Actions to Improve Your Financial Life in 2012

Golden Nest EggI recently received an email from The Kelly Group at Morgan Stanley Smith Barney with some good practical advice on a financial checkup that everyone should do once a year. The email resonated with me so I thought to share it with you by putting the text of it below.  My suggestion?  Take time over the next week to answer these questions for yourself.

Have questions once you go through this list? Reach out to your financial advisor.  As the Kelly Group puts it, your financial advisor should "love to hear from you and about you!"

Success always begins with a plan.

Here are some financial planning items that you can review after the hectic holidays and before the year gets into full swing:

  1. Review your debt.  How much do you really owe? What are the rates and terms?

  1. Check your employer retirement plan.Are you contributing the max? Have you rebalanced?

  1. Update your Annual Savings Goals. Are you paying yourself first?

  1. Simplify your financial life. Do you know where all your retirement savings are?

  1. Make sure you are adequately insured.

    1. Review you homeowner’s and auto policies. Check those deductibles and coverage.

    2. Evaluate your life insurance policies.

    3. Make sure you have an Umbrella policy.       

  1. Pull out those Estate Planning Documents. When were your will, trusts and powers of attorney were last updated?

  1. Rebalance Your Investments. Remember that we can help you rebalance your investments to remain in line with your goals, time horizon and risk tolerance.

  1. Weigh Investment Opportunities and Risks. Is your portfolio positioned for your future?

As attorneys, we are not financial advisors, but we work hand-in-hand with the advisors our clients rely on to help our clients reach their goals.  Our sphere of knowledge is the law and how it might be navigated to a person's advantage.  A financial advisor looks to what assets your have and how you can use them to reach your goals.  The world has gotten so complicated it really does take a team at times to make sure that you have all the information that you need to get to where you want your family to be to feel secure and meet your goals. 

Tax Primer for Filing your 2011 Taxes

TaxesIt's that time of year when we are all hunkering down getting our documents together to file our income taxes.  While we recently blogged about proposed changes to the tax code, filing your taxes deals with the laws that are in place here and now.  

So, what  do you need to know?  Marty Abo, CPA at Abo and Company apparently spent last weekend putting together a punch-list of what you need to know for the 2011 tax season:

"From tax credits, exemptions and deductions for individuals and Section 179 expensing for small businesses, here's what Abo and Company thinks you may want to know about the tax changes for 2011."

So, here is your tax season checkup checklist reproduced with permission from the email alerts sent to clients and friends of Abo and Company, Certified Public Accountants - litigation & forensic consultants.  I found it valuable and Marty was happy to allow us to share it with you.


From personal deductions to tax credits and educational expenses, many of the tax changes relating to individuals remain in effect through 2012 and are the result of tax provisions that were either modified or extended by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.

Personal Exemptions - The personal and dependent exemption for tax year 2011 is $3,700, up $50 from 2010.

Standard Deductions - In 2011 the standard deduction for married couples filing a joint return is $11,600, up $200 from 2010 and for singles and married individuals filing separately it's $5,800, up $100. For heads of household the deduction is $8,500, also up $100 from 2010.

The additional standard deduction for blind people and senior citizens is $1,150 for married individuals, up $50, and $1,450 for singles and heads of household, also up $50.

Income Tax Rates - Due to inflation, tax-bracket thresholds will increase for every filing status. For example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $69,000 for a married couple filing a joint return, up from $68,000 in 2010.

Estate and Gift Taxes - The recent overhaul of estate and gift taxes means that there is an exemption of $5 million per individual for estate, gift and generation-skipping taxes, with a top rate of 35%. For married couples the exemption is $10 million.

Alternative Minimum Tax (AMT) - AMT exemption amounts for 2011 are slightly higher than those in 2010 at $48,450 for single and head of household fliers, $74,450 for married people filing jointly and for qualifying widows or widowers, and $37,225 for married people filing separately.

Marriage Penalty Relief - For 2011, the basic standard deduction for a married couple filing jointly is $11,600, up $200 from 2010.

Pease and PEP (Personal Exemption Phaseout) - Pease (limitations on itemized deductions) and PEP (personal exemption phase-out) limitations do not apply for 2011, but these are set to expire at the end of 2012.

Flexible Spending Accounts (FSA) - 
Under new standards, the cost of an over-the-counter medicine or drug cannot be reimbursed from the account unless a prescription is obtained. The change does not affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eye glasses, contact lenses, co-pays and deductibles.

