Yesterday, the US House of Representatives passed the “American Taxpayer Relief Act of 2012”, which is set to be signed by the President shortly. The bill’s volume of tax extensions is pretty extreme. It extends nine individual tax breaks, 31 business tax breaks, 12 energy tax breaks, as well as partially extending the current tax brackets. Much has already been written about the bill’s impact on individual tax rates. So here are the items most pertinent to Massachusetts businesses and small business owners:

Business Tax Extenders

Section 301 - Extension and modification of research credit – The research credit has been extended for two years, retroactively to January 1, 2012 and through December 31, 2013.

Section 308 – Extension of wage credit for employers who are active duty members of the uniformed services – This tax credit is provided to small business that provide wage payments to active duty members of the armed services. This credit has been extended through December 31, 2013.

Section 309 – Extension of work opportunity tax credit – The work opportunity tax credit is available to business that pay wages to a targeted group. The credit is available for wages paid in the first and second year of employment. There are various targeted groups, but the largest pool are qualified veterans of the armed services. This has been extended through December 31, 2013.

Section 311 - Extension of 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements - This creates a 15 year depreciation life for certain property. It has been extended for two years, retroactively from January 1, 2012 through December 31, 2013.

Section 315 – Section 179 increased expensing limitation – Businesses can deduct the cost of equipment placed in service under what is known as Section 179 deduction. This deduction was set at $139,000 in 2012 and $25,000 in 2013. This has been retroactively increased to $500,000 for 2012 and set at $500,000 for 2013. It is scheduled to revert to $25,000 in 2014.

Section 324 – Extension of temporary exclusion of 100 percent of gain on certain small business stock – Under certain rules, 100% of the capital gain on the sale of small business stock can be excluded from income. Various rules apply, but the stock needs to be held for more than five years. This has been extended for stock acquired in 2013.

Section 326 - Extension of reduction in S-Corporation recognition period for built in gains tax – For businesses that convert to an S corporation, the conversion is not a taxable event. However, following this conversion, the entity must hold the assets for ten years to avoid a tax on any built in gains at the time of conversion. This period has been reduced to five years for sales that occur in either 2012 or 2013.

Section 331 - Extension and modification of bonus depreciation – Bonus depreciation of 50% has been extended through the end of 2013.

Other Pertinent Sections

Section 101 - Permanent extension and modification of the 2001 Bush tax cuts – Amongst other things, this sets the estate tax rate at 40% for individual estates greater than $5 million. The gift tax exemption is also set at $5 million.

Section 102 - Permanent extension and modification of the 2003 Bush tax cuts - It extends the 15% capital gains rates, with an increase to 20% for upper income earners.

Section 103 – Extends of the 2009 Tax Relief – This extends for a period of 5 years the American Opportunity Tax Credit. This is a $2,500 tax credit on qualifying college tuition payments.

Section 104 – Permanent Alternative Minimum Tax (AMT) Relief – This permanently increases the AMT exemption to $78,750 from $45,000, then indexes the exemption to inflation. This is retroactive to the 2012 tax year. The increase in the exemption prevents many from falling under the AMT.

J. Christopher Boyd, CFP (Chris) is a leader in the Financial Planning Association of Massachusetts and host of a financial radio show on WXTK 95.1. He will be hosting a live Boston.com chat on Friday, Dec. 21 at 1 p.m.

With only 17 days until next year, the potential realities of the “fiscal cliff” are coming more clearly into focus. The bottom line, should we actually land in next year with no deal to avert the fiscal cliff, is a jump in taxes for many and reduction in the rate of government spending.

The prospective divergent implications on the US economy are pronounced. If we go over the cliff and there is no subsequent deal, a recession is expected by the Congressional Budget Office and many economists, resulting in an estimated 2% to 3% decline in the economy. If a deal comes out of Washington, many economists expect 1% to 2% economic growth. This has a meaningful impact for jobs, income, growth of wealth, and government revenues.

Given the uncertainty of whether there will be a compromise from Washington within the next couple of weeks, what’s an investor to do?

Cliff Proof Planning:
- First, don’t lose your head about the whole thing. Keep working, keep saving, keep investing. The best way to create wealth over time is to spend less than you earn, and invest for the long-term. Keep contributing to retirement plans or some manner of systematic investment, dollar-cost-averaging monthly and using any potential market declines as a buying opportunity.

- Plan for some short-term uncertainties by maintaining a sufficient amount of cash for emergency spending, and so you won’t need to sell securities at inopportune times. By keeping these reserves, you can allow yourself to ride out the bumps with the rest of your diversified portfolio.

- Revisit your estate plan in 2013 – estate tax rates and thresholds will likely change.

- Year-end Tax Planning this year is turned upside-down. Because of anticipated higher tax rates, realize long-term capital gains this year, rather than next year when there are higher rates. Save capital losses for next year, but if there are many, offset gains with losses and carry forward losses for future use.

- Contribute to a Roth IRA instead of a taking a tax deduction in 2012 for a contribution to a Traditional IRA. This can be done in 2013 prior to tax filing in April.

- Whether to convert an IRA to a Roth IRA is more complex and subject to various considerations. Primary considerations are: do you expect to be paying a lower tax rate now while earning or later in retirement? If the answer is now, then convert to a Roth IRA. Be sure to have cash on hand to pay the taxes caused by the Roth IRA Conversion. Check with a qualified tax advisor for the best tax tips.

- Do charitable giving. Because we don’t know what, if any, limitations to deductions may come with a deal, it seems reasonable to make charitable contributions sooner rather than later, particularly for the wealthy.

- Portfolio design revisions – Consider where you hold which investments. For example, it may make sense to hold income generating assets (dividend paying stocks, corporate bonds, etc.) in your retirement accounts, so that income is not taxed unless withdrawn. Conversely, focus on growth stocks, not dividend stocks, in taxable investment accounts. Tax-free municipal bonds may take on greater appeal for those in higher tax brackets.

- Tax Deferral will become more attractive for those in their peak earning years. Life insurance and annuity products can have higher costs and the potential for long surrender charges, so use of such products should be deliberate and well informed, however, these could be useful tools to postponing or even potentially avoiding some taxation.

Are markets poised for a tumble? It seems likely that uncertainty caused by Washington’s dysfunction may result in a temporary slowdown in the economy, but it is important to keep in mind the long view. Will companies continue to be profitable, and will market prices recognize that profitability? The likely answer is “yes.” Eventually, investors will benefit by taking risk. How long before they are compensated for those risks can vary, but as we look out several years, it certainly seems likely that taking risk will be rewarded, particularly with ownership of equities. It’s okay to be a bit tactical on the edges right now, but don’t just run scared.

With only a couple weeks remaining in the year, there is much to consider with your investments and planning. Take a little time now, the long-term results could pay dividends for years.

