What If You Get Audited?

“Audit” is a word that can strike fear into the hearts of taxpayers.

However, the chances of an Internal Revenue Service audit aren’t that high. Between 2010 and 2018, the IRS only audited 0.6% of all individual tax returns.¹

And being audited does not necessarily imply that the IRS suspects wrongdoing. The IRS says an audit is just a formal review of a tax return to ensure information is being reported according to current tax law and to verify that the information itself is accurate.

The IRS selects returns for audit using three main methods.²

• Random Selection. Some returns are chosen at random based on the results of a statistical formula.
• Information Matching. The IRS compares reports from payers — W2 forms from employers, 1099 forms from banks and brokerages, and others — to the returns filed by taxpayers. Those that don’t match may be examined further.
• Related Examinations. Some returns are selected for an audit because they involve issues or transactions with other taxpayers whose returns have been selected for examination.

There are a number of sound tax practices that may reduce the chances of an audit.

• Provide Complete Information. Among the most commonly overlooked information is missing Social Security numbers — including those for any dependent children and ex-spouses.
• Avoid Math Errors. When the IRS receives a return that contains math errors, it assesses the error and sends a notice without following its normal deficiency procedures.
• Match Your Statements. The numbers on any W-2 and 1099 forms must match the returns to which they are tied. Those that don’t match may be flagged for an audit.
• Don’t Repeat Mistakes. The IRS remembers those returns it has audited. It may check to make sure past errors aren’t repeated.
• Keep Complete Records. This won’t reduce the chance of an audit, but it potentially may make it much easier to comply with IRS requests for documentation.

Remember, the information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

Split Decision: Who Joins the Dow 30

You may have heard that both Amazon and Alphabet recently announced stock splits. But what you may have missed is the subplot to the unfolding story.

The decision to split makes it likely that one of them will be added to the Dow Jones Industrial Average (DJIA) the next time there’s a change.

The DJIA is a price-weighted index, meaning its value is derived from the price per share for each stock divided by 30. Some believe that Google and Amazon were too high priced to get selected. By splitting, they improve their chances.

Amazon says it plans to split 20-for-1 in early June. Were the stock to close at $2,500 on the day of the split, each share would go to $125 and each existing holder would get 19 additional shares for every one they own.

Alphabet says it plans to split 20-for-1 in mid-July. Shareholders will get the same treatment.

A company’s board of directors makes stock-split decisions. Among other reasons, the board is looking to make the shares more affordable to employees and individual investors.

Stock splits can be confusing, so please reach out if you want more detailed information. And remember, Amazon and Alphabet are highlighted because they are splitting their shares. This is not a solicitation to buy or sell the securities.

Social Security: Maximizing Benefits

Most understand that waiting to claim Social Security benefits can result in higher monthly payments. However, many don’t know that there are other ways to maximize their benefits, some of which depend on their marital status.

Understanding the strategies for maximizing your Social Security retirement income benefits should be prefaced with a review of the three basic forms of retirement benefits:

1. The Worker Benefit: This is the benefit you receive based on your own personal earnings history, and for which you become eligible after 40 quarters of work.
2. The Spousal Benefit: This is the benefit paid to your spouse. For non-working spouses, this is 50% of the working spouse’s benefit. For working spouses, it is the greater of the benefit earned from his or her earnings or 50% of the worker’s benefit.
3. The Survivor Benefit: This is the benefit paid to the surviving spouse, which is paid at a rate equal to the greater of his or her own current benefit, or, depending on the widow or widower’s age, up to 100 % of the deceased spouse’s current benefit.¹

The first and most obvious strategy for maximizing your Social Security benefit is to simply wait to reach age 70 before beginning to take benefits. By waiting until age 70 to receive benefits, your monthly payments may increase by 24%, not including any cost of living increases that may be added to this amount.²

Benefit Maximization Strategies for Widows and Widowers

Remember, there is no spousal benefit for a widow/widower, but he or she does qualify for a survivor benefit that is equal to 100% of the deceased spouse’s benefit (versus the 50% spousal benefit if the working spouse is still alive). This survivor benefit is available at age 60 or even earlier, depending on the widow/widower’s disability status and whether or not they are caring for a child.³

If you are widowed and also have worked for 40 quarters, you will have a worker benefit and a survivor benefit. This presents you with several choices. One choice is to file for the benefit that provides you the greatest monthly benefit amount.

