Jonathan Clements's Blog, page 55

Yup, most usable, needed tax breaks go to average/middle class Americans.

I recently wrote in a comment on HD that I think the most important, usable, and meaningful tax breaks go to average middle income Americans. Not being a tax expert, I did some digging to find them. 

Perhaps Rick Connor and others know of more I missed.  

Here is what I came up with. 

Child Tax Credit - helps families with qualifying children by reducing their tax liability.

Earned Income Tax Credit (EITC) - the EITC can also provide significant benefits to those within the lower end of the middle-class income range, It's designed to supplement the income of working individuals and families.

Standard Deduction -The standard deduction reduces the amount of taxable income. Increases in the standard deduction can simplify tax filing and provide tax savings for many middle-class taxpayers. Seniors 65 + get an additional deduction.

SALT Deduction-allows federal deduction of state and local taxes, including property taxes.

Tax-free Social Security benefits (for many beneficiaries)- according to the SSA, projections show that an annual average of about 56 percent of beneficiary families will owe federal income tax on their benefits from 2015 through 2050

Retirement Savings Contributions - Tax-advantaged retirement accounts, such as 401(k)s and IRAs, allow middle-class individuals to save for retirement while reducing their current taxable income. 

Roth accounts provide additional benefits with tax-free retirement income. 

The "Saver's Credit" is also available for some moderate income tax payers contributing to retirement accounts.

Education-Related Tax Benefits - Tax credits like the American Opportunity Tax Credit and the Lifetime Learning Credit can help middle-class families offset the costs of higher education.
 

The Health Insurance Premium Tax Credit - This is a refundable tax credit that helps eligible individuals and families pay for health insurance premiums purchased through the Health Insurance Marketplace.

Employer-Sponsored Health Insurance Exclusions - A significant portion of healthcare funding comes from employer-provided health insurance. Employer contributions are tax-free to the worker. 

IRC Section 125 Cafeteria Plans- allows workers to pay their share of different employee benefit premiums on a pre-tax basis.

Health Savings Accounts (HSAs) - HSAs are tax-advantaged savings accounts that can be used to pay for qualified medical expenses.
There are also employer-funded Health Reimbursement Accounts (HRA) plus Flexible Spending Accounts (FSA)

Of coarse, various investment tax provision like capital gains, treatment of dividends, even tax-free interest on municipal bonds apply to all taxpayers.

The post Yup, most usable, needed tax breaks go to average/middle class Americans. appeared first on HumbleDollar.

Should all Americans pay federal income tax? By Ben Rodriguez

RDQ's recent post about seniors paying taxes reminded me that presently only 53% of Americans pay federal income tax.  Many of the remaining 47% are net recipients of money from the treasury.  We all know that everyone working pays payroll taxes, but should everyone pay income tax?

On the Yea side, having all citizens paying income tax would give everyone "skin in the game" when it comes to voting on tax policy and expenditures.  As it is, it is very easy to see why the 53% would ask why the 47% gets to vote on how much the 53% is taxed and where those funds go.  If the percentages flip just a little more there will be more non-payors than payors, creating a potentially perverse situation.

On the Nea side, one must wonder if we're asking for blood from a turnip?  As it is, if the 47% are net zero or net takers and are barely making ends meet as it is, where does this tax money come from?

The post Should all Americans pay federal income tax? By Ben Rodriguez appeared first on HumbleDollar.

And Another Thing….by Marjorie Kondrack

Henry James is one of my favorite authors.  In the late 1880s He wrote a novel, Washington Square,  which was adapted into a play and an award winning movie, “The Heiress”.  Olivia dehavilland starred as Catherine Sloper, a shy, ordinary looking, socially awkward young woman, who stands to inherit a large fortune.

Montgomery Clift, was Morris Townsend, her handsome, charming but ne’er do well suitor—and a wonderful English actor, Ralph Richardson, as Dr. Austin Sloper, Catherine’s father. https://en.m.wikipedia.org/wiki/The_Heiress

In a scene from the movie, Dr. Sloper informs Morris that he is not a suitable candidate as a husband to his daughter,  because he is “simply not in the right category.” (to choose from) for someone in Catherine’s position, whereupon Morris launches into an impertinent rebuke in attempt to disprove Dr. Sloper’s opinion.  When the argument continues and Dr. Sloper’s opinion of Morris as a fortune hunter is confirmed, he summarily dismisses Morris by showing him the door, simply telling him…”you push me to it…you argue too much.”

