Still doing tax returns for my adult children & their spouses

Every year I ask myself, should I continue to offer to do tax returns for my adult children and their spouses? All of them have university degrees and are smart enough to file their own tax returns. My daughter was willing to do it one year using tax preparation software with only a little help from me.

Part of my problem is Canadians are not even aware of how much tax they pay. Plus we keep voting for governments that buy votes using our tax dollars. The average Canadian family will pay 42.9% of their income in taxes imposed by all three levels of government in 2016. (Federal, provincial and local) Tax freedom day was June 7, 2016 if Canadians paid their total tax bill up front. Our U.S. neighbours tax freedom day was April 24th and they will only pay 31% of their income in taxes.

There are a number of reasons why I continue to offer to do tax returns for the whole family. Having worked as a financial advisor, tax planning is a key element when putting a financial plan together. My tax knowledge and skill comes from working many years with accountants and tax lawyers ensuring that my whole family pays the least amount of tax.

Plus, the Canadian tax system is very complicated and is constantly changing with every federal and provincial budget. For example: many tax credits that were given by the Conservative government have been taken away completely by a new Liberal government.

For the 2015 tax year, the Liberals cancelled income splitting for families, a maximum tax credit of $2,000 for transferring up to $50,000 of income to a spouse with a lower income if they had a child under 18 years of age.

Some changes for 2017 include the elimination of the following credits:

  1. Education and textbooks credit
  2. Children’s fitness credit
  3. Children’s arts credit
  4. Public transit tax credit

Now, most retired Canadian seniors who don’t have a pension from their former employer are not even aware of a $2,000 pension credit. It requires opening a RRIF account, transferring $2,000 from their RRSP and then taking it out. They don’t have to wait until they reach the age of 71 in order to open a RRIF account. Plus, RRIF income can be split with your spouse if both of you are 65 years of age which could potentially add up to $4,000 of income tax free per year.

The Federal Liberal government will introduce a new budget on March 22 and there are rumors of more tax increases. Three things that Canadians should worry about;

  1. Higher capital gains inclusion rate from 50% to 75%
  2. Reducing the dividend tax credit
  3. Taxing your principal residency 

I will end this post with two well known proverbs. ” In this world nothing can be said to be certain, except death and taxes.” & “A penny saved is a penny earned.”

 

2nd Anniversary of Smart Money: Lucky number 2

In sports, no one cares who came in second. The number 2 rating of a stock is a buy. There are two sides in investing, you can be either bullish or bearish.  Number 2 in Chinese Culture is an auspicious number because Chinese people believe that good things come in pairs.

“The symbolic meaning of number Two is kindness, balance, tact, equalization, and duality. The number Two reflects a quiet power of judgment, and the need for planning. Two beckons us to choose. The spiritual meaning of number Two also deals with exchanges made with others, partnerships (both in harmony and rivalry), and communication.

2 number

What is the 2nd best investment that you can make?  The number two  investment really depends upon your age, where you live, your risk tolerance, your income level, your time horizon and your family situation. The number two investment choice for someone in their 20’s could be paying down debt. For someone in their 30’s, it could be buying a house.  For a high income earner, it could be maximizing their contributions into their retirement account. For someone who lost their job, it could be starting a small business.

So what is number one?  My answer is YOURSELF because our education system gets a failing grade regarding financial literacy. All these choices requires some financial knowledge and some basic math skills in order to be successful. I was shocked at the results of a recent financial literacy test.

Would You Pass the Global Financial Literacy Test?

Question 1: Suppose you need to borrow 100 U.S. dollars. Which is the lower amount to pay back: 105 U.S. dollars or 100 U.S. dollars plus three percent

Question 2: Suppose over the next 10 years the prices of the things you buy double. If your income also doubles, will you be able to buy less than you can buy today, the same as you can buy today, or more than you can buy today

Question 3: Suppose you have some money. Is it safer to put your money into one business or investment, or to put your money into multiple businesses or investments?

