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Investing Blog Roundup: Individual Stock Perks

This week I came across an interesting Bogleheads discussion about perks offered by certain companies to their shareholders.

For example, I learned that if you own shares of Berkshire Hathaway — even just a single Class B share, which currently runs just $125 — you can get an 8% discount on GEICO car insurance (unless you already have some other “affiliate” discount). For me, that’s a savings of about $65 per year — a pretty good effective dividend for a $125 investment!

I don’t usually think it’s a good idea to buy individual stocks, but I’ll be making an exception in this case.

Investing Articles

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How Do Capital Loss Carryovers Work?

A reader writes in, asking:

“I just read your article on capital gains and losses. I understand that up to $3,000 of a net capital loss can be used to offset ordinary income in a year, and the rest is carried over to use in future years, but I am unsure of whether the carryover is short-term or long-term. For example, if I have the following for one year:

$ 4,000 in STCL
$ 6,000 in LTCL
$10,000 in losses
-$ 3,000 writeoff against ordinary income
$ 7,000 capital loss carryover

Is the $7,000 carryover considered a short-term or long-term capital loss? Or is it divided on a pro-rata basis, such that there would be a carryover of $2,800 STCL and $4,200 LTCL?”

For questions of this nature, it’s often helpful to look at the tax forms themselves, to see how the numbers flow from one line to the next (and from one form to the next). In this case, doing an example run through Schedule D, using the “Capital Loss Carryover Worksheet” from Schedule D’s instructions can give you a good idea of how this all works.

The short answer is that the $3,000 that is deducted from ordinary income comes first from STCLs to the extent possible, then from LTCLs. Then the remaining losses retain their character when carried over for the next year.

So, if the numbers in your example were a taxpayer’s numbers for 2013, when that taxpayer filled out his Schedule D for 2014, he would have a $1,000 STCL carryover ($4,000 STCL, minus the $3,000 that had been used in 2013 to offset ordinary income) and a $6,000 LTCL carryover.

Alternatively, if the taxpayer’s 2013 numbers were as follows:

$ 2,000 in STCL
$ 6,000 in LTCL
$8,000 in losses
-$ 3,000 writeoff
$ 5,000 capital loss carryover

The entire $2,000 of STCL would be used up for the deduction, and the capital loss carryover for 2014 would be considered entirely long-term capital loss.

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Investing Blog Roundup: Retiring Baby Boomers

This week, author/advisor Larry Swedroe provided an excellent answer to a question I see from time to time: Should we fear a stock crash as a result of baby boomers retiring and selling off their shares?

Swedroe writes:

“We’ll begin by pointing out that only unexpected events have an impact on stock prices. And if anything can be forecasted, it’s demographic data. You can be certain that investors in general are well aware of this trend, and thus have incorporated that knowledge and the expected effect of retirees’ equity sales into current prices.”

Investing Articles

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Which Year’s Income Determines Affordable Care Act (“Obamacare”) Subsidy Eligibility?

A reader writes in, asking:

“I’m trying to find more info on ACA premium subsidies. Specifically, I want to understand which year’s MAGI [modified adjusted gross income] is used. For example, would a person’s health insurance premiums for 2015 be determined based upon his 2014 MAGI or 2013 MAGI, etc.?”

The premium tax credit (i.e., the subsidy that reduces premiums) works like any other credit in that it is your income in a given year that determines the size (if any) of the credit for which you are ultimately eligible in that year. For example, your 2014 “household income” (defined here) is what will determine the size of the credit for which you are eligible in 2014.

What is unique about the premium tax credit, however, is that it can be claimed in advance. The applications for coverage ask for an estimate of your annual income, and if your estimate is such that it would make you eligible for a credit, you can take that credit in advance in the form of lower monthly premiums.

But, when it comes time to file your tax return for the year (e.g., April 2015 for your 2014 return), you effectively “settle up.” If your income ends up being lower than you had estimated, and you are therefore eligible for a larger credit than you received in advance, you can receive the remainder of the credit when you file your return.

Conversely, if your income ended up being higher than you had estimated, you have to pay back the excess credit that you received in advance. There are, however, some limitations on the amount you would have to pay back. Specifically, if your “household income” for the year ends up being:

  • Less than 200% of the federal poverty level, the amount you could have to pay back is limited to $600 ($300 if you’re single),
  • 200-299% of the federal poverty level, the amount you could have to pay back is limited to $1,500 ($750 if single), and
  • 300-399% of the federal poverty level, the amount you could have to pay back is limited to $2,500 ($1,250 if single).

If your household income for the year ends up being greater than (or equal to) 400% of the federal poverty level, you would have to pay back the entire amount of any excess credit you received in advance. (Note: The dollar amounts above will be adjusted for inflation, beginning in 2015.)