The new standard applies only to purchases made on or after Jan. 1, 2011, so claims for medicines or drugs purchased without a prescription in 2010 can still be reimbursed in 2011, if allowed by the employer's plan.

A similar rule went into effect on Jan. 1, 2011 for Health Savings Accounts (HSAs), and Archer Medical Savings Accounts (Archer MSAs).

Long Term Capital Gains - In 2011, long-term gains for assets held at least one year are taxed at a flat rate of 15% for taxpayers above the 25% tax bracket. For taxpayers in lower tax brackets, the long-term capital gains rate is 0%.

Individuals - Tax Credits

Adoption Credit - A refundable credit of up to $13,360 for 2011 is available for qualified adoption expenses for each eligible child.

Child and Dependent Care Credit - If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses.

For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher income earners the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.

Child Tax Credit - The $1,000 child tax credit has been extended through 2012. A portion of the credit may be refundable, which means that you can claim the amount you are owed, even if you have no tax liability for the year. The credit is phased out for those with higher incomes.

Energy Tax Credits for Homeowners - Energy tax credits for homeowners expire at the end of 2011 and are not as generous as in previous years. In addition, a taxpayer who has claimed an amount of $500 in any previous year is not eligible for this tax credit.

Homeowners can claim an Energy Star window tax credit of up to $200 maximum as well as a water heater tax credit, which includes electric, natural gas, propane, or oil, up to a maximum of $300. The same maximum ($300) applies to air conditioners, but insulation, doors, and roof credits are capped at $500. The furnace tax credit (includes natural gas, propane, oil, or hot water) and is capped at $150 maximum and efficiency must be at 95%.

Earned Income Tax Credit (EITC) - 
The maximum EITC for low and moderate income workers and working families is $5,751, up from $5,666 in 2010. The maximum income limit for the EITC has increased to $49,078, up from $48,362 in 2010. The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.

Individuals - Education Expenses

Coverdell Education Savings Account - For two more years, you can contribute up to $2,000 a year to Coverdell savings accounts. These accounts can be used to offset the cost of elementary and secondary education, as well as post-secondary education.

American Opportunity Tax Credit (Higher Education) - The expansion of the Hope Scholarship Credit by the American Opportunity Tax Credit has been extended through 2012. For 2011, the maximum Hope Scholarship Credit that can be used to offset certain higher education expenses is $2,500, although it is phased out beginning at $160,000 adjusted gross income for joint filers and $80,000 for other filers.

Employer Provided Educational Assistance - Through 2012, you, as an employee, can exclude up to $5,250 of qualifying post-secondary and graduate education expenses that are reimbursed by your employer.

Lifetime Learning Credit - A credit of up to $2,000 is available for an unlimited number of years for certain costs of post-secondary or graduate courses or courses to acquire or improve your job skills. For 2011, the credit is fully phased out at $122,000 adjusted gross income for joint filers and $61,000 for others.

Student Loan Interest - For 2011 and 2012, the $2,500 maximum student loan interest deduction for interest paid on student loans is not limited to interest paid during the first 60 months of repayment. The deduction begins to phase out for higher-income taxpayers.

Tuition and Related Expenses Deduction - For 2010 and 2011, there is an above-the-line deduction of up to $4,000 for qualified tuition expenses. This means that qualified tuition payments can directly reduce the amount of taxable income, and you don't have to itemize to claim this deduction. However, this option can't be used with other education tax breaks, such as the American Opportunity Tax Credit, and the amount available is phased out for higher-income taxpayers.

Individuals - Retirement

Roth IRA Conversions - There is no longer an income limit for taxpayers who want to convert regular IRAs into Roth IRAs. The difference is that taxpayers who convert to Roth IRAs in tax year 2011 must pay taxes on the conversion income now instead of deferring it in later years as was the case in 2010.


Standard Mileage Rates - The standard mileage rate increases to 51 cents per business mile driven (19 cents per mile driven for medical or moving purposes and 14 cents per mile driven in service of charitable organizations) for the first half of 2011. From July 1, 2011 to December 31, 2011 however, the rate increases to 55.5 cents per business mile. This increase is a special adjustment by the IRS and reflects higher gasoline prices.

