Turbulence.

What about we play the game of pretend?

Imagine you are in an airplane with your champagne glass or aperitif already served in your hand – no you are not dreaming, you are just flying in economy with Air France on your way to Paris. You start watching the latest flight entertainment blockbuster, you feel comfortable with the plane still climbing and skyrocketing at 600 miles per hour. Suddenly you hit some turbulence. What do you?

Most likely you hold on to your drink, hoping not to stain your shirt or your yoga pants. Maybe you tighten your seat-belt. And you wait the turbulence passes. Maybe 5 minutes later, after the captain lowered the altitude of the plane, you continue your trajectory toward your final destination.

A ride on the stock market is very much like a ride on an airplane. You’ll most likely hit turbulence several time. However, you do not jump off the plane just because the wind is strong and the plane shakes. You hold tight, knowing the plane will recover and continue its flight. Same with this crisis and all the precedent ones.

As you already know, the markets around the world have recently experienced significant volatility. The selloff began in China and ultimately resulted in a decline of approximately 9% in a single day. As with most other events of this scale, the “bad news” was spread throughout the rest of the world, ultimately affecting the majority of markets. The indexes in the U.S. and Europe have experienced a decline of between 9 -11% over a 5-day period.

It may be hard, or even impossible, to predict what will happen next with any significant level of certainty. We, therefore, do not recommend that you attempt to time the market or predict the future. Instead, we suggest that you consider the following ideas:

Harvest losses for tax purposes. This technique is indirectly related to the current or any other conditions in the market. Assume that you purchased a high quality investment that is appropriate for your portfolio at $100/share. Due to the recent market turbulence, such investment might have experienced a substantial drop in value, let’s say 10%. As a result, you now have an unrealized capital loss of $10/share on this position. If this investment was purchased in a taxable account, you may want to liquidate it and realize a loss of $10/share. This loss may then be used to offset your other capital gains and reduce your overall tax liability.

Rebalance your portfolio. You may have investments in your portfolio that are not appropriate for your overall asset allocation or life circumstances (e.g. inherited assets or stocks that were purchased by your previous adviser). Perhaps the only reason you still have these investments are large unrealized capital gains. The market volatility may present an opportunity to liquidate such assets at a smaller gain or even loss and help you to re-balance your portfolio toward your desired asset mix without incurring a substantial tax liability.Please talk to an investment advisor to discuss the possible re-balancing of your portfolio.

Keep perspective and think long term. As you already know, you need to take a holistic approach in considering your asset allocation and your investment management approaches. You should take into consideration your unique circumstances when you structure your global asset allocation (e.g. risk tolerance, cash needs, large planned purchases, etc.). Short-term market turbulence should not be an obstacle if you are truly investing for the long term. On the other hand, you should incorporate an appropriate amount of cash reserves or liquid investments in portfolios that are designed to make ongoing or future distributions during turbulent market conditions.

Hope this helps. Sit tight and keep in mind the facts acquired during more than 100 years of market fluctuations: those who abandon ship lose.

Get a Grip…

…on your finances.

Going into debt is as American as the apple pie that taste like pure cinnamon (and you wonder how apple actually tastes) or the cultural ignorance of the rest of the world (and happy to ignore it anyway). It’s the American way! And most of us are content with it.

Unfortunately, if it is your way, you may be so deep in debt that you live paycheck to paycheck, or worse your paycheck is gone before you can even see it. In another word, you run on empty. Any financial transaction is then a struggle, a denial, a stomach ache, a plunge toward deeper and darker waters. This “American way” of life certainly does not feel good and is not what you aspire to.

I am certain anyone would rather be thinking of savings to buy a house, continuing your education or paying for your children, even grand children’s education. And retirement. Aaaahhh sweet retirement, a time spent doing whatever you want without a fixed schedule and no driving during rush hours!

Now it might not be entire your fault if you are in debt. Sure you most likely spend too much money, or rather spend money on non-essential things. However, we know that low wages have remained flat, even decreased in the past decade when adjusted to inflation (see this documentary Inequality for All for accurate data).

