Tuesday, August 31, 2010 Edition #574

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1st Flash

These past couple of years we've been lamenting the death of the American Dream. We were referring to homeownership in the wake of the housing crisis.

Yet that's only an offshoot of the dream that has symbolized America throughout history. I'm talking about the dream that brought our ancestors to this soil in search of a better life for their children. I'm talking about the ability to achieve success through hard work and determination.

And this dream, too, may soon be shattered.

My grandparents left the Italian island of Sicily in the 1920s. They lived in a region considered backwoods by our standards. My grandfather used the skills he gained working the farm to open a butcher shop in Cleveland, Ohio where they settled.

He earned enough to buy a home and provide for his family. He was not considered wealthy by any stretch of the imagination.

But he never would have had the opportunity to become a business owner in his native land, nor own a home aside from a working farm. That was all he really needed to feel successful. He lived the true American dream.

Contrary to popular belief, most millionaires were not born into wealthy families. Only an estimated 20 percent inherited their fortune.

That leaves 80 percent who worked hard to earn their own cash, saved wisely and lived within their means to gain their status. Half are self-employed or business owners.

Most face the same money worries that keep the rest of us up at night. Can they continue to pay their mortgage? Can they fund their children's college education? Will they able to retire securely? After the bottom dropped out of the markets in 2008, their life savings took a drastic hit.

You can't always tell a millionaire by looks alone. Many favor their old, trusty car over a high-end luxury model. Many dress the part of their locale rather than the image portrayed in an executive board room.

I now live in a tourist area where the wealthy come to escape the trappings of their status, or just drop in to do a little big game fishing now and then. I'm always surprised to learn the eccentric- appearing man at the next table with his buttons fastened askew is among the richest folks in the county.

I'm equally surprised when these same folks are the subject of every tax increase suggested by Congress.

It's simply not true to assume the rich dodge paying taxes through calculated misuse of loopholes. The top one percent of our country's earners pay 40 percent of all income tax collected. And with upcoming changes to our tax law, that percentage will soon increase.

Here's a look at the new tax brackets proposed by Congress:

Single Married Filing Jointly 2010 Tax Bracket 2011 Tax Bracket
$0 - $8,375 $0 - $16,750 10% 15%
$8,375 - $34,000 $16,750 - $68,000 15% 15%
$34,000 - $82,400 $68,000 - $137,300 25% 28%
$82,400 - $171,850 $137,300 - $209,250 28% 31%
$171,850 - $373,650 $209,250 - $373,650 33% 36%
$373,650+ $373,650+ 35% 39.6%

Those in the higher income brackets will see an exponentially more significant increase in taxes, some up to six digits. The numbers will skew even further once the new healthcare legislation comes to fruition.

This is not politically based. President Obama himself earned nearly $5 million in 2009. Under this current proposal, he will pay over $200,000 more in taxes next year than he did last. To be clear, that number does not reflect the amount of taxes due. It's merely the projected increase over the prior year.

Those earners at the very top of the scale will not be too impacted overall. Yet some of those currently striving to reach their ranks may become disillusioned.

Some will continue to work hard and gladly pay their own fair share, and be happy to pitch in for those less fortunate.

But they aren't quite so willing to bail out those who mismanaged funds or made poor leadership decisions. They resent carrying along those that merely work the system for a free ride.

Many who could have made a valuable contribution to our society may deem it no longer worth their effort. That's a very real risk, no matter which side of the budget debate fence we sit on. And that's sad. It could well signal the end of our nation's claim as the Land of Opportunity.

2nd Flash

If you have children today, one of the major expenses you need to plan and save for is college tuition. Tuition prices have only gone up… and up. And in this day and age, it is never too early to start saving for your child's future. In the past few years, there has been a lot of talk about 529 Plans; however, many people only have a vague idea of what exactly they are or how they work. This article is designed to clear up some of the mystery and give you some basic information.

What is a 529 Plan?
A 529 Plan is either a college savings plan or a prepaid tuition plan sponsored by a state, state agency, or educational institution. The name is derived from section 529 of the Internal Revenue Code that gives one of these entities the authority to offer such plans. These plans allow anyone, at any income level, to put aside money tax- free for a child, or even for themselves, to help pay for college.

Basic 529 Plan Features
  • Earnings grow tax-free.
  • Withdrawals are tax-free if used for qualified education expenses. Qualified expenses will vary by plan.
  • The account owner is the person who opens the account and contributes money. The beneficiary is the person for whom the funds will be used.
  • The account owner maintains control over the funds for the life of the account.
  • Assets from one plan can be transferred tax-free to a different plan with a different beneficiary as long as the new beneficiary is a family member of the original beneficiary.
  • If you withdraw funds from the plan and use them for anything not considered qualified educational expenses, you will have to pay penalties.
  • Depending on the plan selected, there are federal tax benefits and possibly state tax benefits for contributions.
  • Plans are subject to the vagaries of the market.
There are two types of 529 Plans. They are College Savings Plans and Prepaid Tuition Plans. States, state agencies, and colleges offer different types of these two plans. It helps to have an idea of where the student may want attend (or at least in what state) before exploring available plans in that area.

