When Parents Can Be Claimed Dependents On A Tax Return

In the past year, my mother was admitted to a nursing home, and needed her children to handle all of her affairs. However, our mother is not a dependent for tax filing purposes. Whether a parent can be claimed as a dependent on one's tax return depends on two criteria.

1. A child (or children) must provide over 50% of the support for the parent


2. The parent must have less than $3,300 of gross non-tax exempt income.

It can be challenging to meet both criteria for the reasons below.

As I understand it, if a parent owns a home, they will typically be considered as providing over 50% of their own support, and be disqualified from being a dependent. However, if they live in a rented house that is separate from their child or in a nursing home, it is possible to have over 50% of support provided by their child.

Also, since gross income includes wage, pensions, dividends, capital gains, traditional IRA distributions and interest, it may challenging to keep it below $3,300. Only income exempt from federal income taxes, e.g. municipal bonds and some Social Security payments, can be excluded from the calculation. For Social Security, payments are not counted in gross income until the other taxable income is over $25,000 (single) or $32,000 (married filing jointly).

My mother's situation does not meet either criteria. She still financially supports herself, owns a home and has taxable income over $3,300. Thus, she cannot be claimed as dependent by anybody.

For more on Crossing Generations , check back every Thursday for a new segment.

This is not financial or tax advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC

Links To Carnivals from December 2 - 4, 2007

Here are links to select Carnivals from December 2 - 4, 2007:

The Personal Development Carnival

The Carnival of Personal Finance #129

Investors Blog Network (IBN) Festival #18

Tax Carnival #25

65th Festival of Stocks

Festival of Frugality #102

37th Carnival of Money Stories

Please give the hosts recognition for their hard work by checking out their Carnivals.

This is not financial advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC

Protecting Our Savings Against A Recession

Economists have correctly predicted nine of the last five recessions. -- Paul Samuelson, economist

Since we depend on investment income, the possibility of a recession has me a bit concerned. I've been seeing more articles on the chances of a recession and how to invest for an expected recession. Examples of articles include: Protecting Your Nest Egg in a Recession and Use ETFs to hedge your bets.

The problem is that no one really knows when a recession is coming and how long it will last. So recession proofing one's savings too early or for too long can be costly in terms of lost returns. My personal preference is to set aside part of my savings to protect against a recession, and still stay in the market.

Here are some of the approaches I like:

1. Reallocate a higher percentage to investments that can do well in a recession. I will stay in equities but allocate a higher percentage in CDs, bonds and cash. For example, I may go from 35% cash, CDs and bonds to 45-50%. That way I will still participate in appreciation of the stock market, should a recession be delayed. I still remember the story of a colleague's friend who went 100% cash in 1985 and was still in cash in late 1999. He missed the crash of 1987 but also missed the significant gains of the stock market through 1999.
   
   For the equity portion, I will skew more towards the large cap growth stocks, which tend to do better in the later stages of a bull market. I have also slightly increased the proportion invested in foreign stocks.



2. Keep funds that are needed for the next 3 years in cash or cash equivalents. I will keep near term needs such as our living expenses in cash, laddered CDs or laddered bonds. That way we can get the money we need without taking losses in the stock market, if there is a recession. If we had children in college, we would also use this strategy for college tuition.



3. Set aside a small portion of funds to short individual stocks. When a recession does happen, I will use a small percentage (about 1-3%) of our savings to short individual stocks, using a system developed by a colleague. Also, I have invested in a bear fund, called the Prudent Bear (BEARX), which shorts individual stocks and goes long on gold stocks. This fund had done relatively well, even when the market is rising.

Here are some approaches I will probably not use:

1. Insure my portfolio against losses with put options. Buying index puts or individual stock puts can be very expensive if done frequently. And since options are very time sensitive, it is critical to be good at timing the market, which I have not been very good at doing regularly.



2. Hedging my portfolio with funds or ETFs that short indices. I think going against the market is a bad bet for the long term, and it can be a bad bet for the short term. In today's volatile market, a single piece of good news can cause an index to move up significantly in a day, making a short position a losing one. As I noted above, I prefer shorting individual stocks or a fund that shorts individual stocks.

The only good news about a recession is that the U.S. economy usually recovers and gets stronger. At this time, I still think it is a good bet that the U.S. stock market will be higher 10 years from now.

For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

This is not financial or investment advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC

How A Digital Camera Helps Me Save Money And Time

This year I found a great use for a digital camera that saves money and time - providing visual records for my do-it-yourself projects.

