During the first two years of the economic recovery the richest 7% of American households got richer as the remaining 93% saw their average net worth decline.  Part of the problem was that many middle class jobs were lost during the recession only to be replaced by low-income jobs – a fact documented in the Washington Post article, “How the Recession Turned Middle-Class Jobs into Low-Wage Jobs.”  In fact, the average net worth of the 111 million households in the less affluent 93% fell to roughly $134,000 from $140,000

What about the top 7%?  The top 7% of households ended up with 63% of the nation’s household wealth in 2011 – which was up from 56% only two years earlier.  Moreover, the top 7%, or the 8 million American households who make up wealthiest 7%, saw their average wealth rise from $2.5 million to an estimated $3.2 million.

One final way to view the wealth disparity in the United States is the fact that the average wealth of the top 7% of households was almost 24 times that of those in the less affluent group in 2011 – whereas at the start of the recovery in 2009, that ratio was less than 18 to 1.

In Personal Finance, Turning Money into Wealth, we really don’t discuss income equality, but it is out there – and it may well have an impact on the tax code in the future – particularly in the tax rates for the wealthy, estate planning, and investment taxes.

Class discussion:

1. Do you feel the government should do something to impact this disparity or do you feel that income redistribution should not be a role of the government?

In Chapter 1 of Personal Finance, Turning Money into Wealth, we introduce Principle 9: Mind Games, Your Financial Personality, and then in Chapter 11 we look at how your financial personality can get in the way of successful investing.  The discussion in The Wall Street Journal Report looks at things like how investors rely on experts, base decisions on opinions rather than facts, trade too much, are overconfident and lose out by paying commissions. The discussion focuses on many different dimensions of “the financial personality” and why many individuals simply are not good investors.  Where do you think you fit in?   The more you know about behavioral finance the more likely you are to avoid some of the common investing pitfalls.

Class Assignment and Discussion:

1.  Listen to the streaming discussion titled “How to Tame Your Emotions When Investing.”  One of the items discussed was the fact that investors ignore taxes when making investment decisions.  What did Terrance Odean say about this?  If you invest, have you ever thought about the tax implications when making an investment decision?

2. Take one item that was discussed in this streaming discussion that you felt was interesting and be prepared to discuss it in class.

A recent article in the mint.com blog titled “7 Signs You are Living Beyond Your Means” looks at several key indicators that might help you realize that you might be heading in that direction.  If you find out that you are on that road, what can you do about it? An understanding of setting up a budget and putting together a plan that will insure that you bring in more than you spend is a good place to start and that is addressed in Chapter 2 of Personal Finance, Turning Money into Wealth. Then in Chapter 5 we introduce the concept of “paying yourself first” which starts by automating savings – that is, having a certain percentage of your income automatically deducted from your paycheck and placed into your savings account.  As we said at the start it’s hard to save and automating your savings makes it easier.  This might be the start of keeping your finances under control.

Class Assignment and Discussion:

1. Take a look at the article “7 Signs You are Living Beyond Your Means,” have you ever done any of these things?  Come up with your own “sign” that you are living beyond your means. .  Be prepared to discuss your response to both of these in class.
2. What are you currently doing to keep track of your financial situation?
3. How would “paying yourself first by automating your savings” help you to control your spending?

If you understand your financial personality and how it impacts your investment decisions, you can use that understanding to make better investment decisions – and keep from making mistakes driven by psychological pulls.

How well do you know yourself?  A recent article in The Wall Street Journal, “Investor, Know Yourself” offers a quiz that will give you insights as to how your financial personality is driving your decisions one way and the other.  You might be surprised.

Class Assignment and discussion:

1. Work through the article, “Investor, Know Yourself” in The Wall Street Journal. Be prepared to discuss your response to each of the questions posed.  What did you learn about your financial personality?

2. Are you more of a risk-taker, or are you more risk averse than the average American (question 1 in the article)? What does your response to each of the following say about your financial personality:  (2) your propensity for regret, (3) confidence, (4) conscientiousness, (5) extroversion, (6) agreeableness, (7) openness, and (8) anxiousness – and how did you respond to the 8 questions in the article?  Be prepared to discuss this in class and give some specific examples of actions that are consistent with your financial personality.