While face to face debate has always been a part of our culture,  the internet has given some people permission to become insulting, rude and negative to those who don’t agree with them.  It’s all too easy to minimize the impact of what we are saying when we are behind a computer screen. It can also be easy to do something we may regret.  In a moment of anger, one little message and one little click, can cause damage we can never take back.

Usually, when people argue  on the internet, it’s not to resolve an issue or to understand each other, it’s just about spouting an opinion and seeking attention, or just to get one up on you by flouting, what they consider, is their superior intellect.  So what’s the point—you are rarely going to change someone’s opinion.  All it does is create hostility. .

I’d like to believe I am naive, rather than stupid, but I’ve just begun to wake up to the notion that there are trolls out there in comment land—people who argue just to argue. They only want to mock others who don’t agree with their views, and rile others up.

Even when one person is faced with logical reasoning and solid evidence that proves them wrong;  rather than relent they will resort to personal attacks, There is no payoff to winning an argument.  So unless it involves your integrity or an obvious need to clarify your position, let it go. Some people bring out the best in us, and others—well, they bring out a less than ideal version of ourselves.  .

It takes a lot for me  to get my Irish up.  I’m still learning to quell a slight pugilistic tendency to give these irksome people a Brooklyn beating. Just Joking. But as Jonathan Clements wrote in his summation of personality types,  “Understanding who we are—and the mistakes we’re inclined to make won’t necessarily prevent us from messing up, but it’s clearly a step in the right direction.” And, by all means, look out for the trolls.

The post And Another Thing….by Marjorie Kondrack appeared first on HumbleDollar.

Going Naked

Every day brings me another insurance offer. In today’s mail, I was invited to insure against identity theft for $34.99 a month.

Last week, I was sent a “final notice” to purchase a home warranty. In the same batch of mail, I was offered a $20,000 whole life insurance policy for $132 a month.

My most faithful correspondent is my water company. Every month it invites me to insure the water pipes under my lawn for about $1,000 a year. I would pay up to $6,000 in repairs should a pipe fail.

Lately, when I buy tickets online, a check box appears offering me coverage that would refund my purchase if I could not attend because of illness. A similar offer appears when I book a hotel room.

I’ll bet this isn’t just happening to me. You may be getting a lot of uninvited insurance offers as well. If it helps, here are a couple of rules I learned while studying for the CFP that help me decide what insurance to buy.

The first rule is to buy insurance against catastrophes that we cannot afford. Skip coverage against risks that we could pay from savings.

This means I’m not buying insurance for two tickets to the Philadelphia Flower Show. I invoke the same rule when I throw away the offer for the water line insurance and the home warranty. If something breaks around the house, I can afford to pay for the usual repairs.

I do buy health, homeowners, auto insurance and umbrella insurance policies. If something went seriously wrong in these domains, the cost could be more than I want to bear.

Life insurance falls into a gray area. A second rule can help here: Only buy life insurance when someone depends on your earnings. Following this rule, I carried term life insurance when my kids were young. Now that they are grown, I’ve dropped life insurance.

These rules aren’t absolute. Some people may buy life insurance to help settle their estate, for instance. Others may feel reassured by purchasing an extended warranty on a new car. Still, these two rules help me fend off uninvited offers that seem designed to prey on our natural anxieties.

 

The post Going Naked appeared first on HumbleDollar.

Care to join me on my yacht cruising the Mediterranean? Do you envy the super wealthy? RDQ

There was a time when I probably did- that was many years ago when sailing around the Mediterranean in my luxury yacht was a fantasy. Once, decades ago, I actually explored the cost of renting such a yacht. Back then it was $200,000 a week, plus tips for the crew and the cost of the food you selected. I was afraid I couldn’t afford the tips- but I could bring eight friends to impress.

These days I don’t envy of the billionaires, I don’t worry about them paying their fair share, or how they use every provision in the tax code. We all do the same after-all. I admire many of them. 

I resent distorted claims about their taxes, like an article claiming they pay lower tax rates than low income Americans- 8% the example was, but when you read the analysis they were using the unrealized appreciation on investments, not income. Like taxing the growth in your 401k before you withdrew a penny. 