Another choice may be to start your worker benefit at age 62 and then switch to the survivor benefit once you reach full retirement age. This option is advantageous in instances where the widowed spouse did not accumulate the same level of benefits as the deceased spouse. Choosing this option allows the surviving spouse to take the higher survivor benefit amount. Because there are no delayed retirement credits earned on survivor benefits, there is no advantage to waiting past full retirement age to apply for survivor benefits.⁴

A final choice is to consider starting the survivor benefit at age 60 and then switching to your own worker benefit at age 70. This strategy allows you to begin receiving income based on the survivor benefit as early as possible and provides you time to build up the maximum worker benefit.

As you can see, there are ways you can potentially raise your Social Security benefits. These strategies can help you maximize your benefits beyond what is available to those who simply delay retirement to age 70.

The Fed Makes Its Move

The Federal Reserve recently announced that for the first time in three years, it would increase short-term interest rates by a quarter of a percentage point. In addition, the Fed has stated that it would like to see short-term interest rates near 2% by the year’s end, which would mean a hike at each of the remaining central bank meetings this year.¹

Many investors have been cheered by the Fed’s aggressive move to combat inflation, but even Fed officials acknowledge that higher rates could slow economic growth this year. This cautious stance is no doubt due to the upward pressure on inflation the ongoing invasion of Ukraine has caused.

There’s no surefire way to anticipate what the future will bring, but these recent moves by the Fed indicate that interest rates are heading higher. Let us know if you have any questions or concerns about these announced interest rate hikes. We’re always here to help.

Social Security: The Elephant in the Room

For most Americans, Social Security has represented nothing more than some unavoidable payroll deduction with the positively cryptic initials of “FICA” and “OASDI” (Federal Insurance Contributions Act and Old Age, Survivors and Disability Insurance). It hinted at a future that seemed both intangible and far away.

Yet, many Americans now sit on the cusp of drawing on the promise that was made with those payments.

As the growing wave of citizens approach retirement, questions and concerns abound. Is Social Security financially healthy? How much will my income benefit be? How do I maximize my benefits for my spouse and myself? When should I begin taking Social Security?

Questions & Elephants

Answering these questions may help you derive the most from your Social Security benefit and potentially enhance your financial security in retirement. Before you can answer these questions, you have to acknowledge the elephant in the room.

The Social Security system has undergone periodic scares over the years that have inevitably led many people to wonder if Social Security will remain financially sound enough to pay the benefits they are owed.

Reasonable Concern

Social Security was created in 1935 during Franklin D. Roosevelt’s first term. It was designed to provide income to older Americans who had little to no means of support. The country was mired in an economic downturn and the need for such support was acute.¹

Since its creation, there have been three basic developments that have led to the financial challenges Social Security faces today.

1. The number of workers paying into the system (which supports current benefit payments) has fallen from just over 8 workers for every retiree in 1955 to 3.3 in 2005. That ratio is expected to fall to 2.2 to 1 by 2037.^2,3
2. A program that began as a dedicated retirement benefit later morphed into income support for disabled workers and surviving family members. These added obligations were not always matched with the necessary payroll deduction levels to financially support these additional objectives.
3. Retirees are living longer. As might be expected, the march of medical technology and our understanding of healthy behaviors have led to a longer retirement span, potentially placing a greater strain on resources.

Beginning in 2010, tax and other non-interest income no longer fully covered the program’s cost. According to the Social Security Trustees 2020 annual report, this pattern is expected to continue for the next 75 years; the report projects that the trust fund may be exhausted by 2035, absent any changes.⁴

Social Security’s financial crisis is real, but the prospect of its failure seems remote. There are a number of ways to stabilize the Social Security system, including, but not limited to:

• Increase Payroll Taxes: An increase in payroll taxes, depending on the size, could add years of life to the trust fund.
• Raise the Retirement Age: This has already been done in past reforms and would save money by paying benefits to future recipients at a later age.
• Tax Benefits of Higher Earners: By taxing Social Security income for retirees in higher tax brackets, the tax revenue could be used to lengthen the life of the trust fund.
• Modify Inflation Adjustments: Rather than raise benefits in line with the Consumer Price Index (CPI), policymakers might elect to tie future benefit increases to the “chained CPI,” which assumes that individuals move to cheaper alternatives in the face of rising costs. Using the “chained CPI” may make cost of living adjustments less expensive.

