During 2009 two major acts:  The American Recovery Reinvestment Act (February 17, 2009) and The Worker, Homeownership and Business Assistance Act of 2009 (November, 2009) were signed, sealed and delivered!  What do these major pieces of legislation mean to us, middleclass Americans?    Not much in terms of actual $$$ in your pocket…but you know the old adage:  “something is better than nothing!”

This year’s “stimulus” package is coming to you by the way of a modest refundable tax credit, so don’t look for any checks in the mail.  It’s cleverly called the “Making Work Pay Credit” and it takes effect on your 2009 return.  The amount of the credit is the lesser of 6.2% of the taxpayer’s earned income or $400.  Actually the credit is geared towards the under $75,000 wage earner ($150,000 for a joint filer) and those who qualify, already got it through reduced withholdings in their paycheck.

There is also a $250 special Economic Recovery payment for those collecting social security payments in some form or another prior to February, 2009.  But sorry …no double dipping!  If you are entitled to the “Making Work” credit in one form or another, you won’t get the full $250.  And just to make matters more complicated, to get either you must complete a new form…Schedule M to be exact…to calculate your credit entitlements!

 Probably the most significant change in the “regs” applies to those taxpayers who buy a new house.  For those lucky few who find a great deal and qualify for funding by December 31, 2009, Uncle Sam will provide an $8,000 to first time homebuyers ( or $6,500 if you have owned a home before) credit that can be used against their tax liability or mortgage balance …whichever is more beneficial at the time.  Actually for some young taxpayers this has made coming up with a down payment easier on the pocket book and made buying their first home a feasible reality.  For others, who either already own a home, the $6,500 is certainly stimulating the purchase of a new or second one for retirement purposes.

To encourage new car purchases,  you can now deduct the sales tax paid in 2009 or 2010 from your adjusted gross income.  The car price limit is $49,500, it does not apply to leases, however the sales tax deduction is either an itemized deduction or gets added to the standard deduction, whichever works  best for you. 

In tune with the government’s “helping hand” approach:   those collecting unemployment benefits will also get a little tax relief since the first $2,400 will be exempt from income tax; the education credits have been changed and increased to $2,500 and include books and supplies;  and the child tax and earned income credits have become refundable.

As always, I am only giving you the highlights here and there are many rules, regulations and limitations that may affect your personal tax situation, so please seek out the help of a tax professional.   Next month we will talk about the cobra premium subsidy, home energy credits, gambling losses, passive activity changes and iRA’s …there are definitely more changes and enhancements than we have seen in years!

Last week my husband and I met with our investment broker to review our account and strategize for the future.  Since we are both fast approaching retirement age, we decided that we can no longer tolerate the level of risk that we have sustained in the past and needed a fresh investment direction.

When the market tanked last October, we knew enough to let things ride, settle down and be patient…we did not participate in the “fire sale” like so many others, so our investment account has actually bounced back nicely. But, even with that being said, the volatility of this market is very hard to take, especially at our age, so we feel that it is time to make some changes.

The conversation with our broker really centered around the importance of diversification …buying investments that are not correlated with each other.  What does that mean?  It means that a well rounded investment portfolio consists of variety…so that your investment dollars can withstand any major changes that may come your way.

Diversity not only relates to industry …but also asset class like stocks, bonds, real estate and cash.  Too much in any one investment vehicle can mean disaster if that market  “gets hit”.   Just consider what is going on in real estate today …even though the stock market is recovering to some degree, the commercial real estate market is still plummeting and may not recover for some time.

Beyond asset diversification, you also need to consider industry diversification …finance, automobile, oil, computer, food, telecommunications …never put all of your dollars in one industry, rather select one favorite in each and work from there.  If there is a particular industry you like, consider an industry dominated mutual fund for your portfolio…that way you get a small piece of many companies rather than putting all of your eggs in one basket.

Diversification also applies to the global economy … countries, currencies and foreign markets.  Often global trends are totally opposite of homeland results so they should be taken into consideration while shopping for a well rounded portfolio.

Also, just as an aside, If you have always handled your own investment strategy, consider working with a professional broker.  Making appropriate and smart decisions in this investment environment is not an easy task.  We have found that working with a broker has given us the stamina to ride the wave and make better investment decisions.

Turbulent financial times, like those we have had to face over the last year or so, have brought with them a level of financial uneasiness that most of us have never faced before.  With all that has gone on with the recession, the stock market, the fall of Lehmann  and  the  Madoff scheme, we have  become more cautious about our spending and investing …it’s a good thing.

Now that things have leveled off a bit…we are beginning to get some interesting  questions regarding buying, saving and investing along with some “shouldn’t you always” that make no sense with  today’s money and market conditions.

Money Myth #1:  You should always invest some of your savings in securities, stocks and mutual funds. Your savings should be where you feel most comfortable and reflects your risk tolerance …and if that means a 1% money market account, then so be it.  As we all now know so well, you cannot time or predict the stock market, so only gamble what you can afford to lose…or at least what you can afford to live without so that you can easily ride the waves.

Money Myth #2: You should always pay off your credit cards before adding to savings. I am a real

believer in the almighty budget, so that when you live by the rules …you do a little spending, you do a little savings, you pay off a little debt.  Living with no savings can put you in a very difficult situation if an emergency comes up and immediate cash is needed.   Also, as we all know, credit has really tightened so it may not be as available to you when you need it as it once was.

Money Myth #3:  To reduce credit card debt, you should always pay the highest interest card first. In my mind, consolidating your payments is the easiest and most sensible way to pay down your debt…so my rule is to pay off the smallest debt first so you are reducing the number of payments you need to make each month.  As each debt is paid off, use the released cash flow to increase your payment on the next smallest, and continue the process until you are down to one.

Money Myth #4:  You should save for college first, then for retirement. If your savings cannot stretch for both, save for retirement first…absolutely.  You can always borrow for college at very low interest rates, apply for scholarships, or borrow from your retirement savings, if necessary.  Retirement savings can come only from you.

Money Myth #5:  Buying a house while the prices are low, is always better than renting. When things are tough, flexibility is the key, and renting is a great alternative for people you have relocated for a job, or for those who may not job security and may need to move quickly to find work.  Buying a house is an expensive proposition any way you look at it and may not be a good financial move no matter how reasonable the price.

If you have questions or need some financial direction, I am always happy to help …give the office a call.