Are Your Taxes Going to Change in 2022?

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Wise investors take the “big picture” view.

Most likely, you’ve heard what’s brewing in Washington, D.C., called by one of these names.

The Build Back Better Act.

Or the $3.5 trillion budget reconciliation bill. Or the Jobs and Economic Recovery Plan for Working Families. (1)

Regardless of what name you’ve heard, one fact is clear: It is likely to be months before any action is taken.

When bills are being worked on—especially one that’s this size—it’s a good time to take a quick Civics refresher. Right now, the bill is “in committee” with both the House of Representatives and the Senate. The committees are filling in the policy details and the exact financial figures, which can be a long process. (2)

It will then be up to the House and Senate to vote on an identical version of a final bill—if both can agree to a final version. (2)

Right now, it would be hasty to make any portfolio changes based on what’s being discussed and debated. An ambitious investor would have to guess at what policies will be in the final bill, estimate the financial impact, and determine what portfolio changes should be made. That’s a tall order.

So as difficult as it may be, the best approach is to wait-and-see.

▼Download – 2021 Key Tax Information

Sources

  1. Forbes.com, August 25, 2021
  2. NPR.org, September 14, 2021

This article is for informational purposes only and is not a replacement for real-life advice, so make sure to consult your tax, legal, and financial professionals before modifying your tax strategy.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

What is a Power of Attorney and How Do I Know If I Need One?

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The point of the POA

A power of attorney (POA) is a legal instrument that delegates an individual’s legal authority to another person. If an individual is incapacitated, the POA assigns a trusted party to make decisions on his or her behalf.

There are nondurable, springing, and durable powers of attorney. A nondurable power of attorney often comes into play in real estate transactions, or when someone elects to delegate their financial affairs to an assignee during an extended absence. A springing power of attorney “springs” into effect when a specific event occurs (usually an illness or disability affecting an individual). A “durable” power of attorney allows an assignee, or agent, to act on behalf of a second party, or principal, even after the principal is not mentally competent or physically able to make decisions. Once a principal signs, or executes, a durable power of attorney, it may be used immediately, until it is either revoked by the principal or the principal dies. (1)

Keep in mind this article is for informational purposes only. It’s not a replacement for real-life advice. Make sure to consult your legal professional so you can better understand what type of powers of attorney is a best fit for your situation.

What the POA allows in financial terms. Financially, a Power of Attorney is a tremendously useful instrument. An agent can pay bills, write checks, make investment decisions, buy or sell real estate or other hard assets, sign contracts, file taxes, and even arrange the distribution of retirement benefits.

Advanced Healthcare Directives and Living Wills

Some illnesses can eventually rob people of the ability to articulate their wishes, and this is a major reason why people opt for a Health Care Power of Attorney (HCPOA) or a living will. There are differences between the two.

A Health Care Power of Attorney (also called a “healthcare proxy”) allows an agent to make medical decisions for a principal, should they become physically or mentally incapacitated. A living will gives an assignee similar powers of decision, but this advanced directive only applies when someone faces certain death. The assignee has the authority to carry out the wishes of the incapacitated party.

Would you like to learn more?

It may be time to meet with an attorney who specializes in these issues. You can find one with the help of an insurance or financial professional who has assisted families with legacy planning.

▲ Download

This checklist will help you determine what issues to consider when reviewing your estate plan.

Sources

  1. AgingCare.com, August 23, 2021

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Will There Be a Big Cost of Living Adjustment for Social Security Benefits in 2022?

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The news keeps getting better for Social Security recipients.

It’s now projected that benefits will increase 6.1% in 2022, up from the 4.7% forecast just two months ago. That would be the most significant increase since 1983. (1,2)

It’s all about inflation. Social Security cost of living adjustments (COLA) are based on the consumer price index, which rose 5.4% in June — its largest 12-month increase since 2008. The official announcement is expected in October and, once it’s confirmed, the revised payment will go into effect in January 2022. (3)

More than 65 million Americans receive Social Security, and the annual cost of living adjustments are designed to help recipients manage higher costs. At the start of 2021, recipients saw a 1.3% increase. (4)

The average monthly benefit is $1,544 for retired workers. So a 6.1% increase amounts to $94 more a month. That might not be quite enough for a car payment, but it’s double the 3% raise being given to U.S. workers in 2021. (4,5)

Social Security can be confusing. One survey found only 6% of Americans know all the factors that determine the maximum benefits someone can receive. If you have any questions, please reach out. We have a number of resources at our fingertips that you may find helpful. (6)

Claiming Social Security – decision tree

This decision tree is designed to help individuals think through some of the factors related to when to take Social Security benefits. Working, having other sources of income, expected longevity, preserving a portfolio and trying to maximize benefits are important considerations. The possibility of benefits for family is not included; individuals should contact the Social Security Administration if they have questions about their personal situation.