But debt is far from being a symptom of being poor or small earnings. Debt is a virus that touches the whole population regardless of their income. Debt is mostly prominent in the middle class (lower and higher middle class). Traduction: debt is more a symptom of people who could live with it but choose to put themselves in this precarious situation. Hence by changing their lifestyle, consequently their spending habits, a large portion of people who are in debt could get out of it. However, it is does not happen miraculously, stop dreaming to win the lottery. You need to get a grip and firmly face your financial issues.

Next: Understand Where you Stand.

Stand Still!

Key Points

• Stocks have gone 28 trading days without back-to-back gains; a very unique experience historically.
• Uncertainty abounds, associated with Fed policy, economic surprises on the weak side, and earnings which have dropped into negative territory.
• Investor sentiment is swinging more wildly than is normally the case.

One of our theses for 2015 has been heightened volatility, and with the kind of up-and-down action we’re seeing in the stock market, that view has been accurate to-date. Two weeks ago the S&P 500 was near an all-time high, and then last week lost about 2.5%. In fact, all of the major US equity indices were down more than 2% last week. And as I write this today, the market is up over 1%. With only two trading days (including today) left in the first quarter, the S&P 500 is about flat for the quarter. This type of market action can cause a lot of angst, especially among individual investors.

Bespoke Investment Group (BIG) is among the best in the business at analyzing short-term market movements for any longer-term implications. They show that the S&P 500 has seen nine swings of 3.5% or more—with the largest being the 7% run from early-to-late February. For some of the smaller, less broad-based indices, the swings have been even greater.

28 days

Twitter was alive last week around the fact that the S&P 500 has gone a very long stretch without being able to put together back-to-back gains. As of Friday, that streak is now 28 trading days. A streak that long is so rare, it’s only happened twice before since World War II—in May 1970 and April 1994.

To get an idea of how these streaks impacted returns historically BIG looked at a slightly larger sample set, by including streaks of at least 25 trading days. As you can see in the table below, on average, long streaks without back-to-back gains were actually positive for returns looking forward a month.

Source: Bespoke Investment Group (BIG). 1945-March 27, 2015.

What is causing these wild day-to-day swings in the market?

Be very careful about trying to pinpoint a single thing on a daily basis. It’s human nature—and the media’s obsession—to try to find a particular reason for the market’s action on any given day; but more often than not, it’s simply the imbalance between supply and demand (i.e., “more buyers than sellers” or “more sellers than buyers”) that defines short-term market movements.

More broadly though, it is perhaps uncertainty around Fed policy and the recent weakness in US economic data that has contributed to the pick-up in market volatility. Fed Chair Janet Yellen probably hasn’t helped ease uncertainty by noting on Friday that the Fed is data dependent and the pace of interest rate hikes could “speed up, slow down, pause, or reverse.”

As you can see below, the Citigroup Economic Surprise Index (CESI) for the United States has plunged over the past couple of months—the Ned Davis Research (NDR) version of the index below is smoothed over rolling eight-day periods. The index does not measure economic growth in an absolute sense; instead it measures whether economic data is coming in better (above zero) or worse (below zero) than expected.

Surprises of the Negative Variety

Source: FactSet, Ned Davis Research (NDR), Inc. (Further distribution prohibited without prior permission. Copyright 2015© Ned Davis Research, Inc. All rights reserved.). 2003-March 27, 2015.

As you can see in the table above, the stock market has historically had its worst performance when the US CESI is in its worst zone; as has been the case recently.

Weather and ports

The culprits behind the weakness have been dominated by the harsh winter weather in parts of the country; as well as the West Coast port disruptions. Once again last week, weaker-than-expected reports outnumbered stronger-than-expected reports, which has been the trend for a couple of months. The most headline-grabbing miss last week was the revision to fourth quarter (2014) real gross domestic product (GDP), which was unrevised at 2.2%; below the 2.4% consensus expectation.

At the latest CESI low, it was 1.7 standard deviations below the historic mean, according to NDR. Importantly though, the index is mean-reverting and showing signs of reversing from its latest slump, which is good news for the economy…and possibly for stocks.

Do notice in the table above that as the CESI has recovered historically, stock market performance picks up meaningfully. Caveat: These are averages and not indicative of the likely path this time (think “past performance is not guarantee of future results”).

What are the indications of a turn in economic data?

