From CFP Board's Consumer Advocate, Eleanor Blayney, CFP^®

Across the country, taxpayers were holding their breath as they finalized their 2011 tax returns, with all eyes on lines 73 and 76 of the 1040. If all goes well, they saw a nice, big number on line 73, and a zero on line 76. But heaven forbid if it is the other way around.

When line 73 is positive, the taxpayer gets a refund. When line 76 is positive, he or she owes money to the IRS. For many of us, the whole point of filing taxes seems to be finding out whether we’ll get money back. The larger the number, the happier we are. The average tax refund for 2012 will be approximately $2900 according to mid-March data. In 2011, more than 3 in 4 taxpayers received a refund. As much as we may hate paying taxes, it seems like filing season is a pretty happy time for most Americans. Time to pocket some extra cash and enjoy the spring weather.

But Americans could be even happier, or at least more financially secure, if they spent tax season not focused just on one or two lines of their tax returns, but looking to the other seventy or so lines of the 1040 for planning ideas and strategies for the future. In this fourth of our 12-part series on smart financial planning, we want to take consumers deeper into their 2011 tax returns to find future savings well beyond last year’s refund.

So with your 1040 map in hand, your treasure hunt begins:

• Start with the information leading up to line 22, “Your total income.” Consider the sources of your income and whether they are discretionary in terms of their timing, amount or taxable nature. For example, you have some control over capital gains or losses - when they are realized and the amount. Your portfolio allocation will also affect the amount of taxable interest and dividends you have. And until you turn 70 ½, you have discretion over the amount you take from your IRA.
  
  Bear in mind that marginal tax rates are scheduled to rise in 2013 if no action is taken by Congress. Further, a 3.8% Medicare surtax on investment income will be levied on high income earners. If you are likely to be impacted by these hikes, consider accelerating income into 2012, by realizing capital gains, converting more of your income to tax-exempt sources, or taking more in an IRA distribution (if no early withdrawal penalty applies) in 2012 and less in 2013. This may also be the year to consider a ROTH conversion.


• Now take a careful stroll through all the possible adjustments you can use to limit your tax liability. Leading up to line 37, “your adjusted gross income,” are thirteen allowable subtractions to your income. Which apply to you? If you are in good health, consider setting up a health savings account to accompany a high deductible health care policy. Not only are the contributions tax-deductible, but they grow tax-free and can be withdrawn without tax if used for qualified medical expenses. Are you eligible for an IRA deduction in addition to your retirement plan contributions? Perhaps you are a teacher or planning to move for a new job. Seeing those allowances on the tax return may remind you to keep better expense records over the coming year to fully benefit from these subtractions.


• Next, stop at line 40 to spend time on your deductions. This may involve a detour to Schedule A, where you can review what expenses can be itemized. Focus on deductions that can be accelerated or delayed from one tax year to another. For example, if you expect your tax rate will rise in 2013, you may wish to postpone charitable deductions or large discretionary medical expenses until next year.


• Pause, too, at line 43, “taxable income.” If the number is 0, it’s not an occasion to celebrate. Having no or negative taxable probably means you have missed the opportunity for recognizing more income with very low tax impacts. If this is a likely scenario for 2012, consider realizing capital gains, or a ROTH conversion.


• Finally, it’s back to the line you probably already know by heart: the amount, if any, of your refund on line 73. Compare the amount of your refund to your total income. If the ratio is higher than 10 percent, you should probably reduce it by adjusting your withholdings or estimated payments. If interest rates rise, an even lower ratio should cause you to take action.

A big refund number is not necessarily a good number. That’s real money that you could be using more productively than leaving it interest-free with the IRS.

Your 1040 review may leave you with a head full of numbers, but uncertain how to manage them all for 2012. Here’s where a CFP^® professional can be a valuable guide on your treasure hunt. He or she can help you quantify the benefits of tax-savings strategies and ensure they make sense for your particular situation. The door may be shutting on what you can do to reduce your tax liability for 2011, but your CFP^® professional can open the door to smart tax planning for years to come.

From CFP Board Ambassador Mark Boddy, CFP^®

Winston Churchill once said, “We make a living by what we get, but we make a life by what we give.”

Many of us share a dream of making an impact on the lives of others – a deep desire to “give back” to an organization, community or society that has given so much. The good news is, you don’t need to be wealthy to support a cause that’s close to your heart. Life insurance can be an easy and flexible way to make a significant gift to a favorite charity. At the same time it offers practical advantages, including possible tax benefits.