The US Treasury’s webpage shows that interest expense for the fiscal year ending September 30 20011 will be approximately $460 billion. This is an outrageously large sum of money. However, the US government’s debts total in excess of $14 trillion. As the webpage notes, the US Government is paying 2.9 percent interest rate on its outstanding debts. By historical standards, this is a pretty low interest rate. The US Treasury website notes that in January 2001, the US government was paying an interest rate of about 6.6 percent on its outstanding debt. In September 2005, they were paying 4.7 percent.

The US government’s story of fiscal irresponsibility is followed by an opposite story of personal fiscal responsibility. We have a family friend, Len, that worked his entire life. Len worked hard and received a moderate middle class wage for many years. Len’s wife did not work and brought up their children. They put their kids through college and they still found a way to save some money over the years. When Len retired, he had about $200,000 saved in various CD’s, US Treasuries and IRA’s. He figured the interest earned on his savings and his $14,000 in Social Security would allow him a reasonably comfortable retirement. For many years, he could get between 5 and 6 percent interest on his savings by investing in CD’s and US government securities. This gave him between $10,000 and $12,000 per year of interest income. His retirement did not provide him a lavish lifestyle, but he did spend two months in Florida each winter. Recently he told me he was not going this year as he could no longer afford it. Interest income on his savings had shrunk over 90 percent, to less than a thousand dollars per year. Not because the money had been spent, but because the rates had declined so precipitously. Even worse for Len, the Fed announced that they intend to keep rates this low for the next 2 years.

For two years now, we have heard the President, Congress and the Federal Reserve tell us that low interest rates will help spur investment and consumption. Companies can borrow money cheaper, and thus make capital investments. We also hear fantasy land stories about people purchasing new cars because their monthly payment will be less. While this sounds great, there is also a loser in the person receiving interest income. In years past, Len may have purchased a new car as he had an adequate supply of interest income on hand. Now he can barely afford a tank of gas. There is also a landlord in Florida that no longer has a tenant.

No official ever says it, but low interest rates is a zero sum game. Borrowers might pay less interest expense, but the lenders / depositors also receive less interest income. There is no creation of wealth, growth of money supply, or any other positive economic factors. Just one party undeservedly benefiting and one party undeservedly being punished. A reduction in interest expense to one is a reduction in interest income to another. The correlation is approximately 1.0. It is as simple as that.

Now who do you think is the biggest beneficiary of the low interest rate environment? None other than the US government, the biggest borrower and spend thrift in the world. Do not for a minute think that the Federal Reserve is independent of the US government’s spending problem. They are on board with this and clearly assisting in all ways possible. By keeping rates low, the Federal Reserve is keeping interest costs down for the US government. Let’s say for a minute that interest on government obligations reverts back to a normalized rate of 5.6 percent. Interest expense on the national debt would increase about $360 billion to $823 billion annually. If rates increase to 6.6 percent, as was the case in January 2001, the interest on the debt would approach $1 trillion per annum. How would this impact deficit reduction talks? It is tough to have pet projects, pay for Medicare or anything else, when the interest expense absorbs almost the entire tax base.

Merriam-Websters defines a tax as a charge of money imposed by authority on persons or property. These low interest rates certainly have the feel of redistributing wealth from Len and other fiscally responsible folks to the US government.

It appears that the current record low interest rate environment is here to stay. Last week, the Fed stated that it planned to keep the federal funds rate at an exceptionally low rate through at least the middle of 2013. The federal funds rate is the primary tool used by the Fed and it typically influences interest rates across the spectrum. This federal funds rate has been near zero percent since 2008. Assuming the Federal Reserve keeps their promise of low rates through 2013, the short term rate environment will be near zero percent upwards of five years.

The Fed’s goal is to stimulate economic activity and believes these artificially low interest rates will complete that goal. However, by creating artificially an artificially low interest rate environment, they are benefitting certain groups to the detriment of other groups. Generally speaking, low interest rates benefit those that borrow money and hurt those that are savers. Here are a few specific winners and losers in the current interest rate environment.

Winners:
The US Government – The US Government is clearly the biggest spendthrift around and the biggest beneficiary in a low interest environment. The federal government will spend in the neighborhood of $3.8 trillion in its fiscal year 2011. Unfortunately, they will only take in approximately $2.2 trillion of revenues. To make up the difference, they will have to borrow much of the deficit of $1.6 trillion. The good news for the US Government is that it can borrow the $1.6 trillion at an exceptionally low interest rate. The US Treasury is paying a little over 2 percent on current 10 year obligations and 3.75 percent on 30 year US Treasury bonds. This is very cheap by historical standards.

In 2010, the US Government paid $413 billion in interest expense on its $14 trillion in outstanding debts, which works out to a rate of about 3 percent. Should this rate increase to a still low 5 percent, the federal government’s interest costs would increase by $300 billion to $700 billion. Clearly the US Government’s budget is on an unsustainable track. This seemed obvious to the naked eye well before S&P downgrade occurred. If you ask me, the Fed is getting significant pressure from Washington to keep the rates low to help finance their budget and debt woes.

Housing market –Fortunately, here in Massachusetts, we have not been struck nearly as hard by the housing bubble as other parts of the country. But the impact is still tangible and it still hurts. It would seem to me that cheap mortgages rates are propping up the prices of homes. Clearly one can by a more expensive home when mortgage rates are low, and this rising tide should lift all boats. Last week, a 30 year fixed loan could be had at 3.75 percent. This is the cheapest it has ever been noted on record. Furthermore, those already in their home and able to refinance at these low rates can see a significant reduction to their monthly housing costs.

Corporate Borrowers – After the Fed’s announcement that interest rates were going to stay low, Berkshire Hathaway and Proctor & Gamble both announced significant bond offerings. By borrowing money in a record low interest rate environment, corporations can keep their interest expense low for many years out.

Losers:
Net Savers – Growing up, I remember my parents and grandparents telling me to save my money and be frugal. I recall corny phrases such as “a penny saved is a penny earned” and “it is not how much you make, it is how much you save”. However, it seems the Fed and US Government policy has totally spurned the savers in the country. I know a couple of seniors that had stashed away money over the years in hopes of living a comfortable lifestyle on a steady stream of interest income and Social Security. These folks’ lives have been turned upside down by artificially low rates. It is hard to justify the bad cards being dealt to this group.

Banks – Banks are reliant on interest income on their loan holdings to fund the operations of the bank and hopefully provide a reasonable return on the invested capital. As interest rates remain low, banks see their interest income erode on their loans. The only upside is that banks also pay a significant amount of interest expense to depositors and other debtors. As interest income has eroded, the banks have also been able to cut back their interest expense and this has allowed banks to somewhat maintain net interest margins. However, banks profitability will struggle over the long term if rates stay this low. A banking industry incapable of making money will not be good for the US economy as a whole.

I have been saying for two years that interest rates are likely to go up. At some point, I have to be right, because they can not go any lower. The federal reserve's “quantitative easing” program is scheduled to end next month and I was thinking that interest rates will start to rise shortly thereafter.

