D3 Business Update:

Happy New Year! We have finished up all of our client tax minimization trading strategies and client portfolio rebalancing. We have also completed the inventory of our comprehensive client’s estate planning documents and Patty will be calling you to confirm that we have accurate information.  If you are missing essential documents, we will help you create them.


We wanted to let you know that we will be implementing some new technology in 2011. We are adding a service called By All Accounts that will allow us to automatically update all of our client’s 401(k) plans and 403B plans on a daily basis.  This will help us monitor their asset allocation.  We are also adding a service called Macro Risk Analytics that will allow us to better gauge the sensitivity of our clients assets to the economic environment. We plan to have both of the systems in place by the end of January, before tax season begins.


We have initiated our review of our asset allocation models relative to global risk/reward expectations.  In mid January, when all of the mutual fund performance date is collected, we will  start our in depth, formal review of all the mutual funds in client portfolios.


Lastly, we are changing the name of our “Comprehensive Service” to “Family Office Service” to better reflect the holistic approach we take in serving our clients.  For your information, we have included a 2011 pricing list for the services we provide (feel free to pass this on to a friend or family member that may need financial planning services).


Economic Outlook:

The final third quarter GDP report revision showed that the U.S. economy grew at a 2.6% rate. Retail sales through November 2010 were 8% better than through November of 2009.  Anicdotal reports from retail outlets, and credit card companies indicate that December retail sales were higher than the prerecession high set in December 2007 and double digits higher than 2009.  Career Builder’s recent employer survey indicates that twice as many employers are looking to hire than at this same time last year.


State and local government finances typically lag behind the general economy because the value of the property and income being taxed is often a year old.  As a result you should expect quite a lot of negative news regarding municipal finances.  Unfortunately credit default swap derivatives have invaded the municipal market and these may exacerbate some of the states’ problems.  It is important to put things into perspective.  For example, California, the lowest rated state, will have $86 billion of revenue in 2011.  $36 billion will be allocated to education (the first expense that gets funded) which leaves $53 billion to cover $7 billion of interest payments on their bonds (the second expense that gets funded).   The headlines will sound bad, expenses will be cut, some debt restructuring may occur, but we do not foresee major municipal defaults.


According to Norman Fosback, editor of Fosback’s Fund Forecaster, the U.S. economy from a gross domestic product perspective, has completely recovered to the peak achieved before the great recession of 2008.  A sustained period of real growth, not just recovery, would be positive for stocks.


D3 Investment Outlook:

The lame-duck Congress this year was not very lame. Significant legislation was passed during the past two weeks of December, most of which will be viewed favorably by the financial markets in the short term. The extension of the Bush era tax cuts provides some certainty regarding the treatment of long-term capital gains, qualified dividends and earned income over the next two years. We have included a fairly detailed summary of the new tax legislation for your review.


Corporate dividend payments are increasing again.  255 of the 500 companies in the S&P 500 index either initiated dividends or increased dividends.  According to Standard and Poors, the average annual increase was 8.8%.  Next year they project a 9% increase in dividend payouts.


We believe the bond market ended it’s 30 year bull run (1980-2010) in August when 10 year treasury yields bottomed at 2.50%. 10 year treasury yields are currently at 3.50%, up 1% in absolute terms or up 40% in relative terms from August.  Short duration bonds funds are currently fairly insulated because short term rates are still low and will remain low until unemployment starts to drop.


We continue to believe the stock market is appropriately valued for a slow economic growth forecast.  If the economy grows faster than 3% (which we think it will in 2011), equities should rally.  Barron’s recently published their annual year end outlook and the average prediction of the market strategists interviewed was a for a 10% increase in stock prices.


D3 Investment Insight and Strategy :

We continue with the strategy we started in November of replacing non-dividend paying funds with dividend paying funds and moving  out of traditional bond funds into income oriented funds that will move more with the equity markets than with interest rates.



We hope that each and everyone of you have a happy and prosperous 2011.  And as always thank you for your confidence in D3 Financial Counselors.


