Darrell Financial Services, LLC Mark J. Darrell, CFP 2200 Baltimore Boulevard Finksburg, MD 21048 410-857-7610 888-795-8954 [email protected]March - April 2017 Why Diversification Matters Grandparents Can Help Bridge the College Cost Gap What happens to my property if I die without a will? Cartoon: Taxes Are Universal Money Matters Newsletter A Solid Foundation For Your Financial Future Due Date Approaches for 2016 Federal Income Tax Returns See disclaimer on final page Hi Everyone, With winter winding down, and tax season upon us, this would be a great time to re-evaluate your financial plan. If you would like to schedule some time for a review, please call us. Also, please save the date for our annual Spring Shred Event ! Saturday, April 22nd , from 8:30am to 11am. This will be held at our office: 2200 Baltimore Blvd (Rt. 140), Finksburg, MD. Complimentary coffee, juice, and donuts will be available. Please feel free to invite a friend or family member to come with you! We've prepared a great line-up of articles for you here. If they spark any questions or concerns, give us a call. We stand ready to serve. Also, please consider forwarding this newsletter to any of your friends and family who might be interested in our services. We would certainly welcome the introduction! Until next time, take care. Mark Darrell, CFP Tax filing season is here again. If you haven't done so already, you'll want to start pulling things together — that includes getting your hands on a copy of last year's tax return and gathering W-2s, 1099s, and deduction records. You'll need these records whether you're preparing your own return or paying someone else to do your taxes for you. Don't procrastinate The filing deadline for most individuals is Tuesday, April 18, 2017. That's because April 15 falls on a Saturday, and Emancipation Day, a legal holiday in Washington, D.C., is celebrated on Monday, April 17. Unlike last year, there's no extra time for residents of Massachusetts or Maine to file because Patriots' Day (a holiday in those two states) falls on April 17 — the same day that Emancipation Day is being celebrated. Filing for an extension If you don't think you're going to be able to file your federal income tax return by the due date, you can file for and obtain an extension using IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. Filing this extension gives you an additional six months (to October 16, 2017) to file your federal income tax return. You can also file for an extension electronically — instructions on how to do so can be found in the Form 4868 instructions. Filing for an automatic extension does not provide any additional time to pay your tax! When you file for an extension, you have to estimate the amount of tax you will owe and pay this amount by the April filing due date. If you don't pay the amount you've estimated, you may owe interest and penalties. In fact, if the IRS believes that your estimate was not reasonable, it may void your extension. Note: Special rules apply if you're living outside the country or serving in the military and on duty outside the United States. In these circumstances you are generally allowed an automatic two-month extension without filing Form 4868, though interest will be owed on any taxes due that are paid after April 18. If you served in a combat zone or qualified hazardous duty area, you may be eligible for a longer extension of time to file. What if you owe? One of the biggest mistakes you can make is not filing your return because you owe money. If your return shows a balance due, file and pay the amount due in full by the due date if possible. If there's no way that you can pay what you owe, file the return and pay as much as you can afford. You'll owe interest and possibly penalties on the unpaid tax, but you'll limit the penalties assessed by filing your return on time, and you may be able to work with the IRS to pay the remaining balance (options can include paying the unpaid balance in installments). Expecting a refund? The IRS is stepping up efforts to combat identity theft and tax refund fraud. New, more aggressive filters that are intended to curtail fraudulent refunds may inadvertently delay some legitimate refund requests. In fact, beginning this year, a new law requires the IRS to hold refunds on all tax returns claiming the earned income tax credit or the refundable portion of the Child Tax Credit until at least February 15. 1 Most filers, though, can expect a refund check to be issued within 21 days of the IRS receiving a return. 1 IRS.gov (IR-2016-117, IRS Urges Taxpayers to Check Their Withholding; New Factors Increase Importance of Mid-Year Check Up, August 31, 2016) Page 1 of 4
What happens to my property if I diewithout a will?
Cartoon: Taxes Are Universal
Money Matters NewsletterA Solid Foundation For Your Financial Future
Due Date Approaches for 2016 Federal Income Tax Returns
See disclaimer on final page
Hi Everyone,
With winter winding down, and tax seasonupon us, this would be a great time tore-evaluate your financial plan. If you wouldlike to schedule some time for a review,please call us. Also, please save the datefor our annual Spring Shred Event !Saturday, April 22nd , from 8:30am to11am. This will be held at our office: 2200Baltimore Blvd (Rt. 140), Finksburg, MD.Complimentary coffee, juice, and donutswill be available. Please feel free to invite afriend or family member to come with you!
