Showing posts with label money. Show all posts
Showing posts with label money. Show all posts

Monday, 6 April 2015

Three tax mistakes even smart people make

Graduates celebrate receiving a Masters in Business Administration from Columbia University during the year's commencement ceremony in New York in this May 18, 2005 file photo.
The most common tax mistakes are pretty dumb ones, like forgetting to sign the return, garbling a bank account number or using a nickname instead of the name on a Social Security card.

Even tasks that require some wattage, such as applying common deductions and credits, are not that tough for taxpayers filing electronically, since the software checks for these errors.

Still, there are several mistakes that careful people - even those who hire tax preparers - can make.

Among them:

1. Minimizing earned income

Business owners have a number of ways to pay themselves and reduce the income subject to Social Security and Medicare taxes. But doing so could put a significant dent in future Social Security benefits, sometimes far outweighing any savings.

One common strategy is to convert a business to an S corporation, which allows the owners to pay themselves a lower salary and then take dividends, which are not subject to Social Security taxes.

That might not cause problems for someone who already has a lifetime of high income, since Social Security bases benefits on the worker's 35 highest-earning years, said financial planner Michael Kitces, a partner with Pinnacle Advisory Group in Columbia, Maryland. For others, though, the impact can be significant.

For example, Kitces says, someone paying 12.4 percent Social Security tax on $60,000 in earnings would increase the lifetime payout by $128.58 a month.

On the other hand, he says, avoiding $7,440 in Social Security taxes on that annual pay would cost $1,542.96 a month for life in Social Security payouts. Higher earners might suffer less but still could lose more in guaranteed, inflation-adjusted retirement benefits than they save in taxes.

Advisors should calculate the potential impact on Social Security benefits before recommending strategies to avoid the taxes, said Kitces, who blogs at Nerd's Eye View (

2. Choosing the wrong tax preparer

The more complicated a tax return, the more likely it is to drift into gray areas of the law. Ideally, client and tax preparer will be temperamentally compatible when judgment calls need to be made.

A tax pro who is eager to push the envelope may be a bad fit for a conservative client. Likewise, a client who wants to be aggressive about reducing taxes is likely to be frustrated with a preparer who forgoes legitimate deductions for fear of triggering an audit.

"It's more common that the taxpayer wants to push things," said Phil Holthouse, managing partner of Holthouse Carlin & Van Trigt in Los Angeles. "But there are some tax preparers who want to be heroes and give them an answer that's too good to be true."

Holthouse recommends asking tax preparers straight out how aggressive they are. Ideally, he says, the professional will make it clear that he or she stays within the law, but is willing to explain the alternatives in a given situation and help clients evaluate the risk.

When a gray area comes up or if a client is confused about an issue, he or she should ask what rules apply.

"You can tell a lot by how definitive their answer is," Holthouse said. "If they say, 'Nobody's going to see this' or 'Nobody's going to find it,' that's a real red flag."

3. Refusing to delegate

Most people, including some who file the easiest forms (1040EZ and 1040A), hire tax preparers these days. But some with more complicated returns still insist on doing it themselves. Even when they do not make mistakes, they may be investing more time than the task is worth.

The cost for preparing 1040 with Schedule A itemized deductions averaged $261 last year, according to the National Society of Accountants. The IRS says just preparing a typical 1040 takes four hours, with another hour to file it.

That does not even take into account an additional 17 hours for record keeping and tax planning.

Not all of those hours would disappear when using a professional, of course, but the time and hassle would certainly be less.
Source Reuters
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Monday, 30 June 2014

