You may be celebrating the receipt of a large tax refund this year.  In fact, you may be bragging about it to a friend who earned a similar salary but barely broke even on their taxes this year.  So who is better off?  The individual who paid the lowest tax based on their personal situation by taking advantage of allowable deductions and tax credits is the real “winner” here. So just because you got a refund doesn’t mean that you paid the lowest tax you could have.  Your financial advisor can counsel you accordingly.  The fact is that refunds can be good for some people and, for others, they are not always the best use of their money.

Some people enjoy and actually plan for a tax refund by over-withholding the tax on their salary or paying higher quarterly estimated taxes.  

But sometimes getting a large refund isn’t the best strategy for your money.  Here are a few reasons why:

• It’s like making a tax-free loan to the government (hmm – that doesn’t sound very good).  Blogger Robert Pagliarini points out that the $1,000 you lent to Uncle Sam could have bought you $1,014 during 2012 and now only nets you $1,000 of value.  So think about the loss in spending power due to inflation.  Inflation is low now, but is expected to increase in the future.
• You could have used the money during the year to meet current bills or to purchase items for cash instead of charging the expense on a credit card.
• Your refund may seem like “found money” so, psychologically, you may be inclined to spend it more freely.

If you’d rather not receive a large refund, project what you will owe and adjust your withholding so that you pay enough to cover your obligations and avoid any penalties, but not too much over and above that amount.  Adjustments can be made using IRS Form W-4.  To help you complete the form, the IRS provides a free withholding calculator.  You can also fine-tune the amount of your estimated payments. With all of the tax changes that took place beginning in 2013, be careful about your projections and ensure that you’ve paid sufficient tax. Some people actually like to owe money with their tax returns, (making sure though that they paid in enough so they don’t incur any penalties).   In effect, they are getting an interest-free loan from the government!

Refund or no refund?   Your financial advisor can help you determine what works best for you.  If you jointly determine that planning for and receiving a sizable tax refund is a good idea and works with your financial plan, below are a few options for putting it to best use:

• Pay down credit card debt or other high interest obligations
• Pay down student loans, 401(k) loans, or other loans
• Contribute to your IRA/Roth IRA
• Fund your emergency nest egg.  Most financial experts agree that you should keep at least three to six months’ worth of your living expenses set aside in an emergency fund (even more if you are married and only one of you are working)
• Use IRS Form 8888 to deposit your refund to different accounts at banks or other financial institutions without it ever reaching your hands.  If you don’t see it, maybe you won’t spend it!  Form 8888 can also be used to buy up to $5,000 in U.S. Series I Savings Bonds with your refund.
• If you have insurance needs, using your refund to meet this expense is a good use of the money.
• Allot your refund towards your estimated taxes for the current year.   Having a little cushion that can prevent penalties for underpayment is not a bad thing.

 As always, your financial advisor can work with you to help you decide what to do in light of your financial goals and situation.

Back in the day, any corporate entity could issue an MLP, so in 1987 the government restricted which businesses could do so. In order to be deemed an MLP, 90 percent of the partnership’s income must be derived from various “natural resource” activities, such as oil and gas exploration, production, and transportation; real estate; and commodities.

Most MLPs are currently involved in what is called the “midstream” aspect of the energy industry, which includes processes occurring between the source of a commodity (e.g., natural gas or petroleum) and its endpoint, such as the transportation (pipelines) and processing of these resources.

The payouts on midstream oil and gas MLP investments have traditionally been attractive, thanks to the stable, predictable cash flow associated with the transportation of this necessary commodity. However, the computation of taxes on MLPs can be complex. The company sends each investor a K-1 typically in late February or March with information they can use, e.g., payouts and percentages, to determine their tax obligation regarding the partnership.

In addition to being a stand-alone investment, MLPs also can be a part of a larger vehicle such as an open- or closed-end mutual fund or an exchange traded fund (ETF). You can also gain exposure to MLPs through an exchange traded note (ETN). If you purchase an MLP embedded in another investment, some of the tax benefits of being a limited partner will be lost. ETF and ETN investors can bypass the filing of K-1s for tax purposes, but ETFs are required to pay corporate taxes, which will result in a decrease in returns. ETNs are not subject to the corporate tax, but they are exposed to the creditworthiness of the issuer of the notes, which adds an element of risk. Your financial advisor can explain these differences in more detail.

According to a recent article in Barron’s, the Alerian MLP Index, the industry benchmark, returned less than 5% compared to the 16% recorded last year by the S&P 500. Despite 2012’s less-than-stellar performance, we believe MLPs are positioned to perform well going forward thanks to an expected boom in U.S. energy exploration and production.

In addition to tax rules that can be complex, MLPs each have their own source of income and risk profile. With the help of your financial advisor, carefully consider the benefits of MLPs—and the risks—to see if they are match for your current and future financial objectives.