There are several ways to make a charitable gift using life insurance. You can:

1. Name a favorite charity full or partial beneficiary of a new or existing policy. Upon your passing, all or part of the face value amount of the policy will go to the charity you name as beneficiary. Until that time, you remain in control of your policy. This means you have the flexibility to make changes to the policy at any time, including switching your choice of charitable beneficiary. You also retain access to your policy’s cash value.
   
   Although the death benefits will be included in your estate, any estate taxes attributable to the life insurance benefits will be offset by an estate tax charitable deduction.


2. Donate an existing policy. Like many people, you may have more than one insurance policy, each purchased to satisfy a specific need. Some of those needs may no longer exist (e.g., providing for a child’s education or paying off a home mortgage upon death). By giving one of your policies to charity, typically you may take an income tax deduction equal to the fair market value of the policy or your cost basis, whichever is less, in the year in which you make the gift. If the policy is not paid up, any future premiums paid by you may also be income tax deductible, and the proceeds will not be included in your estate as long as you live at least three years beyond the gift.
   
   Keep in mind, when you give a policy to charity, that charity becomes the owner of the life insurance policy. This means you give up all control of the policy forever.


3. Gift your policy dividends. Life insurance policy dividends received in cash can also be donated to charity – an easy, economical way to make charitable gifts. Typically cash dividends are received tax-free up to your basis in the policy. After you recover your basis, additional dividends received are taxable to you. Most of the time, the cash you give to charity is deductible.


4. Give excess coverage. If you participate in a group term life insurance policy at work, you may be required to pay income tax on the cost of coverage over $50,000. By naming a charity as the beneficiary of the group term insurance for this excess coverage, you can not only make a significant gift to charity, you may be able to avoid this tax.

Leaving a Legacy

Finally, life insurance can be an effective wealth replacement tool as part of an estate plan. If you transfer assets to charity and are entitled to an immediate income tax deduction, you can use the tax savings from that deduction to purchase a life insurance policy to benefit your heirs.

Using life insurance to meet your philanthropic goals is an innovative way to provide meaningful, and often much greater, financial support to a favorite charity than you might otherwise be able to make. A knowledgeable CERTIFIED FINANCIAL PLANNER™ professional (CFP^®) can help you determine if life insurance is appropriate for your philanthropic goals and guide you through the transfer strategies and tax consequences. Working in conjunction with your legal and/or tax advisor, he or she can offer solutions to meet your particular needs.

From CFP Board Ambassador Bill Garrett, CFP^®

The transition to retirement can be stressful. However, with some preparation you can be confident about this important phase of your life.

As a CERTIFIED FINANCIAL PLANNER™ professional I speak with people all the time about retirement. Many have done a thorough job of preparing financially for retirement. However, most have not done much in the way of making sure other non-financial needs will be met once they are no longer fully employed. Often, people fail to appreciate what they will give up when they leave their careers, such as the structure, social life, sense of purpose, self-esteem and an identity that are provided through the workplace. If they are married or have a partner, they also may fail to consider how the other person may feel about the retirement decision. It is vital that all involved parties have a realistic and candid conversation and not just assume they want the same things in retirement.

In my experience there are five top reasons why people fail the retirement test:

They retire for the wrong reasons
It’s important to ask yourself why you want to retire. Too often people don’t really think the decision through. For instance, retiring just because you are eligible for retirement benefits without having a plan for what you will do while retired often spells trouble.

They are not prepared emotionally, intellectually or spiritually
Will you have a support system such as your spouse, a church, friends or family in retirement?

Many people expect their spouse to be their entire social life. But how does your spouse feel about spending time exclusively with you? Have candid conversations about each other’s expectations.

Do you have interests that will stimulate you intellectually?

Have you thought about how you might help others while in retirement?

Will you feel disconnected from society? It is easy to become isolated in retirement.

They don’t know themselves as well as they think
Have you thought through what the transition will be like?

How and where will you spend your days?

Have you done some reading on the subject or discussed it with those already retired – or your partner?

Have you created a list of goals while in retirement? Worthwhile goals can give people purpose and fulfillment.

They have no written financial plan
Have you prepared a budget for retirement?

Have you determined how much you will need in savings and what rate of return and withdrawal you will need to plan for?

Have you made plans for possible long-term care costs and other health related expenses?

Have you worked out an estate plan?

Do you have a plan for regular monitoring of your financial situation?

