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The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010

On December 17, 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was signed into law. In addition to providing a 13-month extension of benefits for the long-term unemployed, the legislation includes a long-anticipated extension of the "Bush tax cuts" that were scheduled to expire on January 1, 2011. Other significant provisions include a new alternative minimum tax (AMT) "patch," a major modification of the estate tax, and a new 1-year 2% employee Social Security payroll tax reduction.

Income tax rates

The Act extends existing federal income tax rates for 2 additional years. As in 2010, the federal tax bracket rates for 2011 and 2012 will be 10%, 15%, 25%, 28%, 33%, and 35%. (Without this legislation, federal income tax rates would have increased beginning in 2011--the current 10% federal income tax bracket would have disappeared, and the five remaining tax brackets would have been 15%, 28%, 31%, 36%, and 39.6%.)

Tax rates for long-term capital gain and qualifying dividends

Existing tax rates for long-term capital gains and qualifying dividends are also extended through 2012. As a result, long-term capital gain and qualifying dividends will continue to be taxed at a maximum rate of 15%. For individuals in the 10% or 15% marginal income tax bracket, a special 0% rate will generally continue to apply.

Alternative minimum tax (AMT)
The Act includes another temporary "patch" for the AMT--this one good for 2010 and 2011. AMT exemption amounts are slightly increased, and personal nonrefundable tax credits will be allowed to offset AMT liability through 2011.

AMT exemption amounts 2010 & 2011
Married filing jointly: $72,450 for 2010 and $74,450 for 2011
Single or head of household: $47,450 for 2010 and $48,450 for 2011
Married filing separately: $36,225 for 2010 and $37,225 for 2011


Estate tax

The Act makes several major-- though temporary-- changes to the federal estate tax, including:

For 2011 and 2012, the estate tax exemption amount (the applicable exclusion amount) will be $5 million per person (the $5 million will be indexed for inflation in 2012); the top estate and gift tax rate for these years will be 35%

The $5 million exemption amount and 35% top estate tax rate will apply retroactively to 2010 as well, but for individuals who died in 2010, an election can be made to choose the estate tax provisions effective prior to this legislation (i.e., no estate tax, but modified carryover basis rules); an extended due date is provided for individuals who died on or after January 1, 2010, but before December 17, 2010.

Beginning in 2011, the gift tax (reunified with the estate tax) will have a $5 million dollar exemption amount; the generation-skipping transfer tax, with a $5 million exemption effective January 1, 2010, will have a 0% tax rate for 2010, and a 35% rate for 2011 and 2012
For 2011 and 2012, when one spouse dies, any unused portion of that spouse's estate tax exemption amount may be transferred to the surviving spouse

One-year reduction in employee payroll tax

For the 2011 year, the employee portion of the Social Security retirement component of FICA employment tax is reduced by 2%. Normally equal to 6.2% of covered wages up to the taxable wage base ($106,800 in 2011), for 2011 this rate will be reduced to 4.2%. Self-employed individuals, who normally pay 12.4% for the Social Security portion of their self-employment taxes, will also benefit from a 2% reduction, paying the tax at a rate of 10.4% for 2011.

"Bonus" depreciation

The Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009 allowed an additional 50% depreciation deduction for qualifying property placed in service during 2008 and 2009. This additional depreciation deduction was allowed for purposes of the alternative minimum tax (AMT) calculation, as well as regular tax. The Small Business Jobs Act extended the 50% additional first-year depreciation deduction for one year to apply to qualified property acquired and placed in service during 2010.

This Act increases the bonus depreciation percentage to 100% for property acquired and placed in service after September 8, 2010 and before January 1, 2012. The Act extends bonus depreciation at the 50% level through 2012 (50% bonus depreciation will apply for property placed in service after December 31, 2011, and before January 1, 2013).

IRC Section 179 expense limits

Section 179 of the Internal Revenue Code allows businesses to elect to deduct the cost of depreciable tangible personal property acquired for use in the business in the year of purchase, rather than through depreciation deductions. Since 2003, several pieces of legislation have temporarily expanded the limits that apply to Section 179.

