AssetPreserver News

The investment lists at AssetPreserver.com are now free.

The idea behind these lists is to show the major stocks in an industry, some examples of low-cost funds and ETFs, and the relevant indexes. These are not investment recommendations.

If you own a gold or silver ETF and sell it, the tax consequences may be higher than you think.

Gold and silver are considered collectibles by the IRS which are taxed at a maximum rate of 28% rather than long-term capital gains rate. This includes gold and silver ETFs, bullion, and coins (except certain U.S. issued ones). When the assets are held less than a year, the gains are taxed as ordinary income which can be up to 35%.

Precious metals ETFs are organized as grantor trusts which means the owner has undivided interests in the metal owned by the fund. Check the website of the ETF on how to calculate the gain or loss when the ETF sells metal to pay for expenses.

If the ETF uses futures or derivative contracts to track performance the collectibles tax rule does not apply.

Investors are not allowed to own collectibles in IRA or other self-directed retirement accounts (401Ks included).  When gold and silver are purchased for such accounts, the cost of buying the collectible is treated as an owner distribution which is included in gross income and taxed as ordinary income. There may be a 10% penalty if the owner is under 59 1/2 years old.

Fortunately, and so far, the rules do not apply to gold or silver ETFs in retirement accounts. The only exception would be if the ETF liquidated and distributed the metal to the shareholders.

Ask your tax advisor how these rules fit into your situation.

AssetPreserver.com recently attended the International Traders Expo in Las Vegas. The impetus behind the show was not long-term investing; it was trading commodities, futures, options, day trading, and forex – not for the faint-hearted. Not being a trader myself, I thought it would be interesting to see how the companies would sell us on their products. My gut feeling was since gold is near an all-time high I would see a focus on precious metals…I was right.

I was surprised at how many people showed up. The seminars I attended and peeked in were nearly full. The one seminar we finally attended was futures trading. A few secrets were thrown out to the audience so they would come back tomorrow at 6 AM when the Europe markets were winding down and the North American ones starting up and a few real trades would be made. The presenter indicated this was a 24 hour a day, 5 1/2 days a week endeavor.  What surprised me was the attendance: the room was full (150 people or so) and most attendees were already trading at this level. I was tempted to ask how many made money over the long term, but refrained.

Most of the exhibits were on trading methods and showing off the latest software. There were several aside presentations on techniques which work best with their tools. Dona asked some poignant questions on how does this help the average person.

One interesting idea had nothing to do with split second trading. It was a private mortgage REIT which relied on farm production for income. It guarantees 7% interest every year for four years after which you can buy in for another four years. The REIT holds mortgages to farms in the Midwest and does not make money until the 7% is paid out to its owners. The prospectus was not available so I have to wait until it arrives in the mail. I will analyze it on AssetPreserver.com.

One booth I visited showed me the gamut of software in which I could trade just about anything. Almost under his breath, the salesman mentioned that after 18 months of trading you should get good enough to start making money.

The whole experience reminded me of the 1850′s gold rush. The ones who made the money were the ones who supplied the tools to the prospectors.

This is not tax season but the topic something to think about: is it good to get a large tax refund?

Against a big refund

Let’s examine the reasons a person shouldn’t get a big tax refund:

You are giving an interest-free loan to the government.

You are taking money out of your cash-flow. If you receive a refund, you’ve had extra money withheld from each paycheck. For some, this money can make a real difference in day-to-day living. In fact, it may be the difference between having to use credit or not.

That money could be invested at a high rate of return. Not only does a tax refund give your money to the government interest-free, it also deprives you of the chance to earn a return on the money.

Loss of purchasing power – by getting no return on your money over the year, you lose purchasing power. In other words, what cost $1,000 a year ago costs about $1,021 today, depending on the inflation rate.

You are not paying less tax. Regardless of whether you owe or get a refund, the tax you pay is the same. Of course, if you owe too much, there is a penalty for underpayment of taxes.

Getting a large refund does not decrease your chances of an audit.

There are many people that will squander their big return.

Another advantage is the money you save, if you choose to automatically deposit it in an account is it in itself is an emergency fund.

For a big tax refund

The big check.

If you want the big check after April 15th, here are a few ideas:

One idea is to have the money that would normally go toward overpaying taxes and put it into a savings account or money market. Have it automatically withdrawn from your paycheck so you do not see it.

Put the money you would give the government into your emergency fund.

Pay down your high interest debt immediately.

Don’t forget that some states gave refunds in the form of an IOU.

