New Tax Changes: Personal

This is a summary of some items in the 2009 Stimulus Bill which relate to individuals. Most of the items have very specific income phaseouts, so please consult with us as to whether these affect your specific situation.

Home Buyers Credit: For homes purchased between January 1, 2009 to December 1, 2009 a credit of up to $8,000 is available for a taxpayer who has not owned a US principal residence in the prior three years. The amount of the credit is 10% of the purchase price. This replaces the prior law, which provided a $7,500 credit for homes purchased between April 9 to December 31, 2008. That credit must be repaid over 15 years or less.

New Car Sales Tax Deduction: Sales-tax for a new car or truck purchase up to the cost of $49,500 may be deducted “above the line” and not as a Schedule A deduction, so it is more beneficial. This phases out, beginning at adjusted gross income of $125,000 and $250,000, respectively, for single or joint filers. This is effective for vehicles bought on or after the effective date, February 17, 2009.

Work Tax Credit: A temporary credit for 2009 and 2010 of 6.2% of earned income, up to a total credit of $400 for individuals and $800 for joint filers. This is retroactive to the beginning of 2009. The phaseouts for this provision are at $75,000 – $90,000 for individuals and $150,000 – $190,000 for joint filers. These benefits may be received by minor adjustments in federal withholding from paychecks, starting around June, 2009.

Higher Education Tax Credits: For 2009 and 2010, the maximum credit per student increases from $1,800 to $2,500 and the income phaseouts are increased significantly to $80,000 -$90,000 for single filers and $160,000-$180,000 for joint filers. Expenses are expanded to include textbooks.

Section 529 Plan and Computer Purchases: For 2009 and 2010, the cost of computers and related technology can qualify as section 529 plan distributions. Internet access charges and software are also covered, as long as they are not for sports or games.

AMT: As Congress has done in prior years, the AMT exemption has again been temporarily increased. We still anticipate that many taxpayers will continue to be affected by the AMT.

Social Security Tax Credit: Recipients will receive a $250 tax credit. This may be in the form of reduced withholdings or a check.

Energy Tax Credits: Homeowners who add energy-efficient windows, furnaces, heat pumps and air conditioners may be eligible for a tax credit of up to 30% of the costs, up to a total of $1,500. In the future, tax credits of up to $7,500 will be available for plug-in hybrids and battery power electric cars. These vehicles are not yet available.

Required Minimum Distributions: More Guidance

As discussed in my post dated January 29, 2009, no required minimum distributions will be required in 2009 for most individuals older than 70 1/2. Minimum required distributions will resume again in 2010.

The waiver of distributions for 2009 applies to recipients from IRA’s, 401(k)s and 403(b)s. However, the exception for no 2009 distributions does not apply to distributions from defined benefit plans, which must take required minimum distributions in 2009.

Beneficiaries of inherited IRAs who are subject to the 5 year rule are also exempt from required distributions in 2009, so they will get 6 years (this applies primarily to non-spouses who receive inherited retirement funds).

The Case for our Investment Philosophy

While reviewing a prospective client’s current portfolio, which we consider like a medical “second opinion,” we again found real world evidence of the strength of our investment philosophy. (Note that we do not currently manage this part of the portfolio and this is only an example, but one that we have seen time and again).

The person’s broker subdivided the account to be managed into three asset categories (large value, large growth and small growth). Beyond the fact that there are many other asset classes that should have been included, the portfolio commentary for 2008 provides very interesting reading. The broker hired or allocated the money into 3 separate funds. Each of the funds then hired 2 or 3 sub-advisors, to actually do the investing.

So this broker of a major brokerage firm, utilizing their vast resources, selected 3 managers. The 3 managers, again assuming used intensive research, each selected multiple sub-advisors. With all this research and diligence, all 3 funds failed to outperform their respective benchmark.

Over a longer time period, the results for this portfolio was no better, as the person’s portfolio failed to beat the broker’s benchmarks over the past one year, 3 years, 5 years or since inception in the 1990s, failing to beat their benchmark by 3-5% each year (as annualized).

While this is only one limited example, it provides further real-world evidence which academic research continues to show: that it is very difficult for active managers to beat their respective benchmarks, particularly over long periods of time.

Thus, by designing a portfolio with the objective of obtaining benchmark returns with far less in fees, investors have a greater likelihood to outperform active managers, over time. For more information on how we design such a portfolio, or to have us perform a “second opinion” on your portfolio, please contact us.