Sources

  1. Fortune.com, July 15, 2021
  2. SeniorsLeague.org, May 12, 2021
  3. InvestmentNews.com, July 13, 2021
  4. SSA.gov, June 2021
  5. SHRM.org, June 2021
  6. FinancialAdvisorIQ.com, July 19, 2021
  7. https://am.jpmorgan.com/us/en/asset-management/protected/adv/insights/retirement-insights/guide-to-retirement/

The forecasts for Social Security benefits are based on assumptions, subject to revision without notice, and may not materialize.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

What to Be Thinking About In Preparation for Retirement

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How do you picture your future?

If you are like many contemplating retirement, your view is likely pragmatic compared to that of your parents. That doesn’t mean you must have a “plain vanilla” tomorrow. Even if your retirement savings are not as great as you would prefer, you still have great potential to design the life you want.

With that in mind, here are some things to think about.

What do you absolutely need to accomplish?

If you could only get four or five things done in retirement, what would they be? Answering this question might lead you to compile a “short list” of life goals, and while they may have nothing to do with money, the financial decisions you make may be integral to achieving them.

What would revitalize you?

Some people retire with no particular goals at all, and others retire burnt out. After weeks or months of respite, ambition inevitably returns. They start to think about what pursuits or adventures they could embark on to make these years special. Others have known for decades what dreams they will follow … and yet, when the time to follow them arrives, those dreams may unfold differently than anticipated and may even be supplanted by new ones.

In retirement, time is really your most valuable asset. With more free time and opportunity for reflection, you might find your old dreams giving way to new ones. You may find yourself called to volunteer as never before or motivated to work again in a new context.

Who should you share your time with?

Here is another profound choice you get to make in retirement. The quick answer to this question for many retirees would be “family.” Today, we have nuclear families, blended families, extended families; some people think of their friends or their employees as family. You may define it as you wish and allocate more or less of your time to your family as you wish (some people do want less family time when they retire).

Regardless of how you define “family” or whether or not you want more “family time” in retirement, you probably don’t want to spend your time around “dream stealers.” They do exist. If you have a grand dream in mind for retirement, you may meet people who try to thwart it and urge you not to pursue it. (Hopefully, they are not in close proximity to you.) Reducing their psychological impact on your retirement may increase your happiness.

How much will you spend?

We can’t control all retirement expenses, but we can control some of them. The thought of downsizing may have crossed your mind. While only about 10% of people older than 60 sell homes and move following retirement, it can potentially lead to more manageable mortgage payments. You could also lose one or more cars (and the insurance that goes with them) and live in a neighborhood with extensive, efficient public transit. Ditching landlines and premium cable TV (or maybe all cable TV) can bring more savings. Garage sales and donations can have financial benefits as well as helping you get rid of clutter, with either cash or a federal tax deduction.1

This article is for informational purposes only and is not a replacement for real-life advice, so make sure to consult your tax, legal, and accounting professionals before modifying your overall tax strategy.

Could you leave a legacy?

Many of us would like to give our kids or grandkids a good start in life, but given some of the economic realities of today, leaving an inheritance can be trickier than many realize.

Consider a couple with, for example, $285,000 in retirement savings. If that couple follows the 4% rule, the old maxim that you should withdraw about 4% of your retirement savings per year, subsequently adjusted for inflation – then you are talking about $11,400 withdrawn to start. When you combine that $11,400 with Social Security and other potential investment income, that couple isn’t exactly rich. Sustaining and enhancing income becomes the priority, and legacy preparations may have to take a backseat. On the other hand, a recent survey showed that 92% of all respondents believe it is important to leave money and other assets to their children.2

How are you preparing for retirement?

This is the most important question of all. If you feel you need to prepare more for the future or reexamine your existing strategy in light of recent changes in your life, conferring with a financial professional experienced in retirement approaches may be a smart move.

