Here Come The $300 / $600 Checks! July 23, 2001February 20, 2017 The frugal Republican administration just spent tens of millions of our tax dollars dollars to send people letters telling them to expect their $300 and $600 checks. You may have gotten one yourself. ‘This mailing was a complete waste of taxpayer money,’ said Republican Congressman Peter Hoekstra, of Michigan, miffed not least because 500,000 letters went out with the wrong information, leading to further expense in correcting them. In any event, the checks have begun going out. The lower the last 2 digits of your Social Security number, the sooner yours will arrive. (Those ending in 00-09 arrive this week; 90-99 will arrive in late September.) If you run balances on high-interest credit cards, that is unquestionably the place to apply your windfall: pay off those balances! Not having to pay 21% (or even 11%) on a credit card, is like earning 21% (or 11%) tax-free, risk-free. Get off the debt treadmill! But if you don’t particularly need the money, you may want to join those who have decided to support some charitable or political cause they care about. One possible recipient (not my own choice) is the RNC. If you are pleased with the vision of George W. Bush, Trent Lott, Tom DeLay, et al, endorse your check over to the Republican National Committee and mail it to: Robert M. Duncan Treasurer Republican National Committee 310 First Street, SE Washington DC 20003 1. Note that political contributions are NOT tax-deductible (and that only U.S. citizens and permanent residents may make them). 2. Endorse your check: “Pay to the order of the Republican National Committee” (and sign it). 3. Include a business card or a note with your OCCUPATION and EMPLOYER for the RNC’s report to the Federal Election Commission. (This can be “homemaker/self” or “retired/none” — whatever applies.) Maybe include, also, a note to let the RNC know which of their policies you particularly applaud – ‘Drill the Arctic Wildlife Refuge!’ ‘Preserve the gun-show loophole!’ ‘Shut down the Korean peace process!’ ‘Scuttle the nuclear nonproliferation treaty!’ ‘Cut alternative-energy research!’ ‘Criminalize abortion!’ ‘Help Big Tobacco!’ ‘Abolish tax on America’s 4,000 wealthiest estates!’ (My personal favorite: ‘Global warming, global schwarming!’) You could of course just stick to the traditional ‘Cut taxes!’ and ‘Smaller government!’ But that’s getting a little frayed around the edges. For one thing, the federal payroll got significantly bigger under Reagan/Bush, not smaller. It was under Clinton/Gore that the federal payroll shrank sharply – both military and non-military. And it was under Reagan/Bush that taxes on the average American, when you include hikes in Social Security payments, went up, while only taxes on those at the top were slashed. I happen to think it was right to slash my taxes. The top federal bracket had been a preposterous 90% under Eisenhower, a nearly as preposterous 70% from Kennedy all the way through Johnson, Nixon, Ford and Carter, a still-too-high 50% in Reagan’s first term and then 28% in his second. Reagan deserves a lot of credit, I think, for slashing that 70% top bracket. It’s just that by going all the way down to 28% – much as we lucky few loved it – he overshot the mark. The result: Huge deficits and a quintupled National Debt. I think we got the balance about right under Clinton/Gore, leaving income tax rates unchanged for 98% of taxpayers, lowering them to even further-below-zero for the working poor (via an expanded earned-income tax credit), but raising the top brackets to 36% and 39.6%. Do I love paying 39.6% of my marginal income to Uncle Sam? I do not. But I did love the prosperity of the last 8 years, and the extraordinary feeling that we actually had begun, finally, to pay down the $5.5 trillion national debt. It’s not that I’m fixated on paying off the debt. As I’ve written many times: we don’t need to. But paying it down in good times will give us that much more cushion and flexibility to weather, or even largely avoid, bad times. So before you write, ‘more tax cuts!’ on your note to the RNC, remember that tax cuts have consequences. Already, deficits seem increasingly likely . . . which could lead the bond market to demand higher interest rates, your adjustable mortgage payment to rise, the dollar to weaken, imported products to become more expensive – just think back to the last Bush economy. The Bush tax cut, let alone all the time bombs it contains down the road, will pretty much put an end to significant debt reduction. It was nice while it lasted. That said, I recognize many of you disagree with me. I really do invite those of you who are excited by the direction that Bush / Lott / Helms / Armey / DeLay are taking the country to send your refund checks to the RNC. For those of you not so inspired, there is a whole different set of groups to whom you might endorse your check. (See, for example, the set of choices suggested at RejectTheRebate.com.) Your church, your child’s school, Indian earthquake relief – the list is practically endless. Kathryn Lance: ‘A colleague has suggested that we all send our $300 tax refunds as donations to the Democratic Party. Great idea, or what?