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A measuring stick for wealth

Posted by Jamie Downey February 27, 2013 06:03 AM

One of my all around favorite books relating to money matters is Rich Dad’s Guide to Investing by Robert Kiyosaki. I was expecting this book to be something similar to Benjamin Graham’s Security Analysis, an in depth discussion of what to look for in buying stocks. However, the book is not so much about investing as it is about the investor. And it was filled with good ideas that were novel to me.

The concept that most stuck in my mind was how Mr. Kiyosaki measured wealth. He teaches that wealth should not necessarily be measured in units of dollars, but in units of time. This measure of time looks at how long your assets can carry you, without the need to work. In other words, if you stopped working today, how long could you survive financially with the assets that you have?

To determine this, you need to do a little work and create both a budget of your monthly expenditures as well as determine your net assets (value of what you own versus what you owe). Say your household expenditures are $4,000 per month and you have net assets that total $12,000. If you quit your job today, your assets could carry you for about three months, before significant financial hardship set in. Your wealth measure would be 90 days as you could survive that long under your existing lifestyle without working.

The “work” that Mr. Kiyosaki encourages is increasing ones portfolio and passive income. Portfolio income includes things such as interest and dividends. Passive income includes things such as rental income or royalties. Mr. Kiyosaki believes that you should spend some of your time trying to increase these types of income. Let’s say you are successful and after ten years, you can generate $5,000 per month in net rental income and still have only $4,000 per month in living expenses. In this case your wealth number is infinite. You could expect to be able to continue your lifestyle in perpetuity without the need to show up at the office ever again.

A good definition of financial independence might be when your assets generate more income that your household expenses consume. You no longer have to work for money, because your money works for you.

Tax facts, stats and changes for 2013

Posted by Jamie Downey February 18, 2013 06:04 AM

The tax code is ever evolving and 2013 will be no different for taxpayers. The following are some key facts and changes to the tax code for the upcoming year:

• There are seven income brackets; 10%, 15%, 25%, 28%, 33%, 35% and 39.6% individual tax rates for 2013.

• Standard deductions were increased to $12,200 for those married filing jointly, $8,950 for those filing as head of household, and $6,100 for those filing as single.

• The personal exemption amount has been raised to $3,900.

• The top estate tax rate is 40% with a estate tax exemption of $5.25 million.

• Section 179 deduction is up to $500,000 for capital assets acquired in 2013.

• 50% bonus depreciation is allowed for qualified assets placed in service through the end of 2013.

• An individual can contribute up to $17,500 to their 401(k) plan for 2013.

• The tax on capital gains and qualified dividends is 0% for those in the 15% income tax bracket or below, 15% for those in the 25%, 28% 33% and 35% income tax brackets and 20% for those in the 39.6% bracket.

• Required minimum distributions must begin in the year a participant turns 70 1/2.

• The IRA contribution limit increased to $5,500 or $6,500 if the participant is 50 or older.

• The social security taxable wage limit was increased to $113,700 this year from $110,100 for last year. Also changed, retirees under full retirement age now can earn up to $15,120 without losing benefits.

• The employee OASDI (Social Security) tax rate reverted back to 6.2%. Also, the OASDI tax rate under SECA (self-employment tax) reverted back to at 12.4% .

• Mileage rates for business and medical were increased to $0.565 and $0.24 respectively. The mileage rate for charity remains the same at $0.14.

For those of you who forgot a Valentine’s Day present for their significant other, I have taken care of it for you. I prepared a reference guide, the 2013 Tax Facts at a Glance, which highlights important tax rates and deductions for businesses and individuals. (If you want a laminated copy for your loved one, shoot me an email with your address and I can mail you one. I have about 50 leftovers.)

Presidents' Day sales: Things to consider

Posted by Allison Knothe February 15, 2013 02:51 PM

It’s the first big shopping event since the holidays, and Presidents’ Day is a great time to take advantage of all the big sales out there.

Personal finance analyst Jessica Patel, of Bankrate.com, said this is the perfect time to shop for bedding, mattresses, and linens, as well as winter apparel and even some furniture.