Changes in lifestyle

As households transition into retirement, time that had been spent working now is available for other pursuits. Individuals often enter retirement having spent too little time determining how they plan to spend this time – and run the risk of spending valuable time and money pursuing activities that may not prove to be as fulfilling as they had anticipated. For those who continue to work, they work fewer hours per day. Watching more television is a concerning trend. While a slightly higher percentage of people volunteer at older ages, it is important to note that the time spent volunteering remains about the same.

Sources

  1. IRS.gov, March 14, 2019
  2. Bankofamerica.com, Spring 2019
  3. https://am.jpmorgan.com/us/en/asset-management/protected/adv/insights/retirement-insights/guide-to-retirement/#

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

What Does Inflation Mean For Your Investments?

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In August of 2020, the Fed announced that it is willing to allow inflation to run higher than normal in order to support the labor market and broader economy. This major policy shift allows inflation to run above the Fed’s 2% goal for some time before the Fed would consider increasing short-term interest rates in an attempt to combat higher prices. (1)

These robust changes to the Fed’s long-standing inflation policy further illustrates the importance of understanding how inflation is reported and how it can affect your investments.

What Is Inflation?

Inflation is defined as an upward movement in the average level of prices. Each month, the Bureau of Labor Statistics releases a report called the Consumer Price Index (CPI) to track these fluctuations. It was developed from detailed expenditure information provided by families and individuals on purchases made in the following categories: food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other groups and services. (2)

How Applicable Is the CPI?

While it’s the commonly used indicator of inflation, the CPI has come under scrutiny. For example, the CPI rose 1.4 percent for the 12-months ending in January 2021 – a relatively small increase. However, a closer look at the report shows movement in prices on a more detailed level. Used car and truck prices, for example, rose 10 percent during those 12 months. (3)

As Inflation Rises and Falls, Three Notable Effects are Observed:

First, inflation reduces the real rate of return on investments. So, if an investment earned 6 percent for a 12-month period, and inflation averaged 1.5 percent over that time, the investment’s real rate of return would have been 4.5 percent. If taxes are considered, the real rate of return may be reduced even further. (4)

Second, inflation puts purchasing power at risk. When prices rise, a fixed amount of money has the power to purchase fewer and fewer goods.

Third, inflation can influence the actions of the Federal Reserve. If the Fed wants to control inflation, it has various methods for reducing the amount of money in circulation. Hypothetically, a smaller supply of money would lead to less spending, which may lead to lower prices and lower inflation.

Empower Yourself with a Trusted Professional.

When inflation is low, it’s easy to overlook how rising prices are affecting a household budget. On the other hand, when inflation trends higher, it may be tempting to make more sweeping changes in response to increasing prices. The best approach may be to reach out to your financial professional to help you develop an investment strategy that takes both possible scenarios into account.

Average Inflation Targeting

This page shows inflation expectations and the headline personal consumption deflator over time. The Federal Reserve’s policy framework of average inflation targeting seeks to push up inflation expectations (left) and will allow for a period of inflation over their 2% target, indicating that they are more concerned about the prospect of too little inflation, rather than too much. (5)

Sources

  1. CNBC.com, August 27, 2020
  2. Bureau of Labor Statistics, 2021
  3. InflationData.com, 2021
  4. This is a hypothetical example used for illustrative purposes only. It is not representative of any specific investment or combination of investments. Past performance does not guarantee future results.
  5. https://am.jpmorgan.com/us/en/asset-management/protected/adv/insights/market-insights/guide-to-the-markets/

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

How the Recent Rally in Oil Prices Could be a Hopeful Sign for the Economy and Investors

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At this time last year, it was still unknown that a deadly global pandemic was on the rise, eventually stalling economic growth and sending crude oil prices into negative territory. But recently, oil prices have surged, with crude hitting highs not seen since before the pandemic.

A Hopeful Sign

Recent production cuts and a belief in the potential for underlying economic growth are spurring a rally. Although the demand for oil is still lower than normal, many investment professionals harbor hopes of a speedier than expected economic recovery thanks to the ongoing global vaccination effort. (1)

Oil Prices and the Economy

The price of oil can often influence the costs of other production and manufacturing across the United States. For example, there is a direct correlation between the cost of gasoline or airplane fuel to the price of transporting goods and people. A drop in fuel prices means lower transport costs and cheaper airline tickets. (2)

The Ultimate Lead Indicator?

