The Most Wonderful Time of the Year
Way back in 1963, the singer Andy Williams introduced one of the most popular Christmas songs of all time: “It’s the Most Wonderful Time of the Year.” Decades later, the office-supply store Staples repurposed it to sell school supplies, and Miller recycled it once again to sell light beer. But for our friends at the IRS, the most wonderful time of the year starts right now. So here are some tax time quotes to get you in the spirit of the season:
“It’s tax time. I know this because I’m staring at documents that make no sense to me, no matter how many beers I drink.”
Dave Barry
“Nuclear physics is much easier than tax law. It’s rational and always works the same way.”
Jerold Rochwald
“I don’t care anymore whether I pay more taxes or less taxes, as long as I don’t have to understand it.”
Bob Thaves (“Frank & Ernest”)
“If you make any money, the government shoves you in the creek once a year with it in your pockets, and all that don’t get wet you can keep.”
Will Rogers
“You don’t pay taxes — they take taxes!”
Chris Rock
“Nothing makes a man and wife feel closer, these days, than a joint tax return.”
Gil Stern
“U.S. Internal Revenue Service: an agency modeled after the revenue raising concepts of the 19th century economist, Jesse James.”
Robert Brault
“It would be nice if we could all pay our taxes with a smile, but normally cash is required.”
Anonymous
Sure, writers and columnists like Will Rogers and Dave Barry can make you laugh at the tax man. But can they actually help you pay less? No! And there’s nothing funny about wasting money on tax you don’t have to pay. So call us when you’re ready for a plan, and you’ll enjoy having the last laugh on the IRS!
In The Headlines
Alcoa Finds New Luster in an Old Metal
Alcoa CEO Klaus Kleinfeld is pushing to find high-margin uses for aluminum, like the latest Bud Light “bottle.” Aluminum sold for $3,400 a ton when Klaus Kleinfeld took the helm of Alcoa in 2008. Six months later the price had plunged to $1,100, and Kleinfeld had to lead a massive restructuring of the venerable company (founded in 1888). With the bad days now behind him, Kleinfeld, 57, focuses on two priorities: keeping costs low to maintain profits in his commodity aluminum business, and developing innovative new products like aluminum-lithium alloys that can make beverage cans that look like bottles, and high-tech fasteners, for which Alcoa can charge a premium.
Kleinfeld points out that Ford’s new F-150 pickup truck got a lot of attention for having an aluminum body. He believes that Ford’s choice was driven by two things. One is regulation, which basically obligates the car companies to get better on their fuel efficiency. The other is that Kleinfeld believes consumers today have a choice in all categories of vehicles, so they can now go for the F-150 and be assured it has towing capacity, fuel efficiency, and strength.
Alcoa provided military-grade aluminum that is lighter and stronger. How much weight does aluminum take out of a truck? Ford has said it is more than 700 pounds. Kleinfeld says this allows consumers the choice to get the fuel efficiency or to load 700 pounds extra onto the truck and travel with it.
On the other hand, a couple of very high profile planes, the Boeing 787 and the Airbus A350, are made of carbon fiber rather than aluminum. No problem says Kleinfeld. “We’re very happy about these things because we also have a fastener business and a forging business where we make a lot of materials for those composite planes. There’s no plane in which Alcoa has more total value, in fact, than the 787.”
He also points to the fact that when Boeing and Airbus had to make a decision two years ago about their two workhorses, the 737 and the A320, they decided to go for aluminum. The new versions are all aluminum, so he is confident that aluminum is here to stay. And the aluminum alloys that go into them are not the same as 10 or 15 years ago. The invention of aluminum lithium, the combination with other materials, he says, is the trend.
Beyond looking at new uses for Alcoa’s core product, Kleinfeld is also focused on leadership. At Alcoa, he has established a T-shaped leadership model. The horizontal component represents qualities the company looks for related to analytics, strategic thinking, languages, math skills, and international experience. The model also has a vertical or depth component. This evaluates a person’s ability to get through a difficult experience—something that is very deep or challenging or frustrating.
In a possible reference to his own experience at Alcoa, Kleinfeld said, “If you want to lead anything, it doesn’t work to just have the general management skills because there are going to be one or two or three issues where you have to roll up your sleeves and get into it and don’t stop digging until you’ve found the bottom. If you don’t do that, you’re not going to earn respect.”
Will Greek Elections Shake the European Financial Status Quo?