We've prepared a great line-up of articlesfor you here. If they spark any questions orconcerns, give us a call. We stand ready toserve. Also, please consider forwarding thisnewsletter to any of your friends and familywho might be interested in our services.We would certainly welcome theintroduction!
Until next time, take care.
Mark Darrell, CFP
Tax filing season is here again. If you haven'tdone so already, you'll want to start pullingthings together — that includes getting yourhands on a copy of last year's tax return andgathering W-2s, 1099s, and deduction records.You'll need these records whether you'repreparing your own return or paying someoneelse to do your taxes for you.
Don't procrastinateThe filing deadline for most individuals isTuesday, April 18, 2017. That's because April15 falls on a Saturday, and Emancipation Day,a legal holiday in Washington, D.C., iscelebrated on Monday, April 17. Unlike lastyear, there's no extra time for residents ofMassachusetts or Maine to file becausePatriots' Day (a holiday in those two states) fallson April 17 — the same day that EmancipationDay is being celebrated.
Filing for an extensionIf you don't think you're going to be able to fileyour federal income tax return by the due date,you can file for and obtain an extension usingIRS Form 4868, Application for AutomaticExtension of Time to File U.S. IndividualIncome Tax Return. Filing this extension givesyou an additional six months (to October 16,2017) to file your federal income tax return. Youcan also file for an extension electronically —instructions on how to do so can be found in theForm 4868 instructions.
Filing for an automatic extension does notprovide any additional time to pay your tax!When you file for an extension, you have to
estimate the amount of tax you will owe andpay this amount by the April filing due date. Ifyou don't pay the amount you've estimated, youmay owe interest and penalties. In fact, if theIRS believes that your estimate was notreasonable, it may void your extension.
Note: Special rules apply if you're living outsidethe country or serving in the military and onduty outside the United States. In thesecircumstances you are generally allowed anautomatic two-month extension without filingForm 4868, though interest will be owed on anytaxes due that are paid after April 18. If youserved in a combat zone or qualified hazardousduty area, you may be eligible for a longerextension of time to file.
What if you owe?One of the biggest mistakes you can make isnot filing your return because you owe money.If your return shows a balance due, file and paythe amount due in full by the due date ifpossible. If there's no way that you can paywhat you owe, file the return and pay as muchas you can afford. You'll owe interest andpossibly penalties on the unpaid tax, but you'lllimit the penalties assessed by filing your returnon time, and you may be able to work with theIRS to pay the remaining balance (options caninclude paying the unpaid balance ininstallments).
Expecting a refund?The IRS is stepping up efforts to combatidentity theft and tax refund fraud. New, moreaggressive filters that are intended to curtailfraudulent refunds may inadvertently delaysome legitimate refund requests. In fact,beginning this year, a new law requires the IRSto hold refunds on all tax returns claiming theearned income tax credit or the refundableportion of the Child Tax Credit until at leastFebruary 15.1
Most filers, though, can expect a refund checkto be issued within 21 days of the IRS receivinga return.1 IRS.gov (IR-2016-117, IRS Urges Taxpayers toCheck Their Withholding; New Factors IncreaseImportance of Mid-Year Check Up, August 31, 2016)
Page 1 of 4
Why Diversification MattersWhen investing, particularly for long-term goals,there is one concept you will likely hear aboutover and over again — diversification. Why isdiversification so important? The simple reasonis that it helps ensure that your risk of loss isspread among a number of differentinvestments. The theory is that if some of theinvestments in your portfolio decline in value,others may rise or hold steady, helping to offsetthe losses.
Diversifying within asset classesFor example, say you wanted to invest instocks. Rather than investing in just domesticstocks, you could diversify your portfolio byinvesting in foreign stocks as well. Or you couldchoose to include the stocks of different sizecompanies (small-cap, mid-cap, and/orlarge-cap stocks).
If your primary objective is to invest in bonds forincome, you could choose both governmentand corporate bonds to potentially takeadvantage of their different risk/return profiles.You might also choose bonds of differentmaturities, because long-term bonds tend toreact more dramatically to changes in interestrates than short-term bonds. As interest ratesrise, bond prices typically fall.
Investing in mutual fundsBecause mutual funds invest in a mix ofsecurities chosen by a fund manager to pursuethe fund's stated objective, they can offer acertain level of "built-in" diversification. For thisreason, mutual funds may be an appropriatechoice for novice investors or those wishing totake more of a hands-off approach to theirportfolios. Including a variety of mutual fundswith different objectives and securities in yourportfolio will help diversify your holdings thatmuch more.