Of note, however, is the fact that there is no provision for “settling up” with regard to the cost sharing subsidies (i.e., the subsidies that reduce your deductible, out of pocket maximum, etc.). They too are initially based on the income estimate that you provide when applying for coverage, but they are not corrected retroactively if your estimate ends up being off target. (Of course, even ignoring any ethical qualms, you wouldn’t want to intentionally lie in order to get a larger subsidy, given that section 1411(h) of the PPACA provides for penalties of up to $250,000 for “knowingly and willfully providing false or fraudulent information” when applying for coverage.)

In the event that it becomes clear that your actual income for the year is going to be significantly different from the estimate you provided (e.g., due to a change in job status or marital status), you must inform the insurance exchange as to your change in circumstances, and they will adjust any subsidies you are receiving accordingly going forward.

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Topics Covered in the Book:
  • The difference between deductions, exemptions, and credits,
  • Itemized deductions vs. the standard deduction,
  • Several money-saving deductions and credits and how to make sure you qualify for them,
  • Click here to see the full list.

A testimonial from a reader on Amazon:

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Investing Blog Roundup: Index Fund Securities Lending

One question readers ask from time to time is how many Vanguard index funds manage to trail their index by an amount less than the fund’s expense ratio. To some extent, the answer is pure randomness. An index fund doesn’t typically hold every security in the index, in exactly the designated proportion, at every moment in time.

Another part of the answer, however, is that the funds earn some money from securities lending. Barry Barnitz has more on that topic on the Bogleheads Blog this week:

Investing Articles

Other Money-Related Articles

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What is a Qualifying Longevity Annuity Contract (QLAC)?

I’ve been getting a lot of questions about the Treasury Department’s recent release of final regulations that create a new type of annuity in the tax law: “Qualifying Longevity Annuity Contracts” (QLACs).

To explain, we first need to back up a step. This isn’t really a new type of annuity. This is simply a new tax treatment for types of annuities that already exist (specifically, certain types of deferred annuities) when they are purchased inside tax-deferred IRAs or tax-deferred employer-sponsored retirement plans.

Deferred Lifetime Annuities in General

A basic deferred lifetime annuity works like this:

  • You pay a lump sum premium now (e.g., at age 65) to an insurance company, then
  • Starting at a specific age in the future (e.g., age 85) the insurance company begins paying you a specific amount of money every month, and they continue to do so for the rest of your life.

In other words, these are much like the immediate lifetime annuities we often talk about here on the blog, except for the fact that the income doesn’t kick in for many years (hence, “deferred lifetime annuity”). And, because the payments don’t kick in for several years, the premium is much lower for a given level of income.

For example, as of this writing, for a 65-year-old female to purchase an immediate lifetime annuity paying $1,000 per month, the premium would be $180,384. In contrast, for a 65-year-old female to purchase a deferred lifetime annuity, for which payments begin at age 85, paying $1,000 per month, the premium would be $24,740. (These quotes are coming from the Income Solutions website.)

If deferred annuities of this nature have no appeal to you, then you do not need to worry about these new rules.

Effect of the New Regulations

Generally, with a traditional IRA or 401(k), you have to start taking required minimum distributions (RMDs) soon after reaching age 70.5. Thus, prior to the new rules, if you purchased a deferred lifetime annuity within your traditional IRA that pays nothing until, say, age 80, you could have a problem. The annuity is not liquid, so you might end up in a situation in which the liquid IRA balance is not sufficient to satisfy your RMD.

Now, this is no longer a concern. Under the new rule, as long as the annuity meets the requirements to be a “qualifying longevity annuity contract,” the value of the annuity would not be included in the value of your IRA — or 401(k) or other similar account — when calculating your RMD.

Requirements to be a QLAC

A deferred annuity must meet several requirements to be considered a QLAC.

First, payments must start no later than the first day of the month after the month in which you reach age 85.

Second, the annuity must not be variable annuity or “indexed annuity” (i.e., equity indexed annuity/fixed index annuity).

Third, the annuity cannot have much in the way of bells and whistles. Optional riders that would be allowed include:

  • Inflation adjustments,
  • Survivor benefits to a designated beneficiary, provided they meet a few specific requirements (e.g., in most cases the benefit to the survivor cannot be greater than the payments that were being made to the original owner), and
  • A “return of premium” rider, wherein upon the death of the original owner, the designated beneficiary receives an amount equal to the premium(s) paid, minus any amount that has been paid out so far.

Finally, there are some dollar limits to be aware of:

  • The total premium(s) paid for your QLAC(s) must not exceed $125,000,
  • The total premium(s) paid for your QLAC(s) in IRAs (not including annuities in Roth IRAs) cannot exceed 25% of your total IRA balances (not including Roth IRAs), with IRA balances being measured as of 12/31 of the prior calendar year, and
  • The total premium(s) paid for QLAC(s) in an employer-sponsored retirement plan cannot exceed 25% of your account balance in that plan.

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