Medicare While Still Employed

Finance Gourmet on August 28, 2015

Everyone knows that Medicare provides heath care coverage for retired Americans over 65 years old. But, with more American’s working beyond age 65, there is plenty of confusion about how Medicare works if you are still employed and working at a job, especially if it provides health insurance.

Medicare is a health care program for American workers age 65 and older. Although it is often paired with Social Security, the programs are different. In fact, with modifications to the Social Security retirement age moving back full retirement benefits, there is now an age disconnect between the two programs. This can cause a financial issue if you aren’t thinking about Medicare when you turn 65 because you are still working a job and don’t need Medicare insurance because you have coverage at work.

Medicare Late Enrollment Penalty

Does it make sense to enroll in Medicare if you are still working when you turn 65?

When you turn 65, you must enroll in Medicare during your initial enrollment period to avoid paying a penalty when you enroll later. The penalty for late enrollment in Part A is an increase in your monthly premium of up to 10% for twice as many years as you did not enroll after your initial window. Your window is generally 3 months before and after you turn 65. If you do not sign up during your window, you can sign up between January 1 and March 31 each year.

Medicare while still employed imageFor example, if you do not enroll when you turn 65, and then wait to enroll until you are 67, then you will pay a penalty for four years. That is two times the number of years you were late for enrollment.

The penalty for Medicare Part B late enrollment is forever, but the initial enrollment period may be different if you are still employed.

Medicare Part A While Working

Medicare Part A enrollment can be particularly confusing. As noted above, if you do not enroll during your initial enrollment window for Part A, you may be subject to a penalty of up to 10 percent on your monthly premiums for Part A coverage. However, most people do not have to pay a monthly premium for Medicare Part A. This is sometimes referred to as premium-free Part A Medicare. Obviously, a 10 percent penalty on a $0 premium payment is $0. (The exceptions to this are generally people who did not earn income that paid Medicare taxes, that is people who lived off of investment income.)

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What makes this tricky is that most people are eligible for premium-free Part A. If you qualify to draw Social Security and are over age 65, then chances are you get free coverage. No reason to not have additional free coverage.

Here is the catch, though. If you are not currently collecting Social Security, you are NOT automatically enrolled in Medicare Part A. You must enroll manually. Also, because premiums cannot be deducted from your Social Security check, you will need to make an auto-pay arrangement, or send in a check every month.

Since it is free, there is no reason not to enroll. Even if you have health care coverage through your employer, Part A may cover some things your other plan doesn’t.

You can apply for Medicare coverage online.

Medicare Part B While Still Working

Part A Medicare basically covers hospital care and nursing home care. For everything else that you are used to insurance covering, you need Medicare Part B.

Medicare Part B covers regular medical services such as doctor visits, preventative care, x-rays, blood tests, and so on.

The Medicare Part B penalties are worse than Part A penalties because they continue for the entire time you are enrolled in Medicare. In other words, they never expire or go away; you pay more forever. You don’t want to get stuck with this Medicare penalty.

Unlike Part A, Part B does have a monthly premium that almost everyone pays. So, if you are already covered by health insurance from your job, Medicare B may be an unnecessary expense. Fortunately, for people over 65 who are still working, and covered by group health insurance, there is a Special Enrollment Period to sign up for Part B (and Part A).

Your Medicare Part B Special Enrollment Period lasts for 8 months after your employment ends or your coverage ends, whichever comes first.

There is no Special Enrollment Period based on COBRA coverage.

In short:

  • If your job ends, you have 8 months to enroll.
  • If your employer stops offering group coverage, but you are still working, you have 8 months to enroll from the date the coverage stops.
  • If you stop working and enroll in COBRA, you still only have 8 months from the day your employment stops to enroll, no matter how long your COBRA coverage lasts.
  • If you have your own personal coverage (not GROUP coverage through your employer), there is no Special Enrollment Period.
  • If your group plan covers less than 20 people, it may not qualify, be sure to check with your HR department and local Social Security office to be sure.

Typically, your best move will be to enroll right away once you retire and your employment ends. The only typical exception would be if you were laid off and your employer gave you free health coverage for a period of time as part of your severance. However, remember that your enrollment period starts on the day you stop employment, not when your coverage ends.

Quick Medicare Enrollment Period Advice

Here is the short, short version. Be sure you understand all the ifs and buts from above first. But, if you worked your 40 quarters, and you are still employed by a company big enough to have at least 20 employees covered, and you get that coverage from your employer then:

  1. Enroll in Part A coverage during your initial window (the 7 months around your birthday, 3 months before, the month of, and 3 months after)
  2. Enroll in Part B as soon as your coverage ends or your leave your job

That’s basically it. You can always contact Medicare directly, and typically most Social Security workers have a pretty good understanding as well.

