Big tax surprise looming for high earners

 Published: Thursday, 26 Dec 2013 | 11:52 AM ET

 

By: Jeff Morganteen | Producer, CNBC.com

Tax shock for high earners looms

Thursday, 26 Dec 2013 | 10:29 AM ET

Joseph Perry, Marcum Partner, explains why high income earners are in for a big tax shock this year and shares how effective tax planning can help ease the tax bill.

 

Attention high-income earners: Be prepared to pay more in this year's tax bills.
How much more? That depends on your income, deductions and exemptions, but according to Joe Perry, a partner overseeing tax and business services at Marcum, about 1,200 of his clients earning more than $400,000 will see their 2013 tax bills grow by an average of 7 percent compared to 2012. The changes amounted to a total of $250 million more in taxes this year, he told CNBC on Thursday.
"People are aware of the changes, but I don't think they are prepared for the changes," Perry said on "Squawk on the Street." 

(Read more: Five tips for year-end tax planning)

Clint Hild | E+ | Getty Images

 

After President George W. Bush's tax cuts for the highest income bracket expired earlier this year, married couples filing jointly with income greater than $450,000 face a 39.6-percent income tax—up from 35—plus a 20 percent tax on qualified dividend and long-term capital gains, up from 15 percent. The new tax rules also limited the kind of deductions joint filers earning more than $300,000 could file.

"You have to plan for a two-year period," Perry said. "You can't just look at one year. You want to understand where you're going to be in 2013 and 2014. Then when you look at the years you want to see if you're coming up on any of the thresholds."

Perry said high-income earners should think about gifting appreciated assets to take advantage of generous deductions.


—By CNBC's Jeff Morganteen. Follow him on Twitter at

@jmorganteen

and get the latest stories from "Squawk on the Street." 

CNBC Video of Article: http://www.cnbc.com/id/101297236

Federal workers' pensions targeted in budget deal

Distinctly unpopular among voters and a scant presence in most congressional districts, federal workers have become an easy target in the hunt for budget savings.
Their retirement programs are notably generous compared to the norm in private industry. But for federal workers hired after 2012, the pension program is turning less generous.
Most federal civilian employees hired beginning in January will contribute 4.4 percent of their pay to their pension plans under the House-passed budget bill the Senate is expected to approve this week. Government workers hired in 2013 will continue paying 3.1 percent of their gross pay to help cover their pensions; those on the federal payroll before then, 0.8 percent.

"It's insane they should be expected to fund government," said Jackie Simon, policy director for the American Federation for Government Employees, the union representing 630,000 federal workers. "It's a big country. The burden should be spread more broadly."

Deal not done: Senate needs to pass budget deal

 

CNBC's John Harwood reports that the Senate will vote on the budget compromise before the end of the week, but the deal is not done yet.

But with pensions for nongovernment workers on a path toward extinction, federal employees get little sympathy from some experts.
"Their private sector counterparts would be jealous of the benefits they're maintaining," said John Ehrhardt, a principal at the actuarial and consulting firm Milliman.
While 38 percent of private industry workers received pensions in 1979, just 14 percent did so in 2011, the most recent figures from the Employee Benefit Research Institute, which advocates for benefit programs.

Besides retaining their pensions, most federal workers also can contribute to a 401(k)-like savings program, the Thrift Savings Plan.
That combination is far better than what's available to most private industry workers. In 2011, only 11 percent of employees in the private sector had both savings plans and monthly pension payments, according to the research institute.

For federal workers, the government matches up to the first 5 percent of employees' contributions to their retirement savings.
Only about 4 in 10 companies offer retirement savings plans, a number that's been growing. The most common practice is for employers to match half what workers contribute up to the first 6 percent of pay, according to an industry survey.
Federal workers and their supporters argue that their pensions can't be considered in a vacuum.

Democrats to have worst year of their life: Pro

Discussing the budget deal in Washington, with Democratic strategist Jimmy Williams; Republican pollster Jim McLaughlin; and WOR radio talk show host Mark Simone

The 2.2 million federal civilian employees have had their pay frozen for the past three years. In addition, most were furloughed for at least a day without pay this year, thanks to the automatic spending cuts triggered by the two parties' budget standoff.
Federal workers aren't the only public employees facing growing pension expenses. Such plans remain common for many state and local workers, and 30 states imposed higher pension costs on their employees between 2009 and 2012, according to a National Conference of State Legislatures survey.