The detailed commentary:

For the large value asset class, the firm wrote: “The Fund outperformed its benchmark, the Russell 1000 Value Index, in the fourth quarter, but underperformed it for the full year.” In mid-December, the Fund replaced one of the 3 sub-advisors that it had hired to manage the fund. (See more about this in my post dated January 28, 2009).

For the large growth asset class, “compared to the Fund’s benchmark,…the Fund underperformed during the quarter, as well as for the full calendar year…The portfolio continues to be subadvised by three active managers…The three sub-advisors ended the year underperforming the benchmark.”

For the small growth asset class, “the Fund’s negative return was accompanied by relative underperformance versus the Fund’s benchmark…for both the quarter and the year overall. The Fund is sub-advised by two active managers…” The active fund sub-advisors decided to overweight the portfolio in 3 sectors. “However, the stocks in which the sub-advisors invested underperformed stocks in the sector as a whole. Energy stocks within the small cap growth universe declined by nearly 50% during the quarter. The Fund’s holdings in this sector underperformed the benchmark’s sector return.” This means the Fund’s energy sector picks did even worse than the benchmark’s 50% loss.

Snowball….Well Worth the Time

I highly recommend this book, Snowball, by Alice Schroeder, which documents Warren Buffett’s life, including both his personal and business life. It is very long, but very worthwhile reading. Buffet is considered by many as the greatest investor of all time.

The book does describe Buffett’s investment philosophy. Much can be gained by learning his important lessons of incredible discipline and patience, as well as how he has used past weaknesses in the market or specific companies to buy, yet be patient when others are greedy. However, much of the book discusses Warren’s personal life, from his childhood newspaper delivery business (he built an “empire” as a teenager) to his relationship with Bill and Melinda Gates.

The title of the book represents Buffett’s investment philosophy, that money invested and allowed to accumulate and compound over many, many years will “snowball” into even more money. He certainly has succeeded at this.

While I recommend this book, a previous book on Buffett by Roger Lowenstein, written in the 1990s, provides more information on the business side of Buffett and his investment decision making.

Tax Updates to come…but not yet

The House has already passed it’s version of the Stimulus bill. The Senate is expected to approve it’s version on Tuesday, February 10th. Then the bills must be reconciled and approved by both chambers, before the President can sign it (OK, that’s Govt 101).

We will provide a summary of the major tax items once the final bill is enacted. You should not do any planning based on either the House or Senate version, as neither is law yet. For example, both bills contain legislation for the purchase of a new home, but they have very different provisions.

If you do have any questions, please contact us.

Have a Kindle Day!

Today, the Amazon Kindle 2 was announced. Last spring, I received as a gift the first version of Amazon’s electronic book reader, Kindle. The second version appears to be only an incremental improvement of the first version of the Kindle, which is already a terrific technological accomplishment.

For those of you who are serious readers, the Kindle is a great device. I am able to carry many books (it can store hundreds), emailed documents and articles, and magazines all in a device that is smaller than most paperback books. You are able to read it without any glare or problems that come with reading a computer screen. It is very readable, inside or outside, even on a beach in the sun. The cost to download most books is $9.99 and is done in under a minute, from practically anywhere in the U.S. The text size is easily changeable, so it is great for those whose vision is declining.

If you ever want to see it, just let me know. And unfortunately, I don’t receive any commissions from Amazon.

Tax Updates

Minimum Required Distribution rule change for 2009:
Almost anyone who is required to take a minimum required distribution in 2009, as a participant or as a beneficiary, does not need to take the distribution from their retirement plan or IRA in 2009. If you think this impacts you, consult with us or your tax advisor, as there may be planning opportunities. It may make tax sense to take some distribution for 2009, but less than you would otherwise be required to distribute.

Ford Hybrid Tax Credits:
If you order or purchase a new 2010 Ford hybrid vehicle by March 31, you may be eligible for a tax credit of up to $3,400 on your 2009 Federal tax return. The Ford Fusion and Mercury Milan are eligible for $3,400 credits, while the Ford Escape (which I own and love!) and Mercury Mariner are eligible for $3,000 credits. The credit amounts decrease after March 31.

Note that credits may be available from other automakers. This was recently announced, so I am posting this for informational purposes only.