Sometime during the first half of 2013, consumers — especially women — could be faced with higher long-term care insurance (LTC) premiums and more restrictive policy provisions. And policyholders beware — many industry watchers believe these changes could be implemented suddenly, without much warning.

With investment returns generally not very robust for insurance companies, thanks to historically low interest rates, many providers are under increasing pressure to raise their prices in order to cover the costs of paying expensive claims on these policies.

Genworth Financial announced this month that rates would be increasing for women and other major carriers are expected to do the same. Women, as a group, are perceived to have a greater need for long-term care as they generally live longer than men. They are frequently the primary caregivers for their spouses, as well. But what happens when they need assistance? An LTC policy can serve as an important safety net in the event they become ill or incapacitated. Any increases imposed on female applicants may be in addition to increases levied on all policyholders. So women may be dealing with a double-whammy in regard to higher premiums.

LTC insurance has become increasingly popular since its inception in the mid-1980s. However, since that time, rates have risen, policy provisions have become more restrictive and several carriers have stopped writing policies altogether. Among these firms are Met Life, Prudential, Guardian and Allianz. Several insurers have also exited the group long-term care market which includes those policies that are offered through employers.

By definition, LTC insurance pays for care when individuals, usually senior citizens, can no longer perform the basic Activities of Daily Living (ADL) on their own. These essential tasks include bathing, toileting, eating, dressing, and walking. Depending on the policy, coverage may pay for personal or adult day care, home health care, or nursing-home care.

According to an article in the Washington Post on February 25, next year the Affordable Care Act will prohibit insurers who sell individual and small-group policies from charging women higher premiums than men. Long-term care insurance is not included in this law, however, and it is estimated by the American Association for Long-Term Care that women’s rates could increase by 20 to 40 percent. Genworth Financial has already said that it will charge new female policyholders with the new, higher rates, but they will not be applied to existing female policyholders or those who apply as a couple.

In addition to premium price hikes, carriers are increasingly asking for medical examinations as part of the application process. These could make it more difficult to qualify for a policy and represent a new aspect of the LTC underwriting process. Previously, statements from your doctor or a medical exam were not required.

So if you are thinking about purchasing a long-term care insurance policy, it may be wise to act sooner rather than later—especially if you are a female. Your financial advisor can help provide counsel about the changing long-term care insurance landscape in light of your personal situation and goals. He or she can also introduce you to the right insurance professionals.

In my last blog, we discussed how upfront career planning in advance of selecting a college can help keep your child on the right road without a costly detour.  Once he identifies a suitable career path, it’s time for him to explore what level of education — as well as what school —is realistic and necessary for your child to pursue his goals.

Once you identify several potential schools and/or programs, assess how successful they are at placing students after graduation.  Do they have internships available that provide an entrée into a first job?  Many colleges have career placement centers — inquire about the number of students who obtain jobs after they graduate.

It is also possible that your child’s career path doesn’t require a four-year degree.  Some jobs in the health care, information technology, and public services fields are among them, according to a recent article in Kiplinger’s Personal Finance.   Perhaps a two-year degree or a certificate program is sufficient for your child’s dream job.  This is one way that parents and children can save on post-secondary education expenses.   Other potential ways to corral expenses include having your child earn credits toward a degree at a community college, signing him up for Advanced Placement courses in high school that may translate to college credit (depending on his AP exam grade), and work study programs. 

A final word of advice to parents:  tread carefully before deciding to assume total repayment of your child’s college loan debt.  Generally speaking, when a child is responsible for paying a portion of their college costs or tuition, he feels more “invested” and tends to earn better grades.   At the same time, be aware that when you co-sign a student loan for your child, if he is unable to make the monthly payments, you will ultimately be responsible.  Also, don’t jeopardize your retirement in order to fund your child’s education.   You need that money to live on in the future and once you tap into your 401(k) or IRA, it may be difficult to replenish it. 

Remember, student loan debt is not going to go away and must be paid back in fairly short order.   Even if your child declares personal bankruptcy, he will still have to pay back his student loans.

By researching and planning in advance, you can help your child select an appropriate school and, importantly, an affordable financing plan (your financial advisor can assist).  These actions will help set the stage for the timely and responsible repayment of his student debt.

This is the first of two blogs that will cover practical advice on how best to deal with the astronomical cost of a college education.

Late last year, it was reported by several major news organizations that Americans hold nearly $1 trillion worth of student loan debt.  And borrowers are having trouble paying it back.  Now more than ever, it’s important to contain your child’s secondary education costs—and to ensure that any loans assumed can be paid back in a timely fashion.  Step one?  Help your child select an appropriate career

Before identifying colleges—and their costs—talk to your child about his career aspirations.  It’s important that your child distinguishes between fields that interest him and those that will help him acquire practical skills that will lead to a fulfilling career.   Point him in the direction of professional and personal contacts he can call, including alumni networks and professional associations.  These will give him a realistic picture of  possible careers and other important information.