Question 4: Suppose you put money in the bank for two years and the bank agrees to add 15 percent per year to your account. Will the bank add more money to your account the second year than it did the first year, or will it add the same amount of money both years?

Question 5: Suppose you had 100 U.S. dollars in a savings account and the bank adds 10 percent per year to the account. How much money would you have in the account after five years if you did not remove any money from the account? (a) $150 (b) more than $150 (c) less than $150

 

literacy

Highlights of the survey:

  • The U.S. lags behind other major English-speaking economies in its percentage of financially literate citizens. Citizens of Canada and the United Kingdom beat the U.S.
  • Only 35 percent of respondents around the world got the right answer to Question 3.
  • Many homeowners can’t calculate the basic interest owed on their loan payments. About a third of adults in the U.S. have an outstanding housing loan; three in 10 don’t understand how their debt accumulates.

literacy1

Answers to the literacy test

  1. 100 U.S. dollars plus three percent
  2. the same
  3. put your money into multiple businesses or investments
  4. more money in the second year
  5. (b) more than $150

Some may argue that personal financial literacy isn’t the number one investment because you can always pay a professional. I would agree if you are lucky enough to select a good one. In twenty years of running a small business, I changed accountants three times. I changed stock brokers countless times until I became a do it yourself investor. I have dealings with three different banks to meet all my financial needs. Plus selecting the right professional still takes some financial knowledge, the ability to understand the advice and act on it.

In reality, the first and best investment that you should make is in educating yourself. Did you get take the financial literacy test and did you answer all five correctly?

June rate hike? Too late for Americans’ to refinance their mortgage?

mortgage

Mortgage rates have been historically low for several years, but a surprising number of American borrowers are still not taking advantage to refinance their mortgage. The Fed raised rates in early December and the common expectation was that mortgage rates would raise in 2016.

The release of the April’s Fed’s minutes indicates that a June rate hike is on the table. Market expectations for a June rate hike moderated to a 28 percent chance Thursday afternoon. The probability for a July hike was 52 percent, a touch above Wednesday’s 51 percent chance.

Are Americans not aware that mortgage rates are on the rise? This could be their last chance to lock in some low mortgage rates.

Being Canadian, I am by no means of an expert on the American mortgage market. It is much more complicated than the Canadian market. What I do know is paying down mortgage debt can save thousands of dollars in interest.

Reducing your interest rate and decreasing the amortization period are the two easiest ways to achieve debt free-living. The decision is not that simple for Americans because mortgage interest is tax-deductible in the U.S. so the savings really depends on your marginal tax rate. Individuals in the lower brackets will benefit the most. Credit scores and the amount of equity that you have in your home are other factors which will affect your ability to refinance your mortgage.

I used an on-line amortization schedule calculator to run some different mortgage refinancing options. Keep in mind, the amount of the interest savings depends on the size of the mortgage.

If you can handle an increase of $200 to $300 a month in mortgage payments  than refinancing a 30 year fix to a 20 year fix could save you a bundle in mortgage interest. For example: refinancing $300,000 from  4.5% (30 yr. fix) to $3.25% (20 yr. fix) would save the borrower $138,839 in interest.

One of the blogs that I follow How to stuff your pig posted “How I Made a $665,680.41 Mistake!”

Here is a portion of her post:

It Was Bitter Pill to Swallow

I still find it hard to believe that I had agreed so readily to pay $405,820.74 in interest on a home that cost only $259,859.67. It’s even harder to believe that I signed a loan where the interest alone was higher than the agreed purchase price by 56%! To top it all off, I put zero down and was stuck paying that dreaded PMI (Private Mortgage Insurance).

Was I on something? I did go through a brief addiction with Oreo cookies. Maybe I could blame this on a sugar high.

Seriously. What was I thinking to sign my life away to the tune of $665,680.41 for a house I had agreed to buy for a cost of $259,859.67?

To read the entire post click here: “How I Made a $665,680.41 Mistake!”