They have not considered how the things they most enjoyed in their job might be recreated in their retirement.
Consider what you enjoy most about work: title; position; perks. What did you most look forward to when you set off for work each morning?

How can you build these same pleasures into your retired life? For example, if you enjoyed the quiet of your own office, make sure you create your own private space to work or read at home. If you really felt “on” when you were in meetings or giving presentations, consider joining a club or organization that needs your skills or shares your interests.

By asking yourself questions such as the ones outlined, you will have a much better sense of what it is you will need to do to truly make retirement fulfilling. Make a list of things you will need to do in retirement to make it enjoyable and rewarding in the following areas: physical, spiritual, mental and financial.

Accept that like any life phase retirement will have ups and downs. Be patient. Understand this is a big change.

Your future awaits you. Make sure you pass the retirement test with flying colors, and enter the next phase of your life with confidence and a plan.

Financial Planning for Your Children

Your Children's College Costs Will Be More Manageable if They Are 'Reasonable and Selective' About Where They Get Their Degree

The cost of a college education is a major reason why many students drop out before completing a degree. A 2011 Pew Research Center report determined that a four-year private college education tripled in price between 1980 and 2010, while student loan debt for a bachelor's degree currently averages more than $23,000 per student borrower. Many students are asking themselves whether their finances will be better if they drop out compared to where they will be after accruing four years of student loan debt in a tepid job market. Estimates indicate that student loan debt surpassed consumer credit card debt for the first time in history in 2010. Meanwhile, the Pew study found that 57 percent of college dropouts age 18 to 34 left college to work and make money, while 48 percent could not keep up with the cost of their education. Experts say spending less can give students and their families a better chance of completing a bachelor's degree. "If students are more reasonable and selective about where they're going to get that degree, college costs are more manageable," notes Certified Financial Planner Board of Standards Consumer Advocate Eleanor Blayney, CFP^®. "At the very least they can do the first two years at a community college and then transfer."

Financial Planning for Your Retirement

Prepare for Your Retirement by Cutting Your Expenses, Saving

Certified Financial Planner Board of Standards Consumer Advocate Eleanor Blayney, CFP^® recommends that workers preparing for retirement see ahead of time which expenses they can reduce or eliminate. While the Employee Benefit Research Institute suggests that homeowners refinance their mortgages to terms that line up closely with their retirement date, Blayney says a better way to reduce mortgage expenses is to pay extra now so that a payment can be missed if money gets tight. "If you have a month where all hell breaks loose, you can relax a bit," says Blayney. Workers should also pay down or get rid of consumer debts such as credit cards, which can charge steep double-digit monthly rates. Financial planners say another way to enhance income in retirement is to work as long as possible, which lets a worker continue adding to their savings and also reduces the number of years he or she will need to live solely on retirement income. Another advantage to this, Blayney says, is that workers who wait the longest to retire tend to receive the largest monthly Social Security payouts.

You Are Responsible for Your Own Retirement Security

A recent survey by the Certified Financial Planner Board of Standards, Inc. finds that Americans understand they are personally responsible for their financial health and are taking more ownership over their retirement, healthcare, and education, even as they expect the government to provide a social safety net in case their plans fall through. CFP Board CEO Kevin Keller said, "Our nation's economic growth will be even greater if people are better armed to make smart financial decisions and plan for their financial future, which Americans are generally more optimistic about than negative." Of the 1,015 U.S. adults surveyed, about 82 percent recognized the importance of creating a financial plan, while 60 percent said they would benefit from the financial advice of a professional planner or adviser. About two in three respondents – 67 percent – said they believe they have sole responsibility for their financial future, but 72 percent hope Social Security will still be around and 62 percent hope to be able to rely on Medicare. The survey found that 51 percent of respondents are hopeful their financial situation will improve over the next year, while fewer than 10 percent expect it to worsen.

It's Not Too Late to Save for Your Retirement

People who are in their 40s and have yet to begin saving for retirement can take a number of steps to get started, writes Wes Moss, CFP^®. For instance, workers should set goals for what they want to be able to do during retirement. Among the things workers should consider is whether they want to travel, start a business, or continue to work part-time after they leave their jobs. Establishing goals is an important part of knowing how much money will be needed in retirement. Workers should then determine how much money they will need to save every month to save the amount of money they want to retire with, Moss says. He adds that those who have trouble finding the money to save may want to consider drawing up a budget, since doing so can help identify areas where spending can be cut. Workers should then come up with an investment strategy and choose the appropriate investment vehicles for meeting their goals. According to Moss, ETFs are a good choice because they make it possible for savers to easily diversify their investments, and they are very low cost and tax efficient. Finally, workers should keep an eye on their investments and make changes as needed. Those who need help may want to consider using The Certified Financial Planner Board of Standards, Inc.'s website to find a CERTIFIED FINANCIAL PLANNER™ professional.