‘ Well, perhaps not surprisingly, I do think that is a great idea (and Kathryn was only one of several of you who have suggested it to me). The DNC is probably the one place, above all others, that President Bush, Karl Rove, et al, would not like to see people send their checks. If this appeals to you, you might want to print this out or address your envelope now to have handy when the great day arrives: 1. Remember that political contributions are NOT tax-deductible (and that only U.S. citizens and permanent residents may make them). 2. Endorse your check: “Pay to the order of the Democratic National Committee” (and sign it). 3. Include a business card or a note with your OCCUPATION and EMPLOYER for the DNC’s report to the Federal Election Commission. (This can be “homemaker/self” or “retired/none” — whatever applies.) 4. Maybe include, also, a note – ‘Reproductive rights!’ ‘The environment!’ ‘The national debt!’ ‘Stem cell research!’ – to let the DNC know what you care about. (On the issue of stem-cell research – frustration over which, as you may have seen on the front page of the Wall Street Journal last week, drove one of our top scientists to emigrate to England where his efforts are ardently sought – may we assume that today’s opponents will, on principle, agree to forgo, and deny their children, the miracle therapies that will likely result?) 5. Include your e-mail address to help the DNC extend its effectiveness. 6. Mail to: Andrew Tobias Treasurer Democratic National Committee 430 So. Capitol St., SE Washington, DC 20003 Think of it as poetic justice. Unlike the RNC, the DNC actually needs the money.
Painting the Tape July 20, 2001February 20, 2017 Paul Morton: ‘I just noticed CN went up over 6% today, from 80 cents to 85 cents a share. And the number of shares traded so far was 1,900. Which to my mind begs the question how many shares of a stock have to be purchased before it sends the price up? I mean, I could afford to buy 1,900 shares of CN. I know it’s illegal to manipulate the stock by buying shares to send its value higher, and then dump them once the value is higher. But isn’t it possible to buy shares in a stock hoping it would go up. Then noticing it HAS gone up, perhaps unaware it has gone up because of YOU. Or maybe you’re aware of what caused the shares to go up after the fact, but that wasn’t your intention on buying the shares initially. So you dump the shares at a nice profit. Sort of premeditation versus temporary impulse? Anyway, Calton seems in a place where one could almost single-handedly send the price up with little investment. It’s a chicken versus egg thing. Who is the finger to be pointed at and when?’ ☞ Well, the first thing to say about this, though off the point of your question, is that the big 71% profit in CN I was gloating about – for those of you who bought the stock a few weeks ago at $5.80, got that $5 return-of-capital dividend shortly thereafter, and then saw the stock open at $1.40 a day or two later (thus effectively turning your 80-cent risk into $1.40 in just two or three weeks) – that awesome profit has now shrunk to zero with the stock back around 80 cents. I know at least one of you did sell at $1.40. Mazel tov. For the rest of us, we’ll just have to see how this speculation turns out. But that’s not what you were asking. The answer to what you were asking is: forget it! In the first place, as you point out, stock manipulation is illegal. More practically, your plan would not work. Yes, by buying 1,900 shares of the stock, you could boost its price, paying (in this example), 85 cents for most of it . . . plus a commission, which can be as low as $13 on a limit order at some deep discount brokers, plus another $13 to sell, but as much as $38 each way – $76 total – at other discount brokers that charge a 2-cent-a-share minimum. (That would be a 4% handicap to overcome.) The problem comes in when you go to sell. Just as a purchase of 1900 was enough to drive the stock up, so you would have paid 85 cents for most of it, a sale of 1900 shares is likely to drive the price down. You might sell the first 100 or 200 or even 500 shares at 85 cents, just as you bought the first 100 or 200 or even 500 at 80 cents. But the balance might well get sold at 80 cents, just as most of your purchase was completed at 85 cents. So what have you accomplished? You bought the stock at 85 cents plus commission and sold it at 80 cents minus commission. You had the fun of seeing your transactions move the market. But you lost money. What some people do attempt to do is ‘paint the tape,’ perhaps in secret concert with a pal or two. They create a flurry of unusual activity in a stock, which attracts the attention of folks who sit mesmerized by such things (in the old days, a narrow ribbon of ticker-tape spewing out of a machine; these days, a narrow ribbon of type dancing across the TV screen or computer monitor), and who think, ‘Gee, something must be going on. Someone must know something. I’ll jump on board.’ That makes the activity and upward spike in the stock price even more noticeable, attracting other momentum players, chart readers and assorted riff raff who care nothing about value and are just in it as a video game – and before you know it, there’s a full-fledged little rally going on in this stock (and maybe some short-covering, too, by nervous, soon-to-be-panicking, short-sellers). So now the stock is really on a roll, CNBC commentators are trying to come up with knowing one-line explanations (‘expectations of street-beating third quarter earnings’), and it’s easy for you and your pal(s) to sell the shares you traded back and forth to get this going. But your buying 1,900 shares of CN, and driving it’s price – $1.40 a couple of weeks ago – up to 85 cents from 80? Nah. Not gonna attract any interest at all. Rarely, even if you made a concerted, illegal effort like the one above, would you be able to ignite enough of a rally to justify your costs and economic risks – let alone the criminal liability. Fun to think about, though, isn’t it? In an earlier millennium, much the same sort of thought was put into turning baser metals into gold. Rejected Hallmark Card (or so the spoof goes): My tire was thumping…. I thought it was flat…. When I looked at the tire…. I noticed your cat… Sorry.
Follow-Ups July 19, 2001February 20, 2017 MONEY MARKET FUNDS Stephen Gilbert: ‘A reader asked, ‘What do you do for a money market account?’ And you answered, ‘I don’t pay much attention to this. I just use the ones that come linked with my brokerage accounts.’ This from the guy who once wrote that you could make more by buying ketchup in cases on sale and keeping it under the bed? I keep my money market funds in a Vanguard Treasury money market account. It yields 40 or 50 basis points more than Schwab’s equivalent account, and is not taxed by the state. (California asks for 9.3% of my income.) Maybe I keep too much in my money market fund, and maybe I only earn $250 extra a year, but I’d rather have it than let Charles Schwab keep it. I don’t think Charles needs the extra money anyway.’ ☞ Sounds good to me. It’s not that I’m no longer frugal. I am now sporadically frugal, where once I was maniacally so. The trick is to be maniacal when you’re young, so you can afford to be sporadic when you’re older. PRICELINE Mike da Mailman: ‘You are so correct about priceline. We have used them 3 times. I just got round trip tickets from Sacramento CA to Norfolk VA for $225 instead of $575. Works for me. Spread the word so they don’t go the way of other dot.coms.’ AIRPORT PARKING Jim Maloney: ‘Your suggestions for ways to save money are often on-target. However, the airport parking one didn’t pan out. I am flying out of LAX for an 11-day cruise and needed long-term parking near the airport. When I entered my data in their system I received two quotes for $99 for both companies — 105 Airport Parking and Park Air Express (which are actually owned by the same company). However, when I went directly the Park Air Express website they were offering parking at $7.99/day with an internet coupon of 1 free day. So the total price becomes $79.90 versus the AirportParkingLots.com price of $99. It pays to shop around.’ ☞ Indeed it does. ICE COLD DE-LITES Chuck Smith: ‘Never fear. I won’t take the last box of GOOD HUMOR ORIGINAL POPSICAL BRAND SUGAR-FREE TROPICAL ORANGE CARRIBBEAN ICE BARS. Instead, I will purchase LIFESAVERS SUGAR FREE POPS THAT HAVE ONLY 10 CALORIES PER POP. See attachment.’ ☞ I am very psyched. I couldn’t find a URL to show you the attachment, but we are talking here about one brilliantly colorful set of 12 Lifesaver-flavored single-stick ice pops. What time does the Food Emporium open? I’m there. FREEZY MATH Mark Roulo: ‘You write: “Fifteen calories . . . Have one every ten minutes for an hour and you’ve burned twice as many calories (just by breathing) as you’ve consumed.’ But 15×6 = 90 calories/hour. Twice that = 180 calories/hour by breathing . . . 24 hours x 180 = 4320 calories/day. This seems high.’ ☞ You’re right. I meant heavy breathing.
