Is Your Advisor Worth It? Vanguard Weighs in.

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You are most likely paying for an investment advisor.  The fees can be in the form of commissions if you’re working with a broker, be a percentage of your assets, and less commonly charged on an hourly basis or a flat annual fee.  But how do you know you’re getting your money’s worth when working with a financial advisor? Certainly peace of mind is a big part of the value proposition for most clients.  One colleague is in the habit of saying that “we sell sleep.”  But how do you quantify the value of psychological well-being because you’re working with a competent financial planner?  You can’t.

 In a report issued last month, mutual fund behemoth Vanguard weighs in on the value of an investment advisor.  While it acknowledges the importance of peace of mind, the report does a rigorous job of delving into the more measurable aspects of working with a wealth manager.  Calling it “Advisor’s Alpha,” Vanguard describes the particular strategies that most help clients.

Now keep in mind that the folks at Vanguard are notorious cheapskates – and I say that with complete admiration.  Their fees are rock bottom and they are well known as the all-around lowest cost investment company.  So when this do-it-yourselfer company looks at the value of an advisor, my suspicion is that they would see little at all.

Vanguard’s surprising conclusion is that a quality wealth manager could add 3 percent annually of value to a portfolio.  Luckily for us, they broke these value components down so you can see whether your current or future advisor uses these techniques.

Behavioral Coaching.  Providing a whopping 1.5 percent of extra return a year, having your advisor work with you to stick to a strategy in good and bad markets is vital.  In good markets, this can take the form of encouraging and educating you to not invest everything in stocks while the markets are rallying.  In poor markets such as 2008, a good advisor can work to keep you invested even when global financial calamity seems to be at the door.

Asset location.  This can add up to 0.75 percent a year to returns, depending on your situation.  Asset location is the concept that there are different types of investment accounts: taxable, tax-deferred (IRAs and 401ks), and tax-free (Roth IRAs), plus some hybrids such as annuities and cash value life insurance.  You should seek to optimize your tax situation by ensuring the right type of investment is in the right type of account.  Do you hold a REIT Fund or a US small cap stock fund?  Those could be great options in a Roth, an account where you’re never taxed on its gains as long as you follow the rules.  Bonds and other interest generating options are good fits for tax-deferred accounts.  By optimizing the asset location, your wealth manager can keep your tax bill down for years to come.

Spending strategy.  While in retirement, you have a choice of different accounts to draw from when generating cash for your living expenses.  Through prudent decisions on IRA distributions and drawing from other accounts, Vanguard estimates that up to 0.7 percent annually can be added to returns.

Rebalancing.   A systematic method of selling your winners and investing the proceeds in your losers can add 0.35 percent a year to overall returns.  Rebalancing sounds very simple when first considered, but care must be taken to do this on a regular basis and in a manner that minimizes taxes.

Cost-effective investing.  Clearly Vanguard has a stake in this question, but they conclude that that careful selection of low-cost funds and other investments can mean 0.45 percent per year in value-add.

Asset allocation.  Vanguard didn’t estimate the value of a prudent investment allocation – the percentage of portfolio in stocks and bonds – and portfolio diversity.  Nevertheless, they state it’s the most important component of overall returns and portfolio risk.

What should we take from the Vanguard study?   That there are many ways for a qualified wealth manager to help you in a way that exceeds their fee, but they must be diligent in using these elements in order for it to be worthwhile.  The study can be found at http://bit.ly/1r5nRcn.

Are You Emotionally Involved with Your Investments?

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Many of you are emotionally attached to your investments.   While this affection can be relatively benign if you’re just holding on to a few shares of grandad’s company, in its more extreme forms it can be harmful to your financial health.  When clients come into our practice and we notice a big holding in one individual stock, we ask about how they came to own it.  Usually it’s one of the following reasons.

Inherited investment.  Your father worked for GE for 30 years and was proud to own company stock.  Your mom purchased a safe utility stock and was able to live off the high dividend.  She also loved its stability.  Your parents are gone now and you continue to grasp on to things that remind you of them.  How could you sell that Hewlett Packard stock that he loved so much in the 90s?