Such plans — called defined benefits because employers must spend whatever is needed to fully finance them — have been fading in the private sector for decades, as companies shed those expenses. Many firms have shifted to savings plans to which they make a defined contribution, making workers face the risk if investments go bad.

Federal workers "have to be careful about crying foul over something for which the other solution would be to eliminate it," said Lynn Dudley, senior policy vice president for the American Benefits Council, representing big companies that provide retirement benefits.

Most federal workers hired before 1984 are covered by the older Civil Service Retirement System. They contribute 7 percent of their earnings for their pensions but are not covered by Social Security — thus avoiding the 6.2 percent Social Security payroll tax other workers pay.
When Congress strengthened Social Security's finances in 1983, it put federal workers hired starting in 1984 under a new Federal Employees' Retirement System. They contribute 0.8 percent of their pay to their pensions, but also pay Social Security taxes.

In 2012, that pension contribution was raised to 3.1 percent. Earlier this year, federal workers' retirement costs seemed on track for deeper increases than those the budget deal would impose.
The Republican-run House approved a budget deducting 6.35 percent from all federal workers' paychecks, not just new hires, to help cover their pensions, saving the government $130 billion over a decade.

President Barack Obama earlier this year proposed saving $20 billion by gradually raising their pension contributions by 1.2 percent.
Rep. Chris Van Hollen of Maryland, top Democrat on the House Budget Committee, said he signed off on the $6 billion increase for new federal employees hired beginning in January after Obama assured him he would propose no new retirement benefit cuts in next year's budget.
Van Hollen, whose district has many federal workers, said Obama made that commitment by phone last week as Air Force One refueled on its way to ceremonies for the late South African leader Nelson Mandela.

—By The Associated Press.

Mediocre test scores at a pretty steep price

  

 Published: Saturday, 7 Dec 2013 | 7:00 AM ET

By: Allen Wastler | Managing Editor, CNBC.com

Well, the results are in and, guess there's no other way to put this: We stink. Well, maybe not so much stink as just we're really, really so-so. And our mediocrity costs a lot.

I'm talking about the latest round of testing 15-year-old students worldwide. The best the United States could do was place 17^th in reading. In math we were 26^th and in science we were 21^st. In fact, the U.S. scored at or just below average in each category, so figure a C minus overall. China and other Asian nations took most of the top spots. Finland, a past champ, dropped a few rankings.
Now there's a lot of debate about this so-called PISA exam. The questions are fairly straightforward. Give this one in the box a try. The answer is at the bottom. If you want more sample questions, go here.

But some argue the test, administered by the Euro-centric OECD in 65 countries or "economies", doesn't check out a valid sample of U.S. students. Others argue that China stacks the deck, only offering up its best urban students and none from the hinterland.

Whatever. If the U.S. slammed the ball out of the park in the first place no one would be debating ground-rule doubles.
Besides our national pride taking a hit (imagine if these were Olympic results?!), this is a money issue: We're wasting it.

We spend about $115,000 in total educating a kid, according to the OECD, more than most countries. Yet this is the best we can do?
If you look at bang-for-the-buck among various selected countries, shown here in two graphs (total education cost per student and the result on the math portion of the PISA test), you see the U.S. isn't doing so great (although Luxembourg may have a bigger gripe).

Japan spends less than the US per student, the equivalent of about $89,000, yet performs much better. Same story with our neighbor to the north.
Just to rub it in, the OECD made it a point to note that the Slovak Republic spends less than half as much as the U.S. yet scores on a par with the United States. Also important to note: China's education costs apparently couldn't be obtained by the OECD. And the scores and rankings of some countries, including the U.S., could be affected by sampling errors, the OECD cautioned.
Nevertheless, the numbers tell a pretty unprofitable tale. The U.S. currently spends close to $1 trillion a year on education. Yet the country's performance in the worldwide PISA test, administered every three years since 2000, has remained static.

