As I took a look at the different return data on the Tax History Project’s site, mentioned above, I noticed that candidates for the presidential office tend to make some tax decisions that are fairly infrequent compared to the general population. I found this to be interesting … so here are the three main points of difference:

Campaign Donations.
You know that little box at the top which offers you a chance to donate additional money to the Treasury ($3) for use in the campaign? Well, this is the only way (that I know of) for a taxpayer to tell the Treasury where to spend some of their dollars. By checking the box, $3 of a person’s income tax towards the Presidential Election Campaign Fund, which is the source of the public funding for presidential candidates.
Obama opted yes,
Biden opted yes,
Romney opted yes (so far, based on his preliminary return),
Ryan opted no.
Checking the yes box is pretty rare. The Federal Election Commission notes, “participation in the tax checkoff program has declined each year, from a high of 28.7% for 1980 returns, to 6.6% for returns filed with the Internal Revenue Service (IRS) in 2010.” How much money does the check-box allocate? The IRS reports that Presidential Election Campaign Fund received “contributions of $40.8 million in Fiscal Year 2010 and $39.6 million in Fiscal Year 2011.” (Source: 2011 IRS Data Book.)

Applying Refunds To Next Year’s Taxes. Persons running for the Oval Office tend to forgo getting an immediate refund and instead prefer to apply the refund as a payment towards next year’s taxes.
Obama applied all his 2011 refund towards his 2012 taxes,
Biden had a small tax amount due, so he had no refund to apply to next year,
Romney plans to rollover all his refund (based on his preliminary return),
Ryan applied most of his refund to next year’s estimates.
I don’t see this terribly much. Typically I find that only some self-employed, retirees, and other persons who routinely pay estimated taxes are more willing to let their refund “roll over” as a payment towards next year’s taxes. Last time we had clear data (in 2009) this was only done in about 3% of all tax returns.

The “Dreaded” Alternative Minimum Tax. Presidential candidates often have incomes and deductions that trigger the AMT. Every taxpayer is required to pay the higher of the alternative minimum tax or the regular income tax, and for most people the regular income tax calculations do come out higher than the AMT. We do what we can around here to try to avoid it for our clients, when possible. But here’s what our presidential friends did:
Obama paid 12,491 of AMT in 2011
Biden paid 6,805 of AMT in 2011
Romney estimates his AMT bill will be 224,425 for 2011
Ryan paid 11,684 of AMT in 2011

Kinda interesting … right?

Financial Advisor Richmond
Financial Planner Richmond
Financial Planners Virginia

Can you believe that the school season is already starting in some areas? This summer has absolutely FLOWN by — and we’re eagerly eyeing the resolution of the upcoming elections, and Congressional action on a whole slew of tax-related items.

Because if they don’t do something about the tax rates, we’re all staring at a huge rate increase, and a variety of tax credits going bye-bye on January 1, 2013. On top of this, with the economy still sputtering, continued chaos in the Middle East … well, it can be a little hairy out there.

Which is why it’s so important for you to maintain your peace in the midst of it all.

Look — it’s no mystery, probably, why I choose to write so often about maintaining the proper perspective. We see clients in here regularly (yes, even outside of “tax season”–more about that in a moment), and you probably wouldn’t believe how often we have the same kinds of conversations. Finances touch a deep place of security (and fear) for so many, NO MATTER how much is in the bank accounts.

From the very well-off, to those deep in debt … everyone can pick and choose their poison these days, when it comes to fear.

I often play the role of counselor, in addition to helping folks navigate their way through this stuff. Because families and business owners make rash decisions in times of perceived crisis–and they often have unforeseen tax and wealth complications from those decisions down the road.

Which is why it’s critical that we take a look at how things are set up for you and your family for the rest of 2012. Midyear is the perfect time to take a clear-eyed look at things, and plan for the best outcome for your family or business.

And so we’re going to make it easy for you. We’ll encourage you, give you good options…and point you into the best direction for your long-term wealth preservation and growth.