Reform is expected to be difficult since it may involve tough choices—something from which many policymakers often retreat. However, history has shown that political leaders tend to act when the consequences of inaction exceed those taking action.

The Utility of Sector Investing

There is a growing popularity among individuals to broaden their investment strategy beyond conventional allocations and investment styles. Some see sector investing as a way to seek new opportunities for enhanced portfolio performance.¹

Because of its narrow focus, a sector investing strategy tends to be more volatile than an investment strategy that is diversified across many sectors and companies. Sector investing also is subject to the additional risks that are associated with each particular industry. Sector investing can be adversely affected by political, regulatory, market, or economic developments.

Sectors are made up of companies grouped by similar businesses that range from natural resources to financial services and from technology to consumer staples. In any given year, one sector may outperform another. For example, in 2020, materials rose 17.9%, while utilities fell -4.1%.²

Successful sector investing depends on an individual’s ability to consistently and accurately determine when to rotate in and out of the various sectors, which may be a challenge for most investors.

Investors are further cautioned that some sector mutual funds are capitalization weighted, meaning that they can be very concentrated in a few stocks, so you need to do your homework.³

Remember that mutual funds are sold by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.

Sector Investing Strategies

There are a number of ways to implement sector investing, depending upon your objective.

Portfolio Carve-Out: This approach dedicates a portion of your portfolio to seek opportunities in a specific sector. For example, if you think a rebounding economy may increase consumer spending, potentially a Consumer Discretionary sector would be a consideration.

Risk Management: Because the correlations between different sectors can be lower than those between general categories (e.g., value vs. growth or large vs. small cap), investors may be able to build a portfolio of sectors that potentially may reduce overall investment risk.

Portfolio Completion: This strategy targets sectors that may be underrepresented in a current portfolio. For instance, if precious metals or real estate exposure is lacking, you can use sector investment to gain that exposure.

Successful sector investing may be a challenge for most investors, but it could present an opportunity for those who do their homework.

^{Because of its narrow focus, a sector investing strategy tends to be more volatile than an investment strategy that is diversified across many sectors and companies. Sector investing also is subject to the additional risks that are associated with each particular industry. Sector investing can be adversely affected by political, regulatory, market, or economic developments.}

And the Executor Is

U.S. Supreme Court Justice Warren Burger is famous for more than just his time on the bench. When he died in 1995, he left a 176-word will that gave no specific power to his executors.¹ As a result, he reportedly cost his estate tens of thousands of dollars in attorney’s fees.

Judge Burger’s case shows that even law-savvy individuals can make mistakes when it comes to writing their own legal documents. But giving executors the proper power is only one piece of the puzzle. How do you choose an executor? Can anyone do it? What makes an individual a good choice?

Many people choose a spouse, sibling, child, or close friend as executor. In most cases, the job is fairly straightforward. Still, you might give special consideration to someone who is well organized and capable of handling financial matters. Someone who is respected by your heirs and a good communicator also may help make the process run smoothly.

Above all, an executor should be someone trustworthy, since this person will have legal responsibility to manage your money, pay your debts (including taxes), and distribute your assets to your beneficiaries as stated in your will.

If your estate is large or you anticipate a significant amount of court time for your executor, you might think of naming a bank, lawyer, or financial professional. These individuals will typically charge a fee, which would be paid by the estate. In some families, singling out one child or sibling as executor could be construed as favoritism, so naming an outside party may be a good alternative.

Whenever possible, choose an executor who lives near you. Court appearances, property issues, even checking mail can be simplified by proximity. Also, some states place additional restrictions on executors who live out of state, so check the laws where you live.

