Editor's Note

by Charles Rotblut, CFA

Editor's Note Splash image

We have a tax guide. It might be a month late, but “The Individual Investor’s Guide to Personal Tax Planning for Tax Year 2010” is in this month’s issue. You can find it on page 6.

Congress did not give us much time to update the guide. The House of Representatives passed the tax bill just three business days before this month’s issue was due at the printer. Fortunately, we had the Senate’s bill to work from, and, despite rumblings from several Congressmen, the House did not change it.

Since the bill was passed so late in the lame-duck session, we did have to make some assumptions about certain numbers. For example, the dollar amounts for the 2011 standard deductions and personal exemptions were not fully known at press time. We’ve labeled projections where they have been used, and our intent is to update our tax tables on AAII.com as the actual numbers are released.

This leads to another point: Most of the tax guides, software programs and other 2010 tax-year aids will have updates. As I state in our guide, the late passage of the new tax law and the logistics of physically producing tax aids make updates a necessity this year. Thus, be sure to check for them. You can also visit the Internal Revenue Service’s website (www.irs.gov) for new information.

There are not many changes in the new tax law relative to what was in place for 2010. The estate tax has been reinstated, though the $5 million exemption (which is portable to the surviving spouse) means the overwhelming majority of Americans will be exempt from it.

The biggest change is the reduction in payroll taxes. U.S. workers will pay 4.2% of their wages (up to $106,800) toward Social Security taxes in 2011, versus the usual 6.2% levy. This is a one-time tax break that will expire at the end of the year. This cut, along with breaks for business investment, led many economists to increase their U.S. GDP growth estimates for 2011.

There is rarely a free lunch, and this tax bill is no exemption. The total cost is $858 billion, which will have to be made up through a combination of higher future revenues and spending cuts. Circle December 2012 on your calendar now, because that is when the current law will expire. Given the forthcoming divided Congress, I am already expecting a lame-duck session to determine the fate of what we’ll pay in 2013.

As far as the current guide is concerned, I largely followed the format used by my predecessor, Maria Crawford Scott. For both the 2010 and the 2011 tax years, you will find tables with specific tax rates, deductions and exemptions and a tax planning worksheet. I’ve also included a special note about the new tax reporting rules that apply when a stock is sold (see page 8 for details). On AAII.com, you will find additional information about health savings accounts, tax exemptions for gains realized on the sale of your home and the dreaded alternative minimum tax (AMT).

Besides the tax guide, this month’s issue includes our annual review of the AAII stock screens and an update to the Model Shadow Stock Portfolio.

Performance information for all 63 screens we track on AAII.com is provided in our annual stock screens review. For this year’s analysis, senior financial analyst and Computerized Investing editor Wayne Thorp reconfigured the style groups used to classify each of the strategies to more clearly describe their investing styles. He also expanded the performance tables to include three-, five- and 10-year returns, along with bull and bear market returns. You can find all of the data, plus a listing of the best- and worst-performing screens, starting on page 25.

AAII Founder James Cloonan sold one stock from the Model Shadow Stock Portfolio and used the proceeds to buy three new stocks. You can see what those stocks were, get updated performance information on the portfolio and see his views on the markets on page 33.

Wishing you prosperity,
Charles

Charles Rotblut, CFA
Editor, AAII Journal
twitter.com/charlesrotblut

Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at twitter.com/charlesrotblut.


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