Mutual funds are sold by prospectus. Pleaseconsider the investment objectives, risks,charges, and expenses carefully beforeinvesting. The prospectus, which contains thisand other information about the investmentcompany, can be obtained from your financialprofessional. Be sure to read the prospectuscarefully before deciding whether to invest.
Diversifying among asset classesYou might also consider including a mix ofdifferent types of asset classes — stocks, bonds,and cash — in your portfolio. Asset allocation is astrategic approach to diversifying your portfolio.After carefully considering your investmentgoals, time horizon, and risk tolerance, youwould then invest different percentages of yourportfolio in targeted asset classes to pursueyour goal.
Winning asset classes over timeThe following table, which shows how manytimes during the past 30 years each asset classhas come out on top in terms of performance,helps illustrate why diversifying among assetclasses can be important.
Number of winning years,1987-2016
Cash 3
Bonds 5
Stocks 10
Foreignstocks
12
Performance is from December 31, 1986, toDecember 31, 2016. Cash is represented byCitigroup 3-month Treasury Bill Index. Bonds arerepresented by the Citigroup Corporate Bond Index,an unmanaged index. Stocks are represented by theS&P 500 Composite Price Index, an unmanagedindex. Foreign stocks are represented by the MSCIEAFE Price Index, an unmanaged index. Investorscannot invest directly in any index. However, theseindexes are accurate reflections of the performanceof the individual asset classes shown. Returns reflectpast performance and should not be consideredindicative of future results. The returns do not reflecttaxes, fees, brokerage commissions, or otherexpenses typically associated with investing.
The principal value of cash alternatives may fluctuatewith market conditions. Cash alternatives are subjectto liquidity and credit risks. It is possible to losemoney with this type of investment.
The return and principal value of stocks may fluctuatewith market conditions. Shares, when sold, may beworth more or less than their original cost.
U.S. Treasury securities are guaranteed by thefederal government as to the timely payment ofprincipal and interest, whereas corporate bonds arenot. The principal value of bonds may fluctuate withmarket conditions. Bonds are subject to inflation,interest rate, and credit risks. Bonds redeemed priorto maturity may be worth more or less than theiroriginal cost.
The risks associated with investing on a worldwidebasis include differences in financial reporting,currency exchange risk, as well as economic andpolitical risk unique to the specific country.
Investments offering the potential for higher rates ofreturn also involve higher risk.
Diversification and assetallocation are methods usedto help manage investmentrisk; they do not guaranteea profit or protect againstinvestment loss.
Page 2 of 4, see disclaimer on final page
Grandparents Can Help Bridge the College Cost GapFor many families, a college education is asignificant financial burden that is increasinglyhard to meet with savings, current income, anda manageable amount of loans. For some, theace in the hole might be grandparents, whoseadded funds can help bridge the gap. If you're agrandparent who would like to help fund yourgrandchild's college education, here are somestrategies.
529 college savings planA 529 college savings plan is one of the bestvehicles for multigenerational college funding.529 plans are offered by states and managedby financial institutions. Grandparents can opena 529 account on their own — either with theirown state's plan or another state's plan — andname their grandchild as beneficiary (onegrandchild per account), or they can contributeto an existing 529 account that has alreadybeen established for that grandchild (forexample, by a parent).
Once a 529 account is open, grandparents cancontribute as much or as little as they want,subject to the individual plan's lifetime limits,which are typically $300,000 and up.Grandparents can set up automatic monthlycontributions or they can gift a larger lump sum— a scenario where 529 plans really shine.
Contributions to a 529 plan accumulate taxdeferred (which means no taxes are due on anyearnings made along the way), and earningsare completely tax-free at the federal level (andtypically at the state level) if account funds areused to pay the beneficiary's qualifiededucation expenses. (However, the earningsportion of any withdrawal used for anon-education purpose is subject to income taxand a 10% penalty.)
Under rules unique to 529 plans, individualscan make a lump-sum gift of up to $70,000($140,000 for joint gifts by a married couple)and avoid federal gift tax by making a specialelection on their tax return to treat the gift as if itwere made in equal installments over afive-year period. After five years, anotherlump-sum gift can be made using the sametechnique. This strategy offers two advantages:The money is considered removed from thegrandparents' estate (unless a grandparentwere to die during the five-year period, in whichcase a portion of the gift would be recaptured),but grandparents still retain control over theircontribution and can withdraw part or all of it foran unexpected financial need (the earningsportion of such a withdrawal would be subjectto income tax and a 10% penalty, though).