Rising interest rates will certainly be welcome news for those that rely on interest as a significant source of income. I know many seniors are being hurt financially as they have almost no ability to earn a reasonable amount of interest. And it does not end with individuals, banks and insurance companies are also reliant on interest as a major source of income and have little place to turn with excess funding.

However, I am not sure that my prediction of rising rates will come to fruition any time soon. Short term interest rates on money markets and short term CD’s are tied closely to yields on the federal funds rate as set by the Federal Open Market Committee of the Federal Reserve. Here is what the Federal Open Market Committee stated at the end of April 2011: “The Committee will maintain the target range for the federal funds rate at 0.0 percent to 0.25 percent and continues to anticipate that economic conditions … are likely to warrant exceptionally low levels for the federal funds rate for an extended period.”

How long that “extended period” is, I do not know. My unscientific search seems to indicate that these low interest rates will be here for at least another year. Bank of America’s US Economic Weekly bulletin predicts that federal funds rate will only increase to 0.50 percent - 0.75 percent through 2012 from its current 0.0 percent - 0.25 percent. This increase would still leave rates anemically low.

So you may want to brace yourself for a continued low rate environment. There are currently not a lot of options out there for those averse to risk.

About three weeks ago, my wife and I refinanced our home for the second time in 18 months. We have shaved about $460 per month off our original mortgage payment. We are definitely a benefactor of the Federal Reserve current interest rate policy. No sane bank would ever provide my wife and me a 30 year loan at 4.25 percent. As of Wednesday, a 30 year US Treasury bond was yielding 4.25 percent. Consequently, the US Government is borrowing money at the same rate that we are borrowing money. Not that we are bad credit risks, we just are not as good as the US government.

Last week the Federal Reserve announced that it will purchase an additional $600 billion of Treasuries in an attempt to further reduce interest rates. Maybe my wife and I will hit pay dirt again and refinance our home at an even lower rate. While these low interest rates have been a blessing to us, they have been a curse to others. Those cursed in the current environment are primarily seniors and savers.

My Grandmother was the model of fiscal prudence and responsibility. She lived through the Great Depression and knew how to stretch and save her money. After retiring, she lived on a modest Social Security annuity and her savings. All of her savings were in CD’s. Like many elders, she preferred not to tap into the principal of her savings and lived on the interest that it earned. After passing this summer, most of her CD’s were earning interest at rates considerably less than one percent. She could no longer live solely on the interest and was dipping into the principal. She was being squeezed and had to cut back where she could. I know others are being squeezed as well.

As if this is not bad enough for seniors, the Federal Reserve wants to INCREASE the rate of inflation. So in addition to earning no interest on their savings, their savings accounts will actually be worth less, i.e. your $100,000 CD will only buy you $97,000 worth of goods next year.

What is the rationale to redistribute money to borrowers (like myself) from savers (like my Grandmother)? This is the net effect of the Federal Reserve’s policy. I save $460 per month and my Grandmother probably gave up a similar size stream of income each month. Is this the new era of responsibility that President Obama was talking about when he ran for President? Are the savers no longer the responsible party and the borrowers are? Maybe my wife and I will go run up our credit cards on frivolous trinkets and become even more responsible. Instead of saving for the kids college (and earning no interest), we will take a vacation.

A recent report from the Associated Industries of Massachusetts (AIM) shows another setback for businesses in this state. Starting January 1, 2011, employers are projected to face a 40% increase in unemployment insurance costs. The average unemployment insurance costs are expected to increase from $646 to $904 per employee. This is the maximum rate increase allowed under current law. Last year, rates increased by an average $111 per employee.

Massachusetts has the highest unemployment insurance costs in the country. AIM and other groups have proposed reforms to help lower the burden and close loopholes in the current system. Neither the Patrick administration nor the legislature have made much effort to address the high costs and weaknesses of the system.

There were two major tax cutting bills that were enacted during President Bush’s administration. They were the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). These two pieces of legislation are often referred to as the “Bush Tax Cuts”. The bills included across the board tax relief for American taxpayers. Many of the tax cuts included in these bills had expiration dates of December 31, 2010. There is much debate in Washington over which, if any, of these provisions should be extended to the future.

There is no debate that the two pieces of legislation provided tax relief for most every American taxpayer. The following is a summary of significant provisions that are set to expire at the end of this year:

Tax brackets: EGTRRA created a new series of lower tax brackets; 10%, 15%, 25%, 28%, 33% and 35%. These lower tax brackets will be replaced with the following higher tax rates 15%, 28%, 31%, 36% and 39.6%. For example, if you are currently in the 10% bracket, your tax rate will increase by half to 15%. Unless Congress and the President act, these new higher rates will impact every US taxpayer.

Marriage penalty: Anyone who remembers political debates of the 1990’s surely remembers discussions regarding the marriage penalty. In many cases, if a man and woman got married, their tax bill filing a joint return was more than their combined tax bill if they each filed single returns. The Bush Tax Cuts had several provisions which provided relief from this so called penalty. This included a standard deduction for a married filing joint couple to be double that of a single filer. In addition, tax rates for married filers were adjusted to reduce the penalty. Much of the relief provided in EGTRRA and JGTRRA will expire in 2011.

Child tax credit: The child tax credit is currently $1,000. This will fall to $500 in 2011. Also, the number of families eligible to receive the credit will decline significantly.

Qualified dividends: The tax rate for qualified dividends is a maximum of 15%. Starting in 2011, dividends will be subject to ordinary income tax rates ranging between 15% and 39.6%.

Capital gains: The top tax rate on capital gains will increase from 15% to 20%.

Estate tax: For 2010 the estate tax has been repealed. However, it returns in 2011 with an exemption level of $1 million and top tax bracket of 55%.

Phase-outs: The Bush Tax Cuts eliminated the phase-outs of the personal exemption and for itemized deductions. These phase-outs return in 2011.

The Tax Foundation estimated that the median family of four saved about $2,200 in federal taxes each year that the Bush Tax Cuts were in place. Much of this savings will vanish if these tax provisions are allowed to expire.

Passage of the Wall Street Reform and Consumer Protection Act appears imminent in the next week or so. Certain improvements to the financial services industry are no doubt in order. However, increasing regulations in one of the highest regulated industries in the country is not likely to reduce the risk to the industry. Here are a few thoughts on the bill:

Investment bank reform – Prior to the recent banking crisis, the United States housed the five largest investment banks in the world, Goldman Sachs, Merrill Lynch, Morgan Stanley, Lehman Brothers and Bear Stearns. Only two of these institutions, Goldman Sachs and Morgan Stanley, remain independent and they are substantially restructured from their former self. The others have either gone through bankruptcy or were acquired in a distressed sale. The market has already applied significant pressure on these entities to correct their misguided past. Does the industry really need the government piling on?

