Day Camps & Your Tax Return

 

Day camps are common during the summer months. Many parents pay for them for their children while they work or look for work. If this applies to your clients, their costs may qualify for a federal tax credit that can lower their taxes. To qualify for the Child and Dependent Care Credit, their expenses must be for the care of one or more qualifying persons. A dependent child or children under age 13 usually qualify. The taxpayer’s expenses for care must be work-related. This means they must pay for the care so they can work or look for work. This rule also applies to a spouse if the taxpayers file a joint return. Spouses meet this rule during any month they are a full-time student. They also meet it if they’re physically or mentally incapable of self-care. The taxpayer must have earned income, such as from wages, salaries and tips. It also includes net earnings from self-employment. Their spouse must also have earned income if they file jointly. Spouses are treated as having earned income for any month they are a full-time student or incapable of self-care. This rule also applies to the taxpayer if they file a joint return.

Generally, married couples must file a joint return. An individual can still take the credit, however, if they are legally separated or living apart from their spouse. They may qualify for it whether they pay for care at home, at a daycare facility or at a day camp. The credit is worth between 20 and 35 percent of their allowable expenses. The percentage depends on the amount of their income. The total expense they can use in a year is limited. The limit is $3,000 for one qualifying person or $6,000 for two or more.

CNBC misguides divorced individuals

 

In this article, When To File for Social Security Retirement Benefits Early, 
CNBC says divorced individuals may want to claim their divorced-spouse benefit early and wait to claim their own benefit at a later date. Wrong. You must be full retirement age to file a restricted application for the divorced-spouse benefit. If you file “early” you will be paid your own reduced benefit first. This will stop the accumulation of delayed credits, and, if your PIA is more than one-half of your ex-spouse’s PIA, you will never, ever, be able to claim the divorced-spouse benefit. 

Summer Weddings and the IRS

Clients preparing for summer nuptials should make sure to do some tax planning. A few steps taken now can make tax time easier next year. All names and Social Security numbers on the tax return must match their Social Security Administration records. If the wife or husband changes their name, they should report it to the SSA by filing Form SS-5, Application for a Social Security Card. When taxpayers get married, they should consider a change of income tax withholding. To do that, they should give their employer a new Form W-4, Employee's Withholding Allowance Certificate. The withholding rate for married people is lower than for those who are single. Taxpayers should also let the IRS know if they move. To do that, file Form 8822, Change of Address, with the IRS. If they are married as of Dec. 31, that is their marital status for the entire year for tax purposes. Since spouses can choose to file their federal tax return jointly or separately each year, it’s a good idea to figure the tax both ways so they can choose the status that results in the least amount of tax.

Schwartz Financial Weekly Commentary (8/10/15)

Michael L. Schwartz, RFC, CFS Comprehensive Wealth Management and Retirement Planning   Weekly Commentary – August 10, 2015
Weekly Market Overview: Back to school…back to higher interest rates? After a solid July jobs report arrived on Friday – 215,000 new jobs were created and unemployment remained at 5.3 percent,… read more.		ARE You overwhelmed at work: Last year, the most popular chapter in Deloitte University Press’ Global Human Capital Trends 2014 report was titled, “the overwhelmed employee.” … read more.		Weekly Focus: Value vs. Growth Investing   See our morningstar report… click here.
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Michael L. Schwartz, RFC, CWS, CFS, a registered principal offering securities and advisory services through Independent Financial Group, LLC., a registered broker-dealer and investment advisor.  Member FINRA-SIPC. Schwartz Financial and Independent Financial Group are unaffiliated entities.   This information is provided for informational purposes only and is not a solicitation or recommendation that any particular investor should purchase or sell any security. The information contained herein is obtained from sources believed to be reliable but its accuracy or completeness is not guaranteed.  Any opinions expressed herein are subject to change without notice.  An Index is a composite of securities that provides a performance benchmark.  Returns are presented for illustrative purposes only and are not intended to project the performance of any specific investment.  Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly.  Past performance is not a guarantee of future results.   * The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. * The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices. * The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market. * Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association. * The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998. * The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones. * Yahoo! Finance is the source for any reference to the performance of an index between two specific periods. * Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. * Past performance does not guarantee future results. * You cannot invest directly in an index. * Consult your financial professional before making any investment decision.