Well it turns out that the US tax code does a very gracious thing when it comes to inherited assets.  It gives you a free pass.  When you inherit property, in most cases you receive a step up in basis.  A day before your dad died if he would have sold that appreciated HP stock, he would have had to pay thousands in capital gains tax.  Upon inheriting that stock, your basis is considered to be the value of the stock on the day of his death.  You now have a free pass to sell it without tax consequences, which you should probably use. 

Employer stock in 401(k) plan.  While this trend is on the wane, many investors still have huge allocations in their retirement plans dedicated to employer stock.  In a 2012 survey by the American Benefits Institute, 93 percent of surveyed companies had less than 20 percent of new plan contributions in employer stock.  Let’s hope this movement continues because holding a significant amount of employer stock is usually a poor choice.  We are not talking about stock options here, which involve complex financial and tax considerations and in many cases should be retained.

While you may be optimistic about your company’s prospects and want to be a team player, history is riddled with examples of overeager employees losing their nest eggs due to calamity with their companies.  Putting a large percentage of your portfolio in a single stock is risky on its own.  When you combine receiving your paycheck from the same source, you are setting yourself up for trouble.  

Just waiting to break even.  Some of you are convinced you haven’t lost money on an investment until you actually sell it.  Whether you purchased Florida real estate in 2005 or Intel stock in 1999, you won’t sell because you realize at some level that once it’s sold the loss becomes real for you.   Guess what?  The value of an investment is the price that the market will pay for it.  You have already lost money on the investment.  It’s all right.  Not every venture is profitable.  The IRS is willing to ease your pain by allowing you to deduct the loss against future investment gains.  Take them up on it.

Product you really like investment.  You shop at Whole Foods so you purchase some WFM stock.  Apple’s innovations and intuitive design are unmatched, so you load up on AAPL.  You drove your buddy’s new Tesla roadster and it was the most incredible motoring experience of your life.  So you go your broker and purchase TSLA.  These are all good companies with compelling products.  But should you bet your life savings on a company worth $27 billion yet that loses money?  Investing in a few shares is fine, but don’t bet your retirement on it.

Being Smart with your Stock Options

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Employee stock options first came into the public eye in late 90s.  Newly minted B-school graduates would compare compensation packages.  They wouldn’t focus much on salary and bonuses, but more on “the options.”  After all, to get wealthy through a paycheck takes decades of spending less than you earn.  But with options this could be achieved in a year or two of frenzied work leading to an IPO – an initial public stock offering.

Today employee stock options don’t provoke the same heart pounding exhilaration as the 90s.  Many of those paper millionaires who worked for dotcoms such as Pets.com and Webvan saw their seven figure net worths crash into oblivion by the time 2000 came around.  But stock options still have their place and can be a valuable part of your compensation package at established and emerging companies.   While this topic can be very complex, we’ll touch upon the major points so you can understand your options or at least follow what your friend or family member is talking about when they say “I got some more options.”

What are stock options?  While there are many types of options, employee stocks options generally give the employee the right to purchase shares of stock of the employer at a certain price.  The company can be privately held such as Boulder-based Orbotix or Sendgrid or publicly traded such as Ball Corporation in Broomfield.  They are called options because the employee has the right to purchase stock at a certain price for a number of years.  If your pre-IPO company does well, you may have options to purchase company shares for 25 cents, which means you have a nice potential profit at an IPO price of $18.  Most options have vesting schedules, which means you don’t get all of your granted options at once but over a number of years to help encourage your long-term commitment to the company.

How much are stock options worth?  Options have two fundamental components of value.  The first portion is the discount the option holder receives on purchasing a share of stock.  If you have 10,000 options to purchase your company’s stock at $1 a share which currently trades at $20 a share, then the discount is worth $19 a share or $190,000.  The second source of an option’s value is the ability to capture the future appreciation of a stock without spending a penny to do it.  Consider that the 10,000 options don’t expire until 2023.  There is tremendous value in the ability over nine years to participate in the potential increase in that stock’s value.  For more information on this elusive component, research the term Black-Scholes.