The $500 Billion Popsicle July 18, 2001February 20, 2017 I am of two minds about this. If I tell you, you might get the last box in the store, leaving me high and dry. But if I don’t tell you, there might not be enough demand to make it worth the store’s while to keep them in stock. What to do? What to do? Oh, all right. But if you get to the freezer compartment and see just one box left, I want you to wait until they restock: GOOD HUMOR ORIGINAL POPSICAL BRAND SUGAR-FREE TROPICAL ORANGE CARRIBBEAN ICE BARS. Fifteen calories, no fat, each one a guilt-free de-light. Have one every ten minutes for an hour and you’ve burned twice as many calories (just by breathing) as you’ve consumed. Thorsten Kril: ‘I discovered a simple rule: once a company reaches $500 billion or so in market cap [as Good Humor may, when the word gets out], it will turn south. I sold my CSCO and INTC on that basis last summer. MSFT I missed – it had already dropped from $500B to $250B when I discovered the rule. I never owned GE, but it looks like a good candidate for my rule, too. And yes, I know, rules stop working when you discover them.’ ☞ Yes, usually they do. It may be a while before we have a chance to test this one again, though. David Smith: ‘I read No Such Thing As a Bad Day. It was very moving, and I enjoyed it. If you ever get a chance, read Trashing the Planet and/or Environmental Overkill by Dixy Lee Ray. They’ve really made me think.’ Barry Raine: ‘You may want to tell your readers about airportparkinglots.com a sort of national network of airport parking lot services in and around many airports all over the US. The deal is that if you make advanced reservations for a spot, you save a huge amount of money as I did at Bradley International in Hartford when I needed a last minute flight. $(25 for eight days) Also, I bought the ticket (from Hartford to New Orleans roundtrip on Continental) through lowestfare.com and only paid $207 with only a 36-hour advance purchase.’
Dog, Gain, Link, Link July 17, 2001February 20, 2017 I suppose you’ve seen the e-mail about the new canine breeds (breed a Collie with a Lhasa Apso and you get a Collapso, a dog that folds up for easy transport). If not, the only one you need be aware of, at least for now, is the Newfoundland crossed with a Basset Hound. That’s right: a Newfound Asset Hound. (Come December, you might check out the Pointer crossbred with an English Setter to produce a Poinsetter, the traditional Christmas pet.) Ralph Sierra: ‘I don’t understand your July 11 column [about the guy with the $150,000 capital loss]. On the one hand, you say he can, ‘offset $3,000 of his income each year for the next 50 years,’ but on the other you say, ‘the first $140,000 or so of gains, should he happen to realize any, will be ‘tax-free.’ I’d heard of the former provision, but not the latter.’ ☞ Let’s say you have $150K loss in 2001, only $3,000 of which you can ‘use.’ You carry forward the rest to 2002. Now let’s say that in 2002 you sell something for a $100,000 gain. Do you pay tax on that gain? No! Because you still have a $147,000 loss to offset it. In that sense, the $100,000 gain is tax-free. So in 2002 you use up $100,000 of the big tax loss carryforward, plus another $3,000 to lower your taxable income . . . and you would still have a $44,000 loss to carry forward to 2003. Thanks to Paul Lerman for this link to a Philadelphia Inquirer editorial concerning my college classmate Elliot Abrams’ appointment at the National Security Council. The essence of it: ‘It is hard to imagine someone less suited to be the council’s senior director for democracy, human rights and international operations. Manuel Noriega? Don King? The hiring of Mr. Abrams – who makes Jesse Helms seem like a milquetoast – mocks the President’s saccharine pledge of civility.’ And thanks to several of you for this affecting piece from a Minnesota Mom in Sunday’s Minneapolis Star Tribune (‘Does Jake ring a bell? Not for the Salvation Army anymore’). It follows in the wake of the Bush administration’s quiet deal to support job discrimination at the Salvation Army in return for $110,000 a month in lobbying efforts – a deal quickly backed off of once it came to light.