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Finance Gourmet on August 27, 2015

Yesterday here on Finance Gourmet, someone who looks an awful lot like me (O.K. it was me) posted about yesterday’s rally, and emphasized the fact that, in the end, the U.S. stock market will always eventually follow the fundamentals of the U.S. economy and the individual stocks in question.

Today (it doesn’t usually happen that fast) the GDP report for the second quarter was revised up from a 2.3 percent annualized growth rate to a 3.7 percent annualized growth rate. Oh, and new jobless claims fell too.

The result?

The U.S. markets are up once again today, which if you are keeping score, completely erases the losses from earlier in this week when we were looking at China instead of America when deciding where the stock market should go.

dow recovers 2015

Aren’t you glad you didn’t panic?

As always, for all non-speculative investors, a solid, well diversified portfolio and regular rebalancing is the best way to accumulate and grow wealth. Being yanked around, emotionally, or financially by every news story that pops up (no matter how big it seems) is just a recipe for too much trading and lower overall investment growth.

The new economic numbers today confirm that, here in America at least, the economy continues to grow. While certainly not on fire in any way, the growth is real and it is leading to job growth, both important pieces of a real economic recovery.

Now, everyone can go back to worrying whether or not the Federal Reserve will raise interest rates in September.

My best guess? — The Fed realizes that the recovery and markets are fragile right now. Rather than actually raising rates at the September meeting, the Fed will instead adopt new language that makes it pretty clear that a rate hike is coming in the beginning of 2016. Keep in mind, the September meeting is really sort of the last time that the Fed will seriously consider a rate hike, because no one likes doing them during the all-important 4th quarter holiday shopping season.


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Finance Gourmet on August 26, 2015

Yesterday, I wrote about how the stock market plunge in China and the subsequent drop in the U.S. markets was not something anyone other than short-term investors should be worried about. Typically, I wouldn’t write another article about the stock market again right away, because I believe that most people would be better off watching the markets less, rather than more.

But, I couldn’t resist today. Yesterday, there was an article that included the word “Bearmageddon” suggesting that a bear market of armageddon-like proportions was in the offing after the U.S. markets closed down six-days in a row. Other articles couldn’t stop pointing out thing like the biggest drop ever, or the longest-streak of down days since whenever, and so on.

Today, the markets closed up. The stories today are about the “biggest gain in almost 4 years.”

Talk about whiplash.

The reality is that the U.S. stock market trades, in the long-term, based upon the fundamentals of the United States’ economy. While it is true that the issues in other countries, like China, can inform potential issues in the U.S. economy, it is important to remember that those issues must be American issues, not Chinese issues.

The truth is that the Chinese economy could crater into a mass recession without necessarily taking the U.S. with it. In fact, thanks to China’s restrictive business policies, American company’s exposure to China is often comically limited, often by a force partner from China itself. While reduced demand from China wouldn’t be anyone’s first choice, the reality is that few company’s count on China for a large portion of their revenues. Even the short-lived concern about iPhone sales in China is probably a small factor to Apple if sales held steady or increased elsewhere.

The point is, that like always, the media love to shout attention grabbing headlines. But, in a year, will this be the beginning of a market correction, bear market, or just a few days of crazy volatility?

The Dow’s 619 point rise today wipes out yesterday’s 200-ish point decline and then some. Who was right, yesterday or today?

It really doesn’t matter compared to who was right last year, or the last five-years?



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Finance Gourmet on August 25, 2015

China! Aggghhhh! Everyone panic.

The Chinese stock marketing is crashing, and it’s making everyone nervous. As always, long-term investors with diversified portfolios need do nothing other than sit back and watch. I, for one, like following along the headlines. You know, the ones that swing violently from doom, to fine, and back again.

What Is Happening In China?

Once upon a time, China was a communist country without much of an economy to speak of. Then, the government decided it wanted to be a big world economy, and in China, what the government wants, the government gets. The Chinese government devoted billions and billions of dollars to building up new cities filled with factories, and then spent even more money subsidizing those endeavors until, everything was made in China. With a new power economy, China also decided to get the other “regular” economy things like banks, lending and even a stock market.

Fast forward a few years, and the Chinese stock market has been roaring along. Then, earlier this summer, the Chinese stock market started to drop. The government stepped in and put a stop to it. Unfortunately, real stock markets eventually end up doing what they want (need?) to do and all such interference does is delay the inevitable.