"One word describes the U.S. performance: Embarrassing," said Gary Beach, editor emeritus of CIO Magazine and author of "The U.S. Job Skills Gap", in an email exchange. "Equate the 10 years of PISA scores (back to 2000) as end of year earnings results for a corporation that spent $5 trillion but had not made one cent of profit...or actually produced a loss. What would happen? The board would fire the entire management team by the 10th year."


Then there's the broader job picture. Employers complain they can't find workers with the education and skills necessary to fill certain jobs and so have to look abroad.

"The US continues to have a shortage of IT workers for the positions available in the US," lamented Jack Cullen, president of Modis IT Staffing, in an email response. "While there may be less of a shift to send more jobs off shore, we have fallen behind in getting enough students to pursue IT related degrees. ...I am not surprised by the (PISA) results. The U.S. educational system is in catch-up mode to countries like China, Japan, and India to name just a few."
Others have countered that employers just want cheap foreign labor. If employers offered higher rates of pay, then more people would be interested in pursing those careers.
Hard to imagine, though, that factoring into a 15-year-old's thinking, much less his or her test score. And regardless, if that cheap foreign labor is actually smarter, the decision is kind of a no brainer, right?

Oh yeah, the answer is 11 a.m.
(This paragraph is for the copy editors who will go nuts that I never spelled out the acronyms: OECD stands for the 34-member Organization for Economic Cooperation and Development and PISA stands for Program for International Student Assessment. Putting either of those in the regular copy would have been truly cumbersome).
—Allen Wastler is managing editor of CNBC Digital. Follow him on Twitter

@AWastler

. You can catch his commentary here and on CNBC Radio. And check out his fiction.

Why traditional diversification is ‘downright dangerous’

   

 Published: Tuesday, 26 Nov 2013 | 9:00 AM ET

 

By: Elizabeth MacBride, Special to CNBC.com

One investing rule doesn't fit all

 

Tuesday, 26 Nov 2013 | 4:00 PM ET 

 

CNBC's Sharon Epperson says no one should blindly stick to the traditional investment allocation of 60 percent stocks and 40 percent bonds.

 

For nearly 70 years, many investors and investment advisors used a basic formula to guide them in creating diversified portfolios: the 60/40 (60 percent/40 percent) stock/bond split.
The strategy worked well: It returned 10 percent a year from 1990–2011.

The question now—as the number of asset classes and strategies available cheaply to investors proliferates, and the risk of holding U.S. bonds rises—is whether the classic 60/40 portfolio split has outlived its investment usefulness and, if so, what should replace it?

For all practical purposes, the short answer is yes, according to Burt Malkiel, Wealthfront chief investment officer, Princeton professor and author of the investment classic, "A Random Walk Down Wall Street," a book that helped launch the low-cost index-investing revolution.

Leland Bobbe | Image Bank | Getty Images

 

Malkiel recently told CNBC that the 60/40 rule was an oversimplification from the beginning. Now he thinks it is downright dangerous. "The investor in bonds is, I think, very likely to get badly hurt by sticking with the 60/40."

Malkiel has a new recommendation for investors, but it is not as appealingly simple as the 60/40 split. Too bad, he said. "I never have liked any kind of norm."


Weaning people off the 60/40 concept is a challenge, however, precisely because it has worked in the past.

Andrew Ang, the Ann F. Kaplan Professor of Business at Columbia Business School, called the 60/40 rule a shorthand for the concept of diversification. It has been embedded in the investing mind-set since 1952, when Harry Markowitz introduced Modern Portfolio Theory. But in the '50s, there were only two asset classes available cheaply—stocks and bonds, Ang said.

A random walk down dead ends in diversification

Why 60/40 came to be the norm rather than some other ratio is anybody's guess. Humans seem intuitively drawn to two-thirds, which is also used to represent balance in art and politics. "You'll get similar results doing 50/50 or even 70/30," said Ang, who, like Malkiel, believes that the plain vanilla portfolio is dead in an increasingly complex world.

Any norm at all ignores another fundamental investing precept—that your allocation needs to change to suit your personality and stage of life—a more important concept now than 70 years ago, because people live longer and plan their own retirements.