Health Care Tax Credit for Small Businesses - Small business employers who pay at least half the premiums for single health insurance coverage for their employees may be eligible for the Small Business Health Care Tax Credit as long as they employ fewer than the equivalent of 25 full-time workers and average annual wages do not exceed $50,000. The credit can be claimed in tax years 2010 through 2013 and for any two years after that. The maximum credit that can be claimed is an amount equal to 35% of premiums paid by eligible small businesses.

Section 179 Expensing - In 2011 (as well as 2010), the maximum Section 179 expense deduction for equipment purchases is $500,000 ($535,000 for qualified enterprise zone property) of the first $2 million of certain business property placed in service during the year. The bonus depreciation increases to 100% for qualified property. If the cost of all section 179 property placed in service by the taxpayer during the tax year exceeds $2 million, the $500,000 amount is reduced, but not below zero.

 Thank you again Marty  and the team at Abo and Company for this very useful information!

This Will Impact Your Wallet - Tax Changes Proposed in Obama 2012 Budget

President Obama’s fiscal year 2013 budget has the potential to trim the deficit by Four Trillion ($4,000,000,000,000.00) Dollars through a combination of spending cuts and tax increases. These proposals will effect all taxpayers, but have particular impact to top earnings, business owners, and those with asset in excess of $5 million.  

President Obama unveiled his fiscal year 2013 budget on February 13, 2012 amidst a cloud of uncertainty relating to Bush era tax cuts and the more immediate the fate of the payroll tax cuts (which news channels advise are to be extended later today). President Obama’s fiscal year 2013 budget proposals incorporate initiatives from his “Blueprint for America” as described in his 2012 State of the Union address. While some of the President’s proposals were immediately rejected by the GOP, others could move along quite quickly. The expected extension of the Employee Side Payroll Tax Cut could serve as a vehicle to move some of the proposals, such as an extension to the 100% bonus depreciation.

What you will find striking in the summary outlining the budget proposal is the effect directly on individuals and businesses. The most significant issue are:

  • Reinstatement of the top individual income tax rates at the 36% and 36.9% tax brackets
  • Reinstatement of  the personal exemption phase out/limitation of itemized deductions for taxpayers earning more than $200,000 a year for individuals or joint returns with incomes over $250,000
  • Return of a $ 1million lifetime gift tax exemption
  • Capping the federal estate tax and generation skipping tax exemptions at $3.5 million per person (with portability between spouses)

Click here for a complete summary.


Insolvent Estates - Who gets paid What when an Estates Debts are more than its Assets?

A decedent doesn't always leave assets to his or her heirs - instead there may only be a pile of debt.  An estate is known as an "Insolvent Estate" when its liabilities exceed its assets.  What to do in that situation?

When determining if there are any assets that will pass to heirs, it is first important to understand that certain assets in New Jersey are excluded from satisfying a decedent's debts.  There are special categories of assets, such as retirement plans (IRA, 401(K), 403(b)) and life insurance, that are exempt from the claims of creditors under state law in New Jersey. Accordingly, there could be beneficiaries of a 401(k) plan and a life insurance policy who will receive assets as a result of the decedent's death, but creditors will go unpaid because there are not sufficient assets outside of the retirement plan and life insurance to satisfy the decedent steps. Look to NJSA 25:2-1 regarding the exclusion of retirement plans, and NJSA §§ 17B:24-6 regarding the exclusion of life insurance.  See here for a great guide of creditor protection for life insurance in all states.  One important caveat is that if the "estate" is the named beneficiary of the retirement plan or the life insurance policy, then the proceeds will be available to satisfy the claims of creditors. Therefore, to get the benefit of creditor protection it is important to name a person or trust as the beneficiary of that asset, and not the "estate".

The next question in this case is if the person is named as the Executor under the Will wants to take on that role under the Will. If there are no assets that are distributable to heirs, and the Executor is only going to be acting for the benefit of creditors, the Executor may be concerned about taking on that role and liability.  Remember, being named as a Executor is only a nomination to that role – the Executor is free to decline for any reason.

In paying the claims of creditors, certain claims have priority over other claims. The theory behind this is that if certain claims were not paid, there will be no incentive to provide the necessary services to an estate that may be insolvent.  The priority of payment is (See NJSA 3B:22-32): 

  • Reasonable funeral expenses;
  • Costs and expenses of administration (including attorney fees, accountant fees, surrogate fees, executor commission, and other costs necessary to the handling of an estate);
  • Debts for the reasonable value of services rendered to the decedent by the Office of the Public Guardian for Elderly Adults;
  • Debts and taxes with preference under federal law or the laws of this State (including any current or back taxes, interest and penalties);
  • Reasonable medical and hospital expenses of the last illness of the decedent, including compensation of persons attending him;
  • Judgments entered against the decedent according to the priorities of their entries respectively;
  • All other claims.