Fannie Mae and Freddie Mac – The Wall Street Journal projected losses at these two entities at over $370 billion through 2020. Losses at these entities will dwarf the losses incurred from the TARP funds (Wall Street Journal estimates this at $89 billion). However, the Wall Street Reform and Consumer Protection Act does not address any type of corrective action for either Fannie Mae or Freddie Mac. Are these not the entities that should be under the most scrutiny?

Community banks – Local and community banks are under much more pressure these days than larger banks. All banks have had significant loan charge-offs in recent years. However, larger banks have accessed the public markets and TARP funds to obtain additional capital. Smaller community banks have been pretty much shut out from these forms of capital. As such, community banks are likely to be less capitalized than their larger bank counterparts. Additionally, the personnel costs incurred to comply with federal and state regulations are one of the largest non-interest related expenses for community banks. This will only get worse as this 2300 page bill becomes law and volumes of new regulations are added. Prepare to see a significant wave of consolidation in coming years in the community bank sector. This will actually increase the size of the larger banks (too big to fail?) and reduce competition.

Higher capital requirements – The new regulations will require banks to have more capital than they did in the past. This will certainly reduce the risk exposure for banks. It will also reduce a banks ability to be profitable and reduce available credit for borrowers. Furthermore, community banks have much less access to capital and many will struggle to meet these new requirements.

TARP – The Troubled Asset Relief Program was no doubt a success. During the banking crises, banks need capital infusions to sure up their balance sheets and public confidence. This mission was accomplished and most of the large institutions have paid back their TARP funds in full with interest. In many cases the US Government will profit from the transaction in the form of warrants received. The four largest losses in the TARP portfolio will come from AIG, General Motors, GMAC and Chrysler. Not one of these entities held a bank charter prior to the crisis. Providing bank funds to GM and Chrysler was a political quid pro quo. Maybe regulating auto manufacturers would be more appropriate than regulating banks.

Derivatives – Warren Buffett has referred to derivatives as “financial weapons of mass destruction”. While this can be true when used for speculative purposes, the purpose of entering into a derivative position is to reduce risk. Even Mr. Buffett will admit that his company, Berkshire Hathaway, has billions of dollars in derivative products. Like all rational bankers, he uses these to limit risk exposures. The government wants to limit the use of a product that can actually reduce a bank’s financial risk.

Propping up residential home prices – For years the Federal Reserve and the government have been propping up the value of homes with various incentives to encourage home ownership. These incentives played an important role in the dramatic increase in home prices through 2006. However, the subsequent fall in residential values was the foundation for the entire financial meltdown. How has the government and Fed responded? They have implemented new incentives to prop up the market such as 30 year fixed loans at 4.875% and $8,000 tax credits. Those that don’t learn from history are bound to repeat it.

Employers sometimes match employee’s 401(k) contributions by using company stock. Once the stock is deposited to the account the employee can sell it (although they may be restricted to holding it for a certain amount of time first.) Employees also amass company stock through ESPP, or Employee Stock Purchase Plans, in which the stock is offered to the employee at a discount. I often find that employees hold on to company stock, letting it build up to become a large portion of the account. This is dangerous for a couple of reasons.

When a client comes to me in this situation he (or she) usually tells me that they “know the company” and are very confident in the stock. But how well do you really know the company? Unless you’re in a top management position you don’t know what decisions are being made that could affect the bottom line. And if you did know, the stock you would be given would come with a lot more restrictions on your ability to sell it. In addition, any company can succumb to poor or fraudulent management. Remember Enron anyone?

Another reason to diversify is that your income is dependent on that company. Why should your investments be dependent on the same risk? Why open yourself up to the risk of losing your income as well as some percentage of your portfolio, both for the same reason?

Finally your company may well be financially strong, with good long-term prospects. But forces beyond their control – like the market downturn we have just experienced – could reduce its value. I often think of a prospective client who walked into my office in 2007 with a $1 million 401(k), all in GE stock. He “knew the company” and wasn’t going to diversify until the stock hit $40 (it was around $36 at the time.) Needless to say he didn’t hire me because my advice was to diversify. I thought of him over the next few years as I watched GE hit $40 briefly – and then sink to about $5 during the recent recession. I certainly hope he sold when he said he would.

The American Recovery and Reinvestment Act created a 65 percent subsidy for COBRA health insurance premiums to people that lost their job between September 1, 2008 and March 31, 2010. This subsidy is paid by the federal government. Eligible workers can receive this subsidy for up to 15 months.

These provisions of the American Recovery and Reinvestment Act expired on March 31, 2010. Anyone losing their job subsequent to this date were no longer eligible to participate in the program. On April 15, "The Continuing Extension Act of 2010" was enacted. This piece of legislation extended the COBRA subsidy to workers who lose their jobs during April and May of 2010. The subsidy continues to be 65 percent of the health insurance premium cost and workers can receive the subsidy for up to 15 months.

The IRS website has a section devoted to information for employers and employees participating in this COBRA subsidy program.

A recent article by US News and World Report shed some interesting light on just who really is "middle class' and who is not.  If you have always wondered how you fit in, check out these statistics from the article:

Income: Household income for the middle class ranges from $51,000 to $123,000 for the typical four person, two parent household with the median income being $81,000.

Housing: The median home size for those in the middle class is 2,300 square feet

Cars: The typical family has car expenses of $12,400 for two medium sized sedans.

Saving for College: The typical middle class family saves just over $4,000 per year for their two kids.  The article says that this amount of savings should cover 75 percent of the expenses at a state university.

Medical Expenses: It seems that the average middle class family spends just over $5,000 per year on health insurance and other out-of-pocket medical expenses and the article notes that this category is the fastest growing expense in a family's budget.

Vacations:  Now here is where it gets interesting.  The article says that the average cost of a family vacation for four is $3,000 and that families that are slightly more affluent spend about $6,100.

Retirement Savings: The study indicated that the target savings goal should be 3.2 percent of income.  (However, if you have ever run even very basic retirement projections, you know that, depending on your age and current savings, a much higher savings rate is probably much more appropriate.  Shoot for at least 10 percent if you can manage it).

Everyday Expenses: The average middle class family spends about $14,000 per year on the somewhat descretionary spending categories of food, clothing, entertainment and other expenses.

Net Worth: The typical household has a net worth of about $84,000 but obviously that number varies widely with age and other circumstances.

Mortgage Payments and Other Debt: The average family devotes 18 percent of their disposable income to mortgage payments, car loans and credit cards. 

If you listen to any TV news station you will hear the current day's market activity related in terms of the Dow Jones Industrial Index ("the Dow.") The Dow represents 30 of the largest public companies, but is it a good representation of the "market" and, more importantly, should you use it to guage the performance of your portfolio?

The companies that comprise the Dow are chosen by a committee. Some criticisms of this process include the argument that companies are added after they have experienced their prime growth period, and evidence shows that new Dow stocks lose, on average, 20 percent of their value in the first year of inclusion. In addition the index is weighted according to share price, thus stocks with a higher share price have a higher weighting in the index. A $1 change in value of a higher-priced stock counts more than a similar change in a lower-priced stock. Does this make the index a good proxy for the stock market in general? Most advisors think the S&P 500 Index or Wilshire 5000 Index make better benchmarks.