After finally launching its highly anticipated Quantitative Easing (QE) program, the European Central Bank (ECB) now faces another major task: dealing with Greece. It now appears that the next Prime Minister of Greece will likely be Alexis Tsipras, leader of the radical-left Syriza party. Tsipras’ economic advisors say one of their first missions will be to renegotiate the debt Greece owes to the ECB—an explosive idea in both political and central banking circles.
“There are some red-lines that will simply be non-negotiable, for the ECB in particular,” said Doug Rediker of International Capital Strategies, who was formerly the U.S. representative to the International Monetary Fund (IMF). Syriza remains undeterred. “Our party’s mandate is to renegotiate,” said Yanis Varoufakis, who is tipped by some to be Syriza’s new finance minister. Varoufakis, who was most recently an economics professor at the University of Texas in Austin and a self-described libertarian Marxist, argued that there was no hope of Greece paying back all that it owes. “Greece went bankrupt in 2010 and what did Europe do in its infinite wisdom? It tried to deal with a solvency problem by extending the largest loan in history on the weak shoulders of the bankrupted Greek state.”
Greece certainly has a mountain of debt, owing more than $350 billion, not just to the European Central Bank, but also to the IMF, other European governments, and private investors. To the ECB specifically, Greece owes 27 billion euros ($30 billion), in the form of bonds bought by the central bank on the open market back in 2010 and 2011, at the height of the European financial crisis. Under former ECB President Jean Claude Trichet, Mario Draghi’s predecessor, the central bank bought the bonds in an effort to lower Greece’s interest rates so it could borrow again at an affordable rate from the capital markets.
Now, many of those bonds are coming due. Greece has a principal repayment of 3.5 billion euros in July and another 3 billion euros in August. Syriza’s economic policy team wants the ECB to dramatically ease Greece’s repayment terms. “The ECB can do a lot of things,” said John Milios, a Marxist with a PhD in economics. “One solution could be a swap.” In exchange for the bonds currently held by the ECB, Milios wants to give the central bank a different type of bond—a “zero-coupon perpetual.” In other words, a bond that pays a zero interest rate for the entire duration of the bond, which in this case, would be forever.
In the restructuring world, zero coupon perpetuals are derided as “wallpaper.” But Milios insists the ECB would eventually get paid back. The country would begin buying back the debt, i.e., repaying it, once the economy has grown sufficiently that the country’s debt-to-GDP ratio falls to 20%, from the current level of 174%. Milios calculates this would take 58 years. He has written a paper in which he argued that his recommended solution for Greece should take place in all of the highly indebted euro zone countries. Varoufakis suggested a slightly different variation on Milios’ plan. He too wanted the ECB to accept a zero-coupon perpetual, but one with GDP warrants attached. These are payments a debtholder receives that are tied to a country’s GDP growth, and have been used in sovereign debt restructurings in the past. The holder of the warrants gets paid when the economy grows.
What does the ECB think of these ideas? That is unknown as yet, as a spokesperson for the central bank declined to comment on anything related to Greece until after the results of the elections were known. But the suggestion that a Syriza government may not want to pay back the ECB on time puts Greece in a tenuous position when it comes to the central bank’s newly announced quantitative easing program. During a recent press conference, ECB head Mario Draghi said: “There are obviously some conditions before we can buy Greek bonds.” Greek bonds will be excluded from the new program until at least July, Draghi explained, because the bank already owns so much Greek debt that it exceeds ownership limits. Draghi implied however that once Greece pays back the bonds due in July, the country’s debt will become eligible for the program. However, Draghi also said the country must be in compliance with the bailout program imposed by the IMF and the European Commission on the country—a program that Tsipras has also promised to renegotiate.
If the ECB were to stop funding the liquidity of the Greek banks, the banks could collapse—an event that could lead to Greece abandoning the euro and printing its own money once more. Milios didn’t believe it would come to that, saying, “No one wants a collapse of banks in the euro zone. This is going to be Lehman squared or to the tenth. No one wants to jeopardize the future of the euro zone.” Meanwhile, the Syriza team’s plans don’t stop with the ECB. Syriza wants a write-down of the nearly 200 billion euros in loans from the European Financial Stability Fund and other European governments that Greece has received. However, the European Commission has long said that a write-down is out of the question—although lower interest rates and longer maturities are a possibility, as long as Greece sticks to the terms of its bailout program.
Citations
1. http://for.tn/18hsnSO – Fortune
2. http://www.cnbc.com/id/102366312 – CNBC
The Good News Is . . .