In July, we discovered a small amount of water leaking from under the toilet. I was pretty sure the problem was a deteriorating wax seal, which I had experience with repairing in our previous house many years ago. With repair instructions in hand, I took off the toilet and the old wax seal. The flange had rusted and wasn't functional any longer, causing the seal to be insufficient. Unfortunately, I had not seen the type of flange before, since our previous house was 70 years older.

I knew I could describe the problem to the plumbing expert at the Lowe's. However, I realized that a picture would be much more effective. So I took several pictures of the problem and took my digital camera with me to Lowe's. Upon looking at the pictures, the plumbing associate immediately said, " I know exactly what you need ...." The solution worked, and we saved a minimum of $135 for a service call to fix it.

In a second situation, I used the digital camera in a different way to save time when doing a memory upgrade for our desktop computer. In order to access the memory slot, I needed to disconnect all the wires from the printer, monitor, keyboard, mouse and speakers. Normally, I mark each connection since I don't want to take time to figure out where each wire attaches. This time, I took a digital picture of the back of the desktop unit, which served the same purpose as marking each wire. The memory installation went well and I saved a lot of time (and frustration:-).

In these examples, our digital camera provide an immediate accurate visual recording of some important facts and information. For each case, the result was superior to using my usual methods of memory or documenting on paper.

For more on Ideas You Can Use , check back every Tuesday for a new segment.

Photo Credit: morgueFile.com, Paul Anderson

This is not financial or repair advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC

12/3/07 Stock Purchase Update - Benefited From the Rebound

In my 11/26/07 stock purchase update, I wrote about how the 10/15/07 updated buy list of Potash (POT), Southern Copper (PCU), and CNH Global (CNH) was performing. In that article the portfolio was showing the effects of the market correction, but was still up $1577.90 for a 14.8% return, down from previous week's high of $2073.90 for a 19.5% return. On 11/27/07, I purchased 50 shares of BHP Billiton (BHP) at $71.54. As of 11/30/07, the portfolio achieved a new high of $3,041 for a 21.4% gain. The new purchases of PCU, CNH and BHP are now up $616.40 for a 5.8% return. Here's the current status of the portfolio:

	My Wealth Builder 10/15/07 Buy List
Stock [purchase date]	Shares	Purchase Price	Current Price 11/30/07
Potash (POT) [6/7/07]	50	$71.59	$119.89
Southern Copper(PCU) [11/13/07]	40	$108.24	$110.65
CNH Global NV (CNH) [11/13/07]	50	$55.22	$61.33
BHP Billiton (BHP) [11/27/07]	50	71.54	$75.83

The market activity continues to be concerning, with either narrow breadth or a high number of new lows. I believe that the probability of a recession in 2008 is relatively high. However, the Fed interest rate cuts lead me to believe the bull market will last through summer, 2008, although it may be choppy. At this time, I plan only to invest a limited amount in the buy selections.

For more on Strategies and Plans , check back every Monday for a new segment.

This is not financial or investment advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC

Another Blow To the U.S. Economy - Expected Delays For Tax Refunds

How many blows can the U.S. economy take before a full fledged recession occurs? First gasoline prices skyrocketed, followed by a housing bust, then a credit crisis, followed by liquidity issues that caused staggering losses at financial institutions, and recent declining earnings reports have not been received well by the stock market. To date, however, the U.S. economy has been pretty resilient.

The work on freezing some interest rates on subprime loans appears to be helping. While retail sales have been weak, it has not been a complete disaster yet. So consumer spending is still providing some support. However, it looks like a new issue with tax refunds may further weaken consumer spending and credit. In an article I read in Yahoo! Finance titled Millions of Tax Refunds Could Be Delayed , Jim Abrams writes that the inability of Congress to pass the tax bill could move the start of the tax filing season to as late as mid-February, delaying up to 31.8 million refunds for a total of $86.9 billion.

Since many tax filers count on their refunds to cover necessary expenses, it seems to me that a delay would be still another factor that pushes the economy closer towards recession.

For more on New Beginnings, check back every Sunday for a new segment.

Photo Credit: morgueFile.com, Ronnie Bergeron

This is not financial or tax advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC

More Than 40% Pay Zero Federal Income Tax

If you're reading this article, I am guessing you are probably in the 60% that do pay federal income taxes. Of note, most of the non-payers are not wealthy people using tax loopholes. The majority are lower income taxpayers who are single and use the Single or Head of Household (i.e. single with a dependent child) filing statuses. Also, some of the non-payers get a refund that is actually greater than the amount of their federal withholding, due to Earned Income Tax Credit (EITC) which is an anti-poverty tool that is implemented through the Tax Code.