What happens at college time if a grandchildgets a scholarship? Grandparents can
seamlessly change the beneficiary of the 529account to another grandchild, or they canmake a penalty-free withdrawal from theaccount up to the amount of the scholarship(though they would still owe income tax on theearnings portion of this withdrawal).
Finally, a word about financial aid. Undercurrent federal financial aid rules, agrandparent-owned 529 account is not countedas a parent or student asset, but withdrawalsfrom a grandparent-owned 529 account arecounted as student income in the followingacademic year, which can decrease thegrandchild's eligibility for financial aid in thatyear by up to 50%. By contrast, parent-owned529 accounts are counted as parent assets upfront, but withdrawals are not counted asstudent income — a more favorable treatment.
Outright cash giftsAnother option for grandparents is to make anoutright gift of cash or securities to theirgrandchild or his or her parent. To help reduceany potential gift tax implications, grandparentsshould keep their gift under the annual federalgift tax exclusion amount — $14,000 forindividual gifts or $28,000 for joint gifts.Otherwise, a larger gift may be subject tofederal gift tax and, for a gift made to agrandchild, federal generation-skipping transfertax, which is a tax on gifts made to a personwho is more than one generation below you.
An outright cash gift to a grandchild or agrandchild's parent will be considered an assetfor financial aid purposes. Under the federal aidformula, students must contribute 20% of theirassets each year toward college costs, andparents must contribute 5.6% of their assets.
Pay tuition directly to the collegeFor grandparents who are considering makingan outright cash gift, another option is tobypass grandchildren and pay the collegedirectly. Under federal law, tuition paymentsmade directly to a college aren't consideredtaxable gifts, no matter how large the payment.This rule is beneficial considering that tuition atmany private colleges is now over $40,000 peryear. Only tuition qualifies for this federal gifttax exclusion; room and board aren't eligible.
Aside from the benefit of being able to makelarger tax-free gifts, paying tuition directly to thecollege ensures that your money will be usedfor education purposes. However, a directtuition payment might prompt a college toreduce any potential grant award in yourgrandchild's financial aid package, so makesure to ask the college about the financial aidimpact of your gift.
Assets in 529 plans reached$266.2 billion, spread over12.7 million accounts, as ofthe second quarter of 2016.
Source: College SavingsPlans Network, 529 Report:An Exclusive Mid-YearReview of 529 Plan Activity,September 2016
Note: Investors shouldconsider the investmentobjectives, risks, charges, andexpenses associated with 529plans before investing, alongwith each plan's specificinvestment options, underlyinginvestments, and investmentcompany. More informationcan be found in the plan'sofficial disclosure statementsand prospectus, which shouldbe read carefully beforeinvesting. As with anyinvestment, there are generallyfees and expenses associatedwith participation in a 529 plan.There is also the risk that yourunderlying investments maylose money or not perform wellenough to cover college costsas anticipated. Finally, beaware that your ability to takeadvantage of any 529 planstate tax benefits may becontingent on your enrollmentin your own state's 529 plan.
Member FINRA/SIPC andRegistered Investment Advisor
Cartoon: Taxes Are Universal
What happens to my property if I die without a will?If you die without a will, yourproperty will generally passaccording to state law (underthe rules for intestatesuccession). When this
happens, the state essentially makes a will foryou. State laws specify how your property willpass, typically in certain proportions to variouspersons related to you. The specifics, however,vary from state to state.
Most state laws favor spouses and childrenfirst. For example, a typical state law mightspecify that your property pass one-half orone-third to your surviving spouse, with theremainder passing equally to all your children. Ifyou don't have children, in many states yourspouse might inherit all of your property; inother states, your spouse might have to sharethe property with your brothers and sisters orparents.
But not all property is transferred by will orintestate succession. Regardless of whetheryou have a will, some property passesautomatically to a joint owner or to a designatedbeneficiary. For example, you can transferproperty such as IRAs, retirement plan benefits,
and life insurance by naming a beneficiary.Property that you own jointly with right ofsurvivorship will pass automatically to thesurviving owners at your death. Property held intrust will pass to your beneficiaries according tothe terms you set out in the trust.
Only property that is not transferred bybeneficiary designation, joint ownership, will, ortrust passes according to intestate succession.You should generally use beneficiarydesignations, joint ownership, wills, and truststo control the disposition of your property sothat you, rather than the state, determine whoreceives the benefit of your property.
Even if it seems that all your property will betransferred by beneficiary designation, jointownership, or trust, you should still generallyhave a will. You can designate in the will whowill receive any property that slips through thecracks.
And, of course, you can do other things in a willas well, such as name the executor of yourestate to carry out your wishes as specified inthe will, or name a guardian for your minorchildren.