Most recently, the Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009 increased the maximum amount that can be expensed to $250,000 for tax years beginning in 2008 and 2009. This amount was reduced by the amount by which the cost of qualifying property placed in service during the year exceeded $800,000. For tax years 2010 and 2011, the Small Business Jobs Act increased the maximum amount that may be expensed under Section 179 to $500,000 and increased the phase-out threshold amount to $2 million.

For 2012, the dollar limit amount and phase-out threshold level were scheduled to drop to $25,000 and $200,000, respectively. This Act sets the IRC Section 179 expense limit for 2012 at its 2007 level--$125,000, with a phase-out threshold of $500,000--indexed for inflation.

Small business stock exclusion

Noncorporate investors may generally exclude 50% of any capital gain from the sale or exchange of qualified small business stock (generally, stock issued by domestic C corporations whose assets do not exceed $50 million) issued after August 10, 1993 (if a five-year holding period requirement and other requirements are met). The Small Business Jobs Act temporarily increased the exclusion percentage for qualified small business stock acquired during 2010 to 100%, and does not treat the excluded gain as an alternative minimum tax preference. Therefore, no regular tax or alternative minimum tax is imposed on the sale of qualified small business stock issued and acquired after September 27, 2010, and before January 1, 2011, and held at least five years.

This Act extends the 100% exclusion for one year--to qualifying stock acquired before January 1, 2012, and held for more than five years.

Education provisions

The Act extends the American Opportunity tax credit (known as the Hope tax credit before being significantly-- though temporarily--modified by the American Recovery and Reinvestment Act of 2009). The American Opportunity Tax Credit's higher maximum credit amount, increased income limits, expanded applicability to the first four years of college, and potential refundability, available in 2009 and 2010, are extended through 2012.

The current rules that apply to Coverdell Education Savings Accounts (e.g., $2,000 annual contribution limit, education expenses expanded to include elementary and secondary school expenses) are also extended through 2012. Without this change, the annual contribution limit would have dropped to $500 beginning January 1, 2011.

For the student loan interest deduction, increased income limits and the suspension of the 60-month rule, which would have expired at the end of 2010, are extended for 2 years (the deduction was, prior to 2001, limited to interest paid in the first 60 months of repayment).
The deduction for qualified higher education expenses, which expired at the end of 2009, is retroactively reinstated for 2010, and extended through 2011.

Other provisions--individuals

Provisions extended through 2012 include:

Itemized deductions and personal and dependency exemptions will not be reduced for higher-income individuals

"Marriage penalty" relief in the form of an expanded 15% tax bracket and an increased standard deduction amount for married individuals filing jointly

Exclusion of up to $5,250 in employer-provided education assistance for undergraduate and graduate education

Increased earned income tax credit (EITC) for families with 3 or more children, and increased EITC income limits for married couples filing jointly

Increased child tax credit amount with expanded refundability (15% of earnings above $3,000)

Expanded credit for child and dependent care expenses (increased limit on eligible expenses and maximum credit percentage)

An increased adoption tax credit and employer-paid adoption assistance exclusion amount; the credit also remains refundable

Provisions retroactively reinstated for 2010 and extended through 2011 include:

The deduction for state and local sales tax in lieu of state and local income tax on Schedule A

The $250 above-the-line deduction for elementary school and secondary schoolteacher classroom expenses

Increased contribution limits and carryforward period for contributions of capital gain property for conservation purposes

Tax-free distributions to charitable organizations from IRAs by individuals age 70 1/2 or older (up to $100,000 per year); a special provision in the Act allows qualifying individuals to treat a distribution made from an IRA to a charity in January, 2011, as if it were made in 2010

Provisions extended for one year (through 2011):

Increased monthly exclusion amount for employer-provided transit and vanpool benefits

Mortgage insurance premiums deductible as qualified residence interest, subject to an adjusted gross income (AGI) limitation

The Act also reinstates the tax credit for energy-efficient improvements to existing homes for 2011, but as it applied prior to the American Recovery and Reinvestment Act of 2009 (e.g., a 10% credit rate generally applies).