Helping your child focus on his future career should lead to an estimate of what his salary is likely to be as well as his ability to pay back his student loans.    A general rule of thumb (with many exceptions) is that the total amount borrowed should not exceed your child’s annual starting salary.

Your child’s career choice is also key to understanding the kind of lifestyle he will likely lead once he graduates.  Besides expected salary, consider the work/life balance.  The salary may be attractive, but the job may routinely call for 60- or 70-hour weeks which may not be expected, nor appreciated.  Another factor is location.  Can the job responsibilities be performed anywhere or only in certain geographic areas?

Evaluating all aspects of a career up front can help your child avoid a costly correction in the future. We’ve all heard stories about the perennial student who has been going to college for six years because he initially chose to study something he was interested in as opposed to a field that was a bit more practical. Worse yet is a career choice that leads to a mid-life change of occupation, often when there is a family in the picture and significant financial obligations to meet.

Next week, we’ll talk about selecting a degree program and/or institution that will impart the skills your child needs without breaking the bank.

Interest rates are at historic lows and banks and other lenders are actively promoting their ability to refinance your mortgage.   Should you jump at the chance, or let it ride?   The answer will not be the same for everyone.  Depending on your financial situation, refinancing may not be a slam dunk.  Whether it is truly worth it for you depends on several factors.  Among them:  the manageability of your current payment, how long you plan to stay in your home, the cost of the proposed refinancing, and the tax implications.

Is your current monthly mortgage payment creating an uncomfortable drag on your budget?  If so, it might be a good idea to lower your payment through refinancing so it is less of a burden.  However, a lower monthly payment is not all you should consider.  How many years do you have left on your current mortgage and how much longer do you plan to live in your home?   For example, you may only have ten years left and now, by refinancing, you’ve brought your mortgage back to 30 years.  The short-term relief in the form of a lower monthly obligation may not be worth the extra thousands that you will have to pay over the long run.  In addition, if you are planning to move over the next couple of years, for example, you won’t be able to recoup any closing costs charged by your lender.

To reduce your overall debt burden, you may consider going from a 30-year mortgage to a 20-year or a 15-year.  With the help of your financial advisor, run the numbers to see if any of these scenarios is affordable.

Fees are an integral part of the refinancing process.  How much is it going to cost you?   Typical closing costs include an appraisal fee, credit report, title insurance, credit check, lawyers’ fees, and “points.”   These can add up and eat into the savings you will realize from a lower interest rate.  Shop around carefully—terms vary widely.  Some lenders do offer refinancing with no points and low fees. 

Another factor to consider is that a lower interest rate means less interest you can deduct on your income tax which could result in higher tax payments.  This may or may not present a significant issue for you —your financial advisor can provide guidance.

With rates lower than they’ve ever been, you should definitely address the issue of whether or not to refinance.  Together with your financial advisor, you can review your personal financial situation and make a decision that makes good economic sense for you now and in the future. 

To review, here are a few differences between the two types of IRAs:

• Taxes on Roth IRA contributions are paid up front, so if you convert now before tax rates rise, you can pay taxes on the converted amount in 2012 while rates are lower. 
• Assets from a Roth IRA are not taxed upon withdrawal.   And that applies to the earnings as well.
• Distributions are not required at age 70 ½ with a Roth IRA, but they are with traditional IRAs.  Converting is a way to reduce future required distributions from your traditional IRA which are taxable.
• The Roth IRA allows you to accumulate earnings tax-free with no time limit and you can bequeath the Roth IRA to your beneficiaries income-tax free.

If converting from a regular IRA to a Roth is something you’ve been contemplating for a while, making this move now may make sense.  However, don’t let the tax tail wag the dog.  In other words, initiate the conversion only if it works with your established estate plan and goals.  Basically, if you can’t afford to pay the tax now — which is required if you convert to a Roth — you shouldn’t do it.   Talk it over with your financial advisor.  A Roth makes particular sense for younger people because,  generally, they have more time for the Roth to grow, which helps make up for the cost of the conversion.

Your financial advisor can help you decide whether converting your IRA now fits into your overall financial plan, especially in light of the expected increase in tax rates.

To review, a casualty loss can include damage to your appliances, furniture, landscaping, trees, walkways (including boardwalks), cars, etc.  Basically, a casualty loss can be claimed for any actual damage to your property that was caused by a “casualty,” defined by the IRS as the damage, destruction, or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake, or even volcanic eruption.   (Normal wear and tear or progressive deterioration do not fall under this definition.)