Financial Advisor Richmond
Financial Planner Richmond
Financial Planners Virginia

I wrote last week about the different life stages we go through, and how it affects our finances. It’s based on the work of Nobel-Prize-winning MIT Professor, Franco Modigliani, who separated our financial life into four distinct phases:

1. Before having children there is often a surplus of income.
2. While raising and educating children, there is often a deficit when the family is spending more than they are earning.
3. When children go out on their own, families often have a surplus again.
4. In retirement, the surplus is small if it is there at all.

I offered a couple of conclusions from this, last week, and (based on feedback, as well as the fact that I still had more in me on the subject) I’m continuing it this week.

What I advised last week:
1) When you are starting out, don’t try to duplicate your parents’ lifestyle.
2) Encourage your children to save as much money as they can in their 20′s.

A few more important financial thoughts — ones which can help create a generational legacy, even change an entire family line…

3) Avoid debt while raising a family.
Expenses multiply once children arrive. The one-bedroom apartment is replaced by a four-bedroom home with a mortgage. If expenses for food, clothing, medical, dental, clubs, camps and lessons aren’t enough, children have their own set of endless desires.

The average cost of raising a child to age 18 in 2012 dollars, totals about $300,000. After a third of a million dollars in payments, the balloon payment comes at the end when college expenses are often financed through student loans and additional mortgages. During these years, many couples wish they hadn’t spent their pre-child surplus!

Families find it challenging to live within their means during this phase of life. But you can live more simply in order to live debt free. Truly — run the numbers on it, and it’s clear — the difference between middle income and multi-millionaire in the long run is a few hundred dollars a month in saving and investing.

4) Stop telling yourself you will get your finances in order later.
The average American family runs their financial affairs in such a way that if they were a publicly-traded company, their stock price would plummet, the business would go bankrupt and the people in the accounting department would be taken away in handcuffs.

You can’t postpone financial faithfulness any more than you can postpone marital faithfulness! Your habits set your financial DNA, and habits are simply habit-forming.

Many people mistakenly believe that life comes in three stages: learning, working and recreation. They think that until they are toward the middle or end of the working stage of life, they don’t need to worry about finances.

Everyone in America can save something. Whatever you save, the magic of compound interest produces incredible results. It is far preferable to know what you need to save than to arrive at retirement unprepared.

5) Get a retirement checkup before you turn 50.
For most families, expenses drop significantly after children leave home. Although starting younger is obviously more ideal, these are the years when many families realize time is running out to prepare for their retirement and they seek professional financial advice.

So the good news is that this period provides a second chance to save and secure a financially comfortable retirement. If you are in this stage of life, you need to know exactly how much you must save to achieve a comfortable retirement. You don’t have the luxury of guessing at the appropriate savings rate.

The lessons to learn from Modigliani’s work are simple: “Before the children arrive, squirrel it away. Don’t eat more nuts than you can afford in the winter … and when spring arrives (when the children go out on their own) you get one last chance to save for that big nut!”

Financial Advisor Richmond
Financial Planner Richmond
Financial Planners Virginia

The good professor separated the life cycle into four distinct phases:

1. Before having children there is often a surplus of income.
2. While raising and educating children, there is often a deficit when the family is spending more than they are earning.
3. When children go out on their own, families often have a surplus again.
4. In retirement, the surplus is small if it is there at all.

So, conclusion follows: Saving during the two surplus periods of life is crucial to financial well-being later in life. Before the children arrive, squirrel away some money. And when the children leave home, you typically get one last chance to save for retirement or family legacy.

There are a bunch of financial “life lessons” to be gleaned from this research, and in my opinion, it can relieve people to understand where they are in the context of their life cycles, even if it doesn’t go exactly according to the above breakdown, in your family’s particular case.

I’ll start with a few lessons this week, and will add some more next week.

1) When you are starting out, don’t try to duplicate your parents’ lifestyle.
Most of today’s college graduates are ill-prepared for the real world of financial responsibility. They never saw how their parents lived when they were first married and struggling. As a result, they can base their after-school expectations on an upper-middle-class lifestyle. My suggestion for parents? Repeatedly emphasize, and show, that success is earned from the bottom up.

So, for example, if you are a young adult, you can’t afford more house than your budget will allow. If you spend 50% of your lifestyle expenses on housing, you will not be able to live proportionally on the rest of your income. Too much house is one of the most common mistakes young people make.