Some investment professionals view the value of oil as a lead indicator. Whether or not this will remain true for the future, it can be helpful to remember that lead indicators should never be seen as infallible. Abrupt and unexpected changes will prompt lead indicators to rapidly recalibrate their expectations for the future.

Sources

  1. Barrons.com, February 8, 2021
  2. Investopedia.com, January 8, 2021

These forecasts or forward-looking statements are based on assumptions, subject to revision without notice, and may not materialize.

Investing involves risks, and investment decisions should be based on your own goals, time horizon and tolerance for risk. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax, or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Steps to You Can Take to Guard Against Identity Theft

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America is enduring a data breach problem.

As many workers traded in the office for remote work, data security has been a focus for the public and private sectors. Between robocalls pitching low-cost health insurance, pretending to be the I.R.S., or offering “work from home” opportunities, the pandemic has seen scammers getting more creative than they’ve ever been. (1)

Tax time is prime time for identity thieves.

They would love to get their hands on your 1040 form, and they would also love to claim a phony refund using your personal information. You may realize you’ve been the victim of tax fraud if you can’t e-file your tax return because of a duplicate Social Security number or if you receive a notice from the I.R.S. that talks about owing taxes for a year you haven’t filed. (2)

Just make sure when you e-file that you use a secure Internet connection. When you e-file, you aren’t putting your Social Security number, address, and income information through the mail. You aren’t leaving Form 1040 on your desk at home (or work) while you get up and get some coffee or go out for a walk. If somehow you just can’t bring yourself to e-file, then think about sending your returns via Certified Mail. Those rough drafts of your returns where you ran the numbers and checked your work? Shred them.

The I.R.S. doesn’t use unsolicited emails to request information from taxpayers. If you get an email claiming to be from the I.R.S. asking for your personal or financial information, report it to your email provider as spam. (2)

Use secure Wi-Fi.

Avoid “coffee housing” your personal information away – never risk disclosing financial information over a public Wi-Fi network. (Broadband is susceptible, too.) It takes little sophistication to do this – just a little freeware.

Sure, a public Wi-Fi network at an airport or coffee house is password-protected – but if the password is posted on a wall or readily disclosed, how protected is it? A favorite hacker trick is to sit idly at a coffee house, library, or airport and set up a Wi-Fi hotspot with a name similar to the legitimate one. Inevitably, people will fall for the ruse, log on, and get hacked.

Look for the “https” & the padlock icon when you visit a website.

Not just http, https. When you see that added “s” at the start of the website address, you are looking at a website with active SSL encryption, and you want that. A padlock icon in the address bar confirms an active SSL connection. For really solid security when you browse, you could opt for a VPN (virtual private network) service which encrypts 100% of your browsing traffic. (3)

However, be especially careful when clicking on any links that you receive from an unknown sender. Many criminals have caught up, and use sites that seem valid by using the “https” prefix. Look to see what the email is asking for (for example, demanding payment), and verify this by sending a separate email or calling the supposed contact to verify the validity of the email. Look for any misspelled words or incorrect links in the email. If you’re more technically savvy, you can look at the original version of the email to see if it actually originated from somewhere else. (3)

Check your credit report.

You may have been the victim of identity theft or fraud, and not even realize it, until it shows up on your credit reports. Thanks to the Fair Credit Reporting Act (FCRA) you are entitled to one free credit report per year from each of the big three agencies: Experian, TransUnion, and Equifax. This year, because of the increased issues with identity theft and fraud during COVID-19, these three agencies are also allowing weekly credit checks from now until April 2021. Checking your credit report weekly will not affect your ability to order your free annual credit report.4,5

Don’t talk to strangers.

Broadly speaking, that is very good advice in this era of identity theft. If you get a call or email from someone you don’t recognize – it could tell you that you’ve won a prize; it could claim to be someone from the county clerk’s office, a pension fund, or a public utility – be skeptical. Financially, you could be doing yourself a great favor.

Sources

  1. FTC.gov, 2021
  2. IRS.gov, November 25, 2021
  3. NextGov.com, June 19, 2019
  4. Consumer.FTC.gov, 2021
  5. AnnualCreditReport.com, 2021

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Retirement Questions to Consider That Have Nothing to Do With Money

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Retirement Planning is Not Entirely Financial

Your degree of happiness in your “second act” may depend on some factors that don’t come with an obvious price tag. Here are some non-monetary factors to consider as you plan your retirement.