Should the Lower Earning Spouse Claim At Age 62

 

It has become widespread practice for the higher earning spouse in a married couple to claim Social Security benefits at age 70. This will provide maximum income to the couple while that spouse is alive and to the surviving spouse after the death of either spouse. Once couples see the numbers, it doesn’t take a lot of arm twisting to get them to agree. Those that haven’t yet claimed set their sights on a claiming age of 70 and often decide to work until then. Those that claimed early without realizing how much they would be giving up often agree to suspend at full retirement age so their benefit can build 8% annual delayed credits to age 70.

What is not so clear-cut is when the lower earning spouse should claim. (Note: for pronoun purposes we are assuming the lower-earning spouse is a woman and the higher-earning spouse is a man because that’s generally how it is…for the baby boomer generation at least.) First let’s clear up one misconception. Some clients think it’s OK for the lower-earning spouse to take a reduced benefit at 62 because she will be jumping up to 50% of her husband’s benefit when she turns full retirement age. That’s not how it works. If she files at 62 she will be paid 75% of her PIA as her permanent benefit. When she files for the spousal benefit at FRA, she will be paid the difference between her PIA and one-half of his PIA, and this amount will be added to her existing reduced benefit. This will give her a combined benefit that is less than 50% of his PIA.

Nevertheless, some couples want to start the lower-earning spouse’s benefit early to get some Social Security income rolling in while the higher-earning spouse delays. Is this the best strategy for them?

Let’s look at it from a breakeven point of view. Claiming at 62 will give the lower-earning spouse more checks but in a lower amount. Claiming at 66 or 70 will provide a higher benefit but over a shorter period of time. The breakeven age is the age at which more total benefits are received under the later-claiming scenario than under the early-claiming scenario. Our calculators show us that when you are comparing 62 to 70, breakeven age is 78. If you are comparing 66 to 70, it’s 82.

But for couples there’s a twist. Because the higher-earning spouse’s benefit will transfer over to the lower-earning spouse as her survivor benefit, it will be necessary for the higher-earning spouse to outlive the lower-earnings spouse’s breakeven period in order for the delay to pay off. In other words, if he dies early, the lower-earning spouse would have been better off grabbing those reduced benefits starting at 62 because she’ll be giving up her reduced benefit for the higher survivor benefit before her breakeven age. (Note: Unlike with spousal benefits, there will be no reduction in the survivor benefit as long as the widow claims it at her FRA or later, even if she claimed her own benefit at 62. The survivor benefit is a whole new benefit, not an add-on.)

So you are looking not just at the age the lower-earning spouse will be when she dies. You are also looking at the age the higher-earning spouse will be when he dies, and whether it happens during or after the lower-earning spouse’s breakeven period. Got that?

The most extreme example of the delay not paying off is when the higher-earning spouse dies when the lower-earning spouse is age 70. In that case the lower-earning spouse would have foregone eight years of benefits only to transfer over to the same higher benefit she would have gotten if she had filed at 62.

The most extreme example of the delay paying off is when both spouses live to age 100. In that case the lower-earning spouse is enjoying for many, many years the higher benefit she got by delaying. For every year after the breakeven age that they both remain alive, the more the delay pays off.

Because there can be a disparity in the spouses’ ages, it’s more accurate to look at the breakeven period, not the lower-earning spouse’s breakeven age. If the lower-earning spouse’s breakeven age is 78, that’s a period of 16 years (from age 62 to 78). Add this to the higher-earning spouse’s current age to see how long he must live in order for her delay to pay off. If he is 70 when she is 62, he must live another 16 years to age 86 in order for her delay to pay off. This may not be worth it, especially if he is in poor health. If he’s the same age she is, he only has to live until age 78. If he is younger, say 58, breakeven occurs when he is only 74. In that case, it would almost certainly make sense for her to delay.

By the way, if you want to consider the time value of money with a reinvestment rate of 3% over inflation, the breakeven age is 84 if you are comparing 62 to 70 or 86 if you are comparing 66 to 70.