• U.S. housing starts rose more than expected in December as groundbreaking for single-family homes hit its highest level in more than 6 ½ years. It was a hopeful sign for the sluggish housing market recovery. Starts increased 4.4% to a seasonally adjusted annual pace of 1.09 million units, the Commerce Department said. November’s starts were revised up to a 1.04 million-unit pace. Single-family homes starts, the largest part of the market, jumped 7.2% to a 728,000-unit pace, the highest level since March 2008.
• Union Pacific, Corp., one of the nation’s leading railroad companies, reported earnings of $1.61 per share, an increase of 25.8% over year-ago earnings of $1.28. The firm’s earnings topped the consensus estimate of analysts by $0.10. The company reported revenues of $6.2 billion, an increase of 9.3%. Management attributed the company’s results to strong freight volumes and lower diesel fuel prices.
• Shareholders in Family Dollar voted to approve the retailer’s $8.5 billion merger with Dollar Tree, leaving the company’s unwanted suitor, Dollar General, on the losing side. About 74% of all Family Dollar shares were cast in favor of the transaction, the company said in a statement. Family Dollar’s merger with Dollar Tree will create a retailer with more than 13,000 stores and annual revenue above $18 billion.
Citations
1. http://www.cnbc.com/id/102352190 – CNBC
2. http://www.cnbc.com/id/18080780/ – CNBC
3. http://bit.ly/15ITbKH – Union Pacific Corp.
4. http://nyti.ms/18hsCgH – NY Times Dealbook
Planning Tips
An Alternative to the 529 Plan for Funding Higher Education
The President has proposed changing a key provision of the 529 college savings plan which could dramatically affect their usefulness as a way to fund higher education. The popularity of 529 plans has grown sharply in the past decade. There were more than 12 million 529 plan accounts with an estimated $240 billion in total assets at the end of last year, according to the research firm Strategic Insight. While it is uncertain whether these changes to 529 plans will be implemented, it is good to have an alternative strategy. Below are some tips for using a Roth IRA as an alternative education funding plan.
What is the proposed change to the 529 plans? – Currently, the after-tax money you put into a 529 plan can be withdrawn tax-free to pay for tuition, room and board, and other qualified education expenses. Under the President’s new proposal, it is this critical benefit that would change. For new contributions, money could no longer be withdrawn tax-free.
What is the alternative? – There is another tax-free option to save and pay for college and it may offer families more flexibility: a Roth IRA. Ideally, the money that you put away in a Roth IRA should be saved for retirement. Yet many middle-income families may not be aware that after-tax contributions made to a Roth IRA can be withdrawn tax-free at any time to pay for college—or anything else for that matter, if needed.
How does it work? – Earnings in a Roth IRA can also be withdrawn for college expenses without paying penalties; however, you will have to pay taxes on the earnings. Generally, if you withdraw earnings from a Roth IRA before you are
59 ½ years old that money will be subject to income taxes and a 10% penalty. But withdrawals for qualified higher education expenses—for you, your spouse, your children or grandchildren—are an exception, and you do not have to pay the penalty.
What is the downside to this approach? – You cannot contribute as much to a Roth IRA as you can to a 529 plan. The maximum amount that can be contributed to a 529 plan on behalf of each designated beneficiary varies among states, but the IRS generally allows contributions up to “the amount necessary to provide for the qualified education expenses of the beneficiary.” When limits are established, they are usually applied on a lifetime versus an annual basis. (For instance, a plan may limit total contributions to $200,000.) For 2015, you can contribute up to $5,500 to a Roth IRA, or up to $6,500 if you are 50 or older, though you do have until April 15 to contribute to a Roth IRA for the 2014 tax year).
What other restrictions may apply? – There are income limits to be fully eligible to contribute to a Roth IRA. This year married couples must have adjusted gross incomes of less than $183,000 ($181,000 for 2014). If you are single, the income threshold is $116,000 ($114,000 for 2014). But families whose household income is too high to contribute to a Roth IRA could convert a traditional IRA into a Roth IRA and withdraw the Roth money tax-free for college expenses, as long as they follow IRS guidelines.
Citations
1. http://1.usa.gov/1xVtQ7a – IRS
2. http://bit.ly/1xVtVI2 – TheStreet.com
3. http://www.cnbc.com/id/102364599 – CNBC
4. http://bit.ly/15y4mop – Bankrate.com
5. http://bit.ly/1yZMVI6 – Investopedia