What Will You Do With Your Time?

Too many people retire without any idea of what their retirement will look like. They leave work, and they cannot figure out what to do with themselves, so they grow restless. It’s important to identify what you want your retirement to look like and what you see yourself doing. Maybe you love your career, and can’t imagine not working during your retirement. There’s no hard and fast rule to your dream retirement, so it’s important to be honest with yourself. An EBRI retirement confidence survey shows that almost 74% of retirees plan to work for pay, whereas just 27% of retirees report that they’ve actually worked for pay. (1)

While this concept doesn’t have a monetary value, having a clear vision for your retirement may help you align your financial goals. It’s important to remember that your vision for retirement may change—like deciding you don’t want to continue working after all.

Where Will You Live?

This is another factor in retirement happiness. If you can surround yourself with family members and friends whose company you enjoy, in a community where you can maintain old friendships and meet new people with similar interests or life experience, that is a definite plus. If all this can occur in a walkable community with good mass transit and senior services, all the better. Moving away from the life you know to a spread-out, car-dependent suburb where anonymity seems more prevalent than community may not be the best decision for you.

How Are You Preparing to Get Around in Your Eighties and Nineties?

The actuaries at Social Security project that the average life expectancy for men is 84 years old, and the life expectancy for women is 86.5 years. Some will live longer. Say you find yourself in that group. What kind of car would you want to drive at 85 or 90? At what age would you cease driving? Lastly, if you do stop driving, who would you count on to help you go where you want to go and get out in the world? (2)

How Will You Keep Up Your Home?

At 45, you can tackle that bathroom remodel or backyard upgrade yourself. At 75, you will probably outsource projects of that sort, whether or not you stay in your current home. You may want to move out of a single-family home and into a townhome or condo for retirement. Regardless of the size of your retirement residence, you will probably need to fund minor or major repairs, and you may need to find reliable and affordable sources for gardening or landscaping.

These are the non-financial retirement questions that no pre-retiree should dismiss. Think about them as you prepare and invest for the future.

▲Working for Pay in Retirement

“Nearly 3 in 4 workers (74 percent) plan to work for pay in retirement, compared with just 27 percent of retirees who report they have actually worked for pay in retirement. In fact, the RCS has consistently found that workers are far more likely to plan to work for pay in retirement than retirees are to have actually worked (Figure 3). In the 2019 RCS, among retirees who worked for pay in retirement reported why they worked for pay in retirement and almost all gave a positive reason for doing so, saying they continued to work because they wanted to stay active and involved (91 percent), they enjoyed working (89 percent), or a job opportunity came along (58 percent). a Retirees could have retired for more than one reason. However, they reported that financial reasons also played a role in that decision, such as wanting money to buy extras (75 percent), needing money to make ends meet (37 percent), a decrease in the value of their savings or investments (28 percent), or keeping health insurance or other benefits (16 percent). *Retirees could have worked for pay in retirement for more than one reason.” (1)

Sources

  1. EBRI/Greenwald Retirement Confidence Survey, 2020
  2. SSA.gov

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

12 Tax Scams and Schemes To Watch Out For This Tax Season (And Throughout The Year)

elderly man and woman sitting on couch using laptop computers

Photo by Tima Miroshnichenko on Pexels.com

Year after year, certain taxpayers resort to schemes in an effort to put one over on the Internal Revenue Service (I.R.S.). These cons occur year-round, not just during tax season. In response to their frequency, the I.R.S. has listed the 12 biggest offenses – scams that you should recognize, schemes that warrant penalties and/or punishment.

1. Phishing

If you get an unsolicited email claiming to be from the I.R.S., it is a scam. The I.R.S. never reaches out via email, regardless of the situation. If such an email lands in your inbox, forward it to phishing@irs.gov. You should also be careful with sending personal information, including payroll or other financial information, via an email or website. (1,2)

2. Phone scams

Each year, criminals call taxpayers and allege that said taxpayers owe money to the I.R.S. The Treasury Inspector General for Tax Administration says that over the last five years, 12,000 victims have been identified, resulting in a cumulative loss of more than $63 million. Visual tricks can lend authenticity to the ruse: the caller ID may show a toll-free number. The caller may mention a phony I.R.S. employee badge number. New spins are constantly emerging, including threats of arrest, and even deportation. (1,2)