BlackRock ETFs near $1 trillion as it loses market share to Vanguard

The BlackRock logo is seen outside of its offices in New York January 18, 2012.
 - Even as BlackRock Inc (BLK.N) is set to amass $1 trillion in exchange-traded fund assets in its iShares business, U.S. retail investors increasingly prefer to send their money to low-cost leader Vanguard Group, highlighting a weak spot for the world's biggest money manager. With $998 billion in ETF money, BlackRock has more than the next contenders, Vanguard and State Street Corp (STT.N), combined. But the company has struggled to compete with Vanguard, known for its investor-friendly low-cost investing, for Mom and Pop's nest eggs. Retail investors now account for more than half of the $1.8 trillion in ETF assets under management in the U.S, according to consulting firm PwC. So far this year, Vanguard has pulled in about $30.3 billion in net new ETF money in the U.S., or about 43 percent of the market, while iShares is second with $24.7 billion, or about 35 percent. That reflects a trend that's been going on for years: at the end of 2009, BlackRock had 47.7 percent of total U.S. ETF assets under management, compared with 11.7 percent for Vanguard. By the end of May, BlackRock's share was down to 38.9 percent, compared with 20.6 percent for Vanguard, according to Lipper Inc, a unit of Thomson Reuters. "Our aspiration is to be number one in flows, and we can't get there without being higher in the retail market place," said Mark Wiedman, the BlackRock executive who heads the iShares business globally, speaking at the company's annual meeting in New York in June. "We are starting to change our voice for that audience and I would say historically we frankly haven't done that good a job." The market share loss comes in spite of BlackRock's two-year effort to win retail investors. BlackRock introduced a line of low-cost "buy and hold" investor-aimed ETFs in 2012, and since then has been cutting prices on its ETFs, revamping its sales team, and pushing a new branding campaign. The firm has cut prices on 12 funds since 2012, ranging from its S&P Total U.S. Stock Market ETF then to its high-dividend ETF in June 2014. BlackRock says its flows have improved since it started its new retail effort. One of the most significant price reductions was in its iShares High Dividend ETF. The cost to investors for that fund dropped to 0.12 percent a year from 0.4 percent, a move that would cost BlackRock $11.2 million annually, based on the $4 billion in the fund. Last quarter, iShares ETFs generated some $765 million in base fees revenue. "Every basis point that you cut a fee impacts revenues, but we don't really look at that – we look at the profitability of our ETF business over the long term," BlackRock executive Frank Porcelli, head of U.S. Wealth Advisory Business, said at Reuters' Global Wealth Management Summit in June. Asked about how fee cuts would affect BlackRock's profits, he said it was "not relevant." BIGGEST MANAGER With $4.4 trillion in total assets among its various product lines, BlackRock remains the world's largest asset manager and is unlikely to be eclipsed by Vanguard anytime soon. BlackRock has nearly tripled the size of the iShares business since it bought it from Barclay's five years ago, largely by selling to big institutions, such as the Arizona State Retirement System, which plunked down $300 million to seed three iShares funds last year. It has also won institutional and retail investors abroad; BlackRock has a strong presence in Europe, Asia, Canada and Latin America. Total BlackRock ETF assets outside of the U.S. are about $280.5 billion, about 36 percent of the $700 billion total market. Analysts say that iShares' size and scale makes the effect of fee cuts in the near-term fairly minimal on the overall business, but that a prolonged price war could hurt the firm. "It's a tough spot to be in," said Edward Jones analyst Jim Shanahan. "There is some growth potential there, but it is slow to materialize and it has to be powerful enough to offset the addition of a lot of these products with fees less than the current weighted average fee rate." Vanguard, which unlike BlackRock isn't publicly traded, offers significantly cheaper funds. The average expense ratio of a Vanguard ETF is 0.14 percent, or $14 for every $10,000 invested, compared with the industry average of 0.58 percent. BlackRock's average expense ratio is 0.32 percent. "When talking about large, commoditized ETFs, low cost makes a big difference, and Vanguard is a little bit more competitive," said Gabelli & Co analyst Macrae Sykes. "Investors recognize Vanguard as the low-cost leader – whether for index funds, for active funds, for bond funds, for money market funds, or for ETFs," said Vanguard spokesman David Hoffman. "We like to say that we've been lowering the cost and complexity of investing for 38 years. We are also increasingly being recognized for our commitment to providing high-quality products that can play an enduring role in a portfolio." MARKETING TO MOM AND POP The iShares team has been working on building its brand. An "iShares by BlackRock" advertisement now shares the same spot on the New York Times home page as a Vanguard ad that bears its trademark ship. The two alternate in the advertising space next to the markets section. "Brand is important, and we recognize that," BlackRock executive Raj Seshadri, head of U.S. Wealth Advisory iShares and former global chief marketing officer, said in an interview. To succeed better with retail investors, iShares will have to win over advisers such as Carl Amos Johnson, a fee-only adviser and owner of Grove Street Fiduciary in Peterborough, New Hampshire. He estimates that roughly 90 percent of the ETFs in his clients' portfolios are Vanguard funds. "They (Vanguard) have captured the low-cost retail index mind, and even the most naive investor knows that," Johnson said. "To me the brand is not the key, but in the mind of a client, it is a big difference."
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