First, I like to consider the pure breakeven age, without reinvestment, taxes, or other variables which are unknowable. This results in a lower breakeven age and doesn’t require clients to reinvest Social Security benefits or other assets at a specific rate of return in order for the strategy to work. (Sometimes the alternative source of income, while Social Security is being delayed, is to continue working.) Second, I think the average life expectancy is irrelevant when you are working with live human beings who comprise their own little risk pool. By definition, half of all people will outlive the average life expectancy, and there is some evidence that affluent, educated baby boomers will live longer than average. Third, and most important, the conclusion can vary considerably depending on the respective ages and PIAs of the spouses. Until you put a client’s numbers into a calculator, it’s all theoretical.

That said, I can see that it might pay off for a lower-earning spouse to claim early benefits, even if it is not the so-called optimal scenario. I’ve seen cases where the difference between the #1 and #2 scenario is small enough that the couple is willing to forego a few more thousand dollars in lifetime benefits in order to start Social Security income at age 62. That’s their choice and there’s probably not much downside, especially if starting the lower-earning spouse’s benefit at 62 will help convince the higher-earning spouse to delay to 70. And if the higher-earning spouse is over FRA and eligible to file a restricted application for his spousal benefit off the lower-earning spouse’s record, it can help mitigate some of the losses arising from early claiming. Again, this is why you need to contact our office at 215-886-2122 to run the scenarios in our “Spousal Planning Calculator” after having an in-depth conversation with you about goals, income needs, health status, life expectancy, and so on. The consultation without the calculation is incomplete, as is the calculation without the consultation.

 

Views On China

“Nothing in life is to be feared. It is only to be understood.”

– Marie Curie

 

 

Many people have asked me about the recent news out of China. “What’s happening to their stock market?” they want to know. “Will it affect us? Should I be worried?”

I offer the above quote as a response. Nothing in life is to be feared, it is only to be understood … and that includes what’s happening in China. So let’s take a few minutes to understand it!

 

The Year of the Bull Turns into the Year of the Bear

 

For about a year, China’s stock market has been on an incredible hot streak. In fact, it’s more than doubled in value over the past twelve months.1 That’s because millions of people—mostly working class families who previously had little to do with the markets—have been pouring their money into stocks.

 

This trend was driven largely by government-created hype. For months, state-owned media has been urging people to buy stocks, loudly proclaiming that the markets were the place to put their money.2

 

The resulting growth was explosive … and ultimately, unsustainable.

As the demand for stocks increased, so too did stock prices. But that didn’t deter investors, who kept buying as long as stocks looked like they were going up. They even engaged in some very risky behavior in order to keep buying. Many people even borrowed money to invest, a practice known as margin trading. Think of it like taking out a loan just so you can hit up a casino. All investing comes with risk,

of course, but margin-trading takes the concept to an entirely different level. It’s an easy way to turn “investing” into “betting.”

 

To make a long story short, stock prices rose too high, too fast. Meanwhile, the overall Chinese economy has actually been slowing down, and, despite its size, is thought by some analysts to be relatively weak in terms of growth.3 Financial experts have a name for when stock prices skyrocket above the value of the

actual companies behind them.

 

A bubble.

 

Starting in June, the bubble finally began to pop. Ready for some numbers? On June 26th, the Shanghai and Shenzhen composites, the country’s two biggest indexes, both fell over 7% in one day.4 By the end of the month, stock prices had declined more than 20 percent from their June 12th peak.5 By July 9th, the two indexes had both fallen over 30%.6 Investors had finally woken to the fact that their nation’s economy wasn’t an effective prop for their nation’s markets ... and that their own over-borrowing was a problem. Once again, investors acted emotionally—but this time, out of fear instead of greed. Their sudden loss in confidence led to a sharp drop in the stock market.

The Chinese Government Responds

 

Of course, China’s communist leaders weren’t about to just sit back and do nothing. Instead, they’ve enacted a slew of policy changes to try and stop the financial bleeding. For instance, they have:

 

 Ordered brokerages to continue buying stocks in an attempt to prop the markets up

 Lent money to said brokerages for the same purpose

 Announced new regulations on margin-trading and short-selling

 Cut interest rates to record lows

 Banned trading shares in companies whose stock is falling too fast

 

And that’s only the tip of the iceberg. Whether these measures are wise is an open question, but the point is, the government is working overtime to reassure the masses. As of Friday, July 10th, there are signs their efforts may be working. Both indexes closed the day up 4%.7 Time will tell whether things have truly stabilized.