Could that really be true?  In his current best seller, The Money Code, Joe John Duran proposes three “money minds” which control the ways in which we spend, save, and think about finances.  Once you understand your financial personality, or “money mind” as the author calls it, you can use its strengths and, with an awareness of its deficits, avoid financial mistakes that you might otherwise make.

To help you determine what types of behavioral biases you might have, the author has put together an online financial personality quiz.  This quiz doesn’t take long, and at the end you’ll be classified a protector, a pleasure-seeker, or a giver.

Class Assignment and discussion:

1. Take the Money Minds Financial Personality Quiz.  Were you classified as a protector, a pleasure-seeker, or a giver?  Does this make sense to you?  Be prepared to discuss this in class and give some specific examples of actions that are consistent with your financial personality.
2. Repeat question 1, but instead of discussing your insights in class, write a one- page paper that discusses why you fit or do not fit the assigned financial personality.  Also give some specific examples of actions that are consistent with what you feel is your financial personality.

To say the least, the fees on these loans are quite high, costing from $10 to $15 to borrow $100 for only two weeks.  Recently Pew Charitable Trusts came out with a report on them, “How Borrowers Choose and Repay Payday Loans.”  The findings were startling.  They found that over half of the borrowers were not borrowing for temporary emergencies, but rather dealing with persistent shortfalls, and that only 14 percent of borrowers can afford enough out of their monthly budgets to repay an average payday loan.

Discussion questions:

1.  Read through the Overview and Key Findings of “How Borrowers Choose and Repay Payday Loans” – what do you think of payday loans?  Do you think they should be regulated in some way?  Why or why not?

2.  Principle 1: The Best Protection Is Knowledge – will hopefully give you the edge in your personal financial life.  You will know to question, even the bank’s information if it seems too good to be true.  What advice would you give to a friend who told you she was going to her bank to get a “deposit advance loan”?

While maintaining a rainy day fund is just common sense, not everyone has one.  In fact, according to a survey by Netcredit.com, close to half of those surveyed indicated they are living paycheck to paycheck, and of those in their 30s, 62% were concerned about living paycheck to paycheck.  Moreover, according to a recent FDIC study, nearly half of Americans cannot access $2,000 in 30 days to meet an emergency.

Discussion Questions:

1. Take a look at the 2012 NetCredit Survey, with today’s economic situation, what are the most common primary financial goals?
2. Looking at the 2012 NetCredit Survey, where would most people turn to for cash to manage a financial emergency?  Where would you turn to for cash if you needed it for an emergency?  Be prepared to discuss this in class.
3. Take a look at Your Survival Guide for Tough Times.  On page 6 of the Survial Guide there is a listing of unwise practices to avoid.  Which one of those do you think is most dangerous to your financial health?  Be prepared to discuss this in class.

It’s hard to say in advance who might handle their money well and who might not.  For child actors, it is even more of a problem.  Their future financial security is dictated by what their parents or financial planners do with their earnings – and it doesn’t always end pretty as the article “Financial Mismanagement: Child Stars Who Lost it All” shows.

One of today’s child stars is Honey Boo Boo from the hit TLS reality show “Here Comes Honey Boo Boo.”  If you’ve seen the show, you might not have that much confidence in Mama June’s ability to handle Honey Boo Boo’s money – but you’re wrong.  Apparently Mama June is one of those people born with a great financial personality.

According to the article “Mama June Sets Up Trust Fund For Honey Boo Boo & Daughters,” Mama June recently told TMZ that the family receives between $15,000 – $20,000 per episode, and this is divided equally into accounts for the children: Alana “Honey Boo Boo” Thompson, 7; Lauryn, 12; Jessica, 15; Anna, 18, and baby Kaitlyn, and that “TLC puts the money into the girls’ trust accounts for me and then I get an e-mail telling me how much everyone gets. I want my kids to look back and say, ‘Mama played it smart. Not like those other reality TV people.’” Mama June when on to say, “You’re never gonna see me drive a Range Rover or a Mercedes. I’ll drive one if someone else pays for it. Never gonna live above my means.”  You’ve gotta like Mama June!

Discussion Questions:

1. After reading Principal 9 Mind Games, Your Financial Personality and Your Money in Chapter 1 of Turning Money Into Wealth, can you think of some things from your childhood that might have had an effect on how you handle your money?
2. If Mama June puts $4,000 into a trust fund at the end of each year for the next 5 years for Honey Boo Boo, then nothing after that, how much will it be for Honey Boo Boo have in 15 years if it grows at 9% per year?  (hint: let a $4,000 annuity (PMT) grow at 9% per year for 5 years, then determine how much it’s grown to – next, take that amount (now it’s just a lump sum amount, no longer an annuity) and let it grow for 10 years at 9%.)