3. Identity theft

The I.R.S. warns that identity theft is a constant concern, but not just online. Thieves can steal your mail or rifle through your trash. While the I.R.S. has made headway in terms of identifying such scams when related to tax returns, and plays an active role in identifying lawbreakers, the best defense that remains is caution when your identity and information are concerned. (1,2)

4. Return preparer fraud

Almost 60% of American taxpayers use a professional tax preparer. Unfortunately, among the many honest professionals, there are also some con artists out there who aim to rip off personal information and grab phantom refunds, so be careful when making a selection. (1,2)

5. Fake charities

Some taxpayers claim that they are gathering funds for hurricane victims, an overseas relief effort, an outreach ministry, and so on. Be on the lookout for organizations that are using phony names to appear as legitimate charities. A specious charity may ask you for cash donations and/or your Social Security Number and banking information before offering a receipt. (1,2)

6. Inflated refund claims

In this scenario, the scammers do prepare and file 1040s, but they charge big fees up front or claim an exorbitant portion of your refund. The I.R.S. specifically warns against signing a blank return as well as preparers who charge based on the amount of your tax refund. (1,2)

7. Excessive claims for business credits

In their findings, the I.R.S. specifically notes abuses of the fuel tax credit and research credit. If you or your tax preparer claim these credits without meeting the correct requirements, you could be in for a nasty penalty. (1,2)

8. Falsely padding deductions on returns

Some taxpayers exaggerate or falsify deductions and expenses in pursuit of the Earned Income Tax Credit, the Child Tax Credit, and other federal tax perks. Resist the temptation to pad the numbers and avoid working with scammers who pressure you to do the same. (1,2)

9. Falsifying income to claim credits

Some credits, like the Earned Income Tax Credit, are reported by scammers claiming false income. You are responsible for what appears on your return, so a boosted income can lead to big penalties, interest, and back taxes. (1,2)

10. Frivolous tax arguments

There are seminar speakers and books claiming that federal taxes are illegal and unconstitutional and that Americans only have an implied obligation to pay them. These and other arguments crop up occasionally when people owe back taxes, and at present, they carry little weight in the courts and before the I.R.S. There’s also a $5,000 penalty for filing a frivolous tax return, so these fantasies are best ignored. (1,2)

11. Abusive tax shelters

If it sounds too good to be true, it usually is, and that’s especially true of complicated tax avoidance schemes, which attempt to hide assets through a web of pass-through companies. The I.R.S. suggests that a second opinion from another financial professional might help you avoid making a big mistake. (1,2)

12. Offshore tax avoidance

Not all taxpayers adequately report offshore income, and if you don’t, you are a lawbreaker, according to the I.R.S. You could be prosecuted or contend with fines and penalties. (1,2)

Watch out for these ploys – ultimately, you are the first defense against a scam that could cause you to run afoul of tax law.

Sources

  1. irs.gov/newsroom/irs-wraps-up-dirty-dozen-list-of-tax-scams-for-2018-encourages-taxpayers-to-remain-vigilant
  2. forbes.com/sites/kellyphillipserb/2018/03/22/irs-warns-on-dirty-dozen-tax-scams/

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

What is the GameStop Situation all About?

Lafayette, US – December 27, 2016: GameStop Strip Mall Location. GameStop is a Video Game and Electronics Retailer IV

As a long term investors we do not spend too much time on market anomalies, let alone individual stocks that fall outside long-term asset allocation principles, but this seems to have taken over the headlines last week. Rarely do stock market quirks become mainstream news; in this case, it carried over to market sentiment to some extent and definitely raised trading volumes.

What Happened?

GameStop is a video game retailer, and an example of a stock that has been a favorite recent target of short-sellers. This is largely because of skepticism about the company’s long-term business fundamentals (the stock was selling at under $5/share). Like many brick-and-mortar based retailers, Covid has accelerated the movement to online commerce, and has punished these types of companies—putting their future in greater doubt. Taking a step back, selling a stock short is practically the most negative view an investor can take, since it’s the polar opposite of owning it. It involves borrowing the shares from another party, and selling them in advance, so in essence hoping for a sharp downturn to re-buy (‘cover’) the position later at a lower price. So it’s like buy low, sell high, excepted executed in reverse. Investors like hedge funds (often in long/short or market neutral strategies) take short positions in companies for reasons like weak financial prospects, over-optimistic expectations, or even potential fraud. Naturally, this can be risky, especially if extra leverage is used. Such investors may even convey bad news about a company to weaken its stock price, which sounds odd at first thought, but really is not that much different than Warren Buffet talking about his admiration for Coca-Cola—hoping the stock price goes up.

