Balance risk and return to create investment balance

Even if you're not an investment expert, you're probably familiar with the term "diversification." It means not putting all your eggs in one basket. Diversification calls for choosing the right mix of investments to keep a balance between risk and return.

* Choose the right investment mix. While there is no single asset mix appropriate for all investors, most people should have some combination of stocks, bonds, and cash in their portfolio. The right investment mix for you depends on your age, income, family responsibilities, and your tolerance for risk.

* Take a look at your mutual funds. Many mutual fund investors believe that they are well-diversified, even though they aren't. For example, it's possible that different mutual funds own many of the same stocks or similar stocks in the same industries. Whether you're thinking about buying a fund for the first time or you already own several of them, it pays to do a little digging. All mutual funds are required to publish a list of their complete holdings at least twice a year. Get the most recent listing for your funds and compare them for overlapping investments.

* Consider the big picture. When you review your portfolio for diversity, consider the investments both inside and outside your retirement accounts. They are parts of the same picture. Doubling up on the same investment in both types of accounts may decrease your diversification and increase your risk.

* Keep an eye on your 401(k). As a general rule, you should avoid being too heavily invested in any one company's stock, including that of the company for which you work. If your employer matches your 401(k) contribution with company stock, consider other investments for your own 401(k) contributions and for the money you invest outside your 401(k) plan. When you're allowed to do so, consider selling enough company stock to rebalance your 401(k).

Don't risk your financial future by putting too many eggs in one basket. If we can help evaluate your situation, give us a call.

Don't let taxes cloud your economic decisions

Some tax-cutting strategies make good financial sense. Other tax strategies are simply bad ideas, often because tax considerations are allowed to override basic economics.

Here's one example of the tax tail wagging the economic dog. Let's say that you run an unincorporated consulting business. You want some additional tax write-offs, so you decide to buy $10,000 of office furniture that you don't really need. If you're in the 28% tax bracket and you deduct the entire cost, this purchase will trim your tax bill by $2,800 (28% of $10,000). But even after the tax break, you'll still be out of pocket $7,200 ($10,000 minus $2,800) - and stuck with furniture that you don't really need.

There are other situations in which people often focus on tax considerations and ignore the bigger financial picture. For example:

* Someone increases the size of a home mortgage, solely to get a larger tax deduction for mortgage interest.

* A homeowner hesitates to pay off a mortgage, just to keep the interest deduction.

* Someone turns down extra income, because it might "push them into a higher tax bracket."

* An investor holds an appreciated asset indefinitely, solely to avoid paying the capital gains tax.

Tax-cutting strategies are usually part of a bigger financial picture. If you are planning any tax-related moves, we can help make sure that everything stays in focus. For assistance, give us a call.

Plan for the return of some tax break phase-outs

Are you familiar with PEP and Pease? Though they sound like a pop duo, the terms refer to tax rules known as phase-outs that can impact how much federal income tax you owe.

Phase-outs are reductions in the amount of deductions, credits, and other breaks you can claim on your tax return. Though generally based on adjusted gross income, phase-outs vary in rate, amount, and how they're calculated.

Here's an overview of PEP and Pease, two tax breaks that are once again subject to phase-out this year.

* Personal exemption phase-out (PEP). If you're married filing jointly for 2013 and your income exceeds $300,000, the PEP will reduce the amount you claim for yourself, your spouse, and your dependents.

The personal exemption for 2013 is $3,900. But when PEP applies and your income increases, your deduction is reduced accordingly.

* Itemized deduction phase-out. You probably already know that some itemized deductions are limited. For instance, to claim a deduction for medical expenses, your out-of-pocket costs for this year have to exceed 10% of adjusted gross income (AGI). This threshold remains at 7.5% of AGI if you are 65 or older. Miscellaneous itemized deductions, such as unreimbursed employee business expenses, are limited to amounts over 2% of AGI.

* There's also an additional phase-out called the Pease provision that limits the amount of total itemized deductions - after the above reductions. For 2013, Pease kicks in when your income exceeds $300,000 ($150,000 if you're married filing separately).

Other phase-outs limit the amount and deductibility of IRA contributions; the education, adoption, and childcare credits; and the alternative minimum tax exemption. Please call for a review of how phase-outs affect you and what you might be able to do to avoid them.

Check the tax issues if you are caring for elderly parents

As the population in the U.S. continues to age, more and more people will find themselves caring for their parents. Here are some of the tax breaks that caregivers should consider.

* If you provide more than half of your parent's support, you may be able to claim your parent as a dependent on your tax return. To be eligible, your parent can't earn more than $3,900 in 2013, excluding their nontaxable social security and disability income.

* What if you and your siblings all pitch in to support a parent? Anyone who contributes at least 10% of the total support can be the one to claim the $3,900 exemption if all of you sign a multiple support agreement.

* Even if a parent's income exceeds $3,900 this year, you can still deduct the medical expenses paid on the parent's behalf, as long as you provide more than half of his or her support.

* If you hire someone to take care of your parent while you work, you might qualify for the dependent care tax credit. Your parent must be physically or mentally incapable of caring for himself.

* Unmarried individuals who support a paren

t can file their tax returns as "head of household." To qualify, your parent doesn't need to live with you. Instead, as long as you pay more than half of the cost of maintaining your parent's main home, including a rest home or nursing facility, you qualify for this preferential tax treatment.