During Your Retirement, How Much Should You Withdraw From Savings?

Although retirees have long been advised to withdraw 4 percent of their savings each year after they stop working, there is no one-size-fits-all recommendation for how much money should be taken from retirement accounts on an annual basis, writes Abigail M. Rosen, CFP^®. She notes that it can be difficult to come up with a general rule of thumb about how much money to withdraw from retirement accounts because the factors used to calculate that number, including how long retirement will last, the return the retiree will get on investments, and the retiree's health, do not take into account the variables that can have an impact on retirement planning. Rosen recommends setting up a meeting with a financial adviser to come up with a projection for cash flow during retirement. This can help workers determine whether the assets they expect to have in retirement are capable of funding the lifestyle they want. Financial advisers can use a number of variables to develop a cash flow projection, Rosen says, including tax rates, changes in the markets, investment management fees, asset allocation, and healthcare bills. Retirees should review their cash flow plans a year or two after they stop working, and take another look at internal factors like their lifestyle and spending habits as well as external factors like inflation and interest rates, Rosen says. This plan should be further updated every two years during retirement.

Financial Planning for Your Life Now

Do You Contribute to an IRA?

A new survey found that fewer than one in five Americans contribute to an individual retirement account. Among those who do contribute, only about 38 percent contribute the maximum amount allowed under the law. Among baby boomers, about 52 percent make the maximum contribution. The survey also found that three out of four young adults (ages 18 to 34) were not aware of a maximum contribution amount, and more than half did not know that IRA contributions grow tax-deferred. "Financial literacy among younger Americans needs improvement," says Dan Keady, CFP^®. Saving among young adults usually improves when they realize its benefits, such as compounding and tax advantages. Among survey respondents, 62 percent did not know about some IRA features, such as the guidelines for Roth IRAs, or "catch-up" provisions for people over age 50.

Take Control and Stop Sabotaging Your Financial Well-Being

You are your own worst enemy when it comes to your personal finances, not the market and not the economy, writes Ken Moraif, CFP^®. However, if you focus on the three personal aspects that are most likely to hurt your finances, you can avoid doing damage to your financial well-being. A change in your health could lead to big expenses, and Medicare does not cover all issues, so purchase long-term care insurance to forestall having to use your investments. To live a long and active life, your investments need to stay with you for up to 30 years past retirement, so develop an exit strategy to protect yourself from the inevitable economic downturns that you'll likely live through. If you are too emotionally involved with your investments to manage them on your own, you should retain a CERTIFIED FINANCIAL PLANNER™ professional to help you avoid making bad decisions. By planning for your healthcare, protecting yourself from bear markets, and using the services of a CERTIFIED FINANCIAL PLANNER™ professional, you can stop sabotaging your financial well-being.

Wisely Allocate Your Tax Refund

Tax refunds should be saved for retirement, according to Laura Medigovich, CFP^®. However, the idea of saving a tax refund can seem like all work to people who want some allowance to play with as well. A client recently said, "All work and no play makes Jack a dull boy." So this year, Medigovich is encouraging people to plan wisely for allocating their tax refund, by considering dividing the dollars into a bucket for spending, a bucket for short-term goals, and a bucket for retirement planning. The money in the first bucket would go toward immediate personal enjoyment; the second spending bucket would go toward goals over the next three years, such as a new roof, car, or vacation; and the third bucket would go toward long-term savings, such as contributions to a traditional IRA or Roth IRA, explains Medigovich.

Hiring a CERTIFIED FINANCIAL PLANNER™ Professional

A CERTIFIED FINANCIAL PLANNER™ Professional Can Help You, Even if Your Budget Is Limited

Financial planning services can offer an inexpensive way for investors to get help developing a savings plan, overhauling a budget, and paying down debt. A number of new resources are now available for people who want to create a financial plan, which is not just for people who have high net worths or complicated investments. "This is a wonderful way for young people or [those] who suddenly have to manage their own finances to get off on the right foot," says Susan John, CFP^®. Personal finance website LearnVest.com started offering three types of plans in January, including an entry-level plan that costs $69 and provides a customized budget breakdown and a financial to-do list; one phone consultation; and three months of unlimited email support with a CERTIFIED FINANCIAL PLANNER™ professional. Myfinancialadvice.com can provide more in-depth help through its national network of CERTIFIED FINANCIAL PLANNER™ professionals who are also registered investment advisers, which means they also can offer specific investing advice on stocks, bonds, and mutual funds with no investment minimum. Site founder Ron Peremel says planners charge on average $135 per hour and communicate by phone and email. The Garrett Planning Network, which has 320 CERTIFIED FINANCIAL PLANNER™ professionals, offers an affordable way to get in-person advice, which is best for investors who need an initial one-off planning session and then an occasional check-in. In-person meetings can cost anywhere from $180 to $240 per hour.