 

What Happens Next?

 

Assuming the worst is over, China will need to turn its attention to the overall economy. If it continues to weaken, then the markets could resume their plunge. How does that affect us? Well, you may have heard the saying that “When a  butterfly flaps its wings in China, a tornado forms in Kansas,” or something similar.

That’s an exaggeration, of course, but in this interconnected world of ours, what

happens on one continent can affect another. After all, China’s economy is the second largest in the world. Their slump could, in theory, spread to other markets as well. The good news is that despite the recent slide, China’s markets are still up over 70 percent from where they were a year ago.6

 

The real question is, “What can we learn from all this?” Remember Marie Curie’s words: nothing should be feared, only understood. That’s why, instead of worrying about China’s immediate future, it makes more sense to see what we can glean from China’s recent past.

 

Lessons Learned

 

“Learning is a treasure that will follow its owner everywhere.”

- Chinese proverb

All this drama serves as a useful reminder of why the basics of investing are so important. For example:

 

 Never invest emotionally.

 

 Proper investing comes from having a sound strategy, preferably one that exists within an overall financial plan. The two Rs, ration and rules, are an investor’s best tools. Unfortunately, too many Chinese investors did the opposite. They invested emotionally.

 

When stocks went up, exuberance prevailed. When stocks started going down, fear took over.

Both ended up being harmful.

 

 Don’t rely on the media. Whether it’s state-owned or private, the media has a vested interest in stirring up emotions. In China’s case, people believed the media’s hype instead of relying on critical thinking or common sense. Never make financial decisions based solely on what you read in the newspaper

.

 Don’t try to invest what you don’t have. Excessive margin-trading is having a destructive effect on many Chinese families. Investing is not gambling … or at least, it shouldn’t be.

 

Regardless of how well off we are, we all have to live within our means.

I hope this message makes the China situation a little more comprehensible. In the end, my professional advice is this: always try to understand the “what” and “why” of what you hear in the news.

 

But don’t waste time fearing the “what if.” Remember the basics of sound investing. They’ve got us this far! As long as we apply them, we will continue to move forward on the path to your financial goals.

 

Finally, always know that my team and I are here for you. We will continue to watch the markets, both in China and elsewhere. We will never stop educating ourselves about what’s happening in the world.

 

And if there are any further developments we feel you should know about, rest assured you’ll hear from us promptly.

 

In the meantime, have a great summer! Please contact me if you have any immediate questions or concerns.

 

 

 

 

Sources

1 Keith Bradsher, “Guide to China’s Market Turmoil,” The New York Times, updated July 9, 2015.

http://www.nytimes.com/interactive/2015/07/06/business/international/china-market-turmoil.html?_r=0

2 Charles Riley & Agnes Chan, “How China’s media and risky trading fueled stock market crash,” CNN Money, July 8, 2015.

http://money.cnn.com/2015/07/07/investing/china-stock-market-crash/index.html?iid=surge-stack-dom

3 “Why China’s economy is slowing,” The Economist, March 11, 2015. http://www.economist.com/blogs/economistexplains/

2015/03/economist-explains-8

4 David Barboza, “China’s Stock Market Plunges,” The New York Times, June 26, 2015.

http://www.nytimes.com/2015/06/27/business/international/chinese-stock-indexes-plunge.html

5 Keith Bradsher, “Chinese Stocks Fall Into a Bear Market,” The New York Times, June 29, 2015.

http://www.nytimes.com/2015/06/30/business/international/chinese-stocks-fall-into-a-bear-market.html

6 David Barboza, “Stock Sell-Off Is Unabated in China,” The New York Times, July 8, 2015.

http://www.nytimes.com/2015/07/09/business/international/stock-sell-off-unabated-in-china.html

7 Charles Riley, “China stocks rebound,” CNN Money, July 10, 2015. http://money.cnn.com/2015/07/09/investing/china-stocksshanghai/

index.html?iid=hp-stack-dom

 

Michael L. Schwartz, RFC®, CWS®, CFS, a registered principal offering securities and advisory services through Independent Financial Group, LLC., A Registered Broker/Dealer and Registered Investment Advisor,  Member FINRA-SIPC.  Schwartz Financial and Independent Financial Group, LLC are separate entities.