Two of the more timely and leading economic indicators—both of which saw better readings upon their most recent releases—are Markit’s composite purchasing managers index (PMI) and initial unemployment claims. Some next-level leading indicators have been signaling a turn for the better as well; including mortgage applications for home purchases, railcar loadings, and hotel revenues. Further supports include existing home prices, bank lending, and consumer net worth.

The problem in the shorter-term though—at least for the stock market—is that economic weakness, the stronger dollar, and the plunge in oil prices have all contributed to a drop in earnings growth. This has been a topic I’ve been covering over various mediums recently.

Foreign profits of US companies s(t)ink

In the just-released broad fourth quarter 2014 corporate profits report (which comes out in conjunction with GDP), foreign profits of US companies fell a sharp 5.3%—the largest quarter-over-quarter decline since 2008. That puts foreign profits only 5% above their 2008 peak. On the other hand, although domestic profits of US companies edged up only 0.3% quarter-over-quarter, domestic profits reached another record high and are 22% above their 2006 peak.

The two main culprits behind the earnings weakness have been the plunge in oil prices (energy sector) and the strength in the dollar (multi-national companies). You can see the effect of the latter in the chart below, which highlights the bias in performance so far this year toward more domestically-oriented companies.

It’s Good to Be Domestic

Source: FactSet.

Honing in on the S&P 500 specifically, operating earnings have moved into negative territory on a quarter-over-quarter basis; and are expected to remain negative for the next two quarters. According to BCA Research, since the 1970s, there were three non-recessionary periods when profit growth slipped into negative territory: 1986, 1998 and 2012. In 1986, stocks pulled back by more than 10% (and subsequently experienced the Crash of 1987); stocks fell by about 20% in 1998; and stocks dropped by 10% and then 8% in a short span of time.

Swingers

The swings in economic data; which have contributed to the swings in the stock market; have all contributed to the swings in investor sentiment. As I’ve noted in recent commentary—as well as on Twitter—bearishness had come back fairly quickly recently, which had been surprising given the market trading near all-time highs two weeks ago. But that has changed, as bullish sentiment on the part of individual investors saw its biggest weekly increase of this year. The dominant measure for individual investor sentiment comes from the American Association of Individual Investors (AAII) and you can see the latest gyrations below.

Investors Sentiment Rebounding

Source: FactSet, as of March 27, 2015.

The good news is the rebound in bullishness has not taken it above the 2009-2015 bull market average of 38.8%. But it does highlight the skittishness of investor sentiment given the current state of Fed/economic/earnings affairs. We reaffirm our view that although the secular bull market that began in 2009 is not over; it’s likely to be a much choppier ride for investors…possibly until earnings can catch back up to valuations.

How to Start Investing in 5 Steps

I understand that investing can seem extremely overwhelming at first.  However, I believe it’s one of the best ways to build your financial security, so I applaud your interest in getting started. The good news about investing is that you don’t have to understand all the intricacies to get started. The trick is to break it down into simple steps.

But before you put any money in the market, I suggest that you cover a couple of financial bases. First, set aside enough cash in an emergency fund to cover three to six months of essential living expenses. Next, make sure you have health insurance (absolutely essential!) as well as car insurance and renters or homeowners insurance, depending on whether you rent or own a home.

With this protective cushion in place, you’re ready to explore investing. Here are five steps to help you get going. You can build on them as you become more comfortable.

1) Set some goals

Investing is about growing your money, but to do that effectively, you have to know what you want to accomplish. So do some thinking. Lay out your short-, medium- and long-term goals. Write them down, give them a time frame, and put a dollar figure beside each. For instance, a short-term goal might be a vacation. A medium-term goal could be a down payment on a house. To me, your number one long-term goal should be retirement.

Having tangible goals is a good motivation to keep saving and investing. It also helps you understand how to invest for the time frame attached to each goal.

2) Check in with your personal risk-o-meter

Risk is the scary part of investing, and there’s no way to avoid it completely. So it’s important to think about how much risk you’re taking on with each investment.  It’s also important to understand that risk and return go hand-in-hand: often the greater the potential return, the greater the risk. Stocks are on the high end of the risk-o-meter with small company stocks often more volatile than large company stocks and emerging markets stocks more volatile than domestic stocks; fixed income investments such as bonds are in the middle; cash investments like CDs are on the low end.

