ProVise Bullets

    • There may still be people rushing to the Post Office this afternoon or evening to get tax returns in the mailbox. Of course, many others will file for an extension. The first extension is for six months and is automatic. However, when you file your extension, you have to send in the money you think you will owe and file form 4868. If you don’t file an extension, there is a 5% per month late filing fee. An underpayment could also be charged interest, and if the amount is significantly under what is owed there could be penalties as well.
    • Taxpayers earning over $200,000 in 2013 can expect their employers to withhold the 0.9% Medicare surtax. Although all of this may not be owed, the employee won’t know for sure how much is owed or how much they will get back until they file their taxes by April 2014.
    • We couldn’t help but notice that the best and worst performing mutual funds or ETFs in the first quarter of 2013 were all leveraged funds. What a difference that makes! Guess right – good news! Guess wrong – really bad news! The S&P 500 was up about 10% during the first quarter. However, if you were lucky enough to own the Direxion Daily Gold Miners Bear 3x Shares you would have enjoyed a 61.7% increase during the quarter. This fund produces about three times any decline in gold prices. At the other end of the spectrum, the biggest loser, Velocity Shares Daily 2x DIX Short-Term ETF, produced a negative 61.9% return. The only way any of these funds makes sense (and we are not sure many of them do), is perhaps for a day trader. We prefer the turtle approach, not the rabbit.
    • You remember that, at the height of the fiscal crisis, Fannie Mae and Freddie Mac found themselves in a terrible situation. Fannie Mae took $116.1 billion in bailout money back in 2008. At the time, many felt that they should have gone under and others felt that they would go under, even with the bailout money. But, in only five short years, Fannie Mae has turned around and it just reported a $17.2 billion profit for last year. In fact, they have paid back about 25% of what is owed to the government.
    • The President has sent Congress his budget for the 2014 fiscal year beginning October 1, 2013 and has put into play what the White House has calculated to be a $1.8 trillion cut in the deficit over the next 10 years. This works out to be $180 billion each year, or more than double the sequester for the current year. The major difference, of course, is that the President is not cutting just expenses, but in his words, trying to take a “balanced” approach, which also raises more revenue. When coupled with the $2.5 trillion in deficit reduction from the other deals that have been made, according to some estimates, it would reduce the deficit by a total of $4.3 trillion over ten years. The White House calculations indicate that by 2016 it would reduce the deficit to 2.8% of GDP and to 1.7% by 2023. Rose colored glasses, we think. There is still a deficit, but a sense that it would be manageable.

A centerpiece to the President’s plan would be an adjustment in the cost of living increases to Social Security. Essentially, it would reduce the inflation adjusted increases, and over time would save a significant amount of money. The President has said he prefers not to do this, but recognizes that compromise will be needed and that there should not be any “political horse trading”. While the Republicans may like this idea (and many liberal Democrats will not), the President insisted that the only way he would accept this provision is if it is accompanied by tax increases. The President estimates that this would save $130 billion over the next ten years.

But, the President has also insisted that these same cost of living increases be applied to adjustments to the progressive tax brackets. Thus, if you decrease the cost of living increases to the tax brackets, it means it would subject more income to higher tax rates and should have about $100 billion over the next 10 years that would not otherwise have been collected. Most of this would be coming from the wealthy, but it would affect all taxpayers.

Perhaps the most interesting provision is a proposal to raise $9 billion over the next decade by limiting the amount of money that individuals can accumulate in retirement instruments and IRAs to a maximum of $3 million. The White House statement said that anything above this amount is “substantially more than is needed to fund reasonable levels of retirement savings”. Many believe that this was a direct shot at his former opponent, Mitt Romney, who disclosed during the campaign that at one point his IRA had $100 million in it because of good investment management. While the President’s plan is short on details, it appears that it may include not only retirement plans, but also annuities and life insurance along with other tax-deferred plans that are often used for retirement.

We will keep you up-to-date as information unfolds, but rest assured, there is no way that the insurance industry or Wall Street will take this lying down.