Which brings us to now. On Monday, the U.S. Stock Market, as measured by the Dow Jones Industrial Average fell, at one time during the day, over 1,000 points. It closed down 588 points for the day. This fall was attributed in large part to the Chinese stock market losing 8.5 percent the day before. (Thanks to time zones, Monday in China occurs overnight on Sunday here in America. In other words, the U.S. stock market already knows what happened in China when it opens. This is particularly pronounced on Mondays, because both markets have been closed for the weekend.)

The following day (overnight from Monday to Tuesday in the U.S.), the Chinese markets, as measured by the Shanghai Composite Index fell 7.5 percent. At first, it seemed like the U.S. markets might rally up. After all, the China thing isn’t THAT big of deal for the U.S.  At one point, on Tuesday, the Dow was actually up, hitting a high of 16,313, around mid-day. But, then after 3:00 pm, things rolled over and end up down almost 205 points at 15,666.

What happened?

Again, the Chinese markets trade overnight when the U.S. markets are closed. There are people out there who aren’t interested in holding their investments overnight, just in case things get even worse in China while everyone over here is sleeping. Better to be in cash, than unable to get out if the China meltdown gets worse, the thinking goes.

What’s The Big Deal?

As you read the dramatic headlines, you may think this is the end. The reality though is a bit different.

First, analysts have been saying for quite a while now that the Chinese stock market was in a bubble. Those same analysts have been noting for even longer that the U.S. stock market has gone a very long time without a correction (technically defined as a drop of 10%). In fact, if you read this article from this very same finance blog earlier this year, you’ll see that I mention that some sort of blow up in either Greece or China would probably be the thing that finally pushed the U.S. markets over into the long called for correction. (Do I get a cookie?)

In other words, according to everyone watching the markets, both were due for a drop of some sort. In fact, the good news is that we can stop hearing about the no correction thing now. That one drop was 10% all at once, so the correction clock starts all over now.

You’ve heard that these stock market plunges have wiped out all the gains from this year. That’s true, but the real question is, if those gains were already on shaky ground, then were they ever legitimate gains? And, if not, aren’t these drops just putting the prices back where they actually should be?

In other words, is the stock market plummeting, or is it just fixing the unrealistic move up from earlier this year?

Whatever the answer, here is a quick reality check. This is a 5-year chart of the Dow average:

dow 5-year chart

Stock prices are down alright, but your 401k is probably still higher than it was a year or two ago. Remember, unless you are day-trading, these price swings are not relevant.

The Chinese index chart is even crazier. You remember that 8% drop, followed by a 7% drop? Huge, right?

Only here’s the thing. While those drops took out the Year to Date gains, they still still weren’t enough to even take out the bottom of a one-year chart.

The reality is that the mountain on that stock chart from February to June probably wasn’t based on legitimate fundamentals in the first place. This quick fall, probably puts things back where they should have been all along. What happens next will determine whether the Chinese economy hits a rough patch, or this is just a bunch of noise for a short period of time. Either way, everyone knows that the current Chinese economy is based on unstable ground. It will have to sort itself out sooner or later.

china-index 12 months

When looking at their “losses”, people tend to count from the top. In other words, today, people are talking about how much they “lost” from the absolute peak rather than from where they actually invested. This is the kind of thinking that leads to fear-based selling. The reality is that the peak was a mistake, that’s what makes it a peak. You didn’t lose money from the peak, you should have never had the peak in the first place.

When you look at your portfolio, don’t compare to the top amount you ever had, compare to what you invested, or to what you had last year, or even the year before. The 5-year chart is still substantially up, and that is how the markets work. Your investment goes up, and it goes down, but if you don’t panic, it will go back up again (and it will go back down again).

Sit tight America. The ride will be bumpy, but the reality is that the U.S. economy is looking up, and has been for a while. In the end, that’s what really decides where the Dow goes, not what’s going on in China.

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Finance Gourmet on August 18, 2015

Here it comes…


A presidential campaign is officially coming, and unofficially already in full swing. With it comes political ads, ads that make it sound certain that we are doomed, we will be doomed, or we must fix the doom.

Are things really that bad? Is Washington really ruining the economy?

The answer, as always, is no.

Politics and Investing Do Not Mix

economy politics doom

The reality of America is that everyone, in both parties, wants the same thing: a stronger, better, bullet-proof economy. The only difference is in the ideas on how to get there. Even tougher to follow is that there is not definitive proof that ANY of the political ideas out there do what their followers think they will.

Republicans think cutting taxes puts more money in the hands of businesses and consumers which boosts the economy. Democrats think government spending puts more money in the hands of business, while improving society, thereby improving the economy. Who is right?

They both are. And, they are both wrong. The key to a strong economy isn’t really political at all. It is cyclical.

Go back over the years and you can prove anything you want, because the reality is that the economy always goes up and down. It’s called the economic cycle, and it is a basic concept of all economics. An economy will expand (Whoo hoo! Good times.) and contract (Boo! Hard times.) over a varying period of time, usually somewhere in the 8 to 12 year range.


The only thing politicians can really do is influence the swing. Even then, the Federal Reserve has much more influence on the economy than Congress and the President.

Don’t ever let anyone tell you this is a bad thing. A table surrounded by economists will do an infinitely better job managing the economy than a roomful of politicians pushing an agenda. Remember when someone says they want to eliminate the Fed, what they are really saying is they think Congress would do a better job running the economy. In the history of the country, has Congress ever done a better job of anything?

But, scary sells.

If you think back, you’ll remember these exact same commercials with the exact same scary music from the last election… and the one before that… and the one before that… and the…

You get the idea.

Whether or not you agree or disagree with whichever political party is a POLITICAL matter, not a financial matter. DO NOT use these ads a reason to question your investments. The economy will rise and fall, no matter who gets elected. In the meantime, stick to your investment strategy and personal finance plan, and let the politicians worry about what is so scary it might make someone vote.

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Finance Gourmet on July 29, 2015

I don’t usually do a lot of analysis of company moves. I just don’t have the time, and often don’t have the insight. But, as a freelance technology writer, I spend a lot of time looking at technology and technology companies. Microsoft is rolling out its new operating system called Windows 10, and it has some interesting marketing and PR behind it.

Free Windows 10 Upgrade

The first interesting thing about Windows 10 is that it is free. Well…. kind of… and sort of.

windows 10 free upgradeIf you already own Windows 7  or Windows 8, Microsoft will allow you to upgrade to Windows 10 for free, for up to one year. That is, you have one year from now to upgrade to Windows 10 and get it for free.

Free? How does this make sense for a publicly traded, profit motivated company?

The first thing to understand is that most customers don’t actually upgrade their operating system when new operating systems come out. For retail customers (that is, people who have their own computers that they use and set up themselves) the process of upgrading an operating system is complicated, and unnecessary. After all, if your computer works now, why bother doing something like upgrading the operating system. This is doubly true if you have to PAY money to do it. Remember, the upgrade proposition is essentially, do this long, boring, complicated thing, to get a few new bells and whistles that you don’t really know why you would need them, and pay $150 to do it.

Not a good deal.

In fact, most retail customers only upgrade their computers when they get new ones. So, Microsoft giving away a year worth of upgrades probably doesn’t cost them as much as you might think.

For corporate customers, the story isn’t much different. If you think upgrading your three or four computers sounds like too much work, imagine having to do it to 1,000 or 10,000 or even 100,000 computers. It takes months of planning, thousands of man hours, plus new training for users, and making sure all of your mission critical applications still work. Is it any wonder that over half of all businesses have a least some Windows XP or Windows Server 2003 computer laying around somewhere?

The money factor is even less there. Most corporate customers have annual licenses that cover all of their Microsoft software. In other words, Microsoft already gets money for Windows every year, and that amount is the same whether they customer is installing Windows 7, Windows 8, or even Windows 10.

No More Windows Versions

Since its inception, Microsoft has operated on the model where it would release a version of Windows, and then sell that version for the next several years while it worked on the next version. The distance between versions always seems to be wrong, either too long or too short. The amount of space between Windows 95 and Windows XP was so laughably long that the company abandoned the naming convention with the year, lest the customer be reminded that they OS was years and years old.

The distance between Windows Vista and Windows 7 was very fast because of another problem Microsoft has. Sometimes, the operating system isn’t well received and customers don’t want it. Then, the company is stuck with a product that people don’t really want but it MUST sell. Even worse, is that even if Microsoft fixes it, the name is poison and no one will ever give it another change. Windows 7, for example, is a lot more like Windows Vista than most people will ever know because they never owned Vista. In fact, within the industry, Windows 7 is often referred to as Vista done right.

Which brings us to no more Windows.

The world of computing changes pretty fast these days. You likely have no idea what version of Chrome or Firefox, or whatever that you are running. They continuously update them. The same thing goes for the phone in your pocket. Only techies know what version of Android they have. Apple is pretty much the only technology company left releasing one version of something at a time.

Microsoft will do the same with Windows. Instead putting years of work into an operating system and hoping to get it right, Microsoft will incrementally release new features and improvements. If a better touch screen technology comes along, the company will just add it in, a little at a time. If customers howl, they can back it out, or make it optional. If they love it, it becomes permanent. And so on.

There are a lot of issues that have yet to be sorted out, including how and when corporate America will include various updates, but for the average consumer, the process will probably fade from their view. And, as far as money goes, while Microsoft will lose out on some upgrade money, this new system ensures that they can react quickly enough to the market to avoid another big, money losing turkey of an operating system, and avoid driving users further into the world of tablets, and away from Windows.

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Finance Gourmet on July 21, 2015

The U.S. stock market is composed of thousands of stocks. Of course, when it comes to moving the overall market, some stocks matter more than others. The biggest stocks, those in the S&P 500, and those in the Fortune 500, have some of the biggest impacts on the overall stock indexes. However, in most cases, the news that comes out of those companies is relatively expected.

apple-stock-logoThe exception to this rule are the technology companies. Unlike, say oil companies, or big manufacturing companies, it isn’t always easy to use the economic information surrounding them to accurately predict what will happen, especially when it comes to earnings reports. And, with those same companies forgoing the usual “guidance” that other companies provide, what happens in tech company earnings can be a true market moving surprise.

This week saw a negative report from industry titan IBM. IBM is not only a household name technology company, but it is also the second highest weighted component in the Dow Jones Industrial Average, commonly referred to as The Dow. The company itself is down over 5 percent so far today, and the Dow is down over 1 percent, or more than 150 points. (Also dragging on the Dow is United Technologies, which, is actually not a tech company.)

The interesting part comes tonight after the closing bell when perhaps the most watched of all technology companies, Apple, reports their earnings. Microsoft and Yahoo report earnings tonight as well.

What gets interesting is that with IBM’s report disappointing, there is cause to believe that maybe other tech companies will disappoint as well. Indeed, all three of the above are currently trading down. If tonight’s reports are all negative (or at least not as positive as Wall Street would like), you can expect a pretty major rout in the markets tomorrow. On the other hand, if all three come in decent, then you can expect a pretty major recovery with everyone assuming that the industry is fine, and IBM was just the only one with a bad quarter.

If they are mixed, that’s where it gets really tricky.

The reality is that as Apple goes, so goes the tech market, at least when the direction is down. A bad report from Apple sends the markets down, no matter how well Microsoft and Yahoo do. However, a good report from Apple, coupled with just one other good report is enough to pull things up.

If the mix comes in good for Apple, but the other two down, then you can expect the broader tech market to end up down, while Apple itself rises. The idea here will be that Apple is a good company, but tech in general is currently in trouble.

The good news is that expectations for Yahoo are low, so even if it comes in weak, that can still be fine as far as Wall Street is concerned. So, basically, what the stock market looks like tomorrow all comes down to Apple. The company offers almost no guidance, so everyone expects essentially more of the same. If that happens, fire up your sunshine playlist. If not, break out that emo playlist you haven’t used in a while.

As always, long-term investors need not concern themselves with these relatively volatile short-term stock price movements. However, heeding that advice is often easier when one knows what is coming, and why the behavior works like that.


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Finance Gourmet on July 17, 2015

Every so often, tax loss harvesting seems to show up in various marketing literature like it was just invented. The funny part is that tax loss harvesting has been around for a very long time. In fact, it’s less important today than it was before Bush the Second cut long-term capital gains tax rates to 15 percent. So, what is tax loss harvesting, and how is it important to the average investor.

Understanding Tax-Loss Harvesting and Capital Gains

tax loss harvestingTo understand tax loss harvesting, you first have to understand capital gains taxes. Income taxes apply to most forms of income. However, the profits made on the sale of certain types of investments — for our purposes, stocks, bonds and other equities — are taxed differently. These taxes are known as capital gains taxes. The easiest way to understand it by example.

If you buy $10,000 worth of Apple stock and then sell it a few years later for $20,000, then you have made a $10,000 profit. This profit is a form of income known as capital gains. The original investment amount, or purchase price, is known as the basis. The basis may be adjusted depending on several factors, but that is outside the scope of this article. You only pay taxes on the difference between the basis and the sale price. In our example, taxes are owed only on the $10,000 profit, not on the whole $20,000 sell price.

There are few important details to grasp here. First, no matter how much paper profit you have in an investment, it is not taxed until you sell. So, even when your Apple stock is worth $18,000, you owe no taxes until you sell the investment. Note this is different from the dividends the stock pays, which are taxable in the year they are paid, even if you reinvest them. Dividends cannot be offset using tax-loss harvesting.

Capital gains are taxed at one of two rates. If you hold the investment for less than one year, this is called a short-term capital gain. Short-term capital gains are taxed as ordinary income. In other words, if you are in the 30% tax bracket, you would pay taxes at the 30 percent rate.

If you hold the investment for longer than one year, then it is a long-term capital gain. Long-term capital gains are taxed at a fixed rate of 15%. (Technically, it can be lower for certain lower incomes.) This is how wealthy people pay such a low tax percentage. If most your income comes from investments, then most of your income is taxed at 15 percent, no matter how high your income actually is.

The final thing to understand about capital gains before you can understand tax-loss harvesting is that you can offset capital gains income with capital losses of the same type. Again, and example is the quickest way to understand.

Let’s say that you make that $10,000 profit on your Apple investment. Now, let’s say, that in the same year you sell your Dubious Company stock. If you bought Dubious Co. at $20,000 and your holdings are worth $12,000 when you sell, you have lost $8,000. That amount is a capital loss.

Now, you can offset that $10,000 capital gain with the $8,000 capital loss, and now you will only owe taxes on $2,000 of capital gains.

Tax Loss Harvesting Defined

So, what exactly is tax-loss harvesting? In the example above you happen to have $8,000 of losses to offset your $10,000 in gains. If you did that intentionally, specifically for the purpose of generating a loss to use to offset your gains, then that is tax-loss harvesting.

Generating losses in order to offset gains is tax-loss harvesting. IRS rules prevent you from buying an investment that is substantially the same for 30 days. In other words, you can’t sell IBM shares, and then buy back those shares withing 30 days, or the loss doesn’t count. This is called a wash sale and is disallowed as a capital loss.

That’s it. That’s all it is.

However, most investment advisors, or financial planners add the next step, which is to buy a replacement investment that is similar enough to the same to keep your portfolio invested like it was before you sold something for a loss, without triggering the wash sale rules. This is very easy with mutual funds or ETFs, and pretty easy with most stocks, assuming that you are managing your portfolio as a whole.

Who Needs Tax-Loss Harvesting

Now we are ready to really understand tax-loss harvesting and how it works, and why it sounds so great on paper, at least.

Individual Stocks

If you only own stocks that you want to own because you have done your research, and you really believe in those specific companies, then tax-loss harvesting probably may not make much sense at first. If you really believe in Yahoo stock, then selling it for tax purposes doesn’t make sense. (In fact, many financial experts advise clients to ignore tax ramifications and just do what is right for your money while letting the tax chips fall where they may.) The reality is that unless something major happens during those 30 days, the price likely won’t have moved that far from your sell price.

Most professional tax-loss harvesting happens away from a company’s earnings announcements for this reason. You won’t want to not own your shares of Yahoo when the company announces it tripled its profits. In fact, if you ever notice your financial advisor harvesting tax losses at earnings time, you may question their competency.

Mutual Funds and ETFs

The easiest tax-loss harvesting is on mutual funds or exchange-traded funds. It is very easy to replace most funds or ETFs with something similar. In fact, with index funds, it is very, very easy. Even for tax purposes, a Vanguard S&P 500 index fund is not the same thing as a Fidelity S&P 500 index fund. So, if you have a loss on one, you can sell it, bank the loss, and then buy a different fund, or better yet, an S&P 500 ETF. You still have essentially the same investing exposure during those 30 days.

Do You Really Need Tax-Loss Harvesting?

As with many financial services and products, the science and finance behind tax-loss harvesting is legitimate. However, that doesn’t mean that is is useful or helpful for all investors. In many cases, it is nothing more than a gimmick, a way to make one investment advisor or another seem special, and not something that will actually help your finances.

When Tax-Loss Harvesting is Not Worth It

You do NOT need tax-loss harvesting in non-taxable accounts, because you do not pay capital gains taxes on those funds, ever. This should go without saying, and very often, it does. If your investment portfolio mainly consists of an $800,000 401k rollover account, tax-loss harvesting is not useful for you.

Commissions and fees can be generated by the selling and buying of investments to generate tax-losses to harvest. This makes tax-loss harvesting a losing proposition for most accounts where you pay a commission, a mutual fund load, or other fee. This is especially important to watch for with mutual funds.  Always get the full cost of the transaction in writing ahead of time. Remember to compare it not to the amount of the loss, but the amount of the tax it will save (roughly, 15% of the total loss.)

For example, if you have a $50,000 investment in a mutual fund that you can sell to generate a $10,000 loss, the the tax savings is roughly $1,500. If you have to pay a 3% load to buy your similar mutual fund, you’ll pay $1,500. In other words, you won’t actually save any money. In general, then tax-loss harvesting works best for people paying a deep discount commission on trades (like those $11.95 trades), or for those who pay an annual fee. If you are paying 1% of your total investment portfolio (and no trading charges) then the cost does not change.

Another factor is that in order for tax-loss harvesting to be worth it is that you have to have enough losses, and enough gains.

Remember capital gains losses can only be used to offset capital gains, except for $3,000 worth. In other words, if you have $20,000 of losses an no capital gains, you can only deduct the $3,000 in that year. While you can carry forward losses to future years, you need to decide if the future possibility of a tax offset is worth the expense and effort now. Even if you have a lot of taxable money invested, if you aren’t selling you aren’t generating gains, and those losses aren’t necessary.

As always, remember to calculate not only the percentage, but the real dollar amount. Tax-loss harvesting isn’t usually worth it until you are talking about a taxable invested portfolio of well over $100,000, with gains over $10,000. (Remember, your 401k and IRAs are already immune from capital gains, so don’t count them.)

In the end, tax-loss harvesting isn’t for basic investors with less than at least six-figures in taxable investment, except in extreme cases. If your advisor is pushing the concept for you ask him to compute a dollar amount (not a percentage) and see if its really worth it in your case.

If you do have a large portfolio and your capital gains taxes are taking a bite, then do check with your advisor to see what they are (or are not) doing about harvesting tax losses for you.

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Finance Gourmet on July 9, 2015

If you’re an American over the age of 10, you know that the U.S. media loves a good, dramatic story, especially one with some “scare” factor. The financial press is no different. So, it can be difficult to know just when a scary financial story is a legitimate concern, and when it’s just the media trying to pump up a story.

Greece and the Grexit

The longest running financial doomsday story involves Greece. The problem in Greece is that it has a huge deficit and no real way of paying it. Just like the U.S. having a deficit isn’t so much of a problem, as long as you can service it, that is, keep paying the bond holders the interest they are due, and the principal back when the bonds mature. Greece has a lot of economic differences from the United States, so comparisons aren’t very accurate. Whenever you hear someone talking about America becoming another Greece just understand that either they don’t understand what they are talking about, or they are trying to make a political point of some sort regardless of accuracy.

greece flagThe big problem for Greece isn’t actually just its deficit. The thing that is causing the trouble is that Greece uses the Euro for it’s financial currency. Typically, if a country like Greece ran a huge deficit that it couldn’t pay back, it’s currency would become less valuable. This would cause imports to be more expensive, but encourages tourism and other inflows from other countries with different currencies. However, because Greece is part of the Euro, its money is Europe’s money. Greece isn’t big enough economically speaking to cause real devaluation of the Euro, so it is stuck.

For years now, the other European countries have been propping up Greece via a variety of methods. In exchange, they want Greece to be more like them (fiscally conservative) and cut expenses and do a better job collecting taxes. The wisdom of this is for another discussion.

Long story made short, earlier this year, Greece elected a government that is based on a promise to not make those cuts and tax increases.

What Does Greece Crisis Mean for U.S. Investors?

So, what does all of this mean for the average American?

In a word, nothing.

Greece has a very small economy. It’s about the same size as the economy of Connecticut. Most importantly, it isn’t linked very much to the United States. Most economic transactions occur in the form of tourism (mostly us going there, so there is no down effect if they stop coming here), and things like olives. Not exactly foundations of the U.S. economy.

Europe, on the other hand, is a pretty big deal to the U.S. economy. However, unlike a few years ago, most of the other European countries have righted the ship and if Greece goes down, it won’t take Europe with them.

The entire issue then is one of stability. Financial markets don’t like instability and so, whenever more dramatic news emerges from Greece, you will see a one or two day blip in the U.S. stock market. The danger to U.S. investors is that there are growing fears that the U.S. stock market is overvalued and that a correction is due. Typically, corrections don’t just happen out of the blue, but rather are started by some, often unrelated, event. In other words, if a few days of market downturn based on Greece instability were to precipitate a correction in the U.S. stock market, that would be a real issue for U.S. investors, at least in the short term.

China Stock Market Meltdown

Unlike Greece, the Chinese economy is actually very big. Unlike Greece, the issue in China is not one of debt or inability to pay it. Also, unlike Greece, China has its own currency.