If there is more than one claim in any class of claims, and insufficient dollars to pay all of that class of claims,  then the claimants of the same class will be paid in proportion to the amount claimed.  This might happen if there were six different medical bills dealing with the decedent's final illness, and not enough dollars to pay all those bills.  See NJSA 3B:22-32.

Executors dealing with insolvent estates therefore have to be very carefully aware of (1) what assets of the estate are available to satisfy claims, and (2) a plan to address a situation where there are not enough assets to pay all debts.

Asset Protection - The Wrong Way

In a case of "you have got to be kidding me" a Florida man adopts his girlfriend (in her mid-40's) as part of an "oh no - I should have done this sooner" dubious asset protection plan.  Steven A. Loeb, Esq. points out that there is a right way and a wrong way to approach asset protection and talks about the situation in more detail below.  Aside from the shake your head in disbelief factor, the take-away here is that key to asset protection planning is having a plan -  and a plan is something that is put into place to address an issue before that issue happens.

Before we get to the details of this case, it is important to understand that while asset protection planning can be part of an estate plan - as in, "I want my daughter's inheritance protected in case she gets a divorce", it can also be a stand alone plan for individuals who are concerned about personal liability.  The clients we work with tend to be professionals (doctors, lawyers, accountants, veterinarians, dentists and architects), as well as real estate developers and closely-held business owners.  The liability risk profile of these individuals is more elevated than the general population, and they may have accumulated some wealth that they wish to shelter from risk of litigation.  For a greater understanding of what asset protection entails, look at a more in-depth article on our website "Asset Protection Trusts - How to Plan Correctly"

But now, lets find out more about our Florida friend:

A recent case against John Goodman, founder of the Polo Club of Balm Beach, is another reason individuals should consider asset protection planning prior to a lawsuit being initiated. The facts of this case (click here for details) are unusual; however an individual running a stop sign is unfortunately an every day occurrence. Proper planning is critical in order to protect one's assets from creditors and unknown situations. Unfortunately for John, it appears he did not have a proper asset protection trust in place prior to the accident. It would appear from the facts that a potential purpose of adopting Mr. Goodman's girlfriend would be to provide access to an irrevocable discretionary trust originally created for his then living children; however the ability for Mr. Goodman to have access to those dollars by adopting his girlfriend (and hence make her a 1/3 beneficiary of said trust given she is now his issue) is suspect. This may be a case of first impression in Florida given the circumstances. 

Yeah, we couldn't believe the facts when we read them either.  But it does serve to illustrate the negative alternative to proper planning.

Image: Grant Cochrane /

Win Big on the Superbowl? Surprise - Those gambling winnings are income.

The Giants won big yesterday, and you might have also if you participated in an office pool, or bet on the over/under, the coin toss, the number of Clydesdale's in Budweiser ads, or any other of the myriad of ways to wager your dollars on Superbowl Sunday.  What you may not know is that those wager winning are taxable income.  

The IRS has issued Tax Tip 2010-34 "Gambling Winnings Are Always Taxable Income" - I guess the name of that Tax Tip says it all.  They go on to give you the top 7  facts the IRS wants you to know about gambling winnings.

  1. Gambling income includes – but is not limited to – winnings from lotteries, raffles, horse and dog races and casinos, as well as the fair market value of prizes such as cars, houses, trips or other non-cash prizes.
  2. Depending on the type and amount of your winnings, the payer might provide you with a Form W-2G and may have withheld federal income taxes from the payment.
  3. The full amount of your gambling winnings for the year must be reported on line 21 of IRS Form 1040. You may not use Form 1040A or 1040EZ. This rule applies regardless of the amount and regardless of whether you receive a Form W-2G or any other reporting form.
  4. If you itemize deductions, you can deduct your gambling losses for the year on line 28 of Schedule A, Form 1040.
  5. You cannot deduct gambling losses that are more than your winnings.
  6. It is important to keep an accurate diary or similar record of your gambling winnings and losses.
  7. To deduct your losses, you must be able to provide receipts, tickets, statements or other records that show the amount of both your winnings and losses.

Want to know more?  Look to IRS Publication 529 "Miscellaneous Deductions" or Publication 525 "Taxable and Nontaxable Income".