It is almost as though we can’t feel successful without immediately enjoying the lifestyle of our parents at the height of their careers! So, help your children decide how much house is enough, and help them to calculate what they can buy for 30% of their standard of living.

2) Encourage your children to save as much money as they can in their 20′s.
Early in your career, when the cost of basic needs is small, income often easily covers expenses, allowing the surplus to be used for savings, investment or added consumption.

Many young people assume they are doing so well financially that they can simply spend their extra money on more stuff. They don’t realize that these years of plenty won’t last.

During this period, save and invest up to 50% of your disposable income for future expenses. Fully fund Roth accounts, and fund 401(k) plans to take advantage of any employer match. Save 10% of your take-home pay for future large expenses. Put an additional 5 to 10% into long-term taxable savings.

This advice is especially important for those who delay marriage until they are in their 30s. Don’t waste a decade of prime saving and investing. You owe it to yourself and your future family to store up those nuts now.

Financial Advisor Richmond
Financial Planner Richmond
Financial Planners Virginia

A thoughtful estate plan can make your heirs’ lives easier. But it is your parents’ estate planning that will make your life easier.

Not every family has fostered the ability to speak openly in love–I’ve written about that necessity in the past. But if you have begun that process, here is an outline of what grown children need to know about their parents’ business. In fact, adults of any age should update their estate plan every year.

And, as a parent, if you are willing to share some of this information with your children–especially if one of them is also the executor of the estate–they’ll appreciate having the facts and be more prepared emotionally when the time comes. They will know your wishes ultimately anyway, and good communication will lessen any surprises ahead of time. They will benefit from knowing the answers to the following questions:

Do you have enough saved for a comfortable retirement? Many financial planners use a safe withdrawal rate by age to make sure their clients will still have enough money toward the end of their retirement. But this isn’t always the case, and it’s worth looking into.

If your spending is under this withdrawal rate, you have more than enough and probably can leave a legacy to your heirs. But if you are over this rate, you may run out of money and have to compromise your standard of living abruptly. It may be uncomfortable, even embarrassing, for parents to share their finances with their children, but grown children often want to know how their parents are doing.

Where are the important documents? The five documents your children should be able to retrieve quickly are a will, a living will, a power of attorney, a directory of basic information and the latest end-of-year financial statements.

The directory of information should list the assets of your estate along with account or policy numbers and contact phone numbers. It also helps to indicate your intentions for the distribution of each asset, which will help confirm you have the correct titling and beneficiary designations on every portion of your estate.

You may have structured your will to divide your estate equally among your children. But if you have tried to make it easy for one child to access your bank accounts by adding his or her name, you have overridden your estate plan and left that child joint tenancy with complete rights of survivorship. This can be a problem.

Titling and beneficiary designations are legal estate planning actions. It’s best to review them with your legal advisor. Various types of assets are best designated differently in the estate plan. This is not the occasion for do-it-yourself thrift. It is a rare family that has compiled and reviewed a complete list of estate assets: bank accounts, investment accounts, retirement account, real estate holding, life insurance, health savings accounts and so on.

Are there any special bequeaths? Any promises you want kept should be documented. Your good intentions won’t matter if you aren’t around to implement them. If you have promised money to a charity and want that obligation kept, document it. If you have promised to loan a child money, document it. If you have promised to help fund your grandchildren’s college education, document that. Without documentation, none of these promises can be kept if you aren’t around to make the decisions.

Are there plans to remarry? If parents have remarried, intergenerational estate planning is even more critical. Prenuptial agreements and careful estate planning are required in the case of second marriages to avoid disinheriting children or grandchildren from the first marriage. The default is rarely a good option.

Do you have any prepaid funeral arrangements? Do you want to be buried or cremated? Do you have any preferences for a memorial service? Although it may seem macabre to plan your own funeral, a memorial service takes time and thought. It will be that much more special and comforting to your family when it is filled with your favorite music and readings.

Encourage your children’s interest in your estate planning. Most of the time, their intentions are honorable. They may simply want to understand your values and therefore your wishes.

Financial Advisor Richmond
Financial Planner Richmond
Financial Planners Virginia