Two things will determine how much risk or uncertainty you can handle: your personal feelings and your time frame. If market ups and downs are going to give you a constant upset stomach, you can take a more conservative approach. If you’re able to live with market fluctuations and think long-term, you can be more aggressive.

Also look at how long you plan to keep your money invested. The longer your time frame, the longer you have to recoup any short-term losses that might occur with normal market changes. In general, if you’ll need your money in:

• Three years or less—Avoid stocks. They’re just too volatile. Consider cash investments like money market funds or CDs instead.
• Three to five years—It may be appropriate to invest as much as 50-60 percent in stocks, with the balance in bonds or cash equivalents.
• Five to 10 years or longer—You can add more stocks to the mix.

3) Open the right accounts 

With your goals in mind, make sure you have the right accounts. In addition to a checking account, you should have:

• A tax-advantaged retirement account, which could be an employer-sponsored account such as a 401(k), a traditional IRA or Roth IRA, or both. To me, these types of retirement accounts are the most important because saving for retirement should be a top priority.  And the sooner you start, the less you’ll likely have to put in each year. If you begin now when you’re in your 20s, and save just 10 percent of your income a year for your entire working life, you’re preparing yourself for a comfortable retirement. If you wait until you’re older to start, you’ll have to sock away a larger percentage.
• A savings or money market account—This is where to stash your emergency fund and any money you’ll need in the next three years.
• A taxable brokerage account—This can be appropriate for medium- and long-term goals.

4) Start with broad-based investments 

It’s easy to get hung up on choosing investments—there are so many. But fortunately, broad-based mutual funds and exchange-traded funds (which pool the money of many investors to purchase a variety of securities) give you a simple way to begin. Funds help you automatically invest in a variety of stocks and bonds so you don’t put all your money in one investment (which is much riskier than owning several investments). Do a bit of research on performance and fees. There are plenty of reliable websites that give details of particular funds and let you comparison shop. You might start with your brokerage company’s website.

5) Put things on automatic

Once you’re set up, put as much as you can on automatic—savings deposits, retirement contributions, even automatic monthly investments into a fund. The less you have to do, the less overwhelming it will be, and the more likely you are to stick with it.

That said, you do want to stay involved. Check your portfolio at least once or twice a year to evaluate performance and to make sure your investments still match your goals and feelings about risk. And try to keep a long-term view. You’re young. You have plenty of time to ride out market swings and reap potential returns. And once you have some money in the market, you may be inspired to learn more. Investing can actually be fun as well as financially rewarding!

What House Can You Afford?

Does it seem like everyone around you is buying a home and you can’t figure out how? Or that buying a home is the next rational step in your life, but there is something (namely, money) holding you back? You are not alone. There are plenty of reasons why you may not be able to afford buying a home and it isn’t necessarily a bad thing.

1. Renting Is More Manageable

People tend to assume that buying a home is always a guaranteed moneymaker and thus more financially prudent than renting. However, the decision of rent vs. buy is not that simple. The appeal of renting — like lack of maintenance responsibility and expenses, fixed monthly cost, no taxes, lower insurance premiums, and greater flexibility — may be what is keeping you from buying your dream home. It’s a good idea to weigh the options carefully before deciding what is right for you and your family.

2. Too Many Expenses

Paying for a home is expensive. It is likely the single largest financial decision you will make in your life. Even if it seems like covering the down payment is possible, it’s important to calculate the monthly mortgage and see if that is realistic. And do not forget about closing costs. These are required at the home purchase (though some lenders allow you to roll the closing costs into the mortgage, this means you pay interest on that additional amount) and often total up to 5% of the home’s price. Whether due to the recession, high student loan balances or investment performance, you might not have all the money you need upfront to cover a home purchase. If you just can’t stomach all these costs, you might not be in the right financial or emotional place to buy a home.

3. Neighborhood Inflation

It turns out that a lot of homeowners want to live in a neighborhood with a good school system, low crime rate, available transportation, necessity access and cultural attractions. Homes in these neighborhoods are going to be more costly, and if you are unwilling to compromise on location, you just may not be able to afford a house … yet. In this case, you may choose to wait until you’ve saved up enough money for what you really want.

