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Tom Tillery has been a
financial planner for 25+ years and is the Vice President of Paraklete Financial, Inc., a fee only Financial Planning firm.

He also writes curriculum for universities and on-line providers of Certified Financial PlannerTM educational courses.


Tom Tillery - the Financial Planning Advocate

This blog is designed for educational purposes. The writers are not engaged in the rendering of accounting, financial planning, legal, or other professional services. If you require such services, a competent professional should be engaged. By using this site you have read, and agreed to the site disclosure.

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Tom Tillery  December 6 2011 03:01:05 PM
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IRA + Deductible Loss

Tom Tillery  September 14 2009 04:00:00 AM
Q. An individual has a traditional IRA with  a loss in it.  The person is thinking of converting it to a Roth IRA.  What is the basis for the purpose of the conversion?

If you have a loss in your traditional IRA, you can recognize that loss if:

(1) the full amount in all of your traditional IRA accounts is distributed and
(2) the total distribution is less than your basis in your traditional IRA account.

Basis in an IRA, how is this possible?  Basis in an IRA is created by making nondeductible contributions to your traditional IRA account in prior years. If you have never made nondeductible contributions to your traditional IRA account, you don't have "basis" in the IRA.

If you don't have basis in the IRA, you'll never have a deductible loss.

A simple loss in value in your IRA is not deductible.

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Workers’ Compensation + Income Taxation

Tom Tillery  September 11 2009 04:00:00 AM
Q. Are workers' compensation benefits taxable?

Generally, workers' compensation benefits are not subject to federal income taxation.

The Internal Revenue Code (IRC) states that generally workers' compensation benefits are not taxable under IRC Section 104(a)(1).  However, IRC section 86(d)(3) states that these benefits may be taxable if:

(1) They are paid in place of wages lost as a result of a work-related accident or injury and
(2) Reduce Social Security or Railroad Retirement benefits received.

In these instances, the same method used to compute the taxable portion of Social Security and Railroad Retirement benefits is used to compute the taxable portion of workers' compensation benefits.

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UTMA + Tax Return

Tom Tillery  September 9 2009 03:56:49 PM
Q.  If a parent has a UTMA Plan established for a child, do they still need to process a tax return for the child even if they claim them as a dependent?

The answer is "Yes."

The first step in determining whether or not your child has to file a tax return is to find out how much income they received in the tax year (earnings in a UTMA for example). If your child received investment income of at least $300 and gross income of $950 or more, then he or she must generally file a return.

Additionally, if your child was under 18 in 2009 and had investment income of $1,800 or less, then you will file a regular 1040 or 1040EZ for the child. All of your child's income will be taxed at his or her own tax rate. You must sign your child's return if he or she is too young (under 14 age) to do so.

There is an option to file on the parents return; however, the rules are far too restrictive to benefit all but a few taxpayers.

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Phaseout of Itemized Deductions

Tom Tillery  July 27 2009 04:00:00 AM
Q.  What is the phaseout of itemized deductions?

Taxpayers with adjusted gross income (AGI) above a certain amount may lose part of their deduction for personal exemptions and itemized deductions.  In 1990, Congress enacted an itemized deduction phaseout for high income taxpayers. Taxpayers subject to this phaseout must reduce the amount of the itemized deductions they can claim on Schedule A of Form 1040.

If the taxpayer's adjusted gross income is above a threshold (or "applicable amount"), then the total allowable itemized deductions is reduced by the lesser of:

    * 3% of the excess of adjusted gross income over the threshold; or
    * 80% of the total itemized deductions otherwise allowable

The following itemized deductions are NOT subject to the overall limit:

1) Medical and dental expenses

2) Investment interest expense

3) Casualty and theft losses

4) Gambling losses

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Taxation of Lottery Winnings

Tom Tillery  July 24 2009 11:08:33 AM
What are the tax ramifications of winning the lottery? Is this different than winning prizes on game shows?