Other provisions--businesses

Provisions extended through 2011 include:

Research and development credit

Indian employment credit

New Markets tax credit

Employer wage credit for activated military reservists

Enhanced charitable deductions for contributions of food inventory, book inventories, and computer equipment

Work opportunity tax credit

This article was provided by Forefield and distributed by Lawrence Sprung.

Closed-End Funds

What is a closed-end fund?
A closed-end fund is an investment company that pools money from many people and invests it in stocks, bonds, or other securities. A fund typically issues a fixed number of shares during an initial public offering (IPO) and buys securities with the proceeds. The fund's capital structure and the number of shares in the fund is determined at this time; that number of shares available does not change (hence the name "closed-end"). Each investor owns shares, which represent a part of these holdings. A fund's net asset value (NAV) represents the total value of those holdings divided by the number of shares outstanding. After the initial IPO, the fund trades on an exchange or in the over-the-counter market, just as any other security would.

A closed-end fund is professionally managed and can be either diversified or nondiversified. If the fund does well, an investor can enjoy share price appreciation, dividend income, and, if the fund sells shares of individual securities for a profit during the year, capital gains distributions.

Closed-end funds, which were first created in the 19th century, are often compared to mutual funds, which are more widely known even though they are newer. Technically, the Investment Company Act of 1940 defines a closed-end company as "any management company other than an open-end company" (such as a mutual fund). Though there are some similarities and both are types of investment companies regulated by the Securities and Exchange Commission, they actually have some substantial differences. For one thing, even though they have been in existence for a much longer time than mutual funds, there are far fewer closed-end funds available; closed-end funds number in the hundreds, compared to the thousands of open-end mutual funds. A closed-end fund also is different from an exchange-traded fund (ETF), though again, there are some similarities.

A closed-end fund can invest in the same types of investments as an open-end fund. However, historically, the majority of closed-end funds have been bond funds, with tax-exempt bond funds being the largest category.

How is a closed-end fund different from an open-end fund?
Like many other investment companies, a closed-end fund offers diversification by investing in many different securities (though diversification alone can't guarantee a profit or protect against the possibility of loss). It also offers professional management and a clearly defined, consistent investment objective. Like mutual funds, a closed-end fund does not pay tax at the fund level, but passes those tax liabilities on to shareholders.

One of the biggest differences between a closed-end and an open-end fund is that shares of most closed-end funds are traded on market exchanges, and generally are not redeemed directly by the company that issues them. By contrast, an open-end fund must always be ready to redeem your shares directly.

The number of shares in a closed-end fund is fixed at the time of the IPO. By contrast, an open-end fund issues and redeems shares daily--that's why they're referred to as "open-end"--and the number of shares varies from day to day, which affects its net asset value (NAV).

A closed-end fund trades throughout the day, just as stocks do, and its price also varies throughout the day. That's different from an open-end fund, which is priced only once a day when its NAV is calculated after the markets close. If you want to sell your shares of a closed-end fund, the willingness of other investors to buy them will determine how easy it is to sell them and the price you will receive for your shares.

Because closed-end funds trade on market exchanges, the market price of a share can fluctuate with the supply and demand of the market. When demand exceeds supply, the market price at which the shares of a closed-end fund trade may be at a premium to its NAV, which represents the intrinsic worth of a share of the fund's assets. Conversely, when supply exceeds demand, a closed-end fund's shares may trade at a discount to its NAV. Though some funds trade at a premium, most closed-end fund shares trade at a discount. This is not true of an open-end fund, which will redeem your shares at the NAV as of the market close on the day you sell (if that occurs after 4 p.m., you'll receive the NAV as of the next closing day).

