Asset allocation is your target mix of stocks, bonds, and cash. Without periodic monitoring, your allocations may stray considerably from your target allocation.

For you to maintain your asset allocation and risk-control strategies, you should:

• Check your asset class weightings semi-annually, or minimally annually.

• Rebalance whenever any asset class has strayed more than 5% from your target allocation.

• Time your rebalancing to coincide with a memorable date, such as a birthday or an anniversary.

It is best to rebalance tax-deferred accounts (401(k) or IRAs) first, since there are no tax consequences. Also, you should determine the amount of any related transaction costs.

By now you should have received your stockbroker’s Form 1099-B. This form is also sent to the IRS and indicates the dollar value of the stock you sold last year. We use this as the minimum amount that is reported on your Form 1040. Any amount less, may generate an IRS Notice. Depending on the broker, the information contained with the 1099-B may be all we need to prepare your tax return. Many brokers are now including not only the proceeds from the sale of stock, but also the basis (cost of your stock) in the stock sold. Unfortunately, they do not always include the basis. As a result, you need to provide us with the information. When you provide your basis, it makes our job easier and less expensive for you. Here are some rules in determining your basis:

• With regard to mutual fund shares, the most common method in determining basis in your shares is the “average cost” method. This means you take the cost of all your shares purchased, including dividend reinvestments, and divide the total by the number of shares on the date of sale. The result is the average cost of shares (your basis). Alternatively, you can use the double-category method, whereby you total the cost of shares held more than one year and total the cost of shares held one year or less. You then figure the average cost per share for each group.
• Under the specific identification method, you specify which shares have been sold. Your basis is what you paid for those shares when you acquired them. In order to use this method you must give written notification to the fund as to which shares you are selling
• If you do not specify a method for calculating basis, the IRS assumes that you use the FIFO method, where the shares sold are the ones you have held the longest, which usually results in the largest capital gain.
• With regard to individual stocks, you may also use the specific identification method and you also must give written notification to your broker to identify the shares that you are selling.
• As with mutual fund shares, if you do not identify the shares sold, the IRS assumes that you use the FIFO method.

These are just a few of the complex rules with regard to purchasing and selling securities. If you have any questions, please call.

If you refinanced, or are considering refinancing, your home mortgage this year, you may be able to deduct some of the refinancing expenses on your tax return.

Points

So-called “points” may be deductible as mortgage interest. Points paid to obtain an original mortgage on the acquisition of your personal residence are fully deductible in the year paid. Points incurred to refinance a home mortgage must be amortized over the life of the mortgage. If you used the loan proceeds to pay for improvements on your residence, and if you meet certain other requirements, the points incurred will be fully deductible in the year paid. If you are refinancing the mortgage on your personal residence for a second time, the unamortized portion of the points paid on the first refinancing will be fully deductible.

IRS Definition of Points

Points, in order to qualify as deducible interest, must be considered compensation to the lender solely for the use or forbearance of money. Points cannot be a form of service charge or payment for specific services. They must be calculated as a percentage of the loan amount, paid by you directly, and may not be derived from loan proceeds.

Related Expenses

Other related expenses, such as appraisal fees, notary fees, note preparation costs, etc., cannot be deducted.

A study of 17,000 stock mutual fund share classes by Standard & Poor’s, determined that fund expenses are a critical factor in fund performance.

The study found that over a ten-year period, stock funds with lower than average expense ratios performed better than funds with higher than average expense ratios in all investment style categories except one. The exception was the mid-cap blend category.

It is important for you to keep fund expenses in the forefront of your analysis when selecting funds for your portfolio.

Significance of tax planning

Tax planning will often result in substantial tax savings. If you use a calendar year for preparing and filing your tax return, your opportunity for tax planning will end on December 31. Therefore, with some exceptions, when you do prepare your tax return two to three months after the end of the year, it is generally too late to do anything.

Tax planning involves the timing and method by which your income is reported and your deductions and credits are claimed. In general, you should defer income into a subsequent year and accelerate deductions into the current year. You also need to consider if the income can be taxed when you are in a year with a lower marginal tax rate (marginal tax rate = highest rate that is applied in the tax computation for a particular taxpayer) and the deductions claimed in a year when you are at a higher marginal tax rate. For example, if you expect to be at a lower marginal rate , you should defer the receipt of income and accelerate deductions.

Three cardinal rules for tax planning:

• Defer tax whenever possible
• Recognize income when your marginal rate is low
• Pay deductible expenses when your marginal rate is high

Planning around your marginal tax rate

Controlling your marginal rate of tax rests in your ability to time your income and deductible expenses. Some other factors that may change your marginal rate of tax from year to year follow.

Filing status

There are four schedules of tax rates that apply to individuals. Two apply to married persons and two to single persons. For married persons, the choices are “married filing jointly” and “married filing separately.” On occasion, a married couple may be able to reduce their overall tax liability by filing separate returns. If separate returns are filed, each spouse reports his or her income and deductions on separate returns. Moreover, for tax purposes, your marital status is determined on the last day of the year.

Single people generally select “single” filing status. If a single person lives with and provides support for a dependent he or she may file as “head-of-household.” These rates are more favorable than the rates that apply for “single” status.

Income level

Your level of income will determine your marginal tax rate. Therefore, significant changes in income from year to year may present planning opportunities. A marriage or divorce can have a major impact on your level of income, as do job changes, retirement, inheritances, illness, and sale of investments.

Tax preference and adjustment items

So called “preference items” and “adjustment items” (some examples include: certain tax exempt interest income, incentive stock options, and certain itemized deductions) are relevant with regard to the Alternative Minimum Tax (AMT). The AMT is in place to make sure that you pay at least a minimum level of tax. Consequently, if your deductions are significant and/or you have taken advantage of too many other tax opportunities, some or all of the “preference items” and “adjustment items” may be disallowed or adjusted for purposes of the AMT calculation. The important thing for you to know at this time is that if you have significant deductions or preference/adjustment items, you may be subject to the AMT. If you are subject to this tax, you may be at a higher marginal rate than you anticipate. Because of this possibility, planning for the AMT is very important.

Conclusion

Tax planning is now much more than just deferring income and accelerating deductible expenses towards year-end. Major Tax Acts over recent years guaranteed lower tax liabilities for almost everyone. But with so many changes being phased in and out over the next several years, you will need a scorecard to keep it straight. Also, with many more options now available, tax-planning strategies should be considered year-round and not only towards year-end.

Based upon a study conducted by Lipper, Inc., owners of stock funds in taxable accounts give up an average of 1.98 to 2.50 percentage points in total returns to taxes annually.

There are some steps that you can take in order to mitigate the impact of taxes on your investments:

• Invest in index funds, particularly in taxable accounts. They usually have a buy and hold strategy, resulting in low turnover of fund holdings (lower capital gain distributions).

• Consider investing in tax-managed funds. These funds take an index-oriented approach and employ additional techniques, such as loss harvesting, and selecting higher cost-basis holdings when selling.

• Hold your less tax efficient funds, such as actively managed funds and taxable bond funds in tax-deferred accounts.