Are there different types of stock options?  Most common are nonqualified stock options (NSOs).  When you purchase shares using NSOs, you need to pay tax on the bargain you’re getting just like any other income you receive as an employee.  In the example above, that would mean your employer would report $190,000 in additional compensation to your salary and bonus upon exercise of those options.  This shows up on your W-2 at the end of the year.  More complex are incentive stock options (ISOs), which often are issued by pre-IPO companies.  These are like financial uranium, powerful if used carefully and wisely but they can crush your finances if you’re not careful.  ISOs give you the ability to purchase shares without paying payroll or ordinary income taxes but you may owe Alternative Minimum Tax also known as the AMT.  If you have significant ISO options, unless you have a penchant for wading through tax code it makes sense to hire an expert to navigate through the tax and investment considerations.

Final point to consider.  When you’re in the midst of building a startup, your first response toward your company’s prospects will usually be strong optimism.  Don’t let this positivity blind you to the fact that if you have the opportunity to exercise and sell shares that would change your financial situation significantly, it should be weighed carefully.  It’s not disloyal to exercise and sell a portion of your shares.  Many times it can form the critical foundation to building future wealth.

Four Tips to Keep Travel Abroad Within Reach

Boeing 747 Aircraft Taking Off

With spring break approaching and a “wintry mix” in the forecast, you may have plans for international travel.  My hunch is that Boulder and Broomfield counties punch well above their weight when it comes to going overseas.  This could be due to our relative affluence and high levels of education, the international influence of CU, the large number of foreign-born residents, and the fact that many are self-described life maximizers who moved to Colorado for the high quality of life.  You may think international travel is extremely costly, but it doesn’t need to be.  With these tips, you can help keep down the costs and risks of your next sojourn abroad.

Be flexible with your destination.   Vacationers start to lose money when they get fixated on a particular place to travel.  By being open to a new experience, you can unlock airfare values that can help keep your travel costs low.  My favorite vacation dream tool is the Explore page on Kayak.com.  With this site you can specify budget, months of desired travel, and preferred weather and location to see the deals that other travelers are finding.

The bargains can be tremendous.  Just a cursory glance at Explore reveals rock bottom round trip fares from Denver such as $295 to Costa Rica, $333 to Jamaica, and $480 to Peru.  Know that it’s highly unlikely that you can get the best times and dates with nonstop flights at these prices.   If you must travel to a particular spot, then set a fare alert at airfarewatchdog.com or another travel site.

Pick the right financial institutions.  When it comes to using money in other countries, there are huge differences between banks.  The best way to exchange currency in most countries is to use the ATM machine once you arrive.  You get a much better rate than the exchange windows at the airport.  But even though it’s the lowest cost option, that ATM visit cost can vary tremendously depending on your bank.

Imagine you have a checking account with one of the mega banks.  You take out $200 from an ATM abroad.  You may spend $13 for the privilege once you consider the fees of your bank, the ATM bank, and foreign currency exchange fees.  If you use a foreign travel friendly bank such as Schwab, the cost is essentially zero.  Also be mindful of your credit cards.  Some will charge a foreign exchange fee of 3 percent, while others have no fee at all.

Rental car insurance.  When you travel domestically, often you can bypass all of the costly insurance options at the rental car counter because you’re covered by your personal auto insurance.  This changes when you travel abroad where generally you are not covered at all.  Consider using a credit card that covers collision damage overseas.  Then combine this coverage with liability insurance that you purchase at the rental car counter.  It can add $15 a day to your rental car costs, but it will be worth it if you run into trouble.

Avoid timeshares.  Timeshares and other forms of fractional ownership rarely make sense.  But when you have a cold margarita in hand and azure seas out of the window, they can be hard to resist.  You may be lured to a timeshare sales presentation with the promise of free massages, hotel stays, or credit in the bar.

Unless you have strong fortitude against high pressure sales tactics, steer clear of these sessions.  After all, there are many timeshare owners who list their properties on eBay for a song as they have tired of the annually increasing maintenance costs.  A great resource to get informed before you go is the Timeshare Users Group at tug2.net.  Your vacation time is too precious to waste on a sales pitch.

Do You Need a Tax Pro?

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Most of you should have no problem preparing your own taxes.  If you have a very simple tax return, you may qualify for the IRS Free File program giving access to H&R Block and other resources to e-file your federal return at no charge. If you prefer a personal touch, the IRS VITA program offers tax help to those earning less than $52,000. If you don’t qualify for either program, both H&R Block and TurboTax are available at a low price online or in your local store.

Whenever we start working with financial planning clients, we review their past tax returns.  While many of them are ably self-prepared, we have found that with some categories of people it makes sense to use a tax professional.

Same Sex Married Couples.  Despite a pending court challenge against Colorado’s ban on same-sex marriage, there are perhaps thousands of married same-sex couples in our state.  They were married in one of the seventeen states or many countries that permit same-sex marriage.  With the Supreme Court’s Windsor decision last year, the federal government now recognizes same sex marriage.  Now those in a same sex marriage must file married filing jointly or separately and cannot file as single or head of household.

While it may just be a matter of changing your tax filing status, there may be complexities that could save you thousands depending on your personal situation.  The IRS now permits same sex marrieds to amend previous returns back to tax year 2010.  But you may need to file three sets of amended tax returns using Form 1040X to get a refund.   Those who are in same sex marriages in which one person earns significantly more than the other are likely to benefit.  Another consideration is if employer health insurance benefits were provided to a same sex spouse. These were considered taxable income previous to last year. Now same sex spouses can receive tax free employer health insurance benefits and are entitled to amend previous tax returns to reflect this difference.

Significant Flood Damage.  If you suffered from our historic floods last September, you may have the right to deduct unreimbursed casualty losses.  Consider the damage to your home and your property.  Perhaps your property was unaffected but its value was due to damage in the general area.  Because we were declared a federal disaster area, you have the right to recognize the casualty loss through an amended 2012 return or for 2013.  If you suffered an unreimbursed loss in value that exceeds 10 percent of your income to all of your property, you should get help with a tax pro who could defend your tax return if necessary.   Same goes if you suffered any significant loss at all to your rental or commercial property.

Business and rental property owners.  Those who own businesses or rental properties should get help with their taxes.  The IRS and Colorado in effect will help pay for your tax preparation as the amount attributable to the business and rental can be deducted on the appropriate schedules.  With businesses you have complexities such as the opportunity to deduct capital expenses over a number of years or in a single year.   You may be able to put in place a small business retirement plan that allows you to deduct up to $56,500 a year depending on your income and age.  A qualified tax preparer can earn their fee in a millisecond with good advice here.   Rental property owners face different depreciation schedules and options, plus some difficult questions about what to do upon the sale of their property.  Should they engage in a tax-free exchange or pay the tax?

If one of these cases applies to you, you fall under the dreaded Alternative Minimum Tax, or have incentive stock options, a qualified tax preparer will be a worthwhile investment for even the thriftiest taxpayer.

Is Obama's New myRA a Good Deal for Savers?

Retirement Road Sign with blue sky and clouds.

In his State of the Union speech, President Obama unveiled a new myRA account for savers.  Introduced as novel way to save for retirement, the myRA “guarantees a decent return with no risk of losing what you put in.”  If I saw a retirement scheme touting a good return with no risk, I would be immediately skeptical.  Risk and reward are inexorably linked.  Let’s dig a little deeper into the myRA to see if it’s a good idea for your savings.

 First I sympathize with the President’s plight.  He wants to increase retirement savings as fewer people have access to guaranteed defined benefit pensions.  Many savers just getting started see the wide swings in the stock market and want no part of it.  So they decide to not save for retirement at all, which of course is a disaster.  Living solely off Social Security is not the subject of glossy brochures extolling fanciful retirement dreams.

Right now there are a jumble of different retirement accounts with their own advantages and qualifications.  While more fundamental reform is needed, he knows he can’t change law without Congress, and this speech was all about affecting change through unilateral executive branch action.

Like a Halloween-sized peanut butter cup, the myRA combines two great investment options in a portion that’s just not big enough for your retirement appetite.  The first ingredient of the myRA is that it is structured as a Roth IRA.  With a Roth you don’t get a tax deduction up front for contributions like a 401(k).  However, you do get tax-free growth for the rest of your life, and the ability to withdraw contributions at any time without penalty.  When you contribute to a Roth, you are shielding your investment from taxation for the rest of your days.

The second ingredient of the myRA comes from the Thrift Savings Plan, which is the retirement plan for federal employees.  The TSP has a unique investment option called the G Fund (https://www.tsp.gov/investmentfunds/fundsheets/fundPerformance_G.shtml) that allows you to invest in Treasury bonds at intermediate-term rates without any risk of losing value.  For our federal employee and retiree clients, we love the G Fund because it gives you a blended rate of the yield of all intermediate and long term Treasury bonds at no credit or principal risk.  Last year was Exhibit A in how investors holding long-term Treasury bonds suffer a decline in value when interest rates increase. In contrast, the G Fund earned 1.89 percent last year.

Through automatic payroll deductions, married savers with an AGI under $181,000 and single savers under $114,000 will be able to contribute the maximum to the myRA in increments as low as $5 per paycheck.    These conform to the standard Roth rules.  I also expect that the maximum contribution just like the Roth will be $5,500 a year with those 50 and over able to contribute $6,500.  If you use up your Roth contribution with another investment, you can’t contribute to a myRA.  One significant caveat is that a myRA account cannot go above $15,000.  You most roll over funds to another Roth at that level.

Is there anything earthshaking about myRAs?  Not really.  You can most likely contribute to a Roth today regardless of what employer plan is in place.  While the myRA does have a novel investment option with a low minimum investment, the $15,000 limit constrains its impact.  Finally those who are just starting their savings should in most cases be investing in stock funds rather than a Treasury bond.  Putting $1,000 in the Vanguard STAR Fund is a much better option for most to get going.   Still interested in the myRA?  Look for it to be rolled as pilot project later this year.

Guilt About Higher Education

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This time of year can be bittersweet for members of the upper muddle class.  Every week high school seniors receive packages and emails from their prospective alma maters.  There can be elation when they find out years of hard work have been rewarded with an acceptance to a good college.  But this is tempered by fears about how their families will pay for school.

Those who come from families with low to average incomes ironically may find elite private schools within their financial reach, if they can secure admission.   Harvard for example will cover tuition, fees, room, and board for students with families that earn less than $65,000 a year.  Even those that earn under $150,000 will pay no more than 10 percent of their income to send their child to college.  That’s why it’s vital to understand the net price of schools given your income profile.

Think about a student from an upper middle income family of four that earns $125,000 a year with $150,000 saved in other non-retirement investments, 529 education savings accounts for both children, and bank accounts, along with $150,000 in home equity.  At Harvard, the family contribution is $19,600 a year, while at Colorado College (arguably our state’s most selective college) the net cost is about $37,000 a year.   Public school is not much better as this family would most likely not receive need-based assistance at CU, resulting in a first year cost of over $28,000.

It wasn’t always this way.  According to the Institute of Higher Education Policy tuition costs have increased 538 percent since 1985.  This is compared to a 121 percent gain in the consumer price index.  While this arresting figure may overstate the case as financial aid is more available today than in 1985, many middle income families earn too much to qualify.  I haven’t seen a reasonable explanation for this phenomenon beside the decreasing support for state funding of public education, which can’t explain but a portion of the increase.  Gone relatively unnoticed is the high inflation of on-campus room and board costs at CU, which total $12,258 this year, exceeding costs of some private institutions such as Duke University.

This is hard to hear for parents of future collegians.  Your grandparents may have put your parents through public or private school on relatively modest incomes.  For your education, your parents may have borne most of the costs.  But what about you?  Understand that it’s an entirely different proposition for you to pay for college than it was in previous generations.  For many of the middle to upper middle income families out there, the covenant of an affordable, traditional four year college education has been broken.

Despair of course is not the only option.  Well known are Colorado 529 education savings plans which give you a state income tax deduction and are a form of an “Education Roth IRA,” where earnings are not taxed if used for higher education.  You have been warned, so start saving now.

More than anything, we need an open conversation between parents and children.  Let them know that there aren’t unlimited funds for college, if that’s the case, and that taking out huge student loans is not the best option.  Nothing sours the elation and promise of college graduation more than a six-figure student loan balance, which can be had with a few strokes of the pen at the bursars office.   Shed your guilt at not being able to pay full-price for four years of private or public education.  Be a smart college consumer using resources such as the net price calculator available on college web sites to determine what your child’s net college costs are likely to be given your financial situation.

What We Can Learn From a Bull Market

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The word that comes to mind to describe last year’s investment performance is awe.  Last month new market all-time highs were so commonplace that they barely merited a mention in the financial press.  We are in the midst of a powerful bull market, and individual investors are finally beginning to believe its strength.   After all, it’s hard to be pessimistic when the S&P 500, the broad index of large US publicly traded companies, had a total return of 32.4 percent last year.

Market watchers are grasping to explain this remarkable run.  Of course any glib member of the financial cognoscenti can supply reasonable ramblings for market performance after the fact.  Market predictions, reserved for the boldest commentators, are often exposed as guesswork when the truth is revealed.

Consider the predictions for last year that came out at the end of 2012. Then Morningstar released its stock market outlook.  It stated that the market was close to fairly valued with high volatility a near certainty for 2013.  Wisely they dismissed the impact of the fiscal cliff (the one from early 2013 that you barely remember) on the market.

A fairly valued market with high volatility in market speak implies a single digit positive return with big swings along the way.  Instead last year the S&P 500 had the best performance since 1997 without a single correction, defined as a 10 percent retreat.  It was a relatively low volatility, strongly positive market.

We shouldn’t pick on Morningstar.  There were plenty of financial experts with seven-figure compensation packages and members of the financial media that missed this incredible run.  Dimensional Fund Advisors in its review of last year’s predictions highlighted a Barron’s cover story in November 2012 telling investors to “get ready for the recession of 2013” and a Time article blaring “Why Stocks are Dead.”

Even if back then you had a clear vision of world events to come in 2013, would it have helped your prediction?  The slowing economy in China weighed upon us.  The fiscal cliff, sequestration, and the debt ceiling demonstrated a poorly functioning federal government.   The civil war in Syria, the Boston Marathon bombing, and the Detroit bankruptcy inspired fear.  For most, those events would not augur a strongly positive year in the financial markets.

Rather than trying to time the market better than the experts, use the odds to your advantage.  Since 1926, the S&P 500 has had 24 years with a negative return, which means that 73 percent of years have had a positive return.  (A free tip for those professional predictors: if you always forecast a positive market then you’ll be right most of the time!)

Your investment strategy should bank upon the long-term appreciation in the markets, with enough in safer alternatives like bonds to endure the downdrafts of horrible markets.  Once you are in the early stages of retirement and pulling cash out of your portfolio, then you should increase your safe  percentage to ensure you’re not liquidating stocks to pay for living expenses in the midst of bear market.  While you may believe you need to hit home runs by chasing hot tips on emerging marijuana penny stocks, hitting singles over time will do the trick.

The Laid Back Portfolio had another strong quarter with an increase of 6.5 percent, finishing the year with 17.5 percent total growth including one percent annual costs.   Bonds were slightly down again with a negative 0.4 percent reading, but the S&P 500’s 10.5 percent return more than made up the difference.  For the start of 2014, we will again rebalance to 60 percent S&P 500 and 40 percent Aggregate Bond Index.

How Much Can Charitable Donations Save You?

Charity

This time of year we hear about the needs of charitable organizations.  The confluence of the giving season and end of the year tax deadlines hits us now.  You only have until tomorrow to make a donation to help with your 2013 taxes.  If you have an influx of new clothes that you unwrapped last week, you may be ready to give some lesser used garments to your favorite charity.

But how much can you claim on your taxes?  The IRS would not be impressed by the blank Goodwill receipt from last week when you dropped off five bags of clothes. So how do you come up with a value?  The IRS states that donated household items must be at least in “good condition” and that you should use fair market value when claiming a charitable deduction.  Use these resources to help.

Deduct It!  Deduct It!  This book by Bert Whitehead and Carol Johnson is released every February and is available at Amazon.com for under $9.  For many years the authors have surveyed thrift stores, auction web sites, and other resources to come up with reasonable values for household items.  It’s a workbook, designed for you to write in donated items that can be tabulated at the end of the year for a total value.  If you produced this completed book in a meeting with the IRS, it would be clear you were acting in good faith with your claims.  Because this book has been produced for many years, it has been through several audits and has served well as substantiation for charitable donations.

Goodwill Valuation Guide.  This free resource available at goodwill.org can be found by searching Donation Valuation Guide.  From coffee tables to griddles to ice skates, this guide gives you a range of the sales price of items sold in their thrift shops nationwide.  While the price is right with this guide, it apparently is not updated each year (this most recent version seems to be from three years ago), and does not give you the benefit of the higher values that can be found through other methods, including eBay auctions.

The do it yourself tax behemoths also have resources for you.  TurboTax offers It’s Deductible (https://turbotax.intuit.com/personal-taxes/itsdeductible/) as an iPhone and web application.  It’s free to use and has more categories than most (examples are western footwear and corduroy pants).   While you need to generate a login and password, in return you get an itemized list of donations that can be imported into TurboTax or printed out.   H.R Block has its own value data related to its tax preparation software, but seems harder to access unless you’re using one of their tax prep products.

The DonationApp for iPhone permits free access to its eBay valuation data until you hit $500 in total donations when the charge becomes $25 per year.  iDonatedIt at $3 in the Apple App and Google Play Store has mixed reviews and allows you to attach a photo to your donation.   The Charitable Donations Log for Android also has thrift store values and the ability to take donation pictures, although its data may be suspect (for example it has a category for used men’s underwear).

Which should you choose?  While the Goodwill guide is free, it may under value your donations because online auction data is not considered.  Deduct It! Deduct It! is worth the $9 if you prefer a physical book.  The smoothest and most authoritative app is It’s Deductible online or for the iPhone.  It’s free, has values pulled from online auctions, and is backed by the biggest player in the industry.

The Upside of a Low Income Year

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Many of you are wrapping up a low income year.  You’re getting a business launched with little income and lot of effort.  It could be a period of under- or unemployment.  Or like many, you have suffered a significant catastrophic flood loss and not been made whole by your insurance company or FEMA.   For more information on how much such a loss might affect your taxes, see my last column or IRS Publication 547 at irs.gov.

 As painful as it might be, you don’t want to let a low income year go to waste.  When clients start with us they provide their two most recent tax returns. Those times when I’ve seen very low or even negative income in years past, I’m frustrated at the lost opportunity.  Don’t let this be you.  Instead when your federal tax rate is low, take a look these options and enjoy the perks of low income.

Zero percent capital gains tax.  If you’re in the 15 percent federal tax bracket or lower, which goes up to $72,500 of taxable income for married couples and half that amount if filing single, capital gains tax pulls a sly trick: it disappears completely.  That’s right.  If you’re in the 10 or 15 percent tax bracket for ordinary income, you’re in the 0 percent federal tax bracket for capital gains.  So consider selling some investments that have increased in value over time.   If you have stocks or mutual funds in your taxable account, consider selling them to recognize income that will not be taxed.  You’ll still pay 4.6 percent state income taxes on the gains if you’re in Colorado.

Roth Conversion.  With a Roth conversion, you’re taking an IRA or other pre-tax retirement account and moving it into a Roth IRA.  It makes sense for most to have a significant percentage of wealth in a Roth because it’s tax-free money.  When you take out a qualified distribution, you don’t have to pay taxes on the gains in the account.  Roths also give you flexibility as you’re not forced to take retirement distributions and may have access to the funds before you retire.  For estate planning purposes, Roth IRAs are wonderful.  Your heirs under current law can get tax-free growth for their lifetimes.

The downside of Roth conversions is that you must recognize the amount you convert as ordinary income.  If you convert $40,000 of your IRA into a Roth, in most cases this adds $40,000 to your taxable income.  But if you are deducting a significant loss from a catastrophe, you may be in low or negative income territory.  A Roth conversion allows you to benefit tomorrow from the low income tax bracket that circumstances put you in today.

End of year deadline.  When you sell appreciated investments to recognize capital gain or convert an IRA into a Roth, remember that you only have until the end of the year to do this.  If you project you will have a low income year in 2013, and you want to “use” your low tax bracket you must sell stocks for gain and complete the Roth conversion by the end of the year.  Once we get into January, the opportunity has passed you by. 

Amend last year for catastrophic loss.  There’s one final wrinkle to consider when it comes to catastrophic losses related our floods in September.  If you live in a county that was declared a federal disaster area, you have the opportunity to take the loss against your 2012 taxes through amending your return.  Your accountant can tell you which option makes the most sense.