Example(s): Joan purchases 1,000 shares of a closed-end fund. Each share costs her $14.50. The fund's NAV is $15.75. Essentially, Joan has bought $15,750 worth of assets for $14,500. Joan later sells her shares for $16. Her profit (not including transaction costs or commissions) is $1,500 ($16,000 minus $14,500). However, had Joan bought her shares at $16 and later sold when they were trading for $14.50, she would have sold her portion of the fund's assets for less than they were worth.

How is a closed-end fund different from an exchange-traded fund?
Exchange-traded funds are a much more recent investment concept than closed-end funds. In some cases, an exchange-traded fund may technically be structured as a closed-end fund. Both trade throughout the day on major exchanges. However, in general, most ETFs available today are passively managed; the fund's objective is to try to replicate as closely as possible the return of a given index. As a result, their market prices typically tend to closely track the value of the securities in its portfolio, which in turn track the index. By contrast, the typical closed-end fund usually trades at a premium or a discount to its NAV.

Interval funds
An interval fund is technically a closed-end fund that periodically offers its shareholders the option to sell some or all of their shares back to the fund. Shareholders who want to accept the offer, which is generally made every three to six months or annually, must notify the fund by a specified date. The actual repurchase will occur later, at a price based on the fund's NAV as of a specified date, typically sometime shortly after the deadline for notifying the fund about a repurchase decision.

However, unlike most closed-end funds, an interval fund has some characteristics of both closed-end and open-end funds. An interval fund may choose to continuously offer shares at a price based on the fund's NAV, as a mutual fund does. And unlike most closed-end funds, an interval fund typically does not trade on the secondary market, but may price shares daily. However, because shares are not redeemed daily, they are classified as closed-end funds by the SEC.

Strengths of a closed-end fund

  • Shares of closed-end funds that are purchased at a discount offer a form of leverage--a potential opportunity to profit not just from any increases in the value of the fund's holdings, but from any increases in demand for the shares themselves. This leverage can potentially improve the returns of your investment.
  • Some closed-end funds literally use leverage; they borrow funds at a relatively low cost and invest it in higher-yielding instruments. As long as interest rates are falling or remain low, this can increase a fund's return. However, when interest rates rise or the availability of low-cost credit disappears, such funds can suffer, and may lag other bond funds that don't use leverage.
  • Because the number of shares is fixed, a closed-end fund does not need to set aside cash to handle shareholder redemptions. That cash can be employed to try to enhance investor returns. And because shareholders do not redeem shares directly, a manager also is not forced to sell assets to meet unexpected shareholder redemptions, which can enable the manager to invest in less liquid securities.
  • Unlike an open-end fund, a closed-end fund's investment strategy does not have to accommodate sudden inflows of new money from shareholders. Such unanticipated inflows can mean a fund must buy securities to put the money to work even if the manager feels the market is already expensive; a closed-end fund manager does not have that problem.
  • Occasionally, a closed-end fund's board of directors may decide to convert the fund to an open-end structure. If that were to happen, shareholders who bought at a discount to the NAV might profit from the difference between their discounted price and the NAV of the newly minted open-end fund.
  • Because closed-end funds are traded and priced throughout the day rather than at the close of business, you have greater control over what price you'll receive when you sell, and when shares are sold.
  • There are no minimum purchase requirements for a closed-end fund bought on the secondary market.
  • Because closed-end funds are traded on the secondary market, they generally do not have the same kind of marketing expenses that an open-end fund does.