Based on reports, it seems a group of retail investors (presumably video game fans, who may have taken the GameStop assault personally) decided to take a stand against ‘greedy’ hedge funds and punish them for taking advantage of these troubled companies. In that sense, this has been described as a morality play (and/or these folks have given hedge funds too much credit, as fund failures are far more common than successes, but not as publicized). They’ve gathered support on Reddit, an online news aggregator and discussion site, as well as Twitter and other forums. By buying large amounts of the stock in aggregate, as well as that of a few other market short targets, like BlackBerry, AMC, and Bed Bath & Beyond, the group hoped to create a ‘short squeeze’. This happens when demand for owning long positions turns the tables on and overwhelms short position holders, pushing prices sharply higher, and creating huge losses for the shorts. Short squeezes can result in dramatic market movements, but have been a common practice for centuries, and often involving well-known investors. Similar to past cases, the result this time has been a sharp increase in volatility and quick and extreme price jumps for several of these companies. It also creates a feedback loop where the more (unjustifiably) expensive a stock gets, the greater the interest and potential profit in shorting it—if the shorts can hold on long enough, suffering losses in the meantime. Shorting is a risky bet, since a stock can fall to a limit of $0, but losses are theoretically unlimited (the stock price can grow to the sky, and the shorting party has to return the borrowed shares at some point, regardless of price).

In addition, this has been described as the mobilization of a populist effort to ‘re-democratize’ Wall Street. While this sounds dramatic, the backdrop is favorable to something like this happening. With brokerages offering easy-to-use platforms and commission-free trades, and some investors with a lot of free time on their hands due to Covid. This may have turned some trading sites into a ‘gaming’ interface of their own, rather than a vehicle to allocate investments for conventional reasons. It’s been suggested that such activity emerging may be signs of a broader bullishness in equity markets without fundamental basis, but in reality these events have occurred before over the years as one-offs rather than part of larger trends. (It happened with trading in ‘volatility’ strategies a few years ago and famously with silver in 1980.) This type of event is naturally easier with smaller, cheap companies, than large ones with strong mainstream demand. AMC has already taken advantage of the new ‘popularity’ in its stock by issuing more equity.

Will the Fed or SEC Impose Additional Regulations?

There have been calls for the Fed to raise Reg T margin requirements to stem this speculative behavior, at least via leverage, but brokerage firms have put on their own limits in some cases. (Bans on GameStop and other stocks have already been implemented by Robinhood, a favored broker for small investors, resulting in its own backlash from those opposing restrictions. A credit crunch on their part seemed to be partially behind it.) Unless this behavior becomes much more widespread and systematic, affecting overall U.S. financial stability, this is out of the Fed’s mandate. The SEC is investigating under the premise that this could be considered organized stock manipulation (through the online messages), along the same lines as a classic ‘pump and dump’ scheme. Insider trading has also been mentioned, but that seems more of a longshot, unless actual company insider information was shared and used. Time will tell whether a formal criminal case of any kind occurs.

This brings up a variety of potential issues, though, including how to regulate (or not regulate) this type of market activity. Many retail investors seem to see this as an ‘us versus them’ moment. On a deeper level, what is considered a fair market? Should smaller investors be protected from themselves? Or, should they be allowed to take the same risks as institutions? Who gets the blame if this turns out badly? How much leeway to give securities markets has been a long-standing question for much of the past century and prior. More regulation tends to pop up if things end badly, which of course they could here, if small investors end up losing their shirts. There is talk again of regulating the shorting of stocks, but the counterargument is that short sellers play an important economic role in efficient market price discovery and keeping supply/demand conditions in balance. Removing these bearish folks could create even more unpredictable stock price behavior, and infuse a tilt toward perpetual bullishness. Of course, this could have its own set of eventual problems.

The 3 Legs of Successful Long Term Investing

During times of market volatility it is important as long term investors to remember the three legs of successful investing:

  1. Proper asset allocation
  2. Rebalancing
  3. Keeping risk below maximum risk tolerance

Sources

  1. LSA Portfolio Analytics