4. Out of Balance

It’s not you, it’s the market. The number of households in America is increasing, availability is low and the prices of homes are rising, yet the number of homeowners continues to decrease. This is especially true in certain locations. As a result of the housing crisis and recession, many potential homeowners are choosing to rent because they cannot afford a home or do not trust real estate as a good investment. You can see how much home you can afford using this calculator. A big factor in determining home affordability is your credit, so make sure you know where you stand. You can get copies of your free annual credit reports at AnnualCreditReport.com and you can check two of your credit scores for free on Credit.com.

The most important thing to remember is that if you cannot afford a home, it’s not a good idea to buy one. This will usually lead to more financial stress down the road.

Tax Tips for New Parents.

1. SSN

Got a new bundle of joy in your household? The key to tax breaks for your child is a Social Security number. You’ll need one to claim him or her as a dependent on your tax return. Failing to report the number can trigger a $50 fine and tie up your refund until things are straightened out. You can request a Social Security number for your newborn at the hospital at the same time you apply for a birth certificate. If you don’t, you’ll need to file a Form SS-5 with the Social Security Administration and provide proof of the child’s age, identity and U.S. citizenship.

2. Dependent Claim

Claiming your son or daughter as a dependent sheltered $3,950 of your income from tax in 2014, saving you a quick $987.50 if you’re in the 25% bracket. (The value of the exemption is reduced if your adjusted gross income exceeds $254,200 if you’re single or $305,050 if you file a joint return.) You get the full year’s exemption no matter when during the year the child was born or adopted. There’s a big catch here, however: If you’re subject to the alternative minimum tax, exemptions don’t count … at all. For 2015 tax returns filed in 2016, the exemption amount will rise to $4,000.

3. Child Tax Credit

A new baby also delivers a $1,000 child tax credit, and this is a gift that keeps on giving every year until your dependent son or daughter turns 17. You get the full $1,000 credit no matter when during the year the child was born.

Unlike the exemption that reduces the amount of income the government gets to tax, a credit reduces your tax bill dollar for dollar. So, the $1,000 child credit will reduce your tax bill by $1,000. The credit is phased out at higher income levels, beginning to disappear as income rises above $110,000 on joint returns and above $75,000 on single and head of household returns. For some lower-income taxpayers, the credit is “refundable,” meaning that if it exceeds income tax liability for the year, the IRS will issue a refund check for the difference.

4. Take More at Home

Because claiming an extra dependent will cut your tax bill, it also means you can cut back on tax withholding from your paychecks.

File a new W-4 form with your employer to claim an additional withholding allowance. For a new parent in the 25% bracket, that will cut 2015 withholding—and boost take-home pay—by about $83 a month. You can also take the child credit cited previously into account on your W-4, pushing withholding down even more.

5. Single Parent

If you are married, having a child will not affect your filing status. But if you’re single, having a child may allow you to file as a head of household rather than using the single filing status. That would give you a bigger standard deduction and more advantageous tax brackets. To qualify as a head of household, you must pay more than half the cost of providing a home for a qualifying person—and your new son or daughter qualifies.

6. Child-care Expenses

If you pay for child care to allow you to work—and earn income for the IRS to tax—you can earn a credit worth between $600 and $1,050 if you’re paying for the care of one child younger than 13, or between $1,200 and $2,100 if you’re paying for the care of two or more children under 13. The size of your credit depends on how much you pay for care (you can count up to $3,000 for the care of one child and up to $6,000 for the care of two or more) and your income. Lower-income workers (with adjusted gross income of $15,000 or less) can claim a credit worth up to 35% of qualifying costs, and the percentage gradually drops to a floor of 20% for taxpayers reporting AGI of more than $43,000. The next slide explains how you might combine this tax break with a child-care flex plan.

7. Child Care Account

You may have an even more tax-friendly way to pay your child-care bills than the child-care credit: a child-care reimbursement account at work.

These accounts, often called flex plans, allow you to divert up to $5,000 a year of your salary into a special account that you can then tap to pay child-care bills. Money you run through the account avoids both federal income and Social Security taxes, so it could easily save you more than the child-care credit. Some workers steer clear of reimbursement accounts because of the use-it-or-lose-it rule that requires you to agree to set aside a certain amount of money for the account at the beginning of the year and, if you fail to spend every dime on qualifying costs, you forfeit any balance at year-end. However, it should be fairly easy to pinpoint your expected child-care costs. Plus, the tax benefits are so powerful that you can come out well ahead even if you wind up forfeiting some of your set-aside.