Donald D. Duncan MBA CFA™ CPA CFP®               Adam Glassberg, Financial Planner

Michael Meyers MBA CFP®                                     Patty Shipinski, Administrative Assistant



The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Provided by Forefield)

On December 17, 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was signed into law. In addition to providing a 13-month extension of benefits for the long-term unemployed, the legislation includes a long-anticipated extension of the “Bush tax cuts” that were scheduled to expire on January 1, 2011. Other significant provisions include a new alternative minimum tax (AMT) “patch,” a major modification of the estate tax, and a new 1-year 2% employee Social Security payroll tax reduction.

Income tax rates

The Act extends existing federal income tax rates for 2 additional years. As in 2010, the federal tax bracket rates for 2011 and 2012 will be 10%, 15%, 25%, 28%, 33%, and 35%. (Without this legislation, federal income tax rates would have increased beginning in 2011–the current 10% federal income tax bracket would have disappeared, and the five remaining tax brackets would have been 15%, 28%, 31%, 36%, and 39.6%.)

Tax rates for long-term capital gain and qualifying dividends

Existing tax rates for long-term capital gains and qualifying dividends are also extended through 2012. As a result, long-term capital gain and qualifying dividends will continue to be taxed at a maximum rate of 15%. For individuals in the 10% or 15% marginal income tax bracket, a special 0% rate will generally continue to apply.

Alternative minimum tax (AMT)

The Act includes another temporary “patch” for the AMT–this one good for 2010 and 2011. AMT exemption amounts are slightly increased, and personal nonrefundable tax credits will be allowed to offset AMT liability through 2011.

AMT exemption amounts 2010 2011
Married filing jointly $72,450 $74,450
Single or head of household $47,450 $48,450
Married filing separately $36,225 $37,225

Estate tax

The Act makes several major– though temporary– changes to the federal estate tax, including:

  • For 2011 and 2012, the estate tax exemption amount (the applicable exclusion amount) will be $5 million per person (the $5 million will be indexed for inflation in 2012); the top estate and gift tax rate for these years will be 35%
  • The $5 million exemption amount and 35% top estate tax rate will apply retroactively to 2010 as well, but for individuals who died in 2010, an election can be made to choose the estate tax provisions effective prior to this legislation (i.e., no estate tax, but modified carryover basis rules); an extended due date is provided for individuals who died on or after January 1, 2010, but before December 17, 2010.
  • Beginning in 2011, the gift tax (reunified with the estate tax) will have a $5 million dollar exemption amount; the generation-skipping transfer tax, with a $5 million exemption effective January 1, 2010, will have a 0% tax rate for 2010, and a 35% rate for 2011 and 2012
  • For 2011 and 2012, when one spouse dies, any unused portion of that spouse’s estate tax exemption amount may be transferred to the surviving spouse

One-year reduction in employee payroll tax

For the 2011 year, the employee portion of the Social Security retirement component of FICA employment tax is reduced by 2%. Normally equal to 6.2% of covered wages up to the taxable wage base ($106,800 in 2011), for 2011 this rate will be reduced to 4.2%. Self-employed individuals, who normally pay 12.4% for the Social Security portion of their self-employment taxes, will also benefit from a 2% reduction, paying the tax at a rate of 10.4% for 2011.

“Bonus” depreciation

The Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009 allowed an additional 50% depreciation deduction for qualifying property placed in service during 2008 and 2009. This additional depreciation deduction was allowed for purposes of the alternative minimum tax (AMT) calculation, as well as regular tax. The Small Business Jobs Act extended the 50% additional first-year depreciation deduction for one year to apply to qualified property acquired and placed in service during 2010.

This Act increases the bonus depreciation percentage to 100% for property acquired and placed in service after September 8, 2010 and before January 1, 2012. The Act extends bonus depreciation at the 50% level through 2012 (50% bonus depreciation will apply for property placed in service after December 31, 2011, and before January 1, 2013).

IRC Section 179 expense limits

Section 179 of the Internal Revenue Code allows businesses to elect to deduct the cost of depreciable tangible personal property acquired for use in the business in the year of purchase, rather than through depreciation deductions. Since 2003, several pieces of legislation have temporarily expanded the limits that apply to Section 179.

Most recently, the Economic Stimulus Act of 2008 and the American Recovery and Reinvestment Act of 2009 increased the maximum amount that can be expensed to $250,000 for tax years beginning in 2008 and 2009. This amount was reduced by the amount by which the cost of qualifying property placed in service during the year exceeded $800,000. For tax years 2010 and 2011, the Small Business Jobs Act increased the maximum amount that may be expensed under Section 179 to $500,000 and increased the phase-out threshold amount to $2 million.

