December ACap ReCap
1. How will Proposition 30 impact me?
Proposition 30, which passed last month in California, has two main components. The first one affects everyone in the state by increasing sales tax by .25 percent beginning January 1, 2013. Sales tax rates vary by county, so if you purchase a $50,000 car in Los Angeles this year where the current sales tax is 8.75 percent, your sales tax would be $4,375; the new sales tax rate on that same car beginning January 1, 2013 will cost $4,500.
The second element of Proposition 30 only affects the high-earners by raising income tax rates according to your taxable income. If your taxable income is over $250,000 (single) or $500,000 (married), your tax rate will rise 1 percent; if your taxable income is over $300,000 (single) or $600,000 (married), your tax rate will rise 2 percent; and if your taxable income is $500,000 (single) or $1,000,000 (married), your tax rate will rise 3 percent. Unfortunately for many, this tax is retroactive to January 1, 2012, which means if you made estimated tax payments throughout the year based on current tax rates, you may owe more taxes still. However, the state has been kind enough not to assess a penalty for these underpayments.
2. Can I donate stocks to charity?
Yes, many charities allow you to donate stock, and I highly recommend it. It is a win-win for both you and the charity because the charity gets stock they can easily sell to raise cash and you get a deduction for the fair market value of the donated stock. In fact, donating stock can be a great risk-minimization strategy. Sometimes investors commit a large portion of their portfolios to only a few stocks they purchased years ago and which have since appreciated. These individuals recognize the need to diversify their holdings to reduce risk, but want to avoid selling the appreciated stocks and incurring huge capital gains taxes. Through a combination of tax-loss harvesting and careful management of charitable donations, one can significantly minimize and even eliminate capital gain tax liability and still get a tax deduction. Keep in mind that the benefits of donating appreciated stocks apply only to taxable accounts and stocks you have owned for at least a year. Also, it only works if you itemize deductions. Stay tuned for an upcoming article on the Financial Planning Association’s blog, which details the benefits of donating appreciated stock.
3. How much should I keep in an emergency fund?
This is a very common question, in addition to “Where should I keep my emergency cash?” How much emergency cash you should have on hand really depends on personal circumstances. Do you have a stable job? Does your income vary? Do you have a social safety net such as parents who can help you financially?
If your income is very stable and you have some type of safety net, 3 to 6 months of living expenses in emergency cash is sufficient. However, if your income is variable (like a commission-based job) and you have no financial safety net, then I recommend stowing away at least 1 year’s worth of living expenses. So, how do you determine the amount? Simply calculate your monthly living expenses and multiply it by the number of months: for example, if your monthly expenses are $6,000, 6 months of emergency cash equals $36,000. This may seem like a lot of money to give up all at once, but you don’t have to submit it all at once. I suggest breaking it down into monthly payments. For example, make a plan to save $600 a month and in 5 years you will have your entire emergency cash reserve saved up. As for where to keep your emergency cash, it should always be in a safe and secure location, such as a bank savings account that’s easily accessible. A Roth IRA is also a great place to house your emergency fund.
4. Is there anything I should do for my finances before the New Year?
Year-end is always a good time to recap, plan for the New Year, and finish time sensitive tasks. On that note, here is a quick list of things to do before year-end:
- Maximize your 401k contributions (limit is $17,000 for 2012). If you don’t have a 401k plan, I recommend starting one before the end of the year to take advantage of 2012’s contribution. If you need advice on starting a 401k, contact us and we will help you set one up.
- If you are in the high-income tax bracket, make an appointment with your tax preparer to learn how Proposition 30 and other unexpected tax increases will impact you.
- Make an appointment with an estate planner. Regardless of your wealth, it is a good idea to establish an estate plan to protect your assets. If you need a referral to a competent estate planner, contact us! We are happy to make an introduction.
- Make your Roth IRA conversions. If your income is too high for a Roth IRA contribution, read this article (Backdoor Roth IRA) on the “backdoor” Roth IRA.
- Make sure your beneficiary designations are accurate and up to date.
- Harvest gains by selling appreciated stock at currently favorable capital gains tax rates. This is one of the best ways to minimize taxes and reduce risk. Need help figuring out how to harvest gains / losses? Contact us for a free review.
- If you are over 70 ½, make your Required Minimum Distribution.
Have a question or need advice on how to manage your retirement accounts? Contact ACap Asset Management at firstname.lastname@example.org or 818-272-8511.
Ara Oghoorian, CFA, CFP® is the president and founder of ACap Asset Management, Inc., a “Fee-Only” investment management firm located in Los Angeles, CA specializing in helping doctors and physicians make sound financial decisions. Visit us at www.acapam.com