Whomever you choose, discuss your decision with that person. Make sure the individual understands and accepts the obligation – and knows where you keep important records. Because the person may pre-decease you – or have a change of heart about executing your wishes – it’s always a good idea to name one or two alternative executors.

The period following the death of a loved one is a stressful time, and can be confusing for family members. Choosing the right executor can help ensure that the distribution of your assets may be done efficiently and with as little upheaval as possible.

Consumer Confidence at the Pump

The latest Consumer Price Index (CPI) report was recently released and confirmed what economists anticipated: consumer inflation has risen 7.9% over the past year, the largest spike since 1982— none of which is a surprise for anyone who has visited a gas station lately.¹

With the price of gasoline trending higher, it may be tempting to attribute these prices to the global economic disruptions caused by Russia’s aggression toward Ukraine. However, the latest CPI reflected the 12-months ended in February and didn’t include most of the oil and gas price increases that followed Russia’s invasion of Ukraine on Feb. 24.²

There is a slight silver lining within the CPI, however. The food away from home index, which tracks restaurant purchases, rose 0.4 percent in February after increasing 0.7 percent in January. This could indicate strengthening consumer confidence despite inflation, as consumers continue to eat out.³

What does this all mean for consumers? It’s hard to say, but some predict further inflationary pressures, while others wait and see what the Fed says at its meeting next week.

If you have any questions or concerns regarding recent events and your portfolio, let us know. We’re always ready to help.

Women and Financial Strategies

Forty-four percent of American women are the primary breadwinner in their house.¹ Yet only 10% of women feel very confident in their ability to fully retire with a comfortable lifestyle.²

Although more women are providing for their families, when it comes to preparing for retirement, they may be leaving their future to chance.

Women and College

The reason behind this disparity doesn’t seem to be a lack of education or independence. Today, women are more likely to go to college and graduate than men.³ So what keeps them from taking charge of their long-term financial picture?

One reason may be a lack of confidence. In one recent study, less than half of the more than 2,000 women surveyed said they felt satisfied with their knowledge of finances.⁴ Women may shy away from discussing money because they don’t want to appear uneducated or naive and hesitate to ask questions as a result.

Insider language

Since Wall Street traditionally has been a male-dominated field, women whose expertise lies in other areas may feel uneasy amidst complex calculations and long-term financial projections. Just the jargon of personal finance can be intimidating: 401(k), 403(b), fixed, variable.⁵ To someone inexperienced in the field of personal finance, it may seem like an entirely different language.

But women need to keep one eye looking toward retirement since they may live longer and could potentially face higher health-care expenses than men.

If you have left your long-term financial strategy to chance, now is the time to pick up the reins and retake control. Consider talking with a financial professional about your goals and ambitions for retirement. Don’t be afraid to ask for clarification if the conversation turns to something unfamiliar. No one was born knowing the ins-and-outs of compound interest, but it’s important to understand in order to make informed decisions.

Compound Interest: What’s the Hype?

Compound interest may be one of the greatest secrets of smart investing. And time is the key to making the most of it. If you invested $250,000 in an account earning 6%, at the end of 20 years your account would be worth $801,784. However, if you waited 10 years, then started your investment program, you would end up with only $447,712.

This is a hypothetical example used for illustrative purposes only. It does not represent any specific investment or combination of investments.

A Challenging Start to 2022

2022 is off to a challenging start for most investors.

Stock prices have been down 6 of the past 9 weeks, and the major averages are either in or teetering on correction territory.

Bond prices are lower, and yields are higher, which has created an opportunity for some but has resulted in losses for others.

The Fed is expected to raise interest rates at its March meeting, where they may attempt to thread the needle of cooling inflation while maintaining the economic recovery.

Geopolitical events have added a layer of uncertainty and are one of the main drivers of volatility. Energy prices continue to move higher as events unfold in Eastern Europe.

Corporate earnings are a bright spot. The job outlook is improving, and it appears that we’re moving past the pandemic. But these green shoots tend to be overlooked.

Add it all up, and you could be thinking, “I just want to sit this one out.” But that’s exactly the time when you should remind yourself about investment strategy. Call me if you’re worried about what lies ahead. We can talk over what’s on your mind.