You can’t double dip, by claiming a child-care credit against funds paid for with flex-plan money. But note that while the limit for flex accounts is $5,000, the credit can be claimed against up to $6,000 of eligible expenses if you have two or more children. So, even if you run $5,000 through a flex account, you could qualify to claim the 20% to 35% credit on up to $1,000 more. Although you generally can only sign up for a flex account during “open season,” most companies allow you to make midyear changes in response to certain “life events,” and one such event is the birth of a child.

8. College Savings

It’s never too early to start saving for those college bills. And it’s no surprise that Congress has included some tax goodies to help parents save.

One option is a Section 529 state education savings plan. Contributions to these plans are not deductible on the federal tax return, but earnings grow tax-free and payouts are tax-free, too, if the money is used to pay qualifying college bills. (Many states give residents a state tax deduction if they invest in the state’s 529 plan.)

Coverdell education savings accounts (ESA) offer another way to generate tax-free earnings to pay for educational expenses. Regardless of how many people contribute, there is a $2,000 limit on how much can go into any beneficiary’s account in one year. There is no deduction for deposits, but earnings are tax-free if used to pay for education expenses. You can use the money tax-free for elementary and high-school expenses, as well as college costs.

9. Kid IRAs

You may have heard about kid IRA—and the fact that relatively small investments when a child is young can grow to eye-popping balances over many decades. While that’s true, there’s a catch. You can’t just open an IRA for your newborn and start shoveling in cash. A person must have earned income from a job or self-employment to have an IRA. Gifts and investment income don’t count. So, you probably can’t open an IRA for your newborn (unless, perhaps, he or she gets paid as an infant model).

As soon as your youngster starts earning some money—by babysitting or delivering papers, for example, or helping out in the family business—he or she can open an IRA. The phenomenal power of long-term compounding makes it a great idea. Although a child must have earned income to have an IRA, the child’s own money doesn’t have to go into the account. It’s fine for a generous parent or grandparent to give the child money for the account. Contributions are limited to $5,500 a year, or 100% of the child’s earnings, whichever is less.

Best and Worst Cities to Retire…

Ah! I am sure you thought I was going to give you a list of cities corresponding to the best and worst to retire. Well I am sure if you google those terms, you’ll find tens if not hundred’s of article from website such as yahoo and CNBC that tell you where you should retire.

I think those article are stupid. Why? Because family, friends, and hobbies. You’re close to retirement, you might have lived in the city where you are for the past 5, 10, 20 years or even longer. You have friends, maybe family in the area. You have hobbies, non-profit organization you participate in, your gym buddies as well as your walking buddies. You enjoy your yard that you spent every spring and summer to take care of.

Given all of that. Would you move to another city that you’ve never been to just because some article told you it is better to retire there? Most likely not.

In addition the criteria of those surveys for retiring cities are the same as for living or working in those cities: affordability, entertainment, public transportation etc.

Key point: Those articles and surveys are worth nothing. Retire wherever you want, wherever you are comfortable living!

Guide to Income Taxes – Part I

Don’t Get too Comfortable

You’ve done your research and you’re feeling pretty good about your investment decisions. But the absolute return is only part of the equation. The next steps are to understand what constitutes income and how different types of income are treated under the federal tax rules, and to determine your tax liability. While the rules change periodically, knowing the fundamentals can help you save on taxes.

Everything is Income

Income extends beyond wages, interest, dividends, annuities, royalties and alimony—it’s any form of realized income, including property or services you receive. Debt that is canceled or forgiven (from a mortgage or student loan) is also considered income for tax reporting purposes. If you’re wondering if it’s income, the answer most likely is yes.

But not All Income is Taxable

That said, your gross income isn’t fully taxable. IRS rules allow the following adjustments:

• Above-the-line adjustments (the “line” here is your adjusted gross income), such as retirement plan contributions, alimony and self-employed health insurance. Note that alimony is deductible but child support is not.
• Special exclusions, such as tax-free municipal bond (muni) income, gifts, inheritances and life insurance proceeds
• Deductions, such as the standard deduction or itemized deductions for such things as qualified mortgage interest, state and local taxes, and charitable gifts
• Personal and dependent exemptions
• Credits, such as foreign tax credit
  If you’re subject to the alternative minimum tax (AMT), check with your tax professional to see which deductions are allowed and which are not.

