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Heads Up! Important Tax Law Change Affects Some Over 70 ½

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IRA Distributions to Charity


The tax law passed to avoid the Fiscal Cliff 13 days ago extends through December 31, 2013, the provision allowing tax-free distributions from individual retirement accounts to public charities, by individuals age 70 1⁄2 or older, up to a maximum of $100,000 per taxpayer per year.


IMPACT. The Act provides special transition rules. One rule allows taxpayers to re-characterize distributions made in January 2013 as made on December 31, 2012. The second rule permits taxpayers to treat a distribution from the IRA to the taxpayer made in December 2012 as a charitable distribution, if transferred to charity before February 1, 2013. For an example of the second rule,

BACKGROUND:  Tom and Mary Jones (fictitious names) are both over 70 ½ and own IRA accounts that require them to take Minimum Required Distributions.  They received $6,000 of such distributions in December 2012.  Their 2012 income from interest, dividends, pension, and taxable portion of Social Security equals approximately $76,000.  Because Tom and Mary do not have a mortgage, they no longer itemize their deductions even though they gift over $6,500 per year to their church and favorite charities.  Tom and Mary’s Federal Income Tax on Form 1040 equals $6,514.


ACTION:  Under the new tax law passed about two weeks ago to avert the Fiscal Cliff, Tom and Mary can write up to $6,000 of checks to their church and favorite charities before January 31, 2013 and reduce, by like amount, the $6,000 of Minimum Required Distribution that occurred in December 2012.  Tom and Mary will save $1,665 of Federal Income Taxes if they write checks to their church and favorite charities equaling the full $6,000.


DETAILS:  here are some additional details you should know:



  • Only those IRA Minimum Required Distributions made in December 2012 qualify.  If a distribution was made in November 2012 or earlier, it does not qualify.

  • Only checks written to charitable organizations between January 1, 2013 and January 31, 2013 qualify.

  • Distributions from Beneficiary IRA’s do not qualify for this special treatment.

  • NOTE:  if the above fact pattern does not work for you because you received your Minimum Required Distribution before December, keep in mind that Minimum Required Distributions in 2013 can also be excluded from income; except, in 2013 you must have the IRA Custodian make the Minimum Required Distribution (or any part) payable to your favorite charitable organization. 

The Markets This Week

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Don’t look now, but with last week’s gains the U.S. stock market is already up 3.2% in just the first eight trading days of 2013, about a quarter of last year’s entire price-only rise of 13.4%. For the second week in a row, stocks hit a five-year high.


In recent weeks, hedge funds and individuals—both unenthusiastic participants in the 2012 equity rally—have shifted money out of fixed-income investments and into stocks, pushing up shares sharply.


Small-cap stocks, in which individual investors often are active, again outperformed last week. The first fourth-quarter earnings reports released—though just a handful—were good enough to boost stocks, or at least not sidetrack the rally.


Last week, the Dow Jones Industrial Average rose 53 points, or 0.4% to 13,488.43, while the S&P 500 gained 6, or 0.4%, to 1472.05, and hit a five-year closing high of 1472.12 Thursday. It’s just 6% below its all-time high of 1565, set in 2007. The Nasdaq Composite added 24 points, or 0.8%, to end at 3125.63. And the Russell 2000 index finished at 880.77, up 0.2%, and near an all-time high.


Among the sectors that rallied, notes Stephen Massocca, a portfolio manager at Wedbush Equity Management, were the high-yielding master limited partnerships (MLPs) and real-estate investment trusts (REITs) that are preferred by individual investors. A bit more than two dozen S&P 500 companies reported fourth-quarter results, and a lack of bad numbers helped support the market, he says. In addition, the recent increase in money flows into mutual funds in instructive, he says. According to EPFR Global, which tracks fund flows, in early January actively managed U.S. equity funds posted their biggest inflow in over a decade.


At the same time, “we’ve been seeing hedge-fund flows coming back in,” adds David Abuaf, chief investment officer of Hefty Wealth Partners. His anecdotal report is supported by data from Carpenter Analytix, which tracks hedge funds. Founder Robin Carpenter writes that the funds, which built equity positions through 2012, now have historically high levels of stocks. They’ve cut their fixed-income positions.


The broader narrative, adds Peter Kenny, managing director of institutional sales at Knight Capital Americas, is that investors are getting more comfortable with the economic picture and what that means for equities.


“It’s a grand party,” but there’s some risk, and the biggest hurdle remains ahead in late February when the government must address the debt ceiling and potential spending sequestrations. Carpenter adds that historically high hedge-fund equity levels often precede downdrafts. Shorter-term, stocks face the technical challenge of overcoming the old intraday high of 1474, reached in September. Should they fail to burst through, a pause in the rally wouldn’t be out of the question. A push through would bring in more investors (Source:  Barrons Online).

The Markets This Week

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A favorable
employment report on Friday led the stock market to its fourth consecutive
weekly gain and a three-month high on Friday. U.S. payrolls added 163,000 jobs
in July, above the 95,000 expected, giving investors some hope that the economy
will manage to shuffle along, instead of falling into a recession.

The Dow
gained 217.29 points Friday to hit 13,096.17, reversing losses from earlier
sessions. The index rose 20 points, or 0.16%, on the week. Likewise, the
Standard & Poor’s 500 rose 25.99 points Friday, bringing its weekly haul to
five points, and leaving the index at 1390.99—10.6% higher than it started
2012. The Nasdaq Composite wasn’t left behind. It gained 58.13 points on
Friday, ending 9.81 points higher on the week at 2,967.90.

The July
jobs numbers offset some of the disappointment investors had after both the
Federal Reserve and the European Central Bank failed to act on recent rhetoric
that they would move to help the economy. Milton Ezrati, senior economist and
market strategist at Lord Abbett, believes the ECB may announce a plan to
provide liquidity within the next two weeks and he’d expect the markets will
continue to rally on the news.

“We
think the market over the next six to 12 months will return more than
10%,” he says. That’s in addition to the gains the market has already
enjoyed this year. If the economy can grow 2%, and inflation runs about 3%, he
believes companies can grow revenue 6% to 7%, especially if they have
international exposure. So even if there is no margin expansion, corporate
earnings should improve moderately. Not bad for a sluggish economy.

THE BIG
SURPRISE of the week was the $440 million loss racked up by Knight Capital
Group (ticker KCG) in just 40 minutes. Thanks to a software glitch, the company
accidentally bought almost 150 stocks on Wednesday. It sold those stocks to
Goldman Sachs at a loss.

Knight
stock collapsed from $10.31 at the week’s start to a low of $2.27 on Thursday,
then bounced more than 50% to $4.05 on Friday on reports that the company
secured a line of credit.

Knight
might not be well known on Main Street, but it is a vital part of the equity
markets. The firm is the largest secondary trader of U.S. equities, trading 15%
of the stocks listed on the New York Stock Exchange in the first half of this
year and 16% of those listed on Nasdaq. You may not think you’re trading with
Knight but the trade that you send to your broker may find its way to Knight to
be executed.

Knight is
reportedly working to raise equity, which isn’t surprising given it only had
$336 million of cash on its balance sheet as of June 30. But even if it manages
to raise the capital it will have to repair its reputation and convince the
Street it’s safe to trade with them again. By the close on Friday, TD
Ameritrade and Scottrade had resumed trading with Knight, while Vanguard Group
and Fidelity Investments reportedly continued to trade elsewhere.

“Knight
has a very strong reputation and was known for staffing up with smart
people,” says one equity trader. Adds Larry Tabb, founder of the research
firm TABB Group: “They have a great business and it’s amazing that in 40
minutes you can do that much damage to a company like Knight.”

Knight’s
software nightmare is just the latest in a spate of market malfunctions. Think
JPMorgan’s big trading losses, the flubbed Facebook and Batts IPOs, MF Global,
and the infamous Flash Crash of 2010. One potential solution: Increase the
difference between where investors can offer to buy and sell stocks,
particularly on mid- and small-cap stocks. The spread is now a penny and Tabb
thinks it should be wider to improve liquidity and slow down the market.

“My
viewpoint over the last year and a half has really changed,” says Tabb,
who previously thought narrow spreads and more technology would improve
liquidity across the markets. “This market is not robust.” (Source:  Barrons Online).