When I first heard this statistic, I was surprised at the magnitude of the percentage. However, one only needs to check a few sources such as the Tax Foundation or the Heartland Institute to confirm the numbers. It is worth noting that these people still pay taxes, even if they don't pay federal income tax. Non-payers of federal income tax still contribute to payroll taxes (social security and medicare), sales tax, and excise taxes.

While I realized that the majority of federal income taxes was paid by a minority of taxpayers (e.g in 2004 10% of taxpayers paid 68.2% of the federal income tax), I didn't realize that such a large proportion (i.e. over 40%) paid no federal income taxes at all. Somehow, that doesn't feel right. I don't believe a tax system that allows 40% to opt out is sustainable, especially if that segment requires signficant services from the government. To me, this would similar to 40% of a company doing no work and the other 60% carrying the load so that the company can make money. I don't believe such a disparity in contribution can work for very long.

With the upcoming Presidential elections, I will be very interested in how federal income tax code issues are addressed. Based on my limited exposure to the candidates so far, I expect I won't be very impressed with any of the proposals. It would be great if I were pleasantly surprised in the next few months :-)

For more on Reflections and Musings, check back every Saturday for a new segment.

Photo Credit: IRS.gov

This is not financial or tax advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC

Our Journey To Financial Freedom #9 - The Professionals We Used

In early October, 2007, I announced that I had retired in my forties. As promised, I am writing a Friday series on "How We Did It," of which this is segment #9. ( #1 is about our childhood , #2 is about education, #3 is about working, #4 is about lifestyle , #5 is about goals, #6 is about staying on track, #7 is about the role of luck and #8 is about my personal finance mind tricks.) This segment about the times we chose to use professional help.

Most of my life I have been a do-it-yourself type of person. My dad was a great do-it-yourselfer and I inherited his ability. Why hire an electrician when I can follow instructions to rewire a light switch? Correct a leaking faucet or toilet? I can be a plumber for a day. Of course, I know my limits. For the big jobs, I call in the pros, e.g. roofing, cutting down a large tree, painting the exterior of a 2 story house.

I also applied this approach to managing my personal finances. On my own, I learned about buying real estate (mainly my home), investing in the stock market (equities and options), buying fixed income securities (CDs, and municipal bonds), and managing IRAs. I still do my own taxes, by hand:-), and routinely do mortgage payoff or compound interest calculations on Excel spreadsheets. Finally, both my spouse and I are pretty good at paying ourselves first, putting money in emergency funds and paying our bills (including credit cards) on time. However, for the big, complex or way out of my league jobs, I hired a pro. Here are some key areas where we used professionals.

Trust and wills. Just before moving to Japan for an international assignment, the company's tax consultants asked us if we had a will. Since we didn't have children at the time, our answer was, "no." He then advised us that while we were in Japan, our estate would handled under their laws, if we had no will. However, if the decedents had a will or trust, Japan would recognize the documents.

Needless to say, with only a short time to moving, we hired a local firm to do the legal work for living trusts, wills, durable powers of attorney, and living wills. For us, it was well worth , given the limited time to do it. A colleague once told me he saved money by buying the living trust forms at an office supply store and doing it himself. I guess if I were single, I would take the risk. However, with a family and the responsibility to ensure the estate is protected for them, I think it's worth the cost of having an attorney make sure it is correct.

Validating amount needed and managing funds for retirement. While we were overseas in Japan, I realized that it would be a good idea to hire a professional wealth manager when when returned. It became obvious to me that I didn't have the time to completely keep up with the latest developments nor did I have time to effectively manage a large investment portfolio.

When we returned, I began to investigate financial advisors. Fortunately, I liked one of the first ones I identified. Their investment approach of prudently growing wealth was in line with my personal preference, and their approach had avoided a large part of the tech decline in 2000-2002. Also, I knew people that had been with them for many years and were satisfied.

Thus, we moved a portion of our savings to a managed investment account. Over the past two and half years, I have had numerous discussions with my financial advisor on investment strategies, retirement readiness and market environments. Importantly, he had access to sophisticated tools (e.g. Monte Carlo simulations) to provide a great estimate of retirement funds sustainability, which gave me high confidence we could retire in our forties. And most importantly, he has given me confidence to stay invested in the stock market even during times of high volatility.

