Skip to content

Yearend tax planning

December 1, 2016

Here are some last minute maneuvers you can do to save taxes this year. What next year will bring is anyone’s guess. My advice is to take the benefits when you can.

  • All planning starts with a projection. Prepare one now to see where you stand
  • If you will be subject to the Alternative Minimum Tax, try to take some steps to either get out of it or take advantage of it. If in it, don’t pay any more state or real estate taxes which will not give you a benefit; instead make the payment the beginning of January if possible. If you cannot avoid the AMT, consider accelerating income that will be taxed at the lower AMT bracket such as cashing in long held U.S. Savings Bonds, accelerating the receipt of income you normally would receive in January, taking a distribution from your IRA or converting all or part of your IRA to a Roth IRA or selling stocks to realize a gain and then buying them back to establish a higher basis
  • If you are eligible for traditional or Roth IRA contributions, consider making the contribution sooner rather than later to start the tax-deferred or tax-free income stream
  • If you have a business or receive income subject to self-employment tax, consider opening a 401k or Keogh account on or before December 31, 2016. Note you can delay opening a SEP as late as the due date (including extensions) for your 2016 tax return. Contributions to all three plans do not have to be made until sometime in 2017 (check with your tax advisor for the dates)
  • Accelerate as many deductions as possible to get the benefit this year rather than next year. One effective way is to donate appreciated stock to a donor-advised fund (DAF). You will get a deduction for the full value of the stock and not have to recognize the income. You can then recommend that the DAF makes contributions to your favorite charities in 2017 or later
  • If you own stock with losses, you can sell them to realize the loss. If you buy them back within 30 days (before or after the sale), you will have a “wash sale” and cannot deduct the loss. A suggestion is to sell and then buy (immediately) an ETF that is similar to the stocks you sell. This will provide a comparable market risk. After the 30-day period, you can reverse the transactions. An example is to sell individual healthcare stocks, and buy a healthcare ETF
  • If you have realized short-term gains, try to sell stocks with losses to shelter them. The best is to sell stock with long term losses. This will net out and these losses won’t offset long term gains in a later year
  • If you own mutual funds that will declare year-end capital gain dividends in December without making an offsetting distribution, consider selling them now!
  • If you want to pass some wealth to others that will be subject someday to estate taxes if retained by you, tax-free gifts of $14,000 per person can be made up until December 31. The $14,000 is doubled if you have a consenting spouse. There is no income tax benefit to this, but it will remove this money and any future earnings and appreciation from your eventual estate
  • If you were required to make estimated tax payments and did not, you should consider taking an IRA distribution and having the funds applied to withholding tax.
  • If you do not want to treat this as a taxable distribution, repay the gross amount to the IRA within 60 days designating it as a tax-free rollover. Note that such distributions can only be done once in a 365 day period
  • Owners of businesses with more than $1 million profits should consider a Captive Insurance Company deduction under IRC§ 831(b)

The above are suggestions you can consider. Before you do anything, meet with your tax advisor to make sure the planning is effective for your situation.

Fidel Castro and Collecting History

November 29, 2016

I collect philatelic envelopes (called covers) postmarked on the day of an historic event. I have collected these almost since I started collecting stamps. This is a branch of first day cover collecting which are envelopes that bear stamps that were postmarked on the day they were issued. I collected historic covers when Fidel Castro addressed the United Nations General Assembly on April 22, 1959 and remember that day clearly.

I was in high school and had mid-term exams that day. Between a morning and afternoon exam I took the subway from my school in the Bronx to the U.N. Building. I had arranged for a pass to be able to enter the building to go to the post office that was in the basement to mail my envelopes. At that time I had a mail order business selling these types of covers and knew the people that could arrange this. I flashed my pass and walked in the main entrance in front of more armed police than I had ever seen before. I dropped off my envelopes and left to go back to take my second exam of the day.

The envelopes had a two color letterpress printed Cuban flag with the appropriate inscription for Castro’s visit. The zinc cut was lent to me by Dr. and Mrs. H. A. Fraenkel, publishers of Ayal albums who had befriended me and were good mentors for my growing cover business.

During that period I made many such current events covers. I also published and sold my own brand of first day covers. I have long ago abandoned the cover business but not the collecting of such covers. Mainly I buy ones I like not seeking or wishing for any completeness. For many years I had an artist friend prepare illustrations that I printed for selected events and occasionally gave some to friends that are collectors or who I think would appreciate having them. The artist, Don Bloom, passed away earlier this year and I miss his friendship and talent and am not sure in what way I will continue my collection of self-published covers.

