.  I have never been much of a resolution guy but I have identified here the five things that I would like to personally improve to help make my 2013 more successful and rewarding… and I’m sharing them with you.

1. I will finally conclude things are never going to slow down.
   I have a tendency to tell myself, “Once this gets done or once we get through this, then I’ll have more time.”  That theory is flawed as every time one thing gets completed, there is always something else waiting to occupy my time.  I’ve developed a thought process over the past couple of years that if I want certain things to occur, they need to be scheduled on my calendar.  Starting this year, I’m going to schedule more time with my wife, my family and my good friends to ensure I spend the quality time that I always intend to with those important people in my life.
2. I will act, rather than just offer to act.
   How many times have you said to someone you know in need, “Just let me know what I can do to help out,” and they respond with something like, “Sure, will do,” or “Thanks for the offer”?  Yet you know they are probably not going to actually ask for the help.  Most people have a natural inclination to not want to ask for help no matter how much they really need it.  Starting in 2013, when I catch myself offering help, I’m going to think about what I can do to actually help and follow through with those actions – whether or not the other person asks.  Most kind acts get done without someone asking so I want to do more of the doing and less of the just asking.
3. I will more regularly reward the people important to me.
   From family and friends to team members here at our firm, I’m going to focus on providing more constant praise, recognition and other positive reinforcements.  Simple things — such as taking the time to say thank you for specific items, remembering a birthday, recognizing accomplishments, celebrating an achievement — can have a very positive impact on the people around you and you can never do them enough.  I don’t do them enough but I am going make an effort to change that starting this year.
4. I will embrace change and uncertainty.
   Similar to my point above regarding time,  this year is the year that I fully embrace that my focus on the wealth management industry and leading a firm of 20+ team members is going to put me in a constant state of change and uncertainty.  To think that is ever going to cease to exist isn’t realistic.  A constant change agent will exist at varying degrees but will still always exist at a rather high level.  Once I stop trying to eliminate this factor, I then can focus more on how to best manage and benefit from it.
5. I will develop three new positive daily habits.
   Students indicate that it only takes 21 days of repetition to develop new positive daily habits.  You can control what new positive daily habits you want to implement and within three weeks these habits should be a constant part of your life and daily routine.  I haven’t selected my three new daily habits yet but I am going to reserve some time to think about that on New Year’s Day and plan to implement them on at a time to improve my odds at success.

Coburn Place is a safe haven which provides transitional housing and supportive services to women and families who have escaped domestic violence.

Personally, I have struggled for years to find the ideal solution that requires a minimal amount of time but still ensures my money is being spent in all the right places.  If a budgeting tool has been created, I have tested it or at least read about it.  I have personally used the likes of Quicken, Money, Mint, Manilla, etc.  I have also had the opportunity to test budgeting software developed by a local technology start-up business in Indianapolis that attempted to combine several of the features offered from the aforementioned names.  With all of these tools, I continued to find myself falling behind.  In the rare cases in which my budget was updated, I found the information to be stale and historical in nature only.  It illustrated where my money was spent last month but never provided an answer as to where my future money was to be used.

Early in 2011, I stumbled upon a blog online.  The premise was to highlight the best financial budgeting tools of 2011.  As I scanned the article, I was familiar with every name listed with the exception of their top rated tool – YNAB (You Need a Budget).  I was intrigued, initially by the fact that a software tool existed that I have never heard of, let alone used.  I immediately went to their website and begin reading about their tool and budgeting methodology.  I quickly found a wealth of information related to their founder and CEO, Jesse Mecham.  I found his story to be quite fascinating as he struggled with many of the same issues I described above.  I was also turned on to the fact that he founded his business using many of the same principals as we use here at Veros, which is providing a service that meets your clients needs, doing so at a fair price, and delivering top notch customer service.

Long story short, YNAB has been the answer to my budgeting frustrations.  I jumped on board a year ago and have found the management to be quite easy and painless.  Better yet, unlike most budgeting tools that only track where your money was spent, YNAB offers the additional benefit of seeing how much you have available to spend in future months by category.  There are four rules that YNAB was built on and it’s these four values that make it hands-down the best budgeting software tool on the market today (pay special attention to Rule 4).

Rule 1: Give Every Dollar a Job
Your money shouldn’t tell you what to do; you are the boss.

Rule 2: Save for a Rainy Day
Take those large, less frequent expenses that usually send you into a financial tailspin and break them into monthly chunks).

Rule 3: Roll with the Punches
Be flexible and address overspending before moving on to the next month.

Rule 4: Live on Last Month’s Income
Spend this month what you earned last month.

As I begin my Christmas shopping in the coming days, I know exactly how much I have to spend, as I budgeted for this throughout 2012.  If you need to get on track with your budget or want to provide a great Christmas gift for a loved one, I would like to recommend YNAB, www.ynab.com .

To me Thanksgiving is a time to gather with family and friends, eat some good food (usually a lot of it), catch up on everyone’s life and watch some football.  It is the time of year to share and reflect on the things in our life that we are thankful for.  These things may be different for each of us, but I would challenge everyone to spend a few moments and really think about what you are thankful for.  With all the “bad news” that is reported in our media it is easy to get bogged down with all of the negative sentiment.  We have a looming “financial cliff”, government debt and instability around the world which continues to add to the market volatility and everyone being on edge even with the elections over now.

As you reflect at Thanksgiving time, one thing is for sure, we know there are many uncertainties and low expectations.  While this may not be an ideal situation, it is reality and it’s times like these that some will stand out of the crowd with forward thinking and making the best of the situation we are all in.  Show your appreciation for the things that are going well for you or use this opportunity to help someone else be thankful that you have done something for them.  It is humbling to see how the south side of Indianapolis has come together to help those impacted by the recent explosion.

It seems the uncertainty, confusion from misleading media, volatility in the markets, and the actions of our government have somewhat put a damper on the holiday season.  However, with Thanksgiving upon us, I hope we can all find plenty of things to be thankful for.