Tradeoffs with a closed-end fund

  • A closed-end fund's market price may decrease if investor demand diminishes. Demand can diminish if the market has a poor perception of the fund or fund manager, or because of other market conditions unrelated to the fund itself. Also, the share price can drop even if the fund manager has invested well and increased its asset value.
  • Closed-end funds have more flexibility to invest in less liquid securities than mutual funds, which can be a problem if the fund's manager needs to sell those securities. An illiquid security generally is considered to be a security that can't be sold within seven days at the approximate price used by the fund in determining NAV.
  • Because leverage magnifies losses as well as enhances return, a closed-end fund that uses leverage may perform worse than an unleveraged fund if its strategy doesn't perform as well as expected--for example, if interest rates rise or the supply of cheap credit contracts, as can occur during a credit crisis.
  • Buying shares at a premium can potentially increase losses; if investor demand drops, the value of your shares will drop also. Even if the fund's manager performs well and increases the value of the fund's assets, a lack of investor demand can cause the fund's market price to fall below not only your purchase price but below the fund's NAV. Because they may trade at a premium or discount, closed-end funds may experience greater volatility than an equivalent open-end fund.
  • A fund's capital can be increased if its board of directors decides to issue new shares through a rights offering, which could dilute the value of existing shares.
  • A closed-end fund is subject to the same market risks as any fund that invests in stocks or bonds--for example, the risk that a bond will experience default, prepayment, or be called early; that a company will go bankrupt; that inflation, interest rates, credit availability, political or economic conditions, and/or currency risk will affect the value of the fund's holdings.
  • Information about closed-end fund performance may not be as readily available as with open-end funds; for example, they only have to issue a prospectus at the time of the IPO. Also, they may be less liquid.


This article was provided by Forefield and distributed by Lawrence Sprung.

Stock Funds by Market Capitalization

Size matters
One way to consider a stock fund is to look at the market capitalization, or market cap, of the stocks in which it invests. Market capitalization represents the total market value of a company's publicly traded and outstanding stock. If a company has issued 10 million shares, each of which sells for $20, its market cap is $200 million.

Why is market capitalization important? Because it's derived from share price, it represents the collective assessment of the investing community about a company's overall worth. As such, it includes not just the company's book value--the value of its assets--but also investors' view of the company's future; a large amount of stock outstanding coupled with a high stock price suggests that a large number of investors have a high opinion of the company.

Market cap also generally indicates how widely held a stock is. Though it's possible for a stock with a large market cap to have a dominant single shareholder, in general, the larger the market cap, the greater the number of investors. The more widely held a stock is, the greater liquidity it has and the more easily it can be traded. That greater liquidity may mean a more stable stock price. A stock that's held by a large number of investors is likely to be more stable than that of a small cap stock that is thinly traded. A single investor's decision to buy or sell would likely have less impact on the stock price if there are 50,000 other investors than if there are only 1,000 other stockholders. (However, that doesn't mean large-cap stocks will outperform smaller caps, and other factors can affect even the most stable stock's value.)

From a mutual fund investor's perspective, all of this is important because a fund generally reflects the characteristics of the stocks it holds. A large-cap fund might behave somewhat differently from a fund that concentrates on small caps. Before investing in a mutual fund, carefully consider its investment objectives, risks, fees, and expenses, which can be found in the prospectus available from the fund. Read it carefully before investing.

Large-cap funds
A large-cap mutual fund would generally invest in stocks with a market cap of at least $10 billion. Such stocks are often widely held by both individual and institutional investors, so the potential pool of buyers is large. Because they are bought and sold frequently every day, that can mean a smaller bid-ask spread (the difference between the lowest price a seller will accept and the highest price a buyer is willing to pay). Tighter bid-ask spreads can mean lower trading expenses for a large-cap fund. Large-cap stocks often pay dividends, and are frequently well-known household names; however, because the companies are already so large, growth may be more difficult for them to achieve.

Midcap funds
A midcap fund would generally invest in stocks with market caps of between $2 billion and $10 billion. Midcaps are often seen as having much of the liquidity of large caps while offering greater potential for future growth.

Small-cap funds
Though the precise definition of "small cap" can vary, a fund that holds stocks with a market cap between $200 million and $2 billion would probably be considered a small-cap fund. Small-cap funds are generally the most volatile; because small-cap stocks are often younger, faster-growing companies with fewer resources, their stock prices can be greatly affected by market events such as a credit crunch, not to mention the business risks of any growing company. However, small caps also have historically offered the highest returns over time because of their greater potential for growth, though past performance is no guarantee of future results.

Some funds focus on even smaller stocks, known as microcaps, whose market caps would generally be under $200 million. Such stocks would typically have the least liquidity, and therefore would typically have higher bid-ask spreads, which would in turn affect a fund's trading costs.