Three Types of Income

Here are the three main types of income.

1. Ordinary: From wages, self-employment income, interest, dividends, etc.
2. Capital: From the sale of property.
3. Passive: From investments in real estate, limited partnerships or business activities where participation is immaterial.
   Each income type has a few subcategories that receive special treatment. For example, municipal bond interest is considered tax-exempt, and “qualified” dividends are taxed at the lower, long-term capital gains rate.

Finally, special rules apply to the interaction between these categories. For example, passive losses can usually offset other passive income, but generally not ordinary income.

Marginal and Effective Tax Rate

Think of our income tax system as a series of steps, where each step (or income bracket) is taxed at a higher rate. Your effective tax rate is the total amount of tax you pay divided by your taxable income (or AGI, if you’re subject to the AMT). This average is your actual tax liability, and it’s typically lower than the marginal rate.

But it’s important to know your marginal tax rate for planning purposes because this is the tax you pay on your next dollar of income. If your effective rate is 22% and your marginal rate is 35%, you pay 35 cents on the next dollar of income, not 22 cents. (By the same token, you save 35 cents on the next dollar you donate to charity, not 22 cents.)

Thus, knowing your marginal tax rate can help you decide which assets go best in taxable vs. nontaxable accounts, whether municipal bonds make sense in taxable accounts, or how much bang for the buck you might receive from making a charitable contribution or harvesting capital losses.

Want a Tax Break? Don’t Wait for the Last Minute.

You do not have to wait for December or April to make your tax moves or other financial moves to reduce your taxes. Taxes are not a April 15th thing, they are a whole year around thing.

Fix your Withholding

If you’re a serial refund-receiver, you have a golden opportunity to give yourself a mid-year pay raise. Simply tell your boss to quit sending so much of your salary off to the IRS. This story tells you how to file a new W-4 form at work to cut withholding and increase your take-home pay. An easy-to-use calculator that will show most taxpayers exactly how many extra allowances to claim on the W-4 to match withholding to how much tax they’ll really owe.

If you’re on track for an average-size refund for 2015, fixing your withholding will boost your take-home pay by about $225 a month for the rest of the year. And, since it’s already midyear, you’ll still get a healthy refund next spring.

Anyone receiving a subsidy to help cover the cost of medical insurance under the Affordable Care Act is walking through something of a financial minefield.

Midyear Adjustment for Obamacare.

If your income or family size changes during the year (maybe you got an unexpected raise or a new baby has arrived or a new college grad departed), the size of your subsidy could be affected. Check to make sure that the estimates you submitted when you got this year’s policy are holding true. If not, let healthcare.gov or your state insurance exchange know as soon as possible. The subsidy—which affects the premiums you’ll pay for the rest of the year—can be adjusted. If a new reality means you deserve a bigger subsidy, you can pay lower premiums for the rest of the year.

If a change means your subsidy should fall, it’s better to pay higher premiums for the rest of the year than be hit with a surprise bill when you file your tax return next spring.

Re-Evaluate Your Retirement (401k or other means) Contributions.

For 2015, workers under age 50 can contribute as much as $18,000 to their 401(k) accounts and older workers can contribute as much as $24,000. Last year’s limits were $17,500 and $23,000. How close are you to maxing out?

You know you need to contribute at least enough to capture 100% of any employer match (otherwise you’re leaving money on the table). But, take a look at your budget and see if you can squeeze more into this tax shelter. An extra $100 a month for 25 years costs you $30,000 but adds up to nearly $100,000 extra in your retirement nest egg, assuming an average 8% annual return. And remember, $100 into a traditional 401(k) cuts take-home pay by just $75 if you’re in the 25% federal tax bracket (and less if you save on state taxes, too).

You know I am a big proponent of retirement savings. So if you have tax refunds, use them to 1.Pay your debt 2. create an emergency fund 3. increase retirement contributions.

HSA’s of FSA’s.

Do you recall how much of your salary you diverted to a flexible spending/reimbursement plan to cover 2015 medical or child care bills?