For more information about the tax issues affecting caregivers and their parents, please give us a call.

How to make employee reviews more constructive and less painful

It's the time of year when you may be scheduling employee reviews. Usually the annual employee performance review is dreaded by both supervisor and employee. The employee knows he'll have to hear about those mistakes from months ago, and the supervisor will finally have to discuss those issues he's been avoiding all year. Too often, the result is discomfort and embarrassment all around. Usually both parties fudge a little and are glad that it's over for another year. Too bad, because another chance for open communication and feedback has been lost.

To improve the process, consider holding performance appraisals more frequently, perhaps even quarterly. This can help make the appraisal less of a "special event" and more of a routine exchange of information. It also means your feedback is more directly related to your employee's recent performance, rather than coming months later.

Of course, even quarterly appraisals don't substitute for immediate feedback. If an employee does something wrong, or something good, tell him or her immediately. Point out the problem, make sure the employee acknowledges it, and make clear what you expect in the future. And if it's something good, the employee will appreciate receiving a pat on the back. With immediate feedback, there should never be any surprises at review time.

At the end of every appraisal, summarize the discussion and put the highlights in writing. Make sure your employee gets a copy. Before the next appraisal, ask your employee to review the copy and prepare his thoughts on his most recent performance. Ask him to present his opinions to start the discussion. If there are areas needing improvement, agree on an action plan and put that in writing too. And that might be a two-way street. It could involve your providing training or taking actions to support the employee, so make sure you're living up to the agreement.

Don't limit the appraisal to a score-card on the employee's achievements. If appropriate, use it to discuss career planning, cross-training, or job enrichment. Solicit ideas from the employee. It can all help turn a judgmental meeting into a constructive exchange of ideas.

A cash reserve adds to your financial security

Many of us are living close to our financial limit these days. We pay our bills on time, but there's not a lot left over. But that's a dangerous situation. If things go wrong, your financial situation can change very quickly from adequate to critical. Without a cash reserve, you could find yourself in serious trouble.

Imagine this situation. You're driving home from work when a motorist runs a red light and smashes into your car. You're rushed to the hospital with a broken leg that must remain in traction for several weeks. You quickly use up any sick leave from your job and your paycheck dries up. Luckily you have basic health and car insurance, but the deductibles and co-pays quickly add up to thousands of dollars. Meanwhile the mortgage and credit card payments are coming due, and you find yourself slipping into arrears.

It sounds grim, but it can easily happen. Natural disasters or a downsizing by your employer can have similar results. And when things go wrong, often several things go wrong at the same time. That's why it's a good idea to build a cash reserve of at least three months' living expenses.

Invest your reserve in a safe, liquid account. Consider investments such as a bank CD, a money market fund, or a very short-term bond fund. Make sure you have easy access to the funds without losing too much interest. And once you've built your fund, avoid temptations to raid it for nonessentials.

It may not be easy to build a reserve, especially if you're barely paying your bills now. But you'll never get there unless you try. Consider setting aside your tax refund or your next bonus, or set yourself a monthly saving goal. Perhaps you give up one espresso a day, eat at home instead of a restaurant one evening a week, or make your own lunch instead of eating out for a month. However you do it, and however long it takes, you might one day be very grateful that you made the effort.

November tax tip

If your other accounts provide enough to support your retirement lifestyle, consider delaying withdrawals from your tax-deferred retirement accounts. Waiting lets your money continue to grow tax-free. Just be sure you don't overlook distribution requirements. They vary depending on type of retirement account and your personal situation.

Help prevent identity theft

Criminals are not only filing bogus tax returns using other people's identification, they are also stealing the "look" of the IRS to phish for additional financial information from taxpayers.

The IRS has made numerous announcements in the past to help protect taxpayers from these scams. It repeats the message that it will never use an e-mail, text message, or social media to initiate a contact about your tax information.

If you receive what looks like an official IRS e-mail, you should forward it to phishing@irs.gov. Do not reply to the sender, and do not open any attachments.

"Tip" or "service charge" rule

Restaurant owners and employees will be affected by an IRS rule going into effect this coming January. The "automatic gratuity" that many restaurants add to the bill for larger parties will be treated as a "service charge" rather than as a "tip." Service charges are treated as regular wages subject to withholding by the employer. Tips, on the other hand, are reported as income by the restaurant employees receiving them. The ruling is likely to complicate bookkeeping and reporting for both restaurant employees and employers.

Upcoming dates following government shutdown

Early in the morning of October 17, President Obama signed a bill into law reopening the federal government and extending U.S. borrowing authority. But the law contains deadlines that could leave the country facing the same issues again. Here are the important dates in the law -

* December 13, 2013 - Report required from Congressional budget negotiators on how to solve long-term budget issues.

* January 15, 2014 - Date after which federal government funding runs out.

* February 7, 2014 - Debt limit extension expires.

Delay in 2014 filing season

The Internal Revenue Service has announced a delay of approximately one to two weeks to the start of the 2014 filing season due to the 16-day federal government shutdown.

The government closure came during the peak period for preparing IRS systems for the 2014 filing season. Updating these core systems is a complex, year-round process with the majority of the work beginning in the fall of each year.

There are additional training, programming, and testing demands on the IRS this year as the agency works to prevent refund fraud and identity theft.

The IRS is exploring options to shorten the delay and will announce a final decision on the start of the 2014 filing season in December.