Investors who let go of oversimplification and embrace a slightly more complex but still low-cost portfolio will be better prepared to meet changes in their lives and the economy, Malkiel said.
(The following is an edited version of an interview CNBC recently conducted with the investing guru on the topic of portfolio diversification.)

"I never have liked any kind of norm. ... The investor in bonds is, I think, very likely to get badly hurt by sticking with the 60/40."

Burt Malkiel

Wealthfront chief investor officer, Princeton professor and author of "A Random Walk Down Wall Street"

CNBC: Why did we ever get the 60/40 in the first place?
 
Malkiel: I don't know. And I don't like any kind of norm, because it depends on so many factors—and your personality.

The correct allocation ought to depend on individual circumstances. It is definitely not the right kind of thing for everybody. What I had in my "Random Walk" for the last several editions is a quite different allocation. You should have more equity orientation. Another rule of thumb: Jack Bogle has often said bonds should be a percentage equal to your age. I don't agree with that, either.
I think that allocation is particularly wrong today because we are in an age of financial repression. ... Europe and Japan are having trouble reining in budget deficits, and we have high debt in the U.S., too. (The governments) are deliberately keeping interest rates down. Even a U.S. bond index fund is not the right thing to do, because BND [Vanguard Total Bond Market ETF] is about two-thirds government or agency bonds.
The investor in bonds is, I think, very likely to get badly hurt by sticking with the 60/40.

Jack Bogle, The Vanguard Group, explains why the index over the actively managed fund is a better option for investors.

CNBC: In the recent editions of "Random Walk," you suggested the following portfolio for an investor in his or her 50s—with each asset class represented by a low-cost fund—and for the percentage allocated to equities to be larger, depending on the age and risk tolerance of the investor:

• Cash: 5 percent
• Bonds: 27.5 percent
• REITs: 12.5 percent
• Stocks: 55 percent

How would you update that portfolio?

Malkiel: The recent editions were written when bonds had a generous yield. Today BND yields are about 2.4 percent. That is why we suggest the bond (safer) part of the portfolio be fine-tuned. We ... use high-quality dividend growth stocks for a part of what otherwise would be a straight bond portfolio. Also, we use some foreign bonds where debt/GDP is low and yields are relatively high.
The updated portfolio for an investor in his or her 50s would look like:

• Cash: 5 percent
• Dividend growth stocks, emerging market bonds and tax-exempt bonds: 27.5 percent
• REITs: 12.5 percent
• Stocks: 55 percent

You use that as a starting point and move allocations up or down, depending on your age.

CNBC: Is the definition of diversification changing?

Malkiel: There are so many more asset classes now. It's not that we want to say absolutely never any bonds.

CNBC: How has your view of asset allocation changed over the years?

Malkiel: I'm more open to the idea that you need stability. You may not, as an individual, just be psychologically able to stand the amount of volatility that equities have. You want a little more stability. ... I can understand that. It depends on your ability to not go crazy and sell at the wrong time when the equities drop, as they do.

I'd like to broaden the definition of how you get the stability. It's just saying ... in today's world, bonds as the only possibility to add stability to a portfolio is a much too narrow way to look at it, and a suboptimal way.

We're talking about a broader definition of diversification. There are some financial advisors using this window to broaden it to include a lot of alternative asset classes, like gold.
Some are even suggesting hedge funds. I believe in wider diversification, but for me wider diversification would be to look at some emerging markets that are very unpopular. Or REITs. Real estate is a hard asset, good when inflation is low.
Something like a hedge fund that charges 2.20 percent is a sure loser.
I'm not a big fan of gold. People say it's a hedge against Armageddon. If the world disappears, your asset allocation will be the least of your concerns.

CNBC: What are the criteria you use to judge an asset class?

Malkiel: You want to control the things you can control. Worry very much about the costs you pay. All of us who deal with the stock market need to be very modest about our ability to make money. But the one thing is certain: The lower the fee I pay ... the more there will be for other investments. Worry about taxes on an asset class, fees, and you do want to be diversified. It's a totally reasonable thing to want stability, but it is not clear to me that that means bonds—or U.S. bonds, specifically.
—By Elizabeth MacBride, Special to CNBC.com

Posted by Wealthwise at 6:57 AM