A college savings plan allows students to set aside funds for college tuition and expenses. The funds grow tax-free and withdrawals are tax-free if used for qualified education expenses.
  • Qualified educational expenses usually include: tuition, mandatory fees, room and board, books, computers, and equipment.
  • Plans are open to adults and children.
  • You can enroll in a plan year-round.
  • There is no residency requirement, so you can purchase a plan from a state where you are not a resident.
  • Many plans have contribution limits in excess of $200,000.
A prepaid tuition plan allows parents to lock-in tuition at today's prices at eligible public and private colleges and universities and to set aside funds to pay for the tuition. As with a college savings plan, the funds grow tax-free and withdrawals are tax-free when used for qualified education expenses.
  • Qualified education expenses usually only include tuition and mandatory fees. Some plans may offer an option to include room and board or other expenses.
  • Many plans are backed or guaranteed by the state.
  • Most plans have age or grade limit requirements for enrollment and have a limited enrollment period.
  • Most plans have a residency requirement (either the account owner or beneficiary must have residency in the state where the account is held).
  • Contribution limits are based on the locked-in tuition rate, fees, and the number of years of attendance (two year school or four year school).
529 Plans are not federally regulated, so plans can vary widely. Each plan will have different rules, investment choices, pricing, and fees. It is important to shop around for the plan that best meets your needs.

There are heavy penalties for withdrawing money for non-educational expenses. Penalties can be as high as 10% to the federal government and state, in addition to federal taxes.

Most plans offer account owners a selection of different types of funds from which to choose to invest their money. Types can include money market fund, bond fund, blue chip stock fund, etc. Although you can select the type of fund you want, you cannot select the individual stocks that make up the fund.

This is just a brief overview of 529 Plans. For more information, check out the web sites of the
College Savings Plans Network or the Investors section of the Financial Industry Regulatory Authority. Information is also available on the Federal Citizen Information Center's web site or call 1-888-878-3256. For specific federal or state tax benefits, consult your tax advisor.

Financial News

Mixed economics news continues. Consumer spending increased 0.4 percent in July, exceeding expectations. Income rose by 0.2 percent in July, less than projected, but an increase. The savings rate, however, dropped. The continued increase in consumer spending is a positive sign for the economy. However, disposable incomes dropped for the first time since the beginning of the year when adjusted for inflation.

Housing prices reported by Fiserv Case-Shiller shows continued gains for home prices in June but at a slower pace. The composite-10 index rose 1.0 percent in June compared to 1.3 percent in May. The seasonality in home prices during the spring/summer months improves sales. So, adjusted data show a much smaller increase of 0.3 percent in June and 0.5 May and April. The year-on-year rate in June also slowed to 5.0 percent for both the unadjusted and adjusted index compared to increases of 5.4 percent unadjusted in May and 5.5 percent when adjusted. Despite the continued gains, the slowed growth in home prices, along with recent increase in houses for sale and decreasing home sales isn't a positive sign for the housing market. The up and down indicators don't make the stock market very comfortable, causing those watching to proceed with caution.

Today’s Market Rates
Tuesday, August 31, 2010
Dow Jones Industrial Average
(Down 413.33 or 3.96% since 12/31/09)
10,014.72 (+0.05%)
S&P 500
(Down 65.77 or 5.90% since 12/31/09)
1,049.33 (+0.04%)
(Down 155.12 or 6.84% since 12/31/09)
2,114.03 (-0.28%)
10 Year Treasury Bond Yield 2.477%  
British Sterling 1.5349  
Euro 1.2682  
On The World Wide Web

New rules for gift cards went into effect on August 22, 2010. These describe key protections, new limits on expiration dates, fee disclosures and restrictions. Find an online guide here.

It's hard to work your way to the top. Find out what leading celebrities did to survive before they found fame.

Celebrities are quick to jump on the bandwagon to raise money for Third World countries in need. But great need exists here at home also. People in the Appalachia region live in conditions we can't begin to imagine. Learn about their plight.

Tip of the Week

Previously, under a 529 Plan, taxpayers with children were encouraged to invest after-tax money into an account that increased with tax free withdrawals assuming the money was being used to contribute towards educational plans. However, in 2011, 529 Plan withdrawals will not be tax free when paying for the cost of computers or internet access. Coverdell ESA Plan will see changes as well. This plan is similar to the 529 Plan but is directed towards elementary and secondary educational costs. In 2011, the maximum contribution limit per year on this plan will drop dramatically from $2,000 to $500 unless Congress moves quickly.


"Open your arms to change, but don't let go of your values." - Dalai Lama

Today in History

1994 - The Irish Republican Army (IRA) announces a "complete cessation of military operations," opening the way to a political settlement in Ireland for the first time in a quarter of a century.

Flash Fact

The number of U.S. households with a net worth of $1 million or more, excluding their primary residence, grew 16 percent in 2009 to a total of 7.8 million American millionaires.

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