 

Greece After The Vote

A few days ago, I sent you some information on the recent Greek debt crisis—specifically, what caused it and why it matters.  I also mentioned that the Greek government decided to hold a referendum on whether to impose new austerity measures in exchange for another bailout.  To quote myself:

Why is Greece back in the news again?  Because Greece has finally defaulted on its debt.  Recently, the Greek government announced it would not be able to make a scheduled debt payment of $1.6 billion to the International Monetary Fund.  In addition, Greece will probably soon default on many of its other obligations, both to bond holders and the European Central Bank. Essentially, it’s the same plot all over again with a similar script.  Greece has asked Europe for another bailout.  Greek’s creditors have responded by saying, “Maybe, but you’ll have to accept some extremely tough terms in exchange.”  (In other words, more austerity.)

The difference this time is that the Greek government seems unwilling to make that exchange.  Mr. Tsipras, the Greek Prime Minister, announced a nation-wide YES/NO referendum to be held on July 5, where citizens could vote whether to accept more austerity measures.  A YES vote would mean more austerity in exchange for another potential bailout.  A NO vote would mean Greece decides to call Europe’s bluff, bargaining the EU will continue to provide financial assistance anyway. Well, the referendum has come and gone, and the final results are in.  61.3% of voters chose the “NO” option.1 So you may be asking yourself: “What does a NO vote mean, exactly?”

The referendum itself was largely symbolic, because the bailout terms Greece was voting on had already expired.  Still, symbols are important.  In this case, the results indicate Greece has decided to reject the kind of austerity measures they’ve been subjected to over the past few years.  That means any negotiations between the Greek government and its creditors will have to start from square one.

Meanwhile, the clock is ticking.  Remember, if Greece continues to default on its loans, the threat of bankruptcy will likely become reality.  That in turn may have a drastic effect on the overall European economy.

Other than the referendum, though, not much has changed since my last message.  As of this writing, the markets have dipped but not plummeted, mainly due to uncertainty over what might happen next.  The Dow fell 46.53 by the close on Monday, while the S&P fell 8.02.2

In the meantime, Greek banks are still closed while Prime Minister Alexis Tsipras decides on how to negotiate with creditors moving forward. In addition, Europe’s financial leaders are holding meetings amongst themselves to determine their next offer.  Both parties are hoping to strike a deal before the end of the month, when Greece owes 3.5 billion Euros to the European Central Bank.  If Greece defaults on that payment, then things get really interesting.  To quote myself again:

So what happens next?  What will this drama lead to? The answer to the first question is simply, “No one knows.”  As for what it will lead to, here’s the worst case scenario.  Let’s say Greece and its creditors don’t come to a new agreement.  If Greece goes into bankruptcy, that will raise the possibility of “financial contagion” throughout Europe.  It could even lead to Greece leaving the European Union, which could cause an even greater shock to the European economy.  In short, many experts are worried about a potential domino effect.  If Greece goes into default, it could start a chain reaction that damages the entire continent. But here’s the good news: Europe is in a stronger position than it was several years ago, and is better equipped to prevent financial contagion.  Then too, Greece makes up a relatively small part of the Eurozone economy, so its exit might not be as catastrophic as some fear.  In addition, the EU has a habit of doing everything it can to prevent a crisis from spinning out of control, so many observers expect a deal to be reached before the worst happens. All of that is still true.  As for us, we’ll continue to watch the markets and study the latest developments. What we won’t do is overreact to one bit of news, about Greece or anything else.  The day-to-day headlines, like the latest about Greece’s referendum, are merely rocks amidst a great river. They may look imposing, but it’s the flow of the river that we care about. 

So here’s the way we’re going forward. My team and I are always evaluating the state of your portfolio.  If we feel the need to recommend any changes, or move to higher ground, we’ll certainly let you know. What should you do?  Get on with enjoying your summer!  And remember that we’re here for you if you have any questions or concerns.  Please feel free to give me a call at 215-886-2122.  I’m always happy to hear from you!