This article was provided by Forefield and distributed by Lawrence Sprung.

Electing Delayed Social Security Retirement Benefits

Definition
You can elect to delay receiving Social Security retirement benefits past normal retirement age.

Prerequisites
You want to optimize your Social Security retirement income and:

· You are at least normal retirement age
· You are fully insured for retirement benefits
· You have applied for delayed retirement benefits by contacting the Social Security Administration

Key Strengths
· Your retirement benefit will increase
· Your surviving spouse's benefit will increase
· Your delayed retirement credit isn't counted toward your family maximum

Key Tradeoffs
· Even though your monthly benefit will be higher, your lifetime benefit may be lower
· The delayed retirement credit won't increase benefits paid to most family members

Variations from State to State
· None

How Difficult Is It to Implement?
· For information on how electing delayed retirement benefits will affect you, you can order a Social Security Statement from the Social Security Administration.
· To apply for delayed retirement benefits, contact the Social Security Administration two or three months before the date you wish to begin receiving benefits. Visit a local office or call (800) 772-1213.
· For investment options or retirement planning advice, contact a financial professional.

This article was provided by Forefield and distributed by Lawrence Sprung.

Small Business Update: Depreciation and IRC Section 179 Deductions

The Small Business Jobs Act of 2010, signed into law September 27, 2010, extends "bonus" depreciation rules that had expired at the end of 2009, and makes big--but temporary--changes to the Internal Revenue Code (IRC) Section 179 deduction rules. If you're a small business owner, you need to be aware of these changes. Keep in mind that you have just a few short months to take advantage of the increased 2010 limits.

Additional first-year depreciation
If you're a business owner, you probably know that you're allowed to deduct the cost of capital assets that you purchase for your business. Typically, part of the cost is deducted each year based on the useful life of the property, according to a depreciation schedule. The Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009 allowed an additional "bonus" 50% first-year depreciation deduction for qualifying property placed in service during 2008 and 2009. This additional depreciation deduction was allowed for purposes of the alternative minimum tax (AMT) calculation, as well as for calculating regular tax. Effectively, this additional first-year depreciation enabled business owners to significantly accelerate the deductions that resulted from capital expenditures.

The good news is that the Small Business Jobs Act extends the additional first-year depreciation deduction for one year to apply to qualified property acquired and placed in service during 2010. The bad news is that you only have through the end of the year to purchase this equipment and place it in service to qualify for the "bonus" 2010 depreciation.

IRC Section 179 rules
IRC Section 179 allows you to elect to deduct (or "expense") the cost of depreciable tangible personal property that you acquired for use in your business in the year that you purchase it, rather than over time through depreciation deductions.

Since 2003, several pieces of legislation have temporarily expanded the limits that apply to Section 179. Most recently, the Economic Stimulus Act of 2008, the American Recovery and Reinvestment Act of 2009, and the Hiring Incentives to Restore Employment (HIRE) Act of 2010 increased the maximum amount that can be expensed to $250,000 for tax years beginning in 2008, 2009, and 2010. The $250,000 cap was reduced if the total cost of qualifying property placed in service during the year exceeded $800,000 (the cap is phased out dollar-for-dollar to the extent that total costs exceed the limit). For 2011, the dollar limit amount and threshold at which the limit would be reduced were scheduled to drop to $25,000 and $200,000, respectively.

Effective for 2010 and 2011, however, the Small Business Jobs Act increases the maximum amount that may be expensed under IRC Section 179 to $500,000, which is reduced when the total cost of qualifying property placed in service during the year exceeds $2 million. Additionally, the Act also temporarily expands the definition of property that qualifies for a deduction under IRC Section 179 to include some real property, including certain improvements made to nonresidential buildings and retail property, as well as qualified restaurant property. However, the maximum Section 179 expense limit that applies to real property is $250,000.

This article was provided by Forefield and distributed by Lawrence Sprung.

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