I can’t imagine a billion dollars would make me happier. I see more problems then benefits. No doubt I couldn’t use TurboTax to do my taxes, or the AARP tax service for that matter. Instead of a mid level Mercedes, I’d be expected to drive a Maybac or more likely be driven in it. What fun is that?

For the most part, I say they earned it. They did what I could never do, actually what very few people could do. They took risks, they persevered, they were inventive, they created things and took thousands of other people along for the ride and made them wealthy too. They created hundreds of thousands of job directly and through businesses that resulted from their actions or leveraged them. 

Look at one of the newest billionaires, Peter Cancro. From a tiny Jersey Shore sub shop to an international business hiring Danny Devito as a spokesman. All built with cold cuts, oil and vinegar. Who among us can’t make a sandwich?

And how did they get their wealth? Just like we all strive to do, invest and let the stock market do the hard work. Of course, it would have been nice to have been in on the IPO for Apple or Microsoft or even an early investor, but there was nothing stopping me. Opportunity was there.

On balance, I say we have all gained from the efforts of many billionaires, some we probably never heard of. Without Phil Knight and John Mars it wouldn’t be worth jogging to a candy store. 

Yeah, I know, some of these folks inherited their wealth. To that I say, so what? Somebody still earned it and I hope to leave what I accumulated to my children too. 

No envy here. 

The post Care to join me on my yacht cruising the Mediterranean? Do you envy the super wealthy? RDQ appeared first on HumbleDollar.

A Simple Way to Avoid Phone Scams

I just read about an excellent script to use when one gets a call purporting to be from a financial institution that is, “every time a financial institution calls: “Where are you calling from? Thank you. I’m going to hang up and call back.”

Then go find the institution’s phone number (from a statement, the back of the credit card, or by typing in the URL of the website itself and finding it on the website; you can’t just search for the website because scammers can manipulate search results) and call the institution yourself.

Financial institutions (banks, credit card companies, brokerage houses, Social Security, the IRS, and on and on) will never call you and ask for information.

This is probably good advice for call from utilities as well.

The post A Simple Way to Avoid Phone Scams appeared first on HumbleDollar.

The Status of Inherited IRAs in 2025

Here is the link to Christine Benz of Morningstar interviewing Ed Slott, who many consider THE expert in the country on the IRS’s interpretation of IRA laws/rules for 2025.

Ed is a gold mine of information as to how to decide on whether to convert traditional IRAs to Roths, and it’s effect on your beneficiaries.

https://app.mscomm.morningstar.com/e/er?utm_source=eloqua&utm_medium=email&utm_campaign=MorningDigest&utm_content=None_62004&utm_id=32087&s=1258972516&lid=91893&elqTrackId=894e84e4e6dd4e4ea71a9bc97420afd2&elq=c1c50cb96d48485491b4d81fbe5a229d&elqaid=62004&elqat=1&elqak=8AF55770D8A5B2AC19A42DE86CB56351215EDD04764F052A1F72EA4FA79B9C459194

The post The Status of Inherited IRAs in 2025 appeared first on HumbleDollar.

Active ETFs: Get Ready ‘Cause Here They Come by Steve Abramowitz

“I’m giving you a love that’s true

And gonna make you love me, too

So get ready, get ready

‘Cause here I come.”

adapted from “Get Ready”

The Temptations, 1966

 

The Motown rhythm and blues quartet may well have divined the arrival of actively managed exchange-traded funds (ETFs). Can’t stop them now, ladies and gentlemen—they’re already here.

Leave it to the frantic asset managers who brought you the load fund and then repackaged it as no load with hidden excessive fees to invent a product to compete with the fabulously successful passive (or index) ETF. The fund purveyors needed to staunch the flow of assets from their high-fee mutual funds to passive ETFs and to convert their longstanding lucrative investment vehicle into one less profitable but more in demand.

A few members of the board arranged in plush leather chairs around a conference table devised a new portfolio wrapper to become known as the active ETF. The creation would combine the best features of passive ETFs—low cost, tax efficiency, flexible trading and transparency. Giddy with their redemption, the executives proceeded to resurrect those tactical acrobats of yesteryear called portfolio managers. They would attract investors alarmed by their absence in passive ETFs.

According to one prominent provider of active ETFs, these trading magicians would “uncover market opportunities and select investments with the goal of outperformance rather than merely tracking an index.” To sweeten the pot, active ETFs would come with a strategically placed price in between that of the inexpensive passive fund and of the exorbitant mutual fund.

