I have a very capable assistant now helping me. Emilia has passed the exam needed to become a CERTIFIED FINANCIAL PLANNER™  practitioner and has worked at another financial planning firm in Brooklyn. She also has engaged in pro bono work. With her help, I can now accept new clients.

Before reopening fully, I wanted to give existing clients who were due for a “fiscal checkup” the chance to sign up for one. I have scheduled a number of meetings and feel comfortable about integrating new work relationships into my schedule.

Life is hectic. A checkup causes people to cast an eye for a brief, concentrated moment on something that is important but too overwhelming to deal with on a daily or even monthly basis. The cost for a checkup is less – sometimes substantially less – than the initial engagement. It helps to assure that the initial assumptions are valid and the plan remains on course.

I recently heard from a client for whom I recommended a portfolio in March. She did not carry out the plan but was now ready to – only there had been so much commotion in the markets that she questioned if the plan was still advisable.

As it turned out, the Standard & Poors 500 Index was within one percentage point of where it was when I created the blueprint. I advised her to ignore all the noise that had roiled the market; investments should be based on long-term strategies. The “review” in this case lasted 15 minutes and I did not change – or charge – anything. (A full-blown update will typically cost one third to one half the cost of the initial engagement.)

A well-chosen set of low-cost investments, primarily index-based, will provide diversification and, on average, will  outperform the same type of active investments over the long-term. By “active,” I  am referring to mutual fund managers or investment advisors who aspire to “beat” the market by their timing and investment selection.

I don’t advocate a “set it and forget it approach” entirely. Many portfolios should be rebalanced approximately once per year to align them with long-term targets.

Ideally, rebalancing would take place largely in tax-sheltered accounts, such as IRAs, in order not to realize taxable gains. But there may also be a role for the taxable accounts to play in rebalancing as well as in certain tax strategies. For example, someone may want to “harvest losses.”

Tax-loss harvesting is the practice of selling investments that have gone down in value to offset gains. Up to $3,000 of losses that exceed these gains can be used as a deduction against ordinary income (salary, interest and other income taxed at your normal tax rate). Unused losses can be carried over to future years. The rules and restrictions are complicated – and include a 30-day waiting period before repurchasing investments – and should be explored in detail on IRS and other trustworthy websites. You should also consult with your accountant and possibly a fee-only financial planner before taking this on.

On the other hand, investors at the 0-15 percent income tax brackets may be able to generate some capital gains without having to pay federal taxes on the gains. These folks may benefit from  “harvesting gains.”

Harvesting gains consists of deliberately selling some investments that have increased in value. The same investments can be immediately repurchased. Down the road, when investors sell the investments a second time for whatever reason, they may get a smaller tax bill because the sale price is being measured against the new higher purchase price.

This can be advantageous for people in lower tax brackets. Suppose a couple jointly filing their 2015 taxes have $80,000 of ordinary income – take-home pay, interest income, self-employed business income, etc. – taxed at ordinary income tax rates. If they take the standard deduction of $12,600 and along with two personal exemptions totaling $8,000, this would lower their taxable ordinary income to $59,400. This would allow them to generate capital gains of $15,500 ($74,900  – the top of the 15 percent ordinary income tax bracket – minus $59,400 of taxable ordinary income) on which the couple would not have to pay any capital gains tax. (New York State taxes gains at the same rate as other types of income, hence there is no special zero rate at the state or city level.) They have saved $2,325 in federal taxes (capital gains tax rate of 15 percent of $15,500.)

(Note: this strategy is not unlimited. The couple in this case would have to pay federal capital gains taxes on any gains that exceeded $15,500 because the gains would push them into the higher 25 percent tax bracket for ordinary income.)

If the couple then repurchases the investments, they will reset the cost basis (defined in a moment) to  a higher value based on the new price. If they need the money a few years later, the tax for selling it could be significantly lower than it would be absent this strategy.

Cost basis is how much was paid for an investment – the original investment and transaction costs plus, potentially, dividends and other distributions that have been used to buy more of the investment. Cost basis is used to determine capital gains. Example (for simplicity transaction costs are excluded):

Determination of Cost Basis

Original Purchase Price                   $1,000

Reinvested Dividends                      $200

Cost Basis                                          $1,200

 

Determination of Capital Gain

 

Sale Price                                           $2,000

Cost Basis                                          $1,200

Capital Gain                                      $800

 

Here is a year-end checklist of things for you to consider:

__Have you taken full advantage of retirement accounts? If you have taxable savings, can you afford to live off a portion of those and add a large chunk of your salary to hit the 401(k) salary deferral maximum? The maximum is $18,000 with an additional $6,000 catch-up allowed for people age 50 and older.If you are self-employed, think about opening an individual 401(k). Typically, this would allow you to put more money aside for retirement and lower your taxes more than contributing to a SEP IRA.

__Consider tax-loss harvesting in your taxable accounts if you are at the 25 percent marginal tax rate or higher. Tax loss harvesting is the deliberate selling of investments that have lost money for tax purposes.

__Consider harvesting gains in your taxable accounts if you are at the 15 percent marginal tax rate or lower up to the top of the 15 percent bracket for your filing status (single, married filing jointly, etc.). Harvesting gains is deliberately booking gains in order to be able to sell with less taxes in the future.

__Another great option for lower-income people may be to convert an IRA to a Roth IRA. This is a taxable distribution, but people at a low tax bracket can fill up the lower tax brackets and get investments in the Roth that in most situations would become fully tax-free in the future. This could become an advantage when their income – and tax bracket – rises due to increased income from salary, pension, Social Security and/or mandatory IRA distributions. This needs to be coordinated with taking zero percent capital gains because harvested gains would reduce the low-tax-bracket dollars that also are ideally used for Roth conversions.

__Track your spending for the month of December to get a baseline figure for your budget, while making adjustments for extra spending that comes around the holidays. Then when the new year rolls around you can set a budget for the year.

__To avoid over-spending during the holidays, create a budget for gifts ahead of time and shop early, taking advantage of sales and avoiding the bigger splurges that might accompany last-minute shopping. You may also save on shipping.

__Check the interest rates on your credit cards and use only those with the lowest annual percentage rate (APR).

__Try to pay for at least one gift with the loose change piling up in your house and car and another gift with reward points from a credit card or banking relationship.

__Shameless plug: Contact me via the Contact Page of my website fredricksonfinancial.com if you would like to schedule a consultation. There is no charge for an initial Get Acquainted meeting.

__The information in this newsletter is educational and not specific advice for any one. Individual circumstances vary. Consult with a tax professional and investment adviser to see how this information may apply to you,

Recent media quotes:

Roth or Traditional IRA – What’s the Difference? Fox Business

Investing for beginners: Do it yourself, hire an adviser or use a robo-adviser?  Bankrate.com

RIAs Shouldn’t Fear the Robots Institutional Investor