Personal Notes

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Tuesday, August 7th
is my birthday.  I was born in 1951.  It is interesting and
enlightening to look back to 1951 to compare and reflect.  In 1951:

·       
Over 1 million youths
march in East Berlin for world peace and Communism.

·       
“Tennessee Waltz” by
Patti Page was a popular song.

·       
Baseball says hello to
Willie Mays, as he joins the New York Giants.

·       
Humphrey Bogart and
Katharine Hepburn star in the classic “The African Queen”

·       
A new car cost
$1,800.  Today, $25,550.

·       
A Gallon of gas cost
$.20.  Today, $3.29.

·       
A new home cost
$16,000.  Today, $169,500.

·       
Income averaged $3,515. 
Today, $34,104.

The
Dow Jones Index equaled 269.  Today 13,169

The Economy

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POSITIVE economic news reports exceeded NEGATIVE economic news in last
week’s developments.  

Below is a succinct list of last week’s
events:

Positives:

1)
Draghi follows up last week’s call to arms with more color on what he’ll do
next if needed and we await Spain and Italy’s SOS.
2) German July unemployment data in line with estimates.
3) Euro zone Purchasing Managers Index services index revised up to 4 month
high but remains below 50 at 47.9.
4) July Payrolls rise 163k vs est of 100k, most since Feb.
5) Institute of Supply Manager services index ticks up to 52.6 from 52.1 but
components mixed with Employment falling below 50 for 1st time this yr.
6) July retail comps rise more than expected helped by pre Bureau of
Transportation Statistics  discounting.
7) Initial Jobless Claims total 365k vs est of 370k.
8) Consumer confidence up more than 3 pts with those that plan on buying an
auto within 6 mo’s rising to the most on record dating back to ’67.
9) Consumer Sentiment’s May home price index rises more than expected m/o/m,
although still down y/o/y.
10) US savings rate rises to 4%, highest since Aug ’11.
11) Bernanke says no to peer pressure and stands pat.

 

Negatives:

1)
Manufacturing Purchasing Managers’ Index’s in China, India, South Korea and
Taiwan all drop.
2) US Institute for Supply Management remains below 50 for 2nd straight month.
3) UK Purchasing Manager Index falls 3 pts to 45.4.
4) Final euro zone Purchasing Manager Index falls to lowest since June ’09.
5) US unemployment rate rises to 8.3% in July from 8.2% as the household survey
falls 195k.
6) REAL US consumer spending in June fell .1% coincident with rise in the
savings rate.
7) June EU unemployment rate at 11.2%, matching high.

Source:  The Big Picture

The Numbers

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Last week, U.S. Stocks and Foreign Stocks and Bonds increased. 
During the last 12 months, STOCKS outperformed BONDS.   

Returns
through 8-3-2012

1-week

Y-T-D

1-Year

3-Years

5-Years

10-Years

Bonds-
BarCap  Aggregate Index

      
.1

   
 3.5

  
6.1

  
6.9

  
6.8

   
5.5

US
Stocks-Standard & Poor’s 500

     
.4

  
12.0

  12.8

  13.9

   
1.6

   
7.0

Foreign
Stocks- MS EAFE Developed Countries

    
1.5

    
2.5

-9.9

   
-.3

 -8.0

   
3.9

Source:
Morningstar Workstation. Past performance is no guarantee of future
results.  Indices are unmanaged and cannot be invested into
directly.  Three, five and ten year returns are annualized excluding
dividends.

The Look Ahead

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On Wednesday, the FED announced a
continuation of its tactic (often referred to as “Operation Twist” by the news
media) whose goal is to stimulate the economy through lower interest
rates.  The stock and bond market’s reaction was terrible.  I suspect
the FED is losing its ability to stimulate the economy through lower interest
rates.  Why?  Interest rates have fallen so low that lowering them
more does not create sufficient incremental benefit.  For example, home
mortgage rates are generally based upon the 10 year maturity U.S. government
bond which currently yields about 1.6% down from 7.3% 20 years ago.  How
much lower can the 10 year U.S. Treasury drop?  And, how many potential
home buyers would receive enough incentive to make a difference to buy vs not
buy a house if the rate on the home mortgage were 3.10% instead of 3.25%? 
I think the markets are realizing the FED’s ability to stimulate has vastly
diminished.  It’s up to Congress and the White House to lead or get out of
the way.