Also, depending on your tax circumstances, particularly if you are affected by the AMT, you may not actually get the benefit of the credit upon the filing of your income tax return (that’s why I’ve used the term “eligible” for a tax credit and have not stated that you “will” get a credit). So, keep in mind that even if you purchase a car eligible for one of these credits, you may not actually get the benefit of the tax credit. That’s the tax code!

Recommended Reading

The first Saturday of March is a special day for me, as that is traditionally the morning when Warren Buffett’s annual report and shareholder’s letter is released (though last year he surprised me by releasing it late Friday afternoon). Reading his letters are invaluable. I will share some highlights of this year’s letter when it is released.

As Buffett made a huge gift to the Bill and Melinda Gates Foundation, Buffet encouraged Bill Gates to write an annual letter, which was released earlier this week. It is fascinating reading and incredible, both in the poverty and medical problems in other parts of the world and the significant efforts that Gates and his wife Melinda are making, both financially and with their time, in an attempt to address and cure some of these problems.

For example, in 1960, almost 20 million children died under the age of 5, of the 110 million children born. In 2005, when more than 135 million children were born, fewer than 10 million children under the age of 5 died. Gates called this “one of the most amazing statistics ever.” His Foundation is focusing on vaccines to cut the 10 million figure in half again within the next 20 years.

I highly recommend reading this report. It will give you an appreciation of how well off so many of us are, and the steps that Gates is taking to address many of the world’s problems. For more information and the full annual letter, see

In commenting on the world’s economic issues, Gates wrote: “If you take a longer timeframe, such as five to ten years, I am very optimistic that these problems will be behind us. A key reason for this is that innovation in every field-from software and materials science to genetics and energy generation-is moving forward at a pace that can bring real progress in solving big problems. These innovations will help improve the world and reinvigorate the world economy.”

If the Best Can’t Pick ‘Em, How Can You?

Each week, publishes an article entitled “Fund Times,” which writes about fund managers that have been fired, quit, changed jobs, etc., among other things.

On January 22, 2009, the lead article was that Vanguard was replacing a subadvisor (manager) for 50% of one of their actively managed funds, Vanguard Growth Equity. In early 2008, they replaced the other subadvisor, who managed the other 50%.

With all the resources that Vanguard has, why would they be frequently changing the managers of this mutual fund? This once again shows how difficult it is to predict the future success of active fund/money managers. Even Vanguard could not do it. Vanguard selected a certain manager a few years ago (presumably after lots of research by many professionals), based on their past performance, then the performance fell below their respective benchmark for a period of time and Vanguard decided to make a change.

Our philosophy is rather than trying to pick and chase a fund manager that will consistently beat a respective benchmark (which is extremely hard to do), we build a portfolio to match the benchmark for each asset class. In the long run, academic data shows that this will be the winning strategy.

Can You Judge a Book By It’s Cover?

I’m not sure we have the answer to that, but we do know that you can judge or evaluate a financial advisory firm by the information and books that they read, or do not read. We value the importance of continually learning from prior financial history and the lessons that can be learned from reading other experts and certain journalists.

Books that we’ve read (and recommend):

  • Snowball, Warren Buffet’s biography, by Alice Schroeder (Excellent background on his life)
  • Panic, by Michael Lewis, a collection of essays on financial crisis from the 1980s to now
  • A Demon of Our Own Design, by Richard Bookstaber
  • Investment Policy, Charles Ellis
  • Buffet: The Making of an American Capitalist, written in 1990s, Roger Lowenstein
  • When Genius Failed: The Rise and Fall of Long Term Capital Management, Roger Lowenstein
  • A Random Walk Down Wall Street, Burton Malkiel
  • Four Pillars of Investing and other books by William J. Bernstein
  • Books by Larry Swedroe, Director of Research, BAM Advisor Services

I will post more to this list in the future. Many of the books that I read before we formed this firm were instrumental in developing our investment philosophy.

Daily or Periodic Reading

  • The Wall Street Journal (in print and electronically), daily, since high school
  • The New York Times, electronically
  • Nick Murray Interactive (online advisor’s newsletter)
  • Information and commentary provided by BAM Advisor Services and Dimensional Fund
  • Advisors
  • Financial Journals: Investment News, Financial Advisor, Investment Advisor
  • Leimberg Services, an online subscription service which provides tax and estate planning updates
  • Some of our favorite journalists: Jason Zweig (WSJ), Roger Lowenstein (NY Times and others), Floyd Norris and Joe Nocera (NY Times)
  • Atlantic Monthly (now emailed monthly to my Kindle)