For 2012, the dollar limit amount and phase-out threshold level were scheduled to drop to $25,000 and $200,000, respectively. This Act sets the IRC Section 179 expense limit for 2012 at its 2007 level–$125,000, with a phase-out threshold of $500,000–indexed for inflation.

Small business stock exclusion

Noncorporate investors may generally exclude 50% of any capital gain from the sale or exchange of qualified small business stock (generally, stock issued by domestic C corporations whose assets do not exceed $50 million) issued after August 10, 1993 (if a five-year holding period requirement and other requirements are met). The Small Business Jobs Act temporarily increased the exclusion percentage for qualified small business stock acquired during 2010 to 100%, and does not treat the excluded gain as an alternative minimum tax preference. Therefore, no regular tax or alternative minimum tax is imposed on the sale of qualified small business stock issued and acquired after September 27, 2010, and before January 1, 2011, and held at least five years.

This Act extends the 100% exclusion for one year–to qualifying stock acquired before January 1, 2012, and held for more than five years.

Education provisions

  • The Act extends the American Opportunity tax credit (known as the Hope tax credit before being significantly– though temporarily–modified by the American Recovery and Reinvestment Act of 2009). The American Opportunity Tax Credit’s higher maximum credit amount, increased income limits, expanded applicability to the first four years of college, and potential refundability, available in 2009 and 2010, are extended through 2012.
  • The current rules that apply to Coverdell Education Savings Accounts (e.g., $2,000 annual contribution limit, education expenses expanded to include elementary and secondary school expenses) are also extended through 2012. Without this change, the annual contribution limit would have dropped to $500 beginning January 1, 2011.
  • For the student loan interest deduction, increased income limits and the suspension of the 60-month rule, which would have expired at the end of 2010, are extended for 2 years (the deduction was, prior to 2001, limited to interest paid in the first 60 months of repayment).
  • The deduction for qualified higher education expenses, which expired at the end of 2009, is retroactively reinstated for 2010, and extended through 2011.

Other provisions–individuals

Provisions extended through 2012 include:

  • Itemized deductions and personal and dependency exemptions will not be reduced for higher-income individuals
  • “Marriage penalty” relief in the form of an expanded 15% tax bracket and an increased standard deduction amount for married individuals filing jointly
  • Exclusion of up to $5,250 in employer-provided education assistance for undergraduate and graduate education
  • Increased earned income tax credit (EITC) for families with 3 or more children, and increased EITC income limits for married couples filing jointly
  • Increased child tax credit amount with expanded refundability (15% of earnings above $3,000)
  • Expanded credit for child and dependent care expenses (increased limit on eligible expenses and maximum credit percentage)
  • An increased adoption tax credit and employer-paid adoption assistance exclusion amount; the credit also remains refundable

Provisions retroactively reinstated for 2010 and extended through 2011 include:

  • The deduction for state and local sales tax in lieu of state and local income tax on Schedule A
  • The $250 above-the-line deduction for elementary school and secondary schoolteacher classroom expenses
  • Increased contribution limits and carryforward period for contributions of capital gain property for conservation purposes
  • Tax-free distributions to charitable organizations from IRAs by individuals age 70 1/2 or older (up to $100,000 per year); a special provision in the Act allows qualifying individuals to treat a distribution made from an IRA to a charity in January, 2011, as if it were made in 2010

Provisions extended for one year (through 2011):

  • Increased monthly exclusion amount for employer-provided transit and vanpool benefits
  • Mortgage insurance premiums deductible as qualified residence interest, subject to an adjusted gross income (AGI) limitation

The Act also reinstates the tax credit for energy-efficient improvements to existing homes for 2011, but as it applied prior to the American Recovery and Reinvestment Act of 2009 (e.g., a 10% credit rate generally applies).

Other provisions–businesses

Provisions extended through 2011 include:

  • Research and development credit
  • Indian employment credit
  • New Markets tax credit
  • Employer wage credit for activated military reservists
  • Enhanced charitable deductions for contributions of food inventory, book inventories, and computer equipment
  • Work opportunity tax credit