If you do not want a tax refund

Adjust the amount of tax withheld from your paycheck so the amount you owe/get is as little as possible. Since each person’s situation is different ask your tax advisor on the amount withheld. If your income is through a W-2 form, all that is required is filing a W-4 form with your employer. You can do this any time of the year.

If you are self-employed, you can calculate the quarterly payments so the total you owe is minimal. Keep the money  in a fixed income account such as money market or money market savings account.

Some factions claim the tax credit is working well; evidence speaks otherwise.

The $8,000 tax credit is (from the IRS web site):

The credit operates much like an interest-free loan, because it must be repaid over a 15-year period. So, for example, an eligible taxpayer who buys a home today and properly claims the maximum available credit of $7,500 on his or her 2008 federal income tax return must begin repaying the credit by including one-fifteenth of this amount, or $500, as an additional tax on his or her 2010 return.

The IRS is now investigating and prosecuting people who are falsely claiming the tax credit. It is estimated that over 100,000 claims are fraudulent.

At calculatedriskblog.com is an interesting calculation on how much the taxpayers are getting tagged for the tax credit:

NAR (National Association of Realtors) estimates that about 1.8 to 2.0 million first-time buyers will take advantage of the $8,000 tax credit this year, with approximately 350,000 additional sales that would not have taken place without the credit.

With 1.9 million first-time buyers, the total cost of the tax credit will be $15.2 billion. Divide $15.2 billion by 350 thousand, and the program cost $43.4 thousand per additional buyer. The actual number could be much higher if there were fewer additional first-time buyers than the NAR’s estimate – or if the overall cost is higher (more buyers claiming tax credit).

The $15 billion dollar price tag is twice what Congress planned.

I have always believed that if $8,000 separates you from buying a house then you cannot afford the house anyways. Given the costs associated with home ownership, $8,000 will go very fast. So I am leery of the long-term effects of the taxpayer gift. I also believe first time buyer home prices have been inflated just like cash for clunker car prices were inflated by many dealerships.

Do you think the tax credit is worth it?

Just a test to see if I can post to twitter.

One of our favorite ETF resources is now defunct. etfconnect.com has morphed itself into cefconnect.com which is closed-end funds only. etfconnect handled etfs and cefs.

There is a preconceived notion on how banks lend money. They make MUCH more money on lending than most people realize.

After reading several books and articles on the money industry I plan to release several easy-to-read articles on the subject. The first one is about how banks really lend money. Granted there is not much you can do to stop their practices, except not borrow or join a credit union, but I believe it is important to understand what they do.

Municipal bonds without the tax break.

Subsidies to municipal bonds so issuers can offer them at a lower rate…good for the issuer, bad for the bond holder. The worst part is they are taxable bonds. The BABs can generate an unpleasant surprise if you are holding a municipal bond fund as they will generate a tax liability.

The description of the bonds are:

The Economic Recovery and Reinvestment Act (the “Act”) created a new form of bonds known as Build America Bonds (“BABs”).  Build America Bonds are taxable and, through Federal subsidies or tax credits, are intended to reduce municipal borrowing costs.

There are two kinds of bonds:

1. The first type of BABs provide a Federal subsidy to investors equal to 35% of the interest payable by the issuer (“Tax Credit BABs”).
2. The second type of BABs provide a direct Federal subsidy that will be paid to state and local governments in an amount equal to 35% of the interest (“Direct Payment BABs”).

Both types of BABs must be issued before January 1, 2011.

Potential investors of BABs include investors in low income tax brackets, individual retirement accounts, public pension funds and foreign investors.

Part of the American Recovery and Reinvestment Act, Build America Bonds offer a 35% rebate from the Federal government to issuers on their interest payments. This means that issuers can offer higher rates on their debt than they typically would be able to afford, and so take their offerings into the taxable bond market.

Guess where the 35% subsidy comes from? The taxpayers.

What is it costing the taxpayers?

Congress’s Joint Tax Committee estimated in February that the Treasury would spend $9.8 billion through 2019 subsidizing the bonds. Matt Fabian, a managing director at Municipal Market Advisors in Westport, Connecticut, said in a June 22 report that the program’s price tag may reach $27.3 billion by the time all such securities mature in 2044.

What does this mean to me?

If you can get a hold of a BAB it will pay a decent interest rate but note it is taxed as ordinary income.

Average annual returns of the S&P 500 Index after declines of 20% or more.

From T. Rowe Price and S&P 500 Index data.

The data shows us the biggest recovery is one year after the bottom was reached. The implication is if you are trying to time the market and miss the bottom, you will miss a good gain.