Some Reasons You May Want to Switch Financial Advisers

Sometimes relationships between clients and their financial advisers do not work out, and this article explains some of the reasons why clients switch advisers. One 2011 report found that the top reason millionaire investors switch advisers is due to a lack of communication. While experts say it may be too much to expect a weekly or monthly phone call from the adviser, clients should be receiving regular statements at the minimum. Adam Koos, CFP^® notes that sometimes clients and advisers do not work well together because of conflicting personalities, a scenario that can run both ways. "Just like the client has the right to pick and choose who they work with from a values standpoint, I weigh my preference with whom I want to work with," Koos says. Many investors do not understand advisers' fee structures and over time may begin to feel they are not getting their money's worth, and it is fair for clients to question confusing fees or ask if the adviser is willing to revisit fees. Two to three years is more than enough time to see how a financial adviser has performed in both down and up markets, Koos says, and if a client's assets are continually underperforming over a period of several years it may be time to move on. High-profile swindlers like Bernie Madoff have made clients much more cautious about their financial advisers. "Whenever you feel like you're being pitched an investment that seems a little 'off book,' if the paperwork seems strange, or if they try to make it sound as if the investment is so exclusive that it needs to be kept on the hush-hush, I'd run as fast as you can," Koos cautions. Finally, the majority of widows--70 percent--who have an investment adviser will switch after the death of their spouse, for both emotional reasons and because their needs may change.

Financial Planning for Women

Different Women Have Different Financial Planning Needs

Financial planners say there is a disconnect between the financial services industry and women worldwide, who now account for $18.4 trillion in consumer spending, hold approximately 30 percent of global wealth, and are the largest emerging market in the world at twice the size of China and India combined. A 2010 study by The Boston Consulting Group found that women were more dissatisfied with the financial services industry than any other that had an impact on their daily life, and reported being treated disrespectfully or given poor advice because of their gender. Certified Financial Planner Board of Standards Consumer Advocate Eleanor Blayney, CFP^® said it simply comes down to listening and noticing. "Advisers are so used to talking to baby boomers--and they themselves are mostly boomers--that they forget that they cannot talk to a young woman the way they talk to her mother. And the way they talk to men won't work when talking with women or their daughters," Blayney said. The study said that financial advisers present the same message and services to women and do not take into account their varying needs and situations in life. A recent graduate with student loan debt, for instance, will have different investment needs than a married woman with children, and the study goes on to say that advisers must learn to tailor their approach if they are going to succeed. In addition, studies have shown that women like to feel that their adviser is educating them about the investment process and is taking the time to explain asset categories that can lead to growth rather than touting complex products and services. "For women, the decision-making process is longer when it comes to hiring an adviser and understanding a strategy," Blayney says. "They won't necessarily come into your office the first time and sign on the dotted line."

Women Must Protect Their Credit During–and After–a Divorce

Divorce can have a significant emotional and financial impact, says Denisa Tova, CFP^®. However, divorce need not hurt a woman's credit. Ideally, divorcing couples should cooperate to preserve their credit rather than launch a long and costly legal battle, Tova says. If both parties have high debt loads and are considering filing for bankruptcy, they should do so as a couple prior to filing for divorce. They also should pay off all joint debts before the divorce is finalized, after which those accounts should be closed, especially credit cards. It may be necessary to sell the home and use the proceeds to pay off the debt, or tap savings or investment accounts. If that is not possible and both parties will encounter debt, it is essential to create a post-divorce budget to ensure the debt will be manageable. Each party also should attempt to transfer their share of the joint debt onto their own credit card to close the joint accounts. But even if one spouse agrees to make the payments on a joint account, both will be equally responsible for it until it is paid off, making it essential to monitor all joint debts even after divorce. Additionally, it is important to obtain a copy of all joint account statements each month from each lender and to frequently check credit reports.

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