“The main tip I would offer is don’t overspend around Presidents’ Day just because there are sales going on,” she said. “Stick to things that are going to be on sale and known to be on sale.”

Jewelry is one thing that people will have trouble finding good deals on, Patel said. But although Valentine’s Day is over and sale signs will be posted, she explained that jewelry prices likely won’t drop drastically.

Patel said that if you are working on paying off debt from holiday purchases and don’t really need the things listed above, staying home might be the best option for you.

“Unless you desperately need new sheets or a new mattress I would shy away from going out to the stores,” she said. “There will be another sale coming up in a couple of months.”

But if you are venturing out for a certain product, remember to do some comparison shopping online before hitting the store.

The biggest downside to shopping online for linens is that you lose the chance to feel the material before buying it, she added.

And although there won’t be the mass hysteria that you see surrounding Black Friday or other big shopping days, Patel recommends doing your shopping earlier in the day to ensure the products you want will be in stock.

The last thing to remember is that if you have specific stores you plan to visit, make sure its sales are going on throughout the weekend, and not just on Monday.

What’s the number one thing on your Presidents’ Day shopping list?

12 shopping tips for Presidents' Day

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Proposed Massachusetts tax increases

Posted by Jamie Downey February 7, 2013 11:13 AM

Governor Patrick has come out with a series of proposed tax increases. These increases will cover a wide spectrum of the Massachusetts tax base. There are some offsets, mostly the reduction on the state sales tax to 4.5% and an increase to the . However, the overall effect would increase the overall tax burden of residence and businesses of the Commonwealth by about $2 billion. Here are the tax increase proposals that will impact most tax payers in the Commonwealth.

Individual Tax Increases:

Individual income tax rate – The Governor proposed a 19% increase in the Massachusetts individual income tax rate from 5.25% to 6.25%.

Cigarette excise tax - Increase the state tax on cigarettes from $2.51 to $3.51 per pack, a 40% increase. This would raise $166 million per year. The increase also applies to smokeless tobacco products. Sales tax will continue to be assessed on the excise tax.

Expand sales tax – This one has been on the Governor’s agenda for a couple of years. He is proposing to expand the sales tax to apply to candy and soda. According to estimates, this would raise $53 million of additional sales tax.

Expand bottle redemption to bottled water and sports drinks – This is a tax although the Governor might not call it one. Since many residents discard their bottles without receiving their deposit back, it is effectively a tax. Yes, one can choose to return the bottles and cans, but only if they have nothing better to do on a Saturday afternoon, plus what is the cost of the gasoline to get to and from the bottle redemption center. In my hometown and most towns throughout the Commonwealth, there is curbside recycling. Most water bottles are recycled in this manner.

Raise gasoline tax – This adds a half cent to the gas tax and increases it annually by inflation. The crafty thing about this is that it allows the tax on gasoline to increase in perpetuity without any further votes by legislators. There is a reason this tax has not been raised for 20 something years, it is generally unpopular and legislators do not want to vote on it.

Raise tolls – This proposal would raise turnpike tunnel and bridge tolls by 5% every two years. See above on automatic increases without legislative votes needed. In addition, the Governor has requested tolls be reinstated on the Western part of the Turnpike.

Increase registry fees by 10% every five years. See above regarding automatic tax increases .

Elimination of Tax Deductions: There are 45 deductions or exemptions proposed for elimination by the Governor, each is effectively a tax increase. Here are the ones that will impact the most Massachusetts taxpayers. (Note – in cases where I have suggested the potential tax increase, it is assuming the higher proposed income tax rate of 6.25%. There would also be some potential offset to this by increasing the standard deduction, which has also been proposed.)

Repeal of exemption on capital gains on home sales – This one can really hit some people hard. Currently, Massachusetts conforms with the federal tax law in exempting up to $500,000 in capital gains on the sale of one’s primary residence. Governor Patrick has proposed eliminating this exemption. If you have been in a home for say 30 years or more, and your home has increased substantially in value, you could effectively see a new $30K tax liability on your home ($500K multiplied by the new proposed tax rate of 6.25%).

