STAFFORD WELLS | personal wealth management

July 2012

Dear Clients & Friends,

Low RiskLow Risk-Rates of Return that beat Money Market Rates
Sounds too good to be true, but it is not. Depending on your tax bracket, a little tax management can eliminate or defer taxes until retirement. That means more money in your pocket. It poses much less risk than trying to eek out a return in today’s volatile bond or stock markets.
In my experience in financial planning, tax planning remains the most commonly overlooked opportunity to increase wealth.
Perhaps you do not want to deal with tax planning. In that case, I suggest enlisting the help of your advisor, accountant or tax attorney. Taking such action if done correctly, should be risk-free, and it should certainly return better than the one-quarter of 1 percent you earn from a money market mutual fund.
If you are in the 45 percent tax bracket (40% Federal and 5% State) and come up with $20,000 in deductions, your tax savings will be $9,000 for the year. A 30% tax rate would equate to $6,000 savings –this is money in your pocket. Furthermore, the deduction may help place you in a lower tax bracket, which could save you even more.

The following ideas might be helpful:

  • Establish a cash balance plan if you are self-employed or have income from other sources. It allows you to put more away on a tax-deferred basis than you ever imagined.
  • Place stock options in a tax-deferred account, so when it comes time to exercise those option, you would not be taxed on the full appreciation at your tax rate.
  • Depending on your income level, you can claim credits on your tax return for tuition expenses incurred for your children’s educations.  For more detail talk with your advisor or accountant.
  • Contribute to a donor-advised fund that allows you to contribute any amount to charity without having to name the nonprofit right away. Once the money is in the fund, the IRS considers the cash gifted, and you can take your time deciding who receives the funds.
  • Contribute more to 401(k) plans once you turn 50 years old. Many employers do not tell employees this, or maybe you missed the circular that human resources sent to you. In 2012, the maximum annual amount that anyone younger than 50 can contribute to a 401(k) plan or IRA is $17,000. But for people older than 50, the IRS provides a catch-up provision that allows them to contribute $5,500 more, which brings the total annual contribution to $22,500. Walking away from a 401(k) match means losing a dollar-for-dollar return if your employer matches your contribution and from potentially placing yourself in a lower tax bracket.

Below are additional tax savings tips you should consider:

  • When gifting to charity, do so with appreciated stock or an appreciated mutual fund--even if it is as little as $500.
  • Balance out losses with gains in your taxable investment account, so you do not incur a tax bill on your gains at the end of the year.
  • Make sure your bond funds and high turnover investments are in your IRA (or Roth IRA) or tax-deferred retirement account, where the gains will not be taxed at your full rate.
  • Place your stock and long-term, buy-and-hold positions in your taxable account as long term gains are taxed at a lower rate.
  • Be sure to invest funds for a child’s education in a 529 plan so the money will grow tax deferred. Funds withdrawn to pay for school expenses do not incur taxes.
  • Maximize your contributions to your 401(k) profit sharing plan, traditional IRA and Roth IRA. Do so even if it does not seem like it is worth the effort.

Garage saleDo you really want to hold that garage sale? Here is a better way to get rid of unwanted items and put money back in your pocket.
I don’t know many people who look forward to giving up their weekend to deal with the headaches of a garage sale. I do know a few, however, who like to rise to the challenge.
If you have a few things or more to sell, here is one of the easiest and most financially rewarding ways to accomplish this unwanted task.
One real life example: Karen has about $700 worth of items she wants to sell in her weekend garage sale. She also owns a couple of expensive evening dresses that she knows will not sell for their full values at the sale and needs to decide what to do with them.
Karen puts signs around the neighborhood and runs an ad in the local paper announcing her garage sale. She spends all day Saturday and  sells $500 worth of items.  After Karen cleans up, she has $200 worth of items remaining and two evening gowns she still needs to dispose of. She puts the $200 worth of unsold goods at the end of the driveway for garbage collection. She thinks about bringing the dresses to the resale shop but holds off for another day (maybe she will get around to it), because she feels exhausted from her garage sale.  For her work, so far, she has put $500 in her pocket.
Perhaps, instead of the garage sale, Karen decides to donate all the items to one charity and take the tax deduction. The charity’s staff comes by her house and picks up all her items. She obtains a receipt for the items ($700) and the two dresses ($800).  Her total donation and tax deduction comes to $1,500. If Karen is in the 40 percent tax bracket, then she has essentially put $600 back in her pocket, as she has saved $600 in taxes--all for a couple of hours of work.
Now, how would you rather you spend your weekend?
Be sure to get documentation from the charity to claim your deduction. If you want a big deduction, keep track of the items and their receipts. According to the Internal Revenue Service, a taxpayer can deduct the fair market value of clothing and household goods.  Fair market value is defined as “the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts.”
If you donate more than $500 worth of goods to a single charity, you must include Form 8283, Noncash Charitable Contributions, with your tax return.
Enjoy your summer!

Estate planningToday’s Estate Planning
If you have not started or updated your estate plan in the last few years, it is time you took a look at today’s estate planning process. No longer just about a will, it takes into account many other aspects of your financial future.  Below are a few areas an estate plan covers, beyond the basic will. An estate plan:

  • Determines the proper ownership of assets for taxes, estate taxes and asset protection.
  • Allows you to allocate charitable donations, which can save taxes today while deferring your gifts into the future.
  • Sets up durable power of attorney or health care proxies, which means identifying the people who are allowed to make health-related decisions on your behalf.
  • Establishes a durable power of attorney for financial matters, which grants another individual or trust company the power to act on your behalf should you become incapacitated.
  • Creates trusts for you and your beneficiaries to protect assets from creditors.
  • Sets up a living trust to carry out your wishes and minimize administrative expenses.
  • Maximizes gift and estate tax exemptions.
  • Continues, sells or transfers a business with the objective of minimizing taxes and mismanagement.


As always, thank you for your continued support, and please contact me if I may be of any assistance.

My Best,

Read my blog; Consider Total Return over yield when seeking income; in Today's Chicago Woman Magazine

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