Payroll Taxes:

For the past two years the employees’ share of payroll taxes were reduced by two percent, this lowered level of payroll taxes has ended with the new tax law. This change has a broad impact, affecting 125 million households – so almost everyone is hit by it. On average this two percent payroll tax increase amounts to $16.37 a week from take home pay, which is just about equivalent to the average gain in weekly wages experienced by workers over the past year.

Medicare Tax on Earned Income:

0.9% Surtax. The changes in Medicare stem from (1) a new 0.9% surtax on earned income for high earners and (2) a new 3.8% surtax on net investment income for high income filers. As a result of the Patient Protection and Affordable Care Act (PPACA) commonly called Obamacare, high-earners must pay an additional 0.9% Medicare payroll tax on wages above $200,000 for individuals and $250,000 for couples. This means for earners above that threshold, the current 2.9% Medicare payroll tax will be increased to a total of 3.8%. This surtax only applies to the employee’s portion of the Medicare tax, not to the employer’s portion. Employers will withhold the additional tax once an employee’s wages reach the threshold. For more on the Medicare tax on earned income go to the IRS website on the Additional Medicare Tax.

3.8% Surtax on Net Investment Income. There is also a new 3.8% surtax on net investment income impacting higher income individuals. This tax affects only individuals with more than $200,000 in modified adjusted gross income (MAGI), married couples filing jointly with more than $250,000 of MAGI, and separate filers with more than $125,000 of MAGI.   For example, let’s look at a taxpayer filing as a single individual who makes $180,000 in wage income plus $90,000 from investment income. The individual’s modified adjusted gross income is $270,000. The 3.8 percent tax applies to the $70,000, which is the amount above the $200,000 threshold, and the individual would pay $2,660 in surtaxes.

Personal Taxes:

Tax Rates. The Bush income tax cuts had been scheduled to be eliminated, but have instead been renewed for all but high-income earners. A 39.6% rate will now apply to taxable income over $400,000 for singles, $425,000 for heads of household and 450,000 for married couples filing a joint return.

The tax rates for 2013 are:

Marrieds:

If taxable income is                                             The tax is
Not more than $17,850                                          10% of taxable income
Over $17,850 but not more than $72,500          $1,785.00 + 15% of excess over $17,850
Over $72,500 but not more than $146,400       $9,982.50 + 25% of excess over $72,500
Over $146,400 but not more than $223,050     $28,457.50 + 28% of excess over $146,400
Over $223,050 but not more than $398,350    $49,919.50 + 33% of excess over $223,050
Over $398,350 but not more than $450,000  $107,768.50 + 35% of excess over $398,350
Over $450,000                                                  $125,846.00 + 39.6% of excess over $450,000

Singles:

If taxable income is                                       The tax is
Not more than $8,925                                         10% of taxable income
Over $8,925 but not more than $36,250         $892.50 + 15% of excess over $8,925
Over $36,250 but not more than $87,850      $4,991.25 + 25% of excess over $36,250
Over $87,850 but not more than $183,250    $17,891.25 + 28% of excess over $87,850
Over $183,250 but not more than $398,350 $44,603.25 + 33% of excess over $183,250
Over $398,350 but not more than $400,000 $115,586.25 + 35% of excess over $398,350
Over $400,000                                                  $116,163.75 + 39.6% of excess over $400,000

Household heads:

If taxable income is                                         The tax is
Not more than $12,750                                        10% of taxable income
Over $12,750 but not more than $48,600       $1,275.00 +15% of excess over $12,750
Over $48,600 but not more than $125,450     $6,652.50 + 25% of excess over $48,600
Over $125,450 but not more than $203,150    $25,865.00 + 28% of excess over $125,450
Over $203,150 but not more than $398,350   $47,621.00 + 33% of excess over $203,150
Over $398,350 but not more than $425,000   $112,037.00 + 35% of excess over $398,350
Over $425,000                                                   $121,364.50 + 39.6% of excess over $425,000

Standard Deduction.  Other changes include a slight increase in the standard deduction, with marrieds getting $12,200, if one spouse is age 65 or older this climbs to $13,400, and if both are 65 or older $14,600. For singles the standard deduction is $6,100, and $7,600 if they’re 65 or older. For household heads it is $8,950 plus $1,500 more once they reach age 65.  Finally, the blind receive $1,200 more ($1,500 if unmarried and not a surviving spouse).

