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Real-Life Situations

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Question:
I own a business, a sole proprietor, so I file my income tax return with a Schedule C.  My children, ages 15 and 17, help me around the office to do chores I assign to them.  Should I pay them?

Answer:
Yes.  There are some very important income tax benefits to do so it is better to put them on the payroll and pay wages to them rather than an allowance.  Your net profit from this business is taxed at the highest tax rate of any income; thus, any deductions like wage payments to children will save substantial income taxes.  And, you can even set up an IRA or SIMPLE IRA account to benefit them later.    Note that the IRS requires the children to perform meaningful work and that you pay them the going rate for such work.

Feel free to contact me if you or someone you know has this type of situation.  Financial Planning advice presented here is general in nature, and individual circumstances make applying these general rules tricky; thus, the above answer cannot be applied to all circumstances because the slightest variation could cause a different outcome.

Personal Notes

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Today (Monday) my wife Jo Anne and I are visiting Madison Square Garden, NYC for the Westminster Kennel Club Dog Show watching some excellent examples of man’s best friend.  You might be surprised to learn the dog show itself has a long pedigree – stretching way back to May 1877.  Dogs are judged against their breed standards, to see how close each dog matches the standard, which is a written description of the ideal specimen of that breed. Standards may include references relating form to function in the performance of the job that the dog was bred for, and may also include items that seem somewhat arbitrary such as color, eye shape, tail carriage and more. While many breeds no longer need to perform their original jobs and are bred mostly for companionship, they should still have the innate ability and physical makeup to perform those jobs, and this is what the judge looks for.  Our companion at home, Bella, is a personality-rich Bichon Frise.  


Economic Reports Last Week

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Last week the number of NEGATIVE developments exceeded POSITIVE developments and the stock market maintained a watchful eye on European concerns. 

Positives:

1) Initial Jobless Claims fall to 358k, 12k less than expected and the 4 week average drops to 366k, the least since May ’08
2) Job Openings in monthly BLS data rise to match the highest since Sept ’08
3) MBA said avg 30 yr mortgage rate falls to new low of 4.05% and refi’s jump 9.4%
4) German Factory Orders in Dec rise a bit more than expected
5) China’s PPI moderates to a gain of just .7% y/o/y, the slowest rate since Nov ’09
6) Indonesia unexpectedly cuts rates to 5.75% while RBA and SK sit pat

Negatives:

1) Greece on brink, AGAIN, unemployment rate in Nov hits 20.9% from 18.2% in Oct
2) German exports in Dec, the main driver of their economy, falls 4.3% m/o/m vs an expected decline of just 1%, German IP falls 3% vs est of flat from Nov
3) Euros being re-deposited with the ECB overnight remain around 500b, matching the amount borrowed under the LTRO
4) BoE votes for more QE, brings asset purchase program up to 325b pounds. 
5) US inflation expectations in TIPS continue to drift higher
6) Feb UoM confidence moderates 2.5 pts after Jan jump of 5
7) Avg gallon of gasoline at the pump rises to most since Sept.

The Markets This Week

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Stock prices eased last week, snapping a five-week winning streak for most of the major indexes. Most of the damage came Friday as traders took profits on news late Thursday of a huge foreclosure-abuse settlement between five big banks and attorneys general from the federal and state governments. 

It wasn’t a great week, but investors still appear to be gaining confidence in a more “normal-acting” market, or one at least where not all stocks rise and fall together, last year’s bugaboo. Trading activity remains unspectacular. 

The Dow Jones Industrial Average dropped 61 points, or 0.5% on the week, to close at 12,801.23. The Nasdaq Composite finished the best of the three main indexes, losing 0.1% last week, to close at 2903.88. 

The market is moving from “macro to micro,” says Brian Belski, the bullish chief investment strategist at Oppenheimer.  A precipitous drop in stock price correlations this year suggests a market in which shares move more on company fundamentals than on global macroeconomic news, he avers. After last year’s persistently high correlations, over 0.9 at times, a reversion to the mean will assure that low correlations will continue, he predicts.

Continued good earnings reports and U.S. macroeconomic data are helping keep the market buoyant, adds Peter Kenny, director of institutional sales at Knight Capital Americas. Leadership by the large-cap tech and financial stocks—instead of the small caps, as was the case in 2009-2010—gives “legitimate support” and confidence to the market’s positive tone, he adds. 

Granted, we are only six weeks into the market’s about-face, but the bears have to pay some attention to this change in market tone.