It is just as important to remember that if you have a diversified portfolio of stocks and bonds, no one market index is going to represent the activity in your portfolio for a given day. If you have 60 percent in large company stocks and 40 percent in bonds and you see that the Dow (or the S&P 500 Index) are down a point, it is likely that your portfolio changed by about 6/10 of that point. Add to the mix your bonds, small company and foreign stocks and you can see that the Dow or any other large company index is not a good illustration of your portfolio.

So watch the day-to-day changes of the Dow with mild interest, but don't take it as an indication of the performance of your portfolio.

In 2008 we experienced the "real estate bubble" – home prices, which had appreciated greatly in a short time period, suddenly experienced a steep decline. Like a burst bubble, prices came down fast. It was similar to the dot com bubble we saw in 2000-2001, when prices of technology companies came crashing down after a huge run up.

Bubbles are nothing new. How about the Beanie Babies craze in the 90's? Japan experienced a bubble in the late 1980's when the Nikkei and land values were propped up by fevered speculation. The Roaring 20's were fueled by huge amounts of credit, something that was new to consumers. But we can go back much farther and still find bubble experiences. In the 1720's England saw the "South Seas Bubble", as the price of stock in the South Seas Trading Company shot up by speculators gambling on the success of the company's plan to take over the British national debt. (Sir Isaac Newton is said to have lost £20,000!) At the same time the US saw the "Mississippi Bubble", named after the French Mississippi Company that took on the entire French national debt, promising investors 120 percent profits! And lastly, the famous "tulip bubble" of 1634, in which the price of tulips soared and people mortgaged their homes to buy the flower.

Bubbles occur when investors ignore the real value of an investment and instead buy on frenzied speculation. While the promise of future gain is inherent in investing, it should be done with good analysis as to the value of the asset and the likely prospects for gain. When investors rush into an investment that has no basis for its price, that is reason to be wary. Like a boiling pot, there will always be bubbles popping up – some say the gold market is in a bubble now. Smart investors take their time to understand the fundamentals and the true value of their purchase.

Whatever your thoughts are on the health care legislation that has passed, everyone has to agree that it is expensive. The Congressional Budget Office estimates that the legislation will cost $950 billion over a ten-year period.

Health care reform comes in two pieces of legislation, The Patient Protection and Affordability Act (the Original Bill) which was signed into law by the President yesterday and the HR 4872 Health Care and Education Affordability Reconciliation Act of 2010 (the Amendment) which passed the House and is expected become law in the near future. To offset the costs of government's increased role in health care, there are several tax increases being imposed (or as politicians like to say "revenue provisions"). Here are a few, but certainly not all, of the more significant "revenue provisions" that I saw while looking through the texts' of the legislation:

Section 1002 of the Amendment – Individual responsibility: Starting in 2014 everyone will be required to maintain health insurance. If you go without insurance, you will be subject to a tax of $695 per year.

Section 1003 of the Amendment – Emploer responsibility: Large companies will be required to provide health insurance as a benefit to its employees. Companies that do not provide this benefit will be imposed a tax of $2,000 a year per employee.

Section 1401 of the Amendment – High cost plan excise tax: Starting in 2018, high cost health insurance plans will be subject to a tax. Plans for single persons that cost in excess of $10,200 and family plans that cost in excess of $27,500 are in this sections crosshairs. The excise tax rate on incremental costs will be 40 percent. In an attempt to appease union dissent, this tax will not be assessed on the individual but will be assessed on the insurance company providing the plan. Ultimately, the costs will still be burdened by the purchaser.

Section 1402 of the Amendment – Medicare tax: Medicare tax will now be assessed on investment income for families making in excess of $250,000 and for singles making over $200,000. Investment income includes interest, dividends, capital gains, rental income and royalties. In the past, Medicare taxes had been assessed on wages only. Earn one dollar of investment income while you are over the threshold limits and you will incur this tax. This tax will commence January 1, 2013.

Section 9015 of the Original Bill – Medicare tax: In addition to the expansion of Medicare tax on investment income as noted in Section 1402 above, the Medicare tax rate has also increased. This tax increases by a third, from 2.9 percent to 3.8 percent.

Section 1404 of the Amendment – Brand name pharmaceuticals: Starting in 2011, the pharmaceutical industry will be subject to a $2.5 billion annual excise tax. The annual excise tax increases in subsequent years, rising to $4.2 billion in 2018. The tax is assessed based on a companies market share and is non-deductible for federal tax purposes.

Section 1405 of the Amendment – Excise tax on medical device manufacturers: Sales of medical devices will be subject to a 2.9 percent national sales tax. This will apply to sales occurring after December 31, 2012.

Section 1406 of the Amendment – Health insurance providers: Starting in 2014, the health insurance industry will be subject to an $8.0 billion annual excise tax. The excise tax increases to $11.3 billion annually for 2015, 2016, and 2017. The excise tax increases to $14.3 billion in 2018 and rises by inflation thereafter. The tax is assessed based on a companies market share and is non-deductible for federal tax purposes. Does anyone think this will create inflation in the health insurance premiums?

Section 9013 of the Original Bill - Modification of itemized deduction for medical expenses: For those incurring significant medical costs, your ability to deduct these expenses will be decreased. This legislation increases the adjusted gross income threshold for claiming an itemized deduction from 7.5 percent to 10 percent.

Section 10907 of the Original Bill - Excise tax on indoor tanning services: This is a sales tax of ten percent assessed on your trip to the tanning salon. This tax begins July 1, 2010.

If you spent this past rainy weekend visiting open houses looking for a new home, you might want to step up the search.  The reason is that we are fast approaching the deadline for the expiration of the Home Buyers Tax Credit.  In order to qualify for the credit, you must have a signed purchase and sale contract in place by April 30.  That gives you about 6 weeks to find a possible property.  (In addition, the sale must close by June 30th.)  This credit has been extended before but it doesn't appear likely that it will be extended again.

The credit is equal to 10 percent  of the purchase price of the home and first time home buyers (those who have not owned a home in the past three years) can qualify for up to an $8,000 credit.  People who already own homes (and have lived in them for 5 out of the past 8 years) can get a credit of up to $6,500 if they purchase a replacement home.

The full credit is available to single filers with Modified Adjusted Gross Income (MAGI) up to $125,000 and $225,000 for joint filers.  Partial credits are available for single filers earning between $125,000 and $145,000 and married filers earning between $225,000 and $245,000.  Single filers earning more than $145,000 and married filers earning more than $245,000 are not eligible for the credit.

Finally, if you make a qualifying purchase in 2010, you have the option of claiming your credit on either your 2009 or your 2010 return.  You will also need to file Form 5405 with your return and you wont be able to file your return electronically because you need to provide documents that prove you are eligible for the credit.