The amount of the loss is the lesser of:

• The adjusted basis of the property – usually the cost if it is a personal asset
• The decrease in fair market value (FMV) as a result of the casualty

Both of the above items must be reduced by the amount of any insurance reimbursement and also any salvage value. If you have insurance, you must file a timely claim for reimbursement in order to take a casualty loss.  If necessary, you can determine the reduction in fair market value by getting an appraisal.

Deducting the loss on your tax return

As Abby explained in last week’s blog post, once you determine the amount of your loss, you must subtract $100 from each casualty event that occurred during the year. Then you add up all the net loss amounts and subtract 10% of your adjusted gross income to calculate your allowable casualty loss for the year.

Importantly, if your 2012 casualty loss is from a “federally declared disaster, there are some special rules. A disaster loss is a loss that occurred in an area determined by the President of the United States to warrant federal disaster assistance. A list of areas warranting public or individual assistance (or both) is available at the Federal Emergency Management Agency (FEMA) website at www.fema.gov.

If your 2012 loss is from a federally declared disaster, you can deduct the loss on an amended tax return for 2011. You generally have until April 15, 2013, to amend your 2011 tax return to claim a casualty loss that occurred during 2012.

Claiming a qualifying 2012 disaster loss on the 2011 tax return may result in a lower tax for that year, often producing or increasing a tax refund. Therefore, you can get a potential tax refund much sooner.

Landscaping and car losses: Some considerations

The cost of restoring your landscaping to its original condition after a casualty may help illustrate the decrease in the FMV of your property.  You may be able to measure your loss by what you spend on the following.

• Removing destroyed or damaged trees and shrubs, minus any salvage you receive
• Pruning and other measures taken to preserve damaged trees and shrubs
• Replanting of material necessary to restore your property to its approximate value before the casualty

In the case of your car, price guides such as the Kelly Blue Book and National Automobile Dealers Association guide, may be useful in determining its value. You can use the books retail values and modify them by factors such as the mileage and condition of your car to more precisely arrive at your vehicle’s value. The prices are not official, but they may be useful in determining value and suggesting relative prices for comparison with current sales and offerings in your area.  If your car is not listed in the books, determine its value from other sources, such as www.edmunds.com. A dealer’s offer for your car as a trade-in on a new car is not usually a measure of its true value.

As always, your financial advisor is here to help.  Consult him or her for additional information and expertise on determining and deducting any casualty losses.

We have received several inquiries about how to report a casualty loss as a result of the storm for 2012 tax purposes. According to the Internal Revenue Service (IRS), a casualty loss can result from the damage, destruction, or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake, or even volcanic eruption.  A casualty does not include normal wear and tear or progressive deterioration.

The rule is this:  If your property is personal-use property (meaning items that are not used in a trade or business or for income-producing purposes)  or is not completely destroyed, the amount of your casualty or theft loss is the lesser of:

• The adjusted basis of your property, or
• The decrease in fair market value of your property as a result of the casualty (or theft).

Report your casualty loss on IRS Form 4684, Casualties and Thefts, but take it as an itemized deduction on Schedule A.  It’s important to note that your deduction will be reduced by any insurance reimbursement you receive.    In addition, in the course of calculating the deduction, you will have to subtract $100 as well as 10% of your adjusted gross income from the amount of the loss.

As always, your financial advisor can assist.  Ask for additional, more specific information and to discuss an appropriate course of action for your personal situation. 

If funds are solicited over the phone, the charity may be using a telemarketing firm.   A recent article in Bloomberg Markets states that some telemarketing firms keep an overwhelming 50% to 70% of the donations collected.  Often, these callers falsely refer to themselves as volunteers.  They often further mislead by saying that over 70% goes to the charity.  That figure often refers to the total proportion of money that the charity raises which supports programs, not the percent that they will receive from the telemarketing firm.    

Sometimes the donor is asked not just to contribute but also to mail letters to neighbors asking them to help.  These neighbor-to-neighbor campaigns are particularly notorious for their low pay-outs to the charity.  Why do charities even use such firms?  Many reason that “some money is better than none” and they greatly value the new households “sold” by the telemarketer for future direct mail purposes.  

Here are a few common-sense tips for donating so that as much as possible goes to the intended cause:

• Review the charity yourself.  You can use www.choosingacharity.com or www.charitynavigator.com , or review its annual financial report.  Pay close attention to their overhead expense—ideally, it should be 25% or less.

• If you have a favorite charity, consider making recurring payments directly to them.  In this way, you help them decrease their fundraising costs.  Contact the charity directly to arrange direct payments from your bank account or credit card.

• Don’t commit to any donations over the phone.  Ask the caller to send material about the organization or research the group or initiative on your own.

Your financial advisor can help you choose an appropriate charity based on your interests.  He or she can counsel you on the best method—and timing—for making donations.