So, what is the problem in China?

stock market down


Much like in the U.S. in the past, the Chinese stock market ran up in what was widely regarded as an unsustainable bubble. Eventually, bubbles pop, and that is what is happening in China. The only reason it’s even news is because it happened so fast.

Even then, the Chinese stock market, for all of it’s free fall, is still higher than it was on January 1st of this year. In other words, this isn’t stock brokers jumping out of office towers.

For virtually all U.S. investors their only exposure to China is in mutual funds with an international component. In the case of diversified funds, the effects will not be drastic. If you happen to have got into a China, or even Asia-only mutual fund, then things probably look pretty scary for that one investment. This is a good lesson in diversification. There is no reason for a U.S. investor to have a huge portion of their finances exposed to China.

In the end, this crisis, like most others, is a short-term issue to the U.S. stock market, where what happens depends, over a 12-month or more period at least, entirely upon what is happening in the U.S. economy where low interest rates, coupled with painfully slow, but real, employment gains are moving the economy in an upward direction. That doesn’t mean a correction isn’t coming, it just means that if one happens, it was already deserved before either China or Greece happened.

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Finance Gourmet on July 1, 2015

When you sell certain assets or investments that have appreciated in value, you may owe taxes on the increased value. The difference between what you paid for the investment and the amount you sold the investment is a capital gain and it is subject to capital gains taxes. However, if you lose money on an investment you can deduct the capital loss.

2015 Capital Loss Deduction

When it comes to taxes, the more tax deductions the better. And, when you lose money on an investment, a tax deduction can take out a little of the sting. However, deducting capital losses can be tricky. Get the rules straight to save on taxes and avoid making mistakes.

Just like with capital gains, there are two kinds of capital losses, short-term capital loss and long-term capital loss. Generally, a long-term capital loss occurs when you have a loss on an investment that you have held for at least one year. Conversely, a short-term capital loss occurs when there is a loss on an investment held for less than a full year.

The tax deduction for capital losses is limited to $3,000 per year against regular income. That means that you can get a full deduction of up to $3,000 each year, regardless of whether you have any other capital gains. (You can each have up to $1,500 for the year if you are married filing separately.) Capital losses are not a itemized deduction, so they can help even if you are taking the standard deduction.

Offset Capital Gains with Capital Losses

However, you can offset an unlimited amount of capital gains with corresponding capital losses. For example, if you had an investment that gave you a $10,000 capital gain, and you have another investment that generated a $10,000 capital loss, you can offset the entire $10,000 gain. That means that you do not pay any capital gains taxes on the $10,000.

There is a catch, however.

In order to offset gains with losses, the type of loss must match the type of gain. In other words, in order to offset long-term capital gains, you must have long-term capital losses. You cannot use a short-term capital loss to offset a long-term capital gain, or vice versa.

It does not matter if your capital loss is short-term or long-term when it comes to deducting the $3,000 above and beyond any investment gains that you have for the year.

Capital Loss Carryover

If you have more losses than gains to be offset, only the first $3,000 of the losses can be deducted from ordinary income. However, the remaining amount is not lost. Rather, losses can be carried forward to be used on future year’s taxes.

Revisiting our example, assume that you have a $10,000 capital gain for the year, but you have $20,000 in capital losses. You can completely offset the $10,000 gain, meaning you owe no capital gains taxes this year. However, you can only deduct $3,000 of the remaining $10,000 of losses against your regular income. That leaves $7,000 of loss that can be carried forward to next year’s 2016 taxes.

In the following year, you can use the entire $7,000 to offset any capital gains. If you have no gains, you can still deduct the $3,000 allowance against ordinary income for the year.

So, if the following year you have $5,000 in capital gains, you can offset all $5,000 and still use the remaining $2,000 in losses as a deduction against ordinary income.

How To Claim a Capital Loss

Capital gains and losses are calculated and reported using Schedule D of Form 1040 and entered on Line 13 of Form 1040.

What is most important about capital losses is that you remember to carry them forward. Users of tax software like Turbo Tax or Tax Cut have this data automatically carried forward by the program if you import last year’s tax returns when you start filing your taxes with the software. However, taxpayers who do their taxes by hand or that switch accountants or tax software need to ensure that their previous year losses are carried forward. Large losses can take years to use up if there are no corresponding large gains to use them against.

Many people have big capital losses to use thanks to recent market volatility. Even if you have tens of thousands of dollars of losses or more, be sure to continue to carry the amount forward. Some day, you’ll make money on an investment and those losses will keep you from having to pay taxes on your gains.

Capital losses can be carried forward forever with no limit on how long they may be used.

Be sure to also understand short sales for capital gains.


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