Just how menacing is the active incursion onto the ETF landscape? Well, aggressively promoted by the asset management companies, it’s burgeoned beyond all expectation. The number of active ETFs has grown exponentially in the last five years from barely 600 to almost 2,500. Likewise, assets under management have ballooned from about 50 billion to almost 900. Distressingly, about 80% of recent ETF launches had a portfolio manager at the helm. The active ETF phenomenon is a juggernaut.

But is the new vehicle an improvement or even any good at all? Specifically, how does its performance stack up against the formidable passive index fund? I thought I would clarify some of the differences between the two fund types and do an illustrative back-of-the-envelope demonstration of comparative performance.

 I first consulted Morningstar’s list of the 28 best active ETFs to buy in 2025 based largely on their proprietary quantitative and analyst ratings. I then selected an active ETF from the T. Rowe Price mutual fund group, a leading provider which earned five of the 28 slots and with which I am familiar. I set out to analyze the Price Growth Stock ETF (TGRW) because of its pedigree and the ready availability of the Vanguard S&P 500 Growth ETF (VOOG) as the passive benchmark.

Let’s start out with an overview of the two contestants. Not surprisingly, both ETFs are classified by Morningstar as covering large growth territory. VOOG has been around a lot longer than  recently launched Price Growth and as you might expect it’s a whole lot bigger. The former’s net assets are currently 15 billion as against the latter’s barely a billion. It is also much better diversified, holding about 200 stocks as compared to 60. In addition, the Vanguard portfolio is considerably less concentrated, having a 53% weighting as opposed to 64% in its top ten stocks.  As befits growth funds in the recent market environment, both of these carry a high tech position, but Vanguard’s is notably smaller (about 40% rather than 50%).

We have here two funds that are quite similar, but the portfolio manager at Price has taken a more aggressive stance to achieve outperformance. So what happened?

I contrasted the funds’ results in thee calamitous 2022 market and the recovery in 2023. During the sharp decline, the somewhat less risky VOOG proved its mettle, dropping about 30% as its adversary plunged 10% more. This pattern was reversed in the following year’s tech-led burst, rewarding the Growth ETF’s manager for his daring.

But what about this year? How have these two ETFs fared in our chaotic market? The data are not eye-opening but a discussion of the trends is instructive. As of mid-March, VOOG and FGRW lost 8.9% and 10.2%, respectively. Several factors might be at work here. The expense ratio of Price’s growth ETF is .52, modestly below the expense of its mutual fund sibling but unconscionable in relation to VOOG’s .07 cost. Another contributor to the difference in performance may be FGRW’s much higher annual turnover rate of 50%. Its manager has incurred high trading expenses as a consequence of his frenetic quest for outperformance.

Do I hear somebody chortling in the back of the class that the difference in the year-to-date results (10.2% for VOOG, 8.9% for FGRW) is practically-speaking insignificant. I would reply that it’s anything but insignificant if it were to persist in a long-term investment plan. Say you’re 45, planning to retire in 20 years and boast a half a million appreciating in an IRA. Further imagine your son needs long-term care, so you won’t be able to make any more contributions. How much will that half million grow to at 8.9% vs. 10.2%?

With the help of the compound interest calculator at investors.gov, we learn that the seemingly small difference in the two rates yields a stark contrast in returns. The lower rate produces a 3.0 million account balance at age 65, whereas the higher rate yields a final figure of 3.8 million. I  submit that an $800,000 difference is indeed significant. Now recall the .45 discrepancy in cost of the two ETFs that will most likely hold about steady across time. Holders of Vanguard’s S&P 500 Growth ETF have that advantage locked in for the duration of their retirement plan.

Now let’s all calm down. This is more a demonstration than it is an upstanding piece of research. The numbers are true, but the time periods are woefully short. To be sure, this is not only a T. Rowe Price problem. It’s endemic to the active fund industry. We will have to “get ready” for the deeper penetration of the active myth into the ETF marketplace. That makes it all the more imperative to fend off for ourselves, our family and our friends the overblown promises of the financial services profession that benefits mightily from all the hoopla. To paraphrase those rhythm and blues lyrics, they want to make you love them, too.