However, in both cases, I did not completely delegate responsibility to the professionals. For the trusts and wills, we already had a working knowledge about estate planning, the benefit of revocable living trusts and how we wanted to distribute our estates. For financial planning, I had already developed financial goals and investment strategies from which we could further refine with our financial advisor. In addition, I am very involved when new investment strategies are being considered.

As we get older, I expect that we will need additional professionals (e.g. a CPA and family attorney) and will be working to identify good candidates in the next few years.

Here's the series:

1. Our Childhood Preparation
2. The Value Of Higher Education
3. Making The Most Of My Job
4. Lifestyle and Spending Choices
5. Setting Goals, Developing Plans and Tracking Process
6. Staying The Course
7. How Luck Played A Role
8. My Personal Finance Mind Tricks
9. The Professionals We Used
10. When Preparation Met Opportunity

For more on Reaping the Rewards, check back every Friday for a new segment.

Photo Credit: morgueFile.com, Andrew

This is not financial or legal advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC

Potential Tax Credits For Having Children

Since our daughter is only three years old, I'm still learning all the tax credits that are potentially available to taxpayers with children. Here are some of the ones that I have identified so far. I've included the updated numbers I found for the 2007 tax year for Married Filing Joint (MFJ) status.

	Credits for 2007 Tax year*
Type	Maximum Benefit	MFJ Phaseout Begins at	MFJ 100% Phaseout at
Child Care Credit	$1,050 per child $2,100 maximum	$15,000**	43% phaseout at $43,000**
Adoption Credit	$11,390	$170,820	$210,820
Child Tax Credit	$1000 per child	$110,000	$110,000 + $20,000 for each child
Additional Child Tax Credit	up to $1000 per child	n/a	earned income below $11,751
Hope Education Credit	$1650 per child	$94,000	$114,000
Lifetime Learning Credit	$2000 per family	$94,000	$114,000
Earned Income Credit	$2853 - one child $4716 - 2 or more	$14,180**	$35,241 for one child $39,783 for 2 or more

*While the sources are believed to be good, My Wealth Builder cannot guarantee the accuracy, timeliness or completeness of the information in the table.

** 2006 tax year number.

I was surprised to find so many possible credits (and large credit amounts) for taxpayers with children. The ones we'll be able to use in the near term are the child tax credit and the adoption tax credit. Hopefully, the education credits (Hope and Lifetime Learning) will still be available when our daughter attends college.

For more on Crossing Generations, check back every Thursday for a new segment.

This is not financial or tax advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC

Comparing Wealth Building to Running a Marathon

In my life, I've noticed I do well with activities where I learn the key principles, practice the skills, and have diligence in making the effort. Having run a marathon, I noticed some similarities between preparing and running the race and building wealth for retirement.

1. Good preparation is important. Training for a marathon involved months of training, lots of distance running and good discipline. I would not have been able to complete the run without doing the training. A side benefit was that it was good for my physical health.
   
   For wealth building, I have found having good personal finance habits and good discipline are important to being successful. Learning to pay oneself first and to buy only what one needs are excellent training for wealth building.



2. Have a plan and refine it as needed. Running at a sustainable pace was important. The finish line is a very far away from the start. It's important to know one's skills and NOT waste energy. I planned and ran the marathon with a college roommate. We decided to run at a 8' 45" per mile pace even though both of us had run 3 to 5 mile races at 7' to 7' 30" per mile. While much slower than our capabilities, we felt this pace would enable us to finish.
   
   For wealth building, I found having a sustainable plan, which we modified as needed, was very helpful.



3. Don't worry about other participants. Keeping focused on our own plan, pace and progress was very important. At the start, there were thousands of runners in the pack. Hundreds of runners passed us in the first five miles. However we passed hundreds of runners in the subsequent 21 miles as they burned out from starting too fast.
   
   In wealth building, others may appear to have more (e.g. luxury cars, expensive clothes, and more gadgets) at the start. However, it is good to avoid comparisons and stick to one's plan.



4. Push to completion when the finish line is close. When I only had 1-2 miles left in marathon, I knew I would have enough energy to finish is good shape. Similarly, as our retirement savings got closer to our target, we seem to be able do a little more to get to the finish.

In my only marathon, I finished the race in 4 hours and 9 minutes, much after the winning time of 2 hours and 12 minutes. On the wealth building side, we have managed to completely retire while in our forties. In both cases, being able to finish made the preparation and effort well worth it.

For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC