July 2012: ACap ReCap
1. What is the Alternative Minimum Tax (AMT), and why do I have to pay it?
The AMT was designed to prevent high income taxpayers from avoiding income taxes by taking too many deductions. Deductions that many Americans rely upon to reduce their taxes such as state income taxes paid, property taxes, medical expenses, and others deductions, are all added back to calculate AMT. If you are subject to the AMT, you are responsible for your regular tax and the AMT. Unfortunately, the AMT now affects more people because the exemptions were never indexed for inflation, and Congress always makes short-term 11th hour patches to appease the voters. If you are a dual income professional family or earn over $150,000 a year, you are probably ensnarled by the AMT. One of the best and easiest ways to either avoid or minimize paying the AMT is to maximize your pretax deductions like your 401k. Any amount you contribute to your 401k is a direct reduction to your taxable income.
2. How can I improve my credit score?
Many individuals impacted by the Great Recession have seen their credit scores plummet because they have either lost their job, house, or both, and were unable to make timely payments on their bills. We all know how important it is to maintain a good credit score because employers, lenders, and landlords alike use it to assess your credibility. If you have seen your credit score decline, or are just building credit for the first time, the best way to improve your credit score is to do it over time. Despite misleading advertisements, there are no quick fixes to repair your credit. Here are some things you can do that will help improve your score the right way: make your payments on time or bring them current; set-up automatic deductions so that you don’t accidentally miss a payment; check your credit annually for errors using the only government approved website (available at www.ftc.gov); reduce your debt; keep your balances low; don’t have multiple credit cards; never default on a student loan, and if at all possible, pay off your credit cards each month.
3. How can I invest in companies like Facebook before they go public?
Facebook is one of the biggest IPO flops in recent history and is down over 50 percent from its initial offering. Notwithstanding the large erosion of wealth since its IPO, early investors in Facebook, notably private equity and venture capital firms, have still made millions. So how can you get in on the action? Unfortunately, many retail investors cannot invest in venture capital and private equity funds because their barriers to entry are very high, and they typically attract institutional clients such as foundations, endowments, and large pension funds. However, there is nothing that says you cannot be your own venture capitalist. Do you know someone who recently started a company or is thinking of expanding their existing profitable business, but is unable to obtain traditional bank financing? If you believe in this person and their product/service, then consider investing in their company by lending money at a reasonable market rate, buying shares in their firm, or both. Your investment in their firm will be less tied to the stock market, give you diversification, and of course help a small business; all good things. Who knows, it might even be the next Google.
4. What should I do first, save for child’s college, save for my retirement, or pay off my student loans?
If you are like most Americans, your annual income is finite, but your goals are infinite. All three are high priorities, but trying to find the right balance to choose which priority comes first is both a financial and emotional decision. Financially, I encourage clients to save for themselves first. Like the airline pre-departure safety message – put your mask on first before assisting your child. Your child can always borrow for college, but you can never borrow for retirement. If you yourself have student debt, chances are the interest rates are very low and the term long. I recently helped a client who has student loans at 2.7 percent for 25 years. In such cases, it makes more sense to keep the loan as long as possible at this low rate. Emotionally, the decision is not so easy. Many people are debt averse and feel compelled to pay down the low interest rate loan, even though financially it would make more sense for them to invest for their future. In such instances, one approach may be to split your contributions equally between the student debt and savings. It is important to note that we are referring to student debt and not consumer debt like credit cards. Individuals who carry credit card debt should implement an aggressive strategy to pay off the debt as quickly as possible.
5. I want to track how I spend my money. What software do you recommend?
I think keeping track of how you spend your money is an excellent decision. I always say “watch your pennies and the dollars will take care of themselves.” I don’t know who originally said that, but it is one of my favorite quotes and applies whether you are managing a large corporation or your household finances. There are a number of ways you can track your spending, and it all depends on how formal you want to be. A simple spreadsheet can be very useful to help keep track of monthly expenses and budgets, but I would encourage you to consider either Quicken or mint.com. Both Quicken and Mint are owned by Intuit and are the industry leaders in personal finance software.