 

 

The post Active ETFs: Get Ready ‘Cause Here They Come by Steve Abramowitz appeared first on HumbleDollar.

Like it or not, we all need to pay taxes. Seniors are no exception. Everyone in the pool.

As I do my daily social media surfing I am finding a disturbing trend- anti tax sentiment and one group or another thinking they should be exempt from taxes. We Americans are not among the highest taxed countries and despite the rhetoric, the wealthy do pay the great bulk of taxes.

Seniors seem to be the most vocal looking for tax exemption. Many feel they should be exempt from property taxes and of course, paying taxes on Social Security benefits. I am not referring to seniors living in or near poverty. 

I find the calls to exempt seniors from property taxes most disturbing and illogical. Especially as property taxes are the primary source of school funding. 

Income taxes on Social Security benefits contribute $50 billion a year to the SS trust and $35 billion to Medicare Part A trust. 

To me, looking to avoid taxes without considering what they provide is like saying a family living on credit cards should not have to pay the bill at the end of the month because they earned or deserve what they purchased. 

“Earned” and “deserve” are frequently used in posts. Living on a fixed income and inflation are common themes. 

Exempting one group of citizens from taxes simply shifts more to another group. Frankly, I don’t think seniors deserve more consideration than a young working family trying to build their future. 

Besides, no group of citizens (often without regard to income) receives more benefits, more special treatment, more discounts than seniors. Possibly as a result of a general erroneous mindset that seniors as a group are poor. 

Preparing for retirement, a life-long process in my view, includes preparing for taxes of all kinds. The pages of HD are full of discussion on the subject. We all use the tax code to minimize our taxes, but we pay what is necessary - to provide vital services, to have good schools and to assist those in need. That how a good society works. Being fortunate by getting old does not exempt us from that responsibility IMO. 

We seniors had a lifetime to prepare for living in old age, without a paycheck. If a person had modest earnings their working life, chances are that will not change in retirement, nor is it a surprise. We knew our income might not grow, we knew inflation was real, we knew we would owe taxes and should have known some would increase. 

Sorry, it’s everyone in the pool in my book - while providing necessary assistance to those truly in need. 

The post Like it or not, we all need to pay taxes. Seniors are no exception. Everyone in the pool. appeared first on HumbleDollar.

RDQ considers: A lump sum in lieu of a pension, withdrawal strategies, annuities and other mundane decisions – good luck.

I recently viewed an interview by Christine Benz on YouTube with the finance writer for the Washington Post.

The topic was the difficulty transitioning from saving to using money for retirement income, a topic frequently discussed on HD. The writer said she was getting ready to retire and her husband was already retired. She went on about her own thinking regarding the difficulty of transitioning from saving to spending. 

After a few minutes of the discussion about withdrawal strategies, she revealed that in addition to what she and her husband had saved, they both had pensions and, of course, social security. Her husbands pension provided her with a survivor annuity. 

She then said she was taking her pension in a lump sum because she wanted total control over her money. Giving up a life annuity income when you have additional resources doesn’t sound like good move to me, especially after saying how difficult the withdrawal strategy would be, what do I know, I’m not a financial columnist. However, I do live on a pension and Social Security and I know the feeling that steady income provides. 

Maybe she has enough investing skills to pull it off, but I bet most of the YouTube viewers would be making a mistake. To me the key to a secure, stress-less retirement is a steady income stream that does not require annual withdrawal calculations or decisions or fluctuating income. 

The writer gave up the second best source, a pension, not available to many Americans these days. Most people must construct their own income stream. 

If I was in that position I would use a portion of my investments to purchase an immediate annuity and I would assure an added income stream with dividends and interest. I see that as simple with few additional decisions needed on an ongoing basis. No guardrails, no ladders, no (significant) worries about the stock market. And it preserves at least a portion of investments. 

In fact, to cope with my non-COLA pension, over many years I have built a supplement income stream from bond interest and dividends and because it has been reinvested for over twenty years, the monthly proceeds could now boost our pension income by nearly 20%. 

No doubt there are other ways to construct a retirement income stream, better than mine very likely, but I like simplicity even at a cost. 

How do people do it, that is, construct their retirement income stream from accumulated savings with minimum effort, maximum stability and minimum stress? 

The post RDQ considers: A lump sum in lieu of a pension, withdrawal strategies, annuities and other mundane decisions – good luck. appeared first on HumbleDollar.