What’s New for 2007

Every year offers some surprises in the financial world, and 2007 is no exception. Here is a look at some of the changes – large and small – that may have an effect on your finances in the year to come.

Charitable Deductions Need More Documentation

I mentioned this one in last month’s newsletter – if you give cash to your favorite charity in 2007 and beyond, ask for a receipt. The IRS now requires that you have a receipt or other written documentation for all cash contributions for which you are claiming a deduction, not just for those exceeding $250 as in years past. Your canceled check and credit card statements can be used for this purpose, as well. The supporting documentation must show the name of the charity, as well as the date and amount of your contribution in order to be accepted as documentation of the contribution.

Refunds Due For Telephone Excise Tax Paid

After more than a century of existence, originally introduced as a luxury tax on wealthy individuals, the federal excise tax on long-distance phone service has been abolished. Actually it was abolished in 2003, but for some reason, Ma Bell and her counterparts continued to charge it up until August of last year. As a result, we all deserve a refund!

This refund won’t make you rich, in fact the range of the refund is between $30 and $60, depending upon how many exemptions you claim on your 2006 tax return. But it’s your money, so don’t forget to fill out the necessary forms to claim it!

For folks who normally would not file a tax return, specifically seniors on a lower fixed income, it may make sense to make sure that they file their return for the year, simply to get this refund.
Note: if you know of someone who needs assistance with filing their taxes and this refund is the only reason that they are filing a return, I would gladly prepare their returns for them free of charge. Just give me a call.

Charitable Contributions From IRAs Allowed

If you’re over 70½ and need to take required distributions from your IRA, you may benefit from a new rule that allows you to contribute as much as $100,000 to a qualified charity directly from your IRA. These distributions are tax-free and can be used to satisfy minimum distribution requirements. If you would like to exercise this option though, don’t wait: it’s only available during the 2007 tax year.

Medicare Part B Premiums Tied to Income

Beginning in 2007, Medicare Part B premiums will be higher for beneficiaries with higher incomes. You’ll pay an income-related premium if your modified adjusted gross income exceeds $80,000 if you’re a single taxpayer, or $160,000 if you’re married and you file your taxes jointly. The Social Security Administration should have already contacted you of this change if you’re already receiving Medicare.

Splitting Tax Refunds

If you are expecting a refund of federal income taxes this year, you can now split up the direct deposit of your refund to as many as three accounts. This can be an IRA, a savings or checking account, a Health Savings Account, or a Coverdell Education Savings Account.

Strategies of Successful Investors

For a golfer looking to improve his game, it can be useful to study Tiger Woods’ strategies and methods. Investors can, in much the same way, learn from the “money masters”. You might not have their resources or years of experience, but understanding their philosophies can help you in your own approach to investing.

Think Like an Owner, Not Like a Trader

This philosophy is as commonsense as the investor who is famous for following it: Warren Buffett. Any list of successful investors includes the chairman of Berkshire Hathaway, and he’s typically at the top of the list. The Oracle of Omaha is well-known for his down-to-earth approach to sizing up investment opportunities.

Buffett invests in businesses, not stocks, and prefers those with consistent earning power and little or no debt. He also looks at whether a company has an outstanding management team. Buffett attaches little importance to the market’s day-to-day fluctuations; he has been quoted as saying that he wouldn’t care if the market shut down completely for several years. However, he does pay attention to what he pays for a stock; as a value investor, he may watch a company for years before deciding to buy. And when he buys, he plans to hang on to his investment for a long time.

Don’t Forget That Markets Can Be Irrational

George Soros feels that markets can be irrational. However, rather than dismissing the ups and downs, the founder of the legendary Quantum Fund made his reputation by exploiting macroeconomic movements. He once made more than $1 billion overnight when his hedge fund speculated on the devaluation of the British pound.

Soros believes in capitalizing on investing bubbles that occur when investors feed off one another’s emotions. He is known for making big bets on global investments, attempting to profit from both upward and downward market movements. Such a strategy can be tricky for an individual investor to follow. However, even a buy-and-hold investor should remember that market events may have as much to do with investor psychology as with fundamentals. Whether or not you apply Soros’s philosophy in the same way he does, that can be a valuable lesson to remember.

Use What You know; Know What You Buy

During his 13-year tenure at Fidelity Investments’ Magellan Fund, Peter Lynch was one of the most successful mutual fund portfolio managers in history. He subsequently wrote two best-selling books for individual investors.

If you want to follow Lynch’s approach, stay on the alert for investing ideas drawn from your own experiences. His books contend that because of your job, your acquaintances, your shopping habits, your hobbies, or your geographic location, you may be able to spot up-and-coming companies before they attract attention from Wall Street. However, simply identifying a company you feel has great potential is only the first step. Lynch did thorough research into a company’s fundamentals and market to decide whether it was just a good idea or a good investment.

Lynch is a believer in finding unknown companies with the potential to become what he called “ten baggers” (companies that grow to 10 times their original price), preferably businesses that are fairly easy to understand.

Make Sure the Reward is Worth the Risk

Perhaps the best-known bond fund manager in the country, PIMCO’s Bill Gross makes sure that if he takes greater risk – for example, by buying longer-term or emerging-market bounds – the return he expects is high enough to justify that additional risk. If it isn’t, he says, stick with lower returns from a more reliable investment. Because bonds have historically returned less than stocks and therefore suffer more from high inflation, he also focuses on maximizing real return (an investment’s return after inflation is taken into account).

Choose a Sound Strategy and Stick To It

Even though all these investors seem to have different approaches, in practice they’re more similar than they might appear. Each of their investing decisions has specific, well-thought-out reasons behind it. They rely on their own strategic thinking rather than blindly following market trends. And they understand their chosen investing disciplines well enough to apply them through good times and bad.

Work with your financial planner to determine a strategy that matches your financial goals, time horizon, and investing style.