    • At this point, the S&P 500 has continued to sustain its upward march from the first quarter, where it saw a 10.6% total return gain. This is the 16th time in the past 25 years that the S&P 500 produced a double digit gain in the first quarter. So, what happens now? Following the previous 15 times this occurred, the S&P 500 went on to produce an average increase of 4.7% in the second quarter, advancing 13 out of 15 times. Of course, the two times it did not advance were during the last two years. Could we be looking for another swoon like the last two years, or could we have a break-out? Don’t look for double-digit gains this quarter as only three times in the past 25 years has the S&P 500 produced any consecutive quarters of 10% or more. (Source: BTN Research)
    • As most investors know, the S&P 500 is a market cap weighted index. That means the bigger you are, the more you count. The five largest stocks in the S&P 500 as of March 31, 2013 made up 11% of the stock market’s capitalization. Thus, 1% of the companies in the Index represented 11% of its total value. The S&P 500, of course, only represents 500 companies and the total market capitalization of the entire U.S. stock market was $19 trillion as of March 31, 2013. At its bear market low four years ago on March 9th, the total market capitalization was only $8 trillion. (Source: BTN Research)
    • Last week the IRS published its 2012 data book which provides us with an inside look as to what is important to the IRS. During the fiscal year ending September 30, 2012, the IRS examined a little less than 1% of all tax returns. Needless to say, however, those who earned the most were the most likely to be examined. The IRS looked at 12.1% of those returns that exceeded $1 million of income, of which there were 337,477. With returns between $200,000 and $1 million, approximately 2.8% were examined. Interestingly, of the 1.5 million returns that were examined, 54,000 of them had more refunds coming to them than the taxpayers had requested. All told, the IRS had 237 million returns sent in and collected $2.5 trillion. Look for the IRS to continue to be very aggressive with taxpayers who earn the most money.
    • Another sign that the economy is getting better can be found in the revenues and expenses of the federal government. During March the deficit grew “only” by $106.5 billion. It is now estimated that for fiscal year 2013, the deficit will reach $845 billion. Politicians are starting to fall all over themselves, as this will be the first time the deficit has been below $1 trillion in the past five years. All of them will take credit for it, even though they have done nothing. In another win for the government, they sold some more General Motors stock during March and have now gotten back about 61% of the $49.5 billion they used during the fiscal crisis to bail out General Motors.
    • We have always joked that when Congress passes a tax act and makes things “permanent” it really means permanent until they change it. We told our long-term readers many times in the past that, at the end of the day, taxes would have to increase (something we don’t like any more than anyone else, but in reality it had to happen), and that did happen at the first of the year. With approximately $800 million of new taxes primarily hefted on the wealthy. But on the estate tax side, there seemed to be unanimity that the exemption should be $5 million indexed for inflation ($5.25 million in 2013) and it would be unified with the Gift Tax and the Generation Skipping Tax. This all made a great deal of sense as it would tax what most people consider to be the very wealthy and protect smaller family wealth, especially business owners and family farms. But the permanence of the estate taxes seems to be not years but months. The President proposed in his 2014 budget to reduce the exemption from $5.25 million to $3.5 million and to raise the rate from 40% to a maximum rate of 45%. He also wants to tax lifetime gifts over $1 million at 45%. This would all become effective in 2018. The exclusions would not be indexed for inflation, which means every year that goes by more estates would become subject to the tax. We don’t care if you are a Democrat or a Republican – this is utter nonsense. People simply cannot plan based on making something permanent and then wanting to change it less than four months later. We’re sorry, it’s not only irrational, but it’s irresponsible as well. We can plan for our clients as long as we have rules that are reasonable and expected to last for more than a few months.

As always, we encourage you to give us a call if you would like to discuss anything further. We will visit again soon. Proudly and successfully serving our clients for over 26 years.


© 4/15/13 ProVise Management Group, LLC

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Dow Jones Industrial Average - The Dow Jones Industrial Average is a popular indicator of the stock market based on the average closing prices of 30 active U.S. stocks representative of the overall economy.

S&P 500 Index is an unmanaged group of securities considered to be representative of the stock market in general. You cannot directly invest in the index.

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