QUIDS, Pros, and Cons July 16, 2001February 20, 2017 George: ‘I found a stock that pays an 8% dividend. I am new to this. What is the difference between this type of security and a CD? (I am sure it’s not FDIC insured, but other than that.) The two I am referring to are called ‘quids’ – PGB and PEQ.’ ☞ QUIDS are Quarterly Income Debt Securities, issued by many utility companies to cope with a changing environment (‘laughingly referred to as ‘deregulation,” reports the estimable Less Antman, ‘by people intent on blaming the free market for recent disastrous changes in government regulation of utilities’). Portland General Electric Company 8.25% (PGB) and Potomac Edison 8.00% (PEQ) are two examples. They are shares of preferred stock that pay quarterly interest . . . unless the company wants to not pay dividends for a while, in which case it may defer them for up to five years (just tell your landlord to wait, ‘it’s coming’) . . . and that mature in 20 to 50 years . . . unless 8% turns out to be more than the company need pay to borrow, in which case, after five years, it can simply call in your shares and borrow someplace cheaper. So you are on the hook to the utility for 20 to 50 years, but the utility is on the hook to you for no more than 5. Of course, you can always get off the hook by selling your shares in the open market. But these shares are not likely to rise to much of a premium even if interest rates decline (buyers will know they can be called), and could fall to a major discount if the company got into trouble or if the general level of interest rates rose. (Why should anyone pay much for your rotten 8% when they can get, say, 10% down the street?) What’s more, if the utility went bankrupt altogether, your claim would come after everyone else except the common shareholders. You might not get a dime. So, no, they’re not CDs! And if you do buy them, and they do decide to defer interest payments for a few years, note that you may still have to pay taxes, currently, on the money you won’t receive until later. And it’s not just QUIDS. All this is basically true of MIDS, MIPS, QUICS, QUIPS, TOPrS, and TruPS. The name for the entire group is FRCS (Fixed Rate Capital Securities). The pros who developed these, perhaps hoping to entice unsophisticated investors like George, may be known in some circles (suggests Less) as Promoters Routinely Inventing Confusing Securities.
My Lucky Day! July 13, 2001February 20, 2017 So I’m going to Omaha, and the Sheraton offers me a $129 weekday special off the normal $185 rate for this nice room. I book it, but then offer Priceline $74 (which becomes $80 with their $5.95 service charge) for any 3-star hotel in downtown Omaha. Five minutes later, my offer is accepted and I have a room – at the same Sheraton. I call to cancel my $129 reservation and go with Priceline’s $80. The one big disadvantage, other than not getting the frequent guest points, or whatever, is that the reservation is nonrefundable. So if I were to cancel the trip, I’d be out $80. Only use Priceline for trips you wont cancel. But gee? A $185 room discounted to $129 but, for me, $80? That seems like a $49 saving, but it’s actually $56.37, because the 13.4% room tax is levied on only $74 instead of $129. Meanwhile, those of you following Calton (CN) see that my triumph was short-lived. Yes, we got our $5 dividend. And, yes, the stock then opened the next day at $1.40 – giving those of us who bought at $5.80 or so a quick 60-cent gain on an effective 80-cent investment. But if you didn’t get out on the open, you saw the stock fall back quickly and close yesterday at 96 cents. What’s more, it turns out I was wrong, and rather than having a bit more than $2 a share in cash, CN now has a bit less – barely $8 million, if that, divided over 4.2 million shares, give or take. So the cautions in last week’s gloating column were real. This company really could blow through its small pile of remaining cash, leaving us shareholders penniless. But for the same reasons I didn’t sell at $1.37 or $1.40, I’m certainly not selling at 96 cents. I’d only sell at this price if I couldn’t afford to see the stock go to zero. Happily, because of a lifetime of deeply discounted hotel rooms, I can afford to see it go to zero. And probably will. (That gloating column was the one in which I revealed the mysteries of the forgotten bread, a common human experience. Herewith another small revelation: That contact lens that fell off your finger as you were leaning over the sink, putting it in your eye? The one where you instantly fear it’s gone down the drain? It’s not in the sink at all. It’s on the ledge of the sink, or on the faucet handle! Those of you with 20-20 vision will have no idea what I’m talking about. But for the rest of us vainglorious souls? I’m certain it’s in the sink, I see all those lens-like water droplets in the sink, I was leaning over the sink, I heard a slight ‘plip’ coming from the direction of the sink – but no, when I am about to give up hope, I see it sitting there on the faucet handle, or the ledge above the basin. It’s a law of physics yet to be explained. And, if you ask me, another reason for Seinfeld to regroup for a new season.)