Social security and public pension deduction - Currently each taxpayer is allowed a deduction of up to $2,000 for payments made to Social Security or to a public pension plan. This has been proposed for elimination. For a dual income household, this would increase their Massachusetts income taxes by up to $250. Does any think it is unfair that the state is taxing monies that are being impounded by the federal government as Social Security taxes?

Dependents under age 12 – The current law allows for a deduction of $3,600 for each dependent in a household under the age of 12, to a maximum of two dependents, or $7,200. The Governor has proposed to eliminate this deduction. This will impact about 500,000 tax filers. A family with two qualifying dependents will pay up to $450 of additional taxes to the state.

Childcare expense deduction – Currently taxpayers are allowed a deduction of up to a maximum of $9,600 for employment related child care expenses, i.e. day care expenses. This is proposed for elimination. Additional Massachusetts income tax on families with two or more children in daycare would be up to $600.

Personal exemption – The parents of full time students 19 years and older currently receive a $1,000 deduction so long as that student is considered a dependent. The Governor has proposed elimination of this deduction. The increased state income tax per family would be $62.50 for each qualifying dependent.

Tuition deduction – Currently taxpayers can deduct tuition payments made toward a two or four year degree, to the extent those payments exceed 25% of adjusted gross income. This is proposed for elimination and will impact an estimated 255,000 taxpayers.

Employer education programs – Certain employers reimburse employees for undergraduate and graduate education tuition. Massachusetts currently allows up to $5,250 of this on a tax free basis to the recipient. The Governor has proposed eliminating this exemption such that all tuition reimbursements will be taxable to the employee. The Governor often talks about investing in education, but wants to tax tuition reimbursement made to employees looking to invest in themselves.

MBTA Passes – Currently employers can provide MBTA passes to employees and pay for parking and certain other commuting expenses without this being reported as income to their employees. The Governor has proposed that these benefits will be reported as income to the employees.

Group life insurance – Certain employers in Massachusetts provide group life insurance benefits to their employees. Under current law, the value of this benefit is not taxed to the recipient. The Governor has proposed that these benefits be taxable income to the employee. My suspicion is that some employers might start eliminating group insurance benefits, commuting reimbursements and employer education programs. This suspicion is not so much for the taxability issue, but because they will have the additional administrative burden of reporting these benefits on an employees’ W-2.

Health Savings Accounts - Currently individuals can deduct payments of $3,100, $6,250 for families, on payments made to a health savings account. The Governor has proposed eliminating this tax deduction. This would could cost a family up to $391 in additional state taxes.

Commuter deduction – The state currently allows a deduction up to $750 for Mass Turnpike tolls or MBTA monthly passes. This has been proposed for elimination and could cost some up to $47 in additional taxes. So someone on the Mass Turnpike corridor that commutes to Boston pays a significant amount in tolls, which is effectively a tax for which no deduction will be allowed.

Corporate tax increases:
There are various tax increases proposed on corporations. All are a bit complicated, but will raise about $500 million in additional tax revenue. One of the proposals expands the sales tax to customized computer software. This will generate some $265 million of additional tax revenue. Also, the Governor proposed repealing the FAS 109 deduction, which would bring in $76 million per year. There is also a proposal to change the apportionment rule relating to services, which would raise $35 million. Finally, a limit on the film credit will raise an estimated $40 million.

ABOUT MANAGING YOUR MONEY
Local finance professionals share insights and advice on issues such as budgeting, managing debt, and retirement planning.

About the contributors

D. Abraham Ringer is a CERTIFIED FINANCIAL PLANNER practitioner and a Financial Adviser with Morgan Stanley Global Wealth Management in Boston. He is registered in MA, NH, NY and several other states to which his articles are directed. For more information please visit www.morganstanleyfa.com/ringer
Financial Planning Association™ of Massachusetts has 900 members who specialize in the financial planning process. Many of its members engage in philanthropic pro bono work in their communities, recommend legislation, elevate public awareness, promote financial literacy, and advocate for sound economic and tax policies.
Odysseas Papadimitriou is the founder of CardHub.com, a credit card and gift card marketplace, and WalletHub.com, a personal finance site. He has more than 13 years of experience in the personal finance industry, and previously served as senior director at Capital One.

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