To encourage people to collect these interesting covers I will send a bunch at no charge if you send me a self-addressed 9×12 envelope with $1.36 postage. I will include Inauguration Day covers for Presidents Reagan, Bush 43, and Obama and a cover when Yogi became manager of the Yankees in 1984. Fold it and mail the envelope to Edward Mendlowitz, CPA, c/o WithumSmith+Brown, PC, One Spring St., 4th Floor, New Brunswick, NJ 08901.


November 22, 2016

Thursday is Thanksgiving – a family oriented holiday and a time for solemn reflection. A friend, Bob Dilenschneider, sent me his annual Thanksgiving message and he is allowing me to share it with you. Enjoy it as I did.

“The presidential election is now behind us and the nation is moving toward the Thanksgiving holiday. To mark this important occasion we send this Thanksgiving Message, as has been our tradition for more than 25 years.

There is much to be thankful for.

Consider offering thanks to:

  • The hundreds of thousands of men and women who serve in our Armed Forces and who work every day—many in extremely dangerous circumstances—to ensure our safety and make this holiday possible;
  • The legions of emergency workers and first responders who toil night and day on health, disaster and other critical issues;
  • Our police officers and firefighters, who protect us at every turn;
  • The thousands of educators and administers who work for very low pay to prepare our young people for the future.

These four examples—our men and women in uniform, our emergency workers, our cops and firefighters, and our educators, together with the generosity of the American people—speak to the American character. The men and women who have stepped forward are unsung heroes for us all.

We owe them a lot.

Now, some facts about Thanksgiving:

  • Thanksgiving is celebrated every year on the fourth Thursday in November. The first Thanksgiving was celebrated by the Pilgrims in 1621. It was not celebrated again for 55 years. Later, President George Washington proclaimed Thursday, November 26, 1789, as a day of “public thanksgiving and prayer,” establishing a non-sectarian tone for the day and stressing the political and moral blessings that make American self-government possible.
  • New York adopted a day of Thanksgiving in 1817 as an annual celebration, and in 1863 President Abraham Lincoln designated a national day of Thanksgiving. This year marks the 152nd anniversary of Lincoln’s Proclamation.
    There are some 24 million U.S. residents of English ancestry as of 2015—some of the 650,000 living in Massachusetts may represent descendants of the Plymouth colonists.
  • There are 6,500 members of the Wampanoag American Indian tribal grouping as of 2010, half of whom resided in Massachusetts.
  • Among the foods served at the first Thanksgiving were waterfowl, venison, fish, lobster, clams, berries, fruit, pumpkin, and squash.
  • 243 million: The number of turkeys raised in the U.S. in 2016, up 4 percent from 2015.
  • There were 65,975 supermarkets and other grocery (except convenience) stores in the U.S. in 2014; 3,109 baked goods stores and 2,798 fruit and vegetable markets.
  • The forecasted weight of cranberries produced in the U.S. in 2016: 859 million pounds; the total weight of sweet potatoes produced by major sweet potato producing states in 2015: 3.1 billion pounds.

Melanie Kirkpatrick, former deputy editor of The Wall Street Journal editorial page, makes an important statement about this holiday in her new book Thanksgiving: The Holiday at the Heart of the American Experience:

“Thanksgiving is at the heart of the American experience. It is intertwined with seminal moments in our history—the arrival of the early European settlers, the Revolutionary War, the Civil War, the westward expansion, the influx of immigrants…Nearly four hundred years after the First Thanksgiving, gratitude is still the byword of the day. On the fourth Thursday of November, most Americans, believers and non-believers, take seriously the custom of pausing to give thanks. This is the essential meaning of the Thanksgiving holiday.”

Thanksgiving! We all have a lot to be thankful for.

Enjoy the day.

– Bob Dilenschneider”

Robert L. Dilenschneider is the Founder and Principal of The Dilenschneider Group, Inc., Strategic Communications Counselors.

Numbers don’t lie, but some may fib a little

November 17, 2016

This was written by a friend, Allen Appel, for his community’s publication, and is presented with his permission. It is right on the mark, reflects my views and I could not have said it any better. Enjoy!

Any foods that diet gurus declare to be unhealthy are taboo in our home. My wife won’t bring them into the house because she would like to stick around for as long as possible and she values my company. In order to get through our doors, a product must carry documentation including at least one of the following qualifiers: sugar-free, no sugar added, fat-free, reduced-fat, caffeine-free, low-sodium, low-calorie, or “lite,” although I have no idea what “lite” actually means.

So one day a few months ago I was amazed when she was unpacking the groceries to see that she’d brought home a package of muffins. Our home is a temple where worshipers practice gustatory restraint. How could she desecrate that temple by admitting a package of killer carbs? Did she think that just because the package had a kosher symbol on it that all the bad stuff had been removed?