Lottery winnings are taxable just as is the fair market value of any non-cash prizes you may win (a car, vacation, real estate). The lottery winnings may also be subject to state income tax.  You are entitled to a tax deduction for any gambling “losses” (including the purchase of lottery tickets). These losses are taken as an itemized deduction on Schedule A of Form 1040 but they cannot exceed your winnings.  Additionally, they are not subject to the 2% of adjusted gross income floor for miscellaneous itemized deductions. Nor are they subject to the 3%-80% overall limitation on itemized deductions (phase out).

Lottery winnings are reported as income in the year, or years, you actually or “constructively” receive those winnings. In the case of non-cash prizes, game shows for example, this would be the year the prize is received.  In the case of cash winnings, if you're required to take the winnings in annual installments, you only report each year's installment as income for that year.

Finally, there are estate consequences if an installment method was selected.  In the event that you die prior to the end of the period of the installment payments, the “present value” of the unpaid installments will be part of your taxable estate.

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Kiddie Tax

Tom Tillery  July 8 2009 04:00:00 AM
Question:  What is the interest income amount that triggers "Kiddie Tax?"

The answer is $1,900.00.

This is a great question.  By way of background the "Kiddie Tax" only applies to unearned income (investment income).

You make cash gifts to your child's custodial account (UTMA/UGMA) and then invest the money on the their behalf in stocks, bonds, mutual funds, T-Bills, and the like. Since your child is considered the legal owner of the custodial account, the income and gains from the assets in it are taxed to the child at his or her low rates — usually only 10% or 15% for ordinary income from interest and short-term capital gains and 5% or less for long-term capital gains and dividends. That's a big difference from the tax rates that high-bracket parents pay, which can run as high as 35% on ordinary income and 15% on long-term gains and dividends.

The "Kiddie Tax"  applies if your child has unearned income that exceeds the threshold, which is $1,900 for 2009.  If the unearned income doesn't exceed the threshold, then it is taxed at the child's low rates. If the threshold is surpassed, only the unearned income in excess of the threshold is taxed at the parent's higher rates.

The "Kiddie Tax" can potentially apply up until the year when your child turns 24.  If your child is 19 to 23 years old, the "Kiddie Tax" will only apply if he or she is a student.

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P/E Ratio

Tom Tillery  July 6 2009 04:00:00 AM
Question: What is the P/E Ratio?

The price-to-earnings ratio (P/E Ratio) of a stock is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share.

An example of the P/E Ratio would be as follows:

If a company is currently trading at $50 per share and its earnings were $1.95 per share, then P/E ratio for the stock would be 25.64 ($50/$1.95).

P/E Ratio = Market Value per Share/Earnings per Share (EPS)

How might you use the P/E Ratio to value a stock?

The current market price for a stock would be derived as follows:

Earnings per share x P/E Ratio = Current Market Price:

1.95 x 25.64 = $50.00
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Registered Investment Advisor

Tom Tillery  July 3 2009 04:00:00 AM
Question: What is a Registered Investment Advisor (RIA)?

An RIA is either an individual or business which has registered with the U. S. Securities and Exchange Commission (SEC) or with a state securities agency and is in the business of giving advice about securities to clients.

Most financial planners are registered investment advisers, but not all registered investment advisers are financial planners. Some financial planners assess every aspect of your financial life—including saving, investments, insurance, taxes, retirement, and estate planning—and help you develop a detailed strategy or financial plan for meeting all your financial goals.

Others call themselves financial planners, but they may only be able to recommend that you invest in a narrow range of products, and sometimes products that aren't securities.

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Harry Markowitz

Tom Tillery  July 1 2009 04:00:00 AM
Question:  Who is Harry Markowitz?

Harry Markowitz is an American economist and a recipient of the Nobel Memorial Prize in Economic Sciences which he shared with Merton H. Miller and William F. Sharpe in 1990.  He is best known for his pioneering work in Modern Portfolio Theory, studying the effects of asset risk, return, correlation and diversification on probable investment portfolio returns.

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