Today, the Hiring Incentive to Restore Employment Act (HIRE), H.R.2847 was passed by the Senate in a 70-28 vote. There are three significant tax incentives for employers included in this bill. They are as follows:

Hiring Tax Incentives – Social Security requires employers to pay 6.2 percent payroll tax on employee wages. This tax ends once an employee receives $106,800 in wages. This is in addition to the 6.2 percent paid by employees for a combined total of 12.4 percent. Medicare adds another 2.9 percent combined tax to the employer and the employee. The proposed legislation would exempt employers from paying their portion of Social Security tax of 6.2 percent on qualified employees who start employment after February 3, 2010 and before January 1, 2011. A qualified employee is defined as someone that has not been employed for more than 40 hours during the 60 days prior to commencement of employment. The new employee cannot replace a currently employed person (unless the current employee quit voluntarily or is terminated for cause.) This could potentially save employers up to $6,622 in payroll taxes ($106,800 x 6.2 percent) for each new hire. It should be noted that employers would concurrently lose their tax deduction for these payroll taxes, which could create a partial increase in income taxes.

Employee Retention Credit - Employers that hire a "qualified employee" and keep them employed for one year will be eligible for a $1,000 tax credit. This is in addition to the reduced payroll taxes paid for the employee. This credit would be available for each qualified employee hired. This credit would be taken on the employer's 2011 tax return.

Capital Expensing - In 2009, the tax code allowed small and mid-size businesses to take a tax deduction for capital purchases up to $250,000. This is often referred to as a Section 179 deduction. Under current legislation, this deduction declines to $125,000 in 2010. The Senate's bill would extend last years provisions and allow for up to $250,000 in capital expenditures to be treated as a deduction in 2010.

While this legislation has passed in the Senate, it still needs to be reconciled to the House's version of the jobs bill which was passed in December.

The weak job market is forcing a new career path for many. Many on the unemployment roles are shedding the traditional career path and striking out on their own as independent contractors, a.k.a. freelancers. Wikipedia defines a freelancer as "somebody who is self-employed and is not committed to a particular employer longterm. Freelancers may charge by the day, hour, or page or on a per-project basis." Many will undoubtedly enjoy this new career while others will miss the structure of working for a single employer.

The most important key to success will be the ability to find customers and deliver value to them. However, this is just step one in the equation and does not guarantee success. If you are thinking about becoming an independent contractor, here are seven additional things to consider for success:

Continuing education – To be successful as an independent contractor, you need to provide as much value as possible to your customers. The only way to do this is to continue your education in your field. Ideally you want to be considered a leader. I do not mean that you have to go back and pay for overpriced, dubious classes at a university. My experience is the return on this kind of education is poor. Education can come at a much less expensive price and in areas which you want to focus. I can not stress enough that people should read for at least a half hour everyday to learn more about their skills and craft. One hour a day and you will receive twice the return. Getting books at the library or buying them on Amazon costs next to nothing financially and the payoff will be huge. The real investment is the time and most people don't do it. If you commit to this level of continuing your education, you will be much more successful than your peers.

Budget – Another key to success in going solo is having a financial budget. As an independent contractor you will no longer receive a regular paycheck. More than likely your weekly income will fluctuate, especially in the early years. Some weeks you will be paid very well for your efforts, and some weeks you will not have any income at all. Financial discipline is needed to deal with this type of fiscal uncertainty. You have to make sure the weeks you are paid well can also carry you through the weeks that you have limited income. Set up an annual budget. Determine what you need for living expenses as well as business related expenses.

Estimated taxes – Over the years, I have run into many independent contractors that get in hot water over failure to pay their taxes. As an independent contractor, you will no longer being paying your taxes involuntarily through payroll withholdings. Instead, you are required to remit payment of taxes every quarter to the IRS and state. This is more complex than it sounds as it requires you to accurately estimate your taxable income for the year. From this you pay your estimated taxes. Pay too little and you may be subject to penalties from the government. Another thing to mention; as an independent contractor your Social Security taxes will effectively double to 15.3 percent. As an employee of a company the employer pays for half of your Social Security tax. As an independent contractor, you will be required to pay the full freight on this tax. Work with your tax advisor to set up estimated tax payments and ensure that you do not have to pay a huge sum of money on April 15th.

Location - The thought of getting out of bed, turning on the coffee maker and working in one's pajamas at the dining room table sounds appealing. For most it will not be feasible. On the rare occasion I try to work from home, it is usually spent side tracked with my daughter and constant trips to the refrigerator. The home office is not conducive to my personality or my current living situation. For those of you in the same boat, you may need to rent a small office outside the home. Additionally, having an office lends you credibility. Rightly or wrongly, potential customers are not likely to be impressed by your home office. It is like getting an email from a business and they are using an AOL as their primary work email. It lacks credibility, which is required when you are seeking new customers.

Network – I do not mean going to networking events, which in my experience are usually a waste of time. What you want to do is find a community of other independent contractors to communicate with and assist. In this community, you can share successes, failures, marketing proposals, office space, overhead and most importantly sales leads. If an engagement is too big for one person to handle, he can bring in others from his / her community to help complete it. Having a good community to work with will be highly important to your success.

Health insurance – One thing you need to consider in your new endeavor is how you will obtain health insurance. Here in Massachusetts you are required to carry it, so skimping is not an option. A plan for a single person runs around $7,000 per year and a plan for a family is over $14,000. It is a lot of dough. If your most recent job paid $75,000 and you received health insurance for the family as well, you will now need to have over $90,000 to have a comparable financial income.

Bookkeeping – Now that you have started your own business you want to learn some basics about bookkeeping. Bookkeeping will help you determine the financial success of your business. Furthermore, you will need this to prepare your tax return.

If you have any other thoughts or questions, please submit them on the right side of this webpage.

With unemployment still hovering around ten percent and an election year underway, both federal and state leaders have recently been embracing small businesses.  According to the Small Business Administration, small businesses have generated 64 percent of all new jobs over the last 15 years.  Unless these small businesses start hiring employees, the elected leaders themselves will be on the unemployment roles later this year.

Earlier this week, Governor Patrick came out in favor of increasing the availability of credit to small businesses and trying to reign in health insurance costs.  While these items are important, he may also consider looking at some issues in the Massachusetts tax code that have changed under his watch to the detriment of small businesses.

Last year, the Department of Revenue issued a directive that can only be characterized as discriminatory against small business owners.  Massachusetts Directive 08-3 states the following: “partners and self-employed individuals are denied any deduction for contributions to their 401(k) plan”.  This directive came from the Governor’s appointed Commissioner of Revenue. 

Here is how it works.  A small business owner maintains (at his cost) a 401(k) plan for his / her employees.  In many cases, the owner even provides a matching contribution to the employees’ account.  The employees contribute to the 401(k) plan and receive a deduction in Massachusetts.  However, the owner that provides the job, provides a matching contribution, and pays for the costs of the plan is not allowed a comparable deduction. 

All other classes of workers including; state employees, those working at a not-for profit, those working at large businesses, even the Governor himself are allowed a tax deferred deduction for retirement savings.  The only one exempt from this tax benefit are the self-employed / small business owner.  The Massachusetts Commission Against Discrimination's webpage defines discrimination as follows: “Discrimination is unfair treatment because of an individual's membership in a particular group.”  It certainly would appear that the self-employed are being unfairly treated as compared to other workers.    

If you check out the White House's budget webpage, you may be a bit confused. In large letters it states "A new era of responsibility - the 2011 budget." However, the subsequent budget calls for $1.6 trillion in deficit spending next year. It certainly confused me and seemed a bit paradoxical.

The details of the budget are a bit ominous. It projects unemployment to remain at 10 percent this year, decrease to 9.2 percent in 2011 and further decrease to 8.2 percent in 2012. Furthermore, significant budget deficits are outlined for the foreseeable future.

The budget includes both tax cuts to certain groups and tax increases to certain groups. However, to deal with the bulging deficits, the tax increases greatly outweigh the tax cuts. The tax increases on upper income families alone is approximately $1 trillion over a ten year period. Here are some of the detailed tax proposals in the budget:

Bush-era tax cuts - Most of the tax cuts implemented under the Bush administration are set to expire at the end of this year. President Obama's proposal is to extend the tax cuts to those earning under $250,000 ($200,000 if single). For those earning over these amounts, he proposes to let the tax cuts expire. The most significant impact of these expiring tax cuts would be an increase in the 33 and 35 percent individual tax brackets. These would increase to 36 percent and 39.6 percent, respectively.

Limiting tax deductions - Another tax increase that will impact higher income families is to limit the benefit of itemized deductions, such as mortgage interest, state taxes and charitable contributions. This would reduce the effectiveness of an itemized deduction by about 25 percent.

Increase the capital gains rate - For those earning over $250,000, Obama proposes an increase in the capital gains rate from 15 to 20 percent.

Bank tax - A tax on banks of $90 billion over the next ten years is proposed. This tax is to pay primarily for the direct bailouts of General Motors and Chrysler, not to mention the indirect bailouts, i.e., cash for clunkers and deductibility of automobile sales tax.

Oil, gas, and coal tax - These companies will be exempted from a manufacturing tax break available to other comparable companies. This will raise taxes on this group nearly $40 billion over the next decade.

Investment managers - The budget proposes to change the way private equity and other money managers are taxed. Those folks will see an increase of $24 billion in taxes over the next decade.

Make work pay - Obama proposes to extend this tax break of up to $800 per year for families.

Purchase of capital assets - Obama has proposed to extend through 2010 a benefit to small businesses that purchase equipment.

I just completed my read of "The Snowball – Warren Buffett and the Business of Life" by Alice Schroeder. This biography covers some 800 pages and provides a perspective on a unique individual. I must admit, he is much different than what I expected. The following is my summary of the major factors that have contributed to Mr. Buffett's incredible success and wealth:

Singular focus – Since Warren Buffett was a young boy, he had almost a singular focus to accumulate wealth. He also believed his way to wealth would be through the stock market. At a very early age, he knew what he wanted and where he wanted to go. Successful people always have long-term visions of their life. This is a lesson especially for younger folks. You will only really succeed in life once you know what you want to accomplish. As Yogi Berra said, "If you don't know where you are going, you may end up some place else."

Dedication - Mr. Buffett spends about 18 hours every day dedicated to investing capital. This is the type of dedication needed to succeed at his level. I doubt he wastes anytime in front of the television or shopping at the mall. Almost all his time is spent thinking and working on Berkshire Hathaway. This type of dedication can have its drawbacks as well. The book does not portray his family life in a very positive manner. He was separated from his first wife (it appears they did not divorce for P.R. reasons) and did not spend much time with his children as they grew up. There is only so much time in a day, and he spent it mostly on business-related activities.

Independent thinking – Buffett has come up with his criteria for investing in companies. These criteria have been developed over years of studying and reading about his craft. He will only invest in companies that meet these criteria. He does not feel pressured when things do not go his way nor when outside sources suggest new rules for investing. The most telling story of this was back in 1999 during the "technology stock bubble". Many people were saying he was too old and out of touch. They said he did not understand the "new economy". Buffett continued to plot his course using the rules he knew and understood. He has been vindicated as the technology market crashed and Berkshire Hathaway has continued to thrive.

Alliances – Mr. Buffett has developed partners and allies to help him attain his goals. He uses these partners to manage his businesses, help find new investments, and to obtain access to capital. Mr. Buffett will be the first to tell you that his wealth would be a small fraction of what it is today without these business associates.

Integrity – Buffett has spent a lifetime being honest and fair with his partners, business associates, and investors. This has given him the title of the most trusted man in corporate America. Being the most trusted man in corporate America benefits him in many ways. Investors are confident they will be treated fairly. Deals are be made in short order without the need for an army of attorneys, bankers, and auditors. The list of benefits goes on and on.

Long-term strategy – Early in Buffett's career, there were times in which he pursued short term money making strategies. However, as the size of his investment portfolio grew, this was not a sustainable strategy. This long-term strategy has benefited him and his investors immensely. He does not get caught up with the whims of the market and short-term prices. He merely seeks investments that can sustain a competitive advantage over the long term. A company can not control its stock price, but it can control its profits and cash flows generated from operations. As long as it supplies a steady stream of cash flows, the long term stock price will take care of itself.

Creativity – Buffett is a creative thinker. This is not a gift, but is the result of his other traits described above. His ability to see things differently is a result of his experience and dedication to business. If something works in one industry, he tries to apply the same principles to other industries.

There is no doubt that God blessed Warren Buffett with significant talents. However, his gifts and talents do not seem to be out of the ordinary. The skills described above seem to be the ones that most play out to his success. I found this very uplifting as most of the above skill sets can be learned by anyone and can be applied in almost any aspect of our lives and careers.

Please note, I do not believe that success is only defined by the size of one's wallet. But I do believe Mr. Buffett success lies in his ability to pursue and achieve his goals.

Have you been thinking about starting your own business, but don't know where to start? Or have you already started your own business, but need some advice on how to take it to the next level?

Accountant and Managing Your Money blogger Jamie Downey, who specializes in the area of small businesses, will be here on Tuesday, Oct. 13, at 1 p.m. to take all of your questions about the world of small business.

A friend of mine, who was laid off several months ago and is sill unemployed, has been kicking around the idea of going into business for himself. His business idea is sound, but at this point, it is still just an idea. He wanted some advice on what he needed to do to get the business up and running. Here were my thoughts on areas that will need to be addressed:

Last Thursday Vice President Biden announced that Social Security recipients will soon receive a $250 "recovery payment". As part of the American Recovery and Reinvestment Act of 2009, this one-time payment will go to adults who receive Social Security and Supplemental Security Income (disability payments), Railroad Retirement and Veterans Benefits.

Eligible recipients must have received one of the above-mentioned payments in November 2008, December 2008 or January 2009. You must also be 18 or older, or a child receiving SSI. However those who receive Medicaid in care facilities will not receive the payment.

The payments will be made in May, and recipients do not need to do anything to ensure that they receive their check. The payment will be made separately from the usual monthly Social Security payment, and will be delivered in the same way as your usual benefit check. In other words if you usually have your Social Security check direct-deposited to your bank account, this check will also be delivered in that manner. This check will not count as income or earnings for Social Security purposes.

It's important to know that the payment is automatic - no one from the Social Security Administration will be contacting you in order to process your payment. Do not give out your Social Security number or other personal information to anyone who calls or emails claiming to be a Social Security employee.

For more information and details, go to the Social Security website.

You can keep a watchful eye on the government as it implements the American Recovery and Reinvestment Act through a new website, www.recovery.gov. The site, run by the Recovery Accountability and Transparency Board has, as its mission, the goal of explaining the Act, showing you how and where the money is being spent, and giving the public complete transparency about expenditures. Right now the site contains only estimates of spending, but as states and agencies begin to spend their stimulus money and report back to the Board, that information will be posted for your inspection. There is even a forum for your stories and comments about the Act and how the bill affects you personally.

The recently passed Emergency Economic Stabilization Act of 2008 (or, as it is more commonly known,"The Bailout Bill") is a law authorizing the Secretary of the Treasury to spend $700B to purchase distressed assets from the nation's banks. The Act certainly has its supporters and opponents. Supporters believe the bill was necessary to save the US economy from another Depression. Opponents believe it only benefits Wall Street financial instutions that acted irresponsibly and out of greed.

However, the Act does contain a number of features that directly benefit the average American taxpayer. Here are some of the highlights:

The extension of a one year patch for the alternative minimum tax: the 2008 exemption is $46,200 for singles, $69,950 for married couples who file jointly and $34,975 for married couples who file separately.

A credit for energy saving home improvements: you can claim a 10% tax credit for installing skylights, new windows and doors, and new high efficiency furnaces, air conditioners and water heaters but you need to wait until 2009 to do this work in order to claim the credit.

An extension on the forgiveness of mortgage debt: through 2012, you can exclude from gross income the forgiveness/discharge of any mortgage debt. The limit is $2M or $1M if married and filing separately.

Teachers, counselors and other educators in K-12 schools can deduct up to $250 of personal expenses made for classroom supplies and materials. This deduction is an "above the line" deduction so you don't have to itemize to claim the deduction.

IRA owners can contribute up to $100,000 directly to a qualified charity without having to count the contribution as income. This benefit is available in both 2008 and 2009 but you must be age 70 1/2 or older to claim it.

Owners of plug-in electric vehicles are entitled to tax credits of $2,500 to $7,500. This credit will phase out once each manufacturer has sold 250,000 vehicles.

According to a recent study by Fidelity Investments, more than a third of the nation's parents have decreased the amount they are saving or have stopped saving entirely for their children's college education. Given the current level of financial anxiety out there and the recent increase in unemployment, this statistic really isn't surprising, but with the market down, now would be an excellent time to be investing new money.

The study also found that 60 percent of parents have at least started saving for college but only 30 percent are investing in a dedicated investment vehicle like a 529 plan. This is interesting because the survey results indicated that most parents can afford to pay just 21 percent of expected college expenses, but parents who save in 529 plans can afford to pay for 40 percent of the expected college expenses.

An even more startling statistic was that 35 percent of the parents surveyed expect that they will have to delay their retirement in order to meet college expenses. These individuals are taking a risk that they will be healthy enough to continue working and that they will have jobs to work at.

If parents are saving less, the remainder has to come from somewhere and the study indicates that 55 percent of parents will be expecting their children to work part time while in college, 44 percent plan to have their children live at home while commuting to college, 37 percent will be encouraging their children to attend a less expensive public school and 23 percent will ask their children to graduate in fewer semesters.

Also, more and more parents will be relying on student loans. In 2007, 52 percent of parents planned to rely on loans to help meet college expenses. In 2008, that figure had risen dramatically to 62 percent.

OK, there's no doubt about it, this has been one heck of a week. People are worried and very nervous. In today's blog entry I am listing some articles that I have read over the past week or so that I think are particularly helpful and insightful. These are really great articles and I won't even attempt to summarize them -- you should read them in their entirety. Hopefully they will make you feel less anxious about all the recent market turmoil.

"Switching to Cash May Feel Safe but Risks Remain" by Ron Lieber of the NY Times

"The Depression of 2008? Don't Count on It" by Jason Zweig of the Wall Street Journal

"As Dire as the Times May Seem, History Isn't About to Repeat Itself" by Karen Blumenthal of the Wall Street Journal

How many old gift cards are you carrying around in your wallet? And how many are at the back of the drawer in your kitchen? If you are like most people, you probably have a decent number of gift cards hanging around and, while you expect to use them some day, you never seem to get around to it.

But did you know that if a retailer enters bankruptcy proceedings, they probably don't have to honor your gift card even if the store is still open? It might surprise you to know that bankruptcy courts consider gift cards to be loans to the company. If a merchant wants to be able to honor gift cards while it is in bankruptcy proceedings, it has to petition the court to allow such an action. Shoppers can lose the value of the card if the merchant doesn't make the request or if the court denies the request.

Fortunately, these rules might be changing. The Consumers Union filed a petition last week with the Federal Trade Commission to require retailers to honor gift cards as long as the store is still open. For more information on this effort, check out this article in The Baltimore Sun.

The take-away from this story? Get out there and start spending those gift cards. You never know when a company might declare bankruptcy. The Sharper Image and Linens and Things are two high profile retailers who recently declared bankruptcy.

Monday was definitely a nail-biting kind of day. The Dow was down over 500 points and a lot of that loss came in the two hours the market was open. Panic was a word you heard on TV and saw on the Internet, and in all the newspapers. It was certainly hard not to feel anxious about the market, your retirement, your savings, and your future financial security. Many people wondered if it was time to move to all cash.

However, those who hung in there were rewarded in Tuesday's market which saw the Dow up 141 points or 1.3 percent and the S&P up 20.90 points or 1.75 percent. It just goes to show that you can't make important financial decisions based on emotions. You have to be able to tune out the fear-inducing headlines and stick with your long term plan. Remember, newspapers and magazines have to lead with the scare tactics or no one would buy the paper.

If you have a properly diversified portfolio, no action is required when the markets are falling -- except that you might want to buy more. If your portfolio has large and small company stocks, growth and value stocks, international exposure and alternative asset classes, you are all set. Sit back and watch what happens. There will be ups and there will be downs. You don't get the higher long term returns of stocks for free -- you have to be willing to soldier through the down days to capture the historically much higher performance of equities.

We don't know what the market will do today, tomorrow or the next day but we do know that in the long run, stocks are your best bet for beating inflation and earning a rate of return that will enable you to meet your long term financial goals.