She put away the last freezer item, a container of fat-free, no-sugar-added ice cream, and noticed that I was still standing there. She traced the imaginary line leading from my eyeballs to the counter and realized that I was staring at the muffins. Without even waiting to be asked, she went right into her explanation.

“Every night after dinner,” she began, “we have coffee. I have a couple of pieces of whole grain flatbread with mine, you have three sugar-free cookies with yours. I got bored having whole grain flatbread for dessert every single night. I needed a change. I was sure you would welcome a change from those sugar-free cookies you have night after night. So I got these muffins. They’re sugar-free and they’re not too high in calories. In fact, one muffin has no more calories than your three cookies.”

I was skeptical, so I picked up the package and tried to read the label. Why do they put all the important information on food containers into such small print? In order to read it I had to get out my magnifying glass.

Yes, it was sugar-free. Okay, that was one thing in its favor. At least it wouldn’t wreak havoc with my A1C. Under “Nutrition Facts” it stated that a serving contained 170 calories. Three of my sugar-free cookies total 130 calories. I could have argued that 170 is more than 130 and, therefore, one muffin did have more calories than three of my cookies but, in the spirit of the presidential polling season, I ignored the disparity and considered the two numbers to be in a statistical tie.

Some other numbers on the label, however, I found impossible to reconcile. The serving size was defined as 2 oz. The net weight of the package was 15 oz. The package held six muffins. Even the Wizard of Oz couldn’t divide 15 oz. by 2 oz. and come up with a quotient of 6. Were the basic rules of arithmetic changed while I wasn’t paying attention? Had I somehow slipped into an alternate universe where mathematical rules are arbitrary? I re-examined the label, passing the magnifying glass slowly over each line. There had to be some explanation. Then I saw it, the key to unraveling the mystery. The figure it showed as “Servings per Container” was 7.5. In order for there to be 7.5 servings in the package, each serving would have to consist of just 4/5 of a muffin.

Silly me! I had assumed that one muffin equaled one serving. I guess I was wrong to think logically. But it was understandable that I should make such a mistake. After all, when I went to a diner and ordered coffee and a muffin I was sometimes served only 4/5 of a cup, but never 4/5 of a muffin. I’ve seen menus where the daily lunch special was a cup of soup and half a sandwich, but never 4/5 of a sandwich. Maybe I don’t eat out often enough.

But getting back to the muffins, I calculated that each muffin actually contained not 170 calories as implied, but 212.5 calories. I can just imagine some marketing executive saying, “We can’t tell customers that our sugar-free muffins contain over 200 calories. Who would want to buy a sugar-free product that can put on weight? But if we define the serving size as 4/5 of a muffin, we can honestly claim that a serving has only 170 calories. And if that doesn’t work we can redefine the serving size as half a muffin, bringing the calorie count down to barely over 100. We won’t have to change the product at all – only the label.”

So, accepting that a serving is 4/5 of a muffin, how do you divide a muffin into two pieces with one piece exactly four times the size of the other? And what do you do with the smaller piece, the one that is only 1/5 the size of a whole muffin? Do you accumulate fifths until you have four, which would qualify as a serving? What do you do with the half serving, the fifths left over from the last two muffins? Hold on to them until you buy another package? Save them for a very small child?

Isn’t it wonderful how we consumers are protected from misrepresentation by the government’s requirement that Nutrition Facts be supplied with each product?

Needed for Every Succession Plan

November 15, 2016

Regardless of the method used in a succession plan ownership will be transferred to another owner. Needed before any transaction can be planned or consummated is the following:

  • An estate plan for the owner
  • A financial plan for the owner
  • An analysis of the cash flow from the transfer to the owner
  • An analysis of the cash flow from the successor and sources of the funds
  • Valuation of the business
  • Possibly a banker
  • Due diligence reviews by successor
  • Employee should be represented by an advisor – definitely an attorney and possibly an accountant and valuation specialist
  • There should absolutely be a buy-sell agreement with strong restrictive covenants
  • Compensation agreement for all owners that work in the business

This list is not a suggestion, it is a must do. Get it done!

30 Ways to Transfer Ownership to a Successor

November 10, 2016

Succession planning is serious business but many owners fail to prepare, either through inaction, disinterest, not knowing how to start or what to do, or other priorities. What they do is their concern even though lack of a plan combined with a sudden death or disability can cause much disarray for stakeholders or dissipated value for the owner’s family.