Remember, this is use-it-or-lose-it money and that makes midyear a good time to check how reimbursable spending is tracking with the amount you set aside. If child-care is proving less expensive than you projected, for example, maybe a summer day-camp is in your qualifying child’s future. (While day camp expenses qualify for reimbursement, overnight camps do not.) If good health has left you with a pile in a medical reimbursement plan, start planning now for the best ways to make the most of that money so you don’t forfeit a dime.

Check Your Investment tools a.k.a. Portfolio

Come November and December, financial publications and Web sites will be flooded with advice on year-end investment moves.

But there’s no reason to wait until the leaves fall off the trees. Take the temperature of your investments now. If you decide it’s time to take some money off the table by realizing profits now, consider whether this is a good time to harvest losses. Never make an investment move solely for tax purposes. But the tax-saving power of dumping a poor performer might be the extra push you need to seek out a better investment.

Getting Rid of Your Debt

Check your credit card bills to see how much interest you’ve paid in 2015. If you keep going at this pace, how much will you pay for the entire year?

Now, ask yourself if it would make sense to use home equity borrowing to pay off the credit cards. While you can’t deduct interest paid on the cards, if you itemize, you can write-off interest paid on up to $100,000 of home-equity debt. Imagine this: $10,000 of credit card debt at 15% costs you $1,500 a year in carrying charges. The same $10,000 of debt on a 4.5% home-equity line of credit costs $450. And, if you’re in the 25% tax bracket, Uncle Sam effectively picks up $112.50 (and if you pay state income taxes, your state government will lend a hand, too).

Take a Look in the Mirror.

The maddeningly complex federal tax law weaves its way into almost every aspect of our lives. And, as our lives change, so do the tax rules we need to understand. If 2015 has already brought significant change to your life—or is sure to do so in the months ahead—check out these collections of the most overlooked tax breaks for New College Grads, New Parents, the Newly Divorced, the Newly Retired and the Newly Widowed. Make sure you don’t overlook one that could save you money.

10 Tips From Successful Retirement Savers

Build wealth. People who save enough money for a secure retirement often start saving at an early age and save consistently throughout their career. It also helps to avoid taxes and fees whenever possible. Here are 10 strategies successful savers use:

Start saving at your first job.

Beginning to save for retirement in your 20s and 30s allows you to start generating valuable compound interest that will accumulate over decades. Tucking away even a small amount will get you into the habit of saving for the future

Save with every paycheck.

Set up a direct deposit from your paycheck to a 401(k), IRA, or taxable investment account, and learn to live on your remaining paycheck. If you make saving automatic, you won’t be tempted to spend it or forget to make a contribution.

Boost your contributions.

As your income grows, increase the amount you divert to your savings accounts. Also save a portion of windfalls such as bonuses or tax refunds. Some 401(k) plans offer automatic escalation, which will gradually increase your contribution amount over time.

Get your employer to contribute.

A 401(k) match or other retirement account contribution from your employer is likely to be the best possible return you can get on an investment. If your employer chips in 50 cents for each dollar you contribute, that’s a 50 percent return.

Claim retirement saving tax breaks.

Retirement savers can get a tax deduction for traditional 401(k) and IRA contributions or tax-free growth using after-tax Roth accounts. Low-income retirement savers can even get a 401(k) or IRA match from the federal government via the saver’s tax credit.

Keep expense ratios low.

High expense ratios mean a big chuck of your returns is going into someone else’s pocket instead of growing your wealth. If you choose funds with low expenses, your money will grow faster.

Avoid fees.

Retirement and investment accounts often charge fees for trades, early withdrawals, failing to take withdrawals correctly, and other specific actions you might take. Get to know the rules so that you can avoid triggering fees and penalties.

Combat inflation.

Some ways to make sure your purchasing power keeps up with inflation include keeping some money in the stock market, investing in real estate, continuing to work part-time at current wage levels, and maximizing your inflation-adjusted Social Security checks.

Begin to protect your savings as you approach retirement.

Once you begin to accumulate a significant nest egg, it becomes more important to protect at least a portion of your retirement savings. You don’t want to encounter significant losses in the early years of your retirement

Diversify.

It’s important to make sure you are not overly dependent on any one source of retirement income. Instead, diversify your retirement income sources so that if any one of them fails, you will still have enough money coming in from other places to pay your monthly bills.