I do recommend doing some on-line research on mortgage rates in your area. Take those numbers and compare them at http://www.amortization-calc.com/ to see if mortgage refinancing makes sense. Remember that the cost of refinancing is tax-deductible but it would be spread out over the length of the new mortgage. You have nothing to lose but time.

Disclaimer:  Mortgage refinancing is very complicate, do your own research and shop around for the best deal.

 

 

 

 

 

Don’t Ask for Financial Advice, I am on Vacation

Although I am no longer working as a financial advisor, sometimes I just can’t get away from being asked financial questions. I just got back from my annual golfing trip to Orlando. The conversations, over a few drinks, are usually about our golf game. However, some of my golfing buddies just have to ask for my opinion regarding their investing ideas.

Here are just a few examples:

Question # 1 – “I saw advertised on T.V.  an investment opportunity in real estate where your money is locked in for 3 years but they pay 8% interest on your money. What do you think”?

Answer:I would have to look at all the financial terms and conditions to give an accurate opinion. However, I have come across private funded rental real estate in the past. Developers can only get bank financing based on long-term lease agreements which are signed before construction begins. Your money goes to build additional units that the developer hopes to lease out within three years. It usually sounds like a safe investment but there are no guarantees that you will get your money back or that the rate of interest will not change.”

Question # 2 – “I own shares of Crescent Point (A Canadian oil & gas producer) and they are trading 40% below my purchase price. Don’t you think that the price of oil will go back up”?

Answer:No, there are 3 billion barrels of oil world-wide sitting in storage tanks and in oil tankers hoping that the price will go up. At $40.00 a barrel, Crescent Point is losing money. They have stop their dividend re-investment plan and are slashing costs, budgets and streamlining operations in order to cope with low oil prices. If they are not successful, they will soon be force to cut their dividend and the stock will fall even further in price.”

Question # 3 – “I have $10,000 in a play money investment account. I was thinking about buying shares in Bombardier (A Canadian manufacturer of planes & trains) because the share value is so low and the shares could bounce back up. What do you think”?

Answer:Not a good investment, just because the share price is only $1.28 doesn’t mean that it is a bargain. Bombardier has cost overruns on its “C Series” planes and can’t deliver them on time. The city of Toronto has an order for new subway cars that should have been delivered over a year ago. It is a poorly run family business with dual class shares so you have no say in the matter. The debt level is so high that there would only be $.03 a share left over if the company sold all its assets to pay off creditors.”

Last year I was asked about IBM. I told my friend that he should convince his wife who just retired from the company to sell her shares. The IBM shares were trading around $185.00 U.S. at that time.

This year I asked him “Did you convince your wife to sell IBM”?

He answered “No, she still owns them, she is emotionally attached to them and she is worried about paying tax”.

I responded “Not to worry, the stock is down to $132.00 and it won’t be long before the stock falls back down to her original purchase price eliminating any tax worries.”

Another friend of mine suggested last year, that I should buy some natural gas stocks because gas prices tend to go up in the winter time. He owned some shares in Encana at around $21.00. I told him that there was an over supply of natural gas due to fracking and that I was avoiding natural  gas stocks.

This year I asked him “How did you make out with Encana, did you have a stop loss order on it’?

He answered ” No, I still own it!”

I responded “Really, that’s too bad!”

(the stock is currently trading at just under $11.00)

Investing Advice

  • Do your homework on investment ideas that you see on T.V.
  • Oversupply of oil takes a long time to rebalance
  • The low price of a stock has no bearing on its true value
  • Don’t let tax concerns stop you from taking a profit
  • Admit you made a mistake and take the loss

I rarely give out stock picks to friends because no matter how many good quality picks you give them, they will always remind you of the one that was a poor performer. The average investor doesn’t realize that even the best stock pickers admit that they are lucky to be right 60% of the time. Financial success comes from letting your winners run and cutting your losses early.

In my experience, most people tend to have an aversion to losses. In fact, most studies in human behaviour suggest that losses are twice as powerful, psychologically, than gains.

Watch out for alligators when golfing in Orlando!