Don’t Buy My Book July 12, 2001February 20, 2017 No, I’m not punishing myself for failing to post a column last night (although that was very, very bad and your subscription has been extended). Rather, I am advising you that the reason I missed the column is that I was working on the latest update to The Only Investment Guide You’ll Ever Need, which should be out around the end of the year. I’d feel a little rotten if you bought the current edition only to discover it failed to take account of the new tax law, or other breakthroughs in financial technology, and that a new one was right around the corner. Joe Cherner (who shorted a few shares of GE around 52): ‘Would you rather own all of GE or all of Sony, NEC and Hitachi and have $350 billion left over?’ ☞ Can I just have the $350 billion? GE is a wonderful company, and is likely to be well-run even post-Jack Welch. But Joe makes an interesting point. Should this colossus really be valued at 34 times earnings? Will it be nimble enough to grow its profits at a rate to justify that? A company selling at 34 times earnings is, essentially, providing you with a 3% return. (Right? You are paying $34 for each $1 of earnings, or about $100 for $3 of earnings – a 3% return.) You don’t get 3% on your money; currently, you get a dividend of about 1.4% (minus whatever taxes you have to pay), with the rest of your share of the profits reinvested for you in exciting new ways to make the earnings even bigger in the future (like factories to make more Compact Fluorescent Light bulbs, please). Yesterday, for example, GE reported a 15% jump in quarterly earnings. But the question is . . . and I don’t know the answer . . . how long can GE keep growing at an above-average pace? If it could keep growing at 15% for the next 100 years, it would be more than a million times as large in 2101 as today, which isn’t impossible for a little hamburger stand with $60,000 in sales – McDonalds could certainly grow to $60 billion in sales by its 100th anniversary – but would be a neat trick for a company like GE with sales, today, of around $130 billion. (They would have to grow to $130 quadrillion, which would be about 400 times the current total gross domestic product of Planet Earth.) Just how sharply GE’s earnings growth will tail off, or even someday reverse, is beyond our knowing. If earnings keep growing at 15% for the next five years, they will have doubled. So if the stock didn’t budge for five years, it would then be selling at 17 or 18 times earnings and ‘returning’ 6% on the same share price instead of 3%. You would have done better in a Treasury Bond. The hope of those who are buying today, of course, is that the stock will budge nicely over those five years, as people keep bidding it up, anticipating ever-higher earnings. And they well may. After all, if GE grew at a still healthy 9% a year for the next century, it would only become 5,000 times as large as it is today, not 1 million times. And does anyone doubt GE can do that? All I know is that GE was a better short at 60, six months ago, or at 52 a few weeks ago (where I, too, shorted a few shares), than it is today, at 46. And that shorting stocks is a loser’s game for most people (me! me! me!). But that Joe is right: GE does still seem pricey.
The 50-Year Loss Carryforward July 11, 2001February 20, 2017 Dan Flikkema: ‘I recently met a casualty of the market. He was temporarily rich selling Celgene stock (CELG) for a big capital gain in 2000. His ‘advisor’ then invested all the proceeds in another company which promptly went bankrupt in 2001. He now has a tax bill of $40,000 on his 2000 gain, no cash left, and a capital loss of $150,000 which he apparently can only use to offset $3,000 of his income each year for the next 50 years. Individuals cannot carry back capital losses to offset a previous years income the way corporations can. Does that seem fair to you? Do you know of anything this person could do? Woody Allen was right when he said that a stockbroker is someone who invests your money until it is gone. Apparently you can lose all your money and then some.’ ☞ Ah. If we could only turn back time and shake this fellow by the lapels. What was he thinking? But we can’t, unless we fly very, very, very fast, and that’s that. As to the taxes, one obvious thing to say is that, no, it doesn’t seem fair not to allow us to ‘carry back’ our capital losses as well as carry them forward, so that his 2001 loss could be offset against his 2000 gain. But we can’t, no matter how fast we can fly, and that’s that. On the other hand, it may not be 50 years before your acquaintance realizes some capital gains against which to offset some or all of what, after the first year, will be his $147,000 ‘capital loss carryforward’ (and what, after the second year, will be his $144,000 carryforward, and then his $141,000 carryforward – each year using $3,000 of it to lower his taxable income). Indeed, for him, the risks of the stock market will, in a sense, be more worth taking than for the average guy, because for him, the first $140,000 or so of gains, should he happen to realize any, will be ‘tax-free.’ (This is not to say he should take imprudent risks. There’s always the chance, through bad luck or bad choices, he could just keep growing, rather than shrinking, his capital-loss carryforward.) Two other thoughts: He could marry a woman with lots of appreciated securities. Even without his tax-loss, this recommends itself if it would require divestiture of a current spouse. I believe his tax-loss carryforward could then be applied to her capital gains, if she choose to realize some and they were filing jointly. (I’m not a tax attorney or matchmaker, however, so this should be further researched before purchase of a ring.) Does your acquaintance have wealthy parents who are already each giving him $10,000 a year in order to shrink their taxable estate? (This is the most any one person can give another without triggering reporting requirements and the gift tax.) If so, they might be able to give him that $20,000 a year not in cash but in appreciated securities, if they happen to have some. His “cost basis” for the shares would be whatever theirs had been, so if each $20,000 chunk had, say, a cost basis of just $4,500, he’d have a further $15,500 capital gain each year against which to offset the loss, and the whole thing would be used up in just eight years or so. That might or might not put him ahead of the game, depending on what happens with the estate tax and the treatment of appreciated securities at death. Sat this went on for eight years and then, tragically, both parents died. The size of their taxable estate would be unchanged whether they had given him cash or stock, so the gift tax would not be affected. But if they had given him cash, he wouldn’t have used up the rest of his loss carryforward . . . and yet, under current law, the appreciated securities in his parents estate would pass to him free of capital gains tax (because he could elect to have the “basis” of their shares “step up” to the price as of their death). So he would have used up his loss carryforward for . . . what, exactly? Nothing, if I’m thinking this through clearly (and I know I can rely on any number of you to set me straight if I am not). So as with most fancy tax maneuvers, I wouldn’t rush into this one, either. Mainly, though, I repeat – what was he thinking?
Money Market Funds July 10, 2001February 20, 2017 David Jelinek: I’m looking at opening a tax-free money market account. Let’s say the going rate for taxable money market funds is 4.75% and that I’m in the 36% federal bracket. That means that my goal is to find a tax-free MM account yielding at least 4.75% * (1-.36), or at least 3.04%. Now here are a few issues: 1. When I find the yield for a tax-free MM acct, that yield isn’t going to stay the same. So how do I judge? Should I just make a decision based on the current taxable and tax-free yields and figure they’ll stay about the same relative to one another? ☞ Yes. That’s a reasonable, if imperfect, assumption. 2. Should I even bother getting a tax-free MM acct in the first place? Maybe I’ll beat that 3.04% figure by 40 or 50 basis points if I’m lucky. Do you think that’s really worth it? ☞ No. No one should ordinarily keep huge amounts in a money market fund, and therefore, the difference in absolute dollars is pretty trivial, and not worth your time worrying about. Fifty basis points on $10,000 is $50. 3. It’s aggravating to think that I won’t even keep pace with inflation. I hate the way the tax code works. ☞ It’s much better in Burundi. Well, on balance, maybe not. To beat inflation safely and with a tax advantage, consider Series I savings bonds. 4. I found something very puzzling about the whole performance vs. expense ratio deal: According to imoneynet.com, two of the best performing tax-free MM funds are Strong Municipal MMF and Vanguard Tax-Exempt MMF. As it happens, Strong has beaten Vanguard every year since 1994 (which is the earliest year for which I have data). And yet, Strong’s total expenses total a whopping 1.1% while Vanguard totals .34% !!! ☞ You are reading the numbers wrong – adding the management fee to the expense ratio. Actually, the management fee is part of the expense ratio. Based on the web sites you linked me to, Strong’s municipal money market expense ratio is 0.6% and Vanguard’s is 0.18%. So Strong is consistently outperforming Vanguard by about 1% every year before expenses!?! Is the muni market THAT inefficient? What the heck is going on here? ☞ I haven’t studied it, but Strong may be taking a little more risk in the nature of the securities it will buy and the length of maturities it will accept. What do you do for a money market account? ☞ I don’t pay much attention to this. I just use the ones that come linked with my brokerage accounts.