For those that want to know somewhat how the process works, here are 30 ways ownership can be transferred to a successor. The following was abstracted from a speech I regularly present with this blog’s title.

  1. Sell the stock
  2. Gift the stock
  3. Stock given as additional compensation
  4. Stock and cash given as additional compensation
  5. Nonqualified stock options
  6. Incentive stock options
  7. Restricted stock issuance
  8. Stock options or restricted stock issued in tandem with cash
  9. Golden parachutes
  10. Phantom stock
  11. Shareholders’, members’ or partners’ agreements
  12. Clauses in compensation agreements
  13. Setting up a new business
  14. Clauses in a will
  15. Living trust combined with an option
  16. Stock redemption
  17. Installment sale
  18. Self-canceling installment note
  19. Installment sale to a “defective” grantor trust
  20. Charity remainder trust
  21. Grantor retained interest trust
  22. Employee stock ownership plan
  23. Sale-Leaseback
  24. Preferred stock recapitalization
  25. S election
  26. A B stock recapitalization
  27. Private annuity
  28. Stock Split Up
  29. Family Limited Partnership
  30. Leveraged buy-out

Many of the above methods are usually used in combinations. Additionally, many can be done pre or post death – it just needs the proper contractual agreements. This list runs the gamut of simple to complex but there is always a way to get it done for a willing client.

A word of caution is that many of these methods are highly technical and provisions of the Internal Revenue Code and Regulations must be strictly adhered to. Additionally, in some cases it might be desirable to secure an IRS ruling.

The above should give you an understanding that these things do occur. It just needs the owner to initiate the process.

Prognosticating Interest Rates

November 8, 2016

A previous blog gave a self-assessment method to determine where you feel the stock market and the level of dividends would be in 10 years. However, in some respects the bond market might be more important to the many investors that primarily buy bank certificates of deposit, bond funds and other fixed income securities. These investors are very risk adverse and likely buy the CDs, bond funds and bonds because they are primarily concerned with the cash flow and safety of principal.

Now I ask you to apply the stock market predicting process to bank CD interest rates and inflation, and if a bond owner, to bond rates. Set up three more graph sheets. Draw a line to indicate where you believe the CD interest rates will be over the next ten years. If you usually buy 1-year or 2-year or even 5-year CDs, put down the ten years trend of what you think those rates will be. On the next two sheets mark off the next ten years annual inflation rates; and long term bond rates.

CD and bond interest rates
If your trend is up it might possibly suggest you should keep your fixed income allocation in short term vehicles waiting for the increase. In today’s market I do not believe you have any other course. Right now the highest short term rates seem to be about 1.25% for a 15 or 18 month CD. Longer term CDs aren’t paying much more – at best 1.75% for a 5 year CD. If you are in individual corporate bonds, you can probably do a little better if you go for less than the top rated bonds and need to go out 10 years to get about 1% higher or 2.75%. 20 year corporate bonds are around 4% to 4.25%. If you typically buy bond funds you should understand that as rates increase the fund values will drop and this will reduce your “total return” on the funds. Because of this I do not believe owning bond funds are a viable investment strategy. My advice for those with CDs for now is to get the 18 month CDs. If you like bond funds I suggest you read my prior blogs – look at the archives on the right for them. If these don’t change your mind, then you deserve the consequences.

If your trend is down you should lock in some longer term rates. Go for the five year CDs or ten or twenty year bonds. If you believe the rates will go lower then you might also believe we will not have much inflation – see next comments.

If your trend is up it shows you believe we will have increasing inflation. How much depends on the slope of your line. If you are right then interest rates should rise. So your strategy should be to keep your money in cash waiting for rates to rise. Opps, here is the “waiting” word – see what I wrote above and some previous blogs. You might also want to buy some TIPS or I-Bonds. If your trend is down this would suggest that you feel we are headed for deflation which accompanies a recession or depression. In this case you should lock up your money in safe insured CDs or U.S. Treasury Bonds. And I would certainly stay away from equities.

Inflation and interest rates
These are tied together. Inflation brings higher rates and low inflation such as we’ve had for the last few years brings low rates and in some cases a flight to safety with negative rates that exist in some countries.

Your graphs
These exercises force you to think about what is going on and to make decisions. I believe the more people understand the more involved they will be in the investing process, and that helps toward making them more secure.

A key to investing is having a sense of which way there will be movement in the stock market, interest rates and inflation. However, these are at best your guesses and it is unlikely that you will be right about everything and certainly the timing of the activity. Accordingly, regardless of what you think, you cannot go all in one way – you need diversification and that will come with a sensible thought out asset allocation plan that matches your investments with your goals.

Whatever, you decide, good luck!