Sentiment can be fickle, but last year’s worries—the European financial crisis and the U.S. economy—no longer appear to be scary enough to usher in more than a routine pullback in the short term. The Greek boogeyman isn’t going away, but the market doesn’t seem so easily spooked. It’s up to the bears to prove it otherwise. 

Increased selling by insiders and abnormally bullish readings from the American Association of Individual Investors’ weekly survey argue for a short-term pullback soon. Potentially worrisome weekend headlines out of Europe—by now customary—could weigh on markets next week (Source:  Barrons Online).

The Numbers

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

Returns
through 2-10-2012

1-week

Y-T-D

1-Year

3-Years

5-Years

10-Years

Bonds-
BarCap  Aggregate Index

     
.2

   
   .6

  
9.8

  
7.2

  
6.6

   
5.7

US
Stocks-Standard & Poor’s 500

   
-.3

    
7.0

  
3.7

  20.1

    
.8

   
4.1

Foreign
Stocks- MS EAFE Developed Countries

   
-.3

    
8.0

-11.6

  10.5

 -6.4

   
3.6


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.

Real-Life Situations

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Questions: My Net Worth is in excess of $1,400,000 and my wife and I own most of our property in joint name.   I understand the estate tax law permits us to transfer up to $5 million when we both pass away.  Does this mean I do not have anything to worry about?

Answer:  
                               
Yes and No.  Current estate tax law permits each individual to pass $5 million to his or her heirs at death ESTATE TAX FREE.  But, the exemption goes back to $1 million in 2013.  It is anyone’s guess as to whether this law will be changed (again) by 2013.

There are several opportunities in the new estate tax law provisions to plan for 2013 no matter what Congress decides.  It is important that we review these provisions with you.

Feel free to contact me if you or someone you know has this type of situation. Financial Planning advice presented here is general in nature, and individual circumstances make applying these general rules tricky; thus, the above answer cannot be applied to all circumstances because the slightest variation could cause a different outcome.

Personal Notes

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My boyhood home in the wilds of Western PA lies a few miles from Punxsutawney- a place that draws the media’s attention one day each year – this Thursday, on February 2nd.        

The Meaning of Groundhog Day

Punxsutawney Phil, the “seer of seers and prognosticator of prognosticators,” is a groundhog resident of Punxsutawney, Pennsylvania, USA. On February 2, (Groundhog Day) of each year, the town of Punxsutawney celebrates the beloved groundhog with a festive atmosphere of music and food. During the ceremony, which begins well before the winter sunrise, Phil emerges from his temporary home on Gobbler’s Knob, located in a rural area about 2 miles east of town. According to the tradition, if Phil sees his shadow and returns to his hole, the United States will have six more weeks of winter. If Phil does not see his shadow, spring will arrive early. The date of Phil’s prognostication is known as Groundhog Day in the United States and Canada.  

The Economy

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Last week the number of POSITIVE developments exceeded NEGATIVE
developments -barely. 

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

Positives:

1) Italian and Spanish bond yields continue lower, 10 yr in Italy below 6%, Spain’s below 5%
2) German IFO business confidence rises to 8 month high
3) German consumer confidence at best since April
4) Euro zone mfr’g and services composite index unexpectedly moves back above 50, led by Germany
5) US Durable Goods orders in Dec surprise to upside but how much was pulled forward from 2012 due to 12/31 expiration of full depreciation expensing?
6) Jan UoM confidence rises to best since Feb ’11
7) Richmond and KC mfr’g survey’s both rise
8) Bank of Thailand cuts rates.
9) Reserve Bank of India cuts reserve requirements

Negatives:

1)Portuguese yields spike, 5 yr CDS up 150 bps on week to new high
2) Spanish unemployment for Q4 rises to 22.9%
3) Italian consumer confidence holds at lowest since at least ’96 when survey began
4) Q4 US GDP rises 2.8%, a touch below expectations but nominal GDP gains just 3.2%, the weakest since Q3 ’09. If deflator was in line with expectations, Real GDP would have been up just 1.3%. Real final sales up just .8% vs 3.2% in Q3
5) Initial Jobless Claims normalize at 377k after holiday distorted 356k last week
6) Inflation expectations within UoM rise to 3.3%, the most since Sept and remains above the 20 yr avg of 3.0%. Expectations also rise to multi month highs in TIPS market
7) New Home Sales remain anemic, prices fall 12.8% y/o/y
8) FOMC stretches out zero rates until late 2014, US$ resumes downward trend against everything. Fed destroying the price mechanism as if interest rates are artificially priced, what are assets really worth? If we don’t know what assets are really worth, how can capital be efficiently allocated? And, if Zero Interest Rate Policy was effective, Japan’s economy would have boomed over the past 10 yrs.