Phaseout in Itemized Deductions. High-incomer earners not only face a higher tax rate, but also lose some of their itemized deductions for 2013. This is referred to as the Please limitation, named after former Congressman Donald Please. The limitation for 2013 will kick in on AGI levels that exceed $300,000 for joint filers and $250,000 for individuals, indexed for inflation. Income over the applicable amount will trigger an itemized deduction limit of the lesser of (a) 3% of the adjusted gross income above the applicable amount, or (b) 80% of the amount of the itemized deductions otherwise allowable for the taxable year. (It should be noted that the Pease limitation doesn’t apply to medical expense deductions, the investment interest deduction, casualty, theft, or gambling loss deductions.)

Personal Exemptions. Other changes include an increase in the personal exemption to $3,900 for filers and their dependents. Once again, this write-off is phased out for high-incomers, being cut by 2% for each $2,500 of AGI over the same thresholds for the itemized deduction phaseout.

Investments:

While the tax rate on capital gains and dividends remains the same for most taxpayers, it jumps to 20% for high-income taxpayers, with high income taxpayers defined as singles with taxable income above $400,000 and couples over $450,000. When you look at this increase coupled with the new Medicare surtax, this rate jumps to 23.8% for high income taxpayers. For others, the old 15% rate still applies, and filers in the 10% or 15% tax bracket still qualify for the special 0% rate.

Alternative Minimum Tax:

While the Alternative Minimum Tax or AMT did not go away, exemptions went up for 2013. For 2013 they jump to $80,750 for couples and $51,900 for both singles and household heads, up from 2012 by $2,050 and $1,300, respectively. It will also automatically adjusted for inflation in the future. In addition, personal tax credits, such as those for tuition and dependent care, will continue to offset alternative minimum tax liability.

Social Security:

As is the case every year, the Social Security wage base rises this year to $113,700, which is a $3,600 boost. As noted earlier, because of the expiration of the 2% cut in the employee Social Security rate and the 0.9% Medicare surtax on high-earners, Social Security taxes are on the rise.

In terms of benefits, Social Security benefits go up 1.7% in 2013, this is less than half of 2012’s hike. The earnings limits also change, going up this year. Taxpayers who turn 66 this year do not lose any benefits if they make $40,080 or less a year. Taxpayers who are at least 62 but are not 66 by the end of 2013 can make up to $15,120 before they lose any benefits. There is no earnings cap once a beneficiary turns 66. The amount needed to earn Social Security credits also changes, going up to $1,160 a quarter. Thus, if you earn $4,640 anytime during 2013 you will capture the full four quarters of coverage.

Medicare:

For 2013, the basic Medicare Part B premium increases to $104.90 per month. For higher income taxpayers (modified adjusted gross incomes for 2011 exceeded $170,000 for couples or $85,000 for single people), the Part B and D premiums are much higher, with the total surcharges on upper-incomers running as high as $297.40 a month.

Medical Deductions:

Deducting Medical Expenses. For 2013, the threshold for deducting medical expenses jumps to 10% of AGI for singles under age 65 and married couples who file a joint return, unless at least one of the filers is age 65 or older in which case the 7.5%-of-AGI cap applies.

Ceiling on Deductible Payins. For 2013, the annual ceilings on deductible payins to health savings accounts rose to $6,450 for account owners with family medical coverage and $3,250 for single coverage. HSA owners born before 1959 can put in $1,000 more. The limitations on out-of-pocket expenses (for example, deductibles and copayments) increased to $12,500 for those with family coverage and $6,250 for single coverage, and the minimum policy deductibles increase to $2,500 for families and $1,250 for individuals.

Long-Term Care Premiums. Taxpayers 71 or older can write off up to $4,550 per person and those 61 to 70 can write-off up to $3,640. For those 51 to 60 the maximum is $1,360, for those age 41 to 50 $680, and 40 and younger $360. In addition, the limit for tax free payouts under such policies increases to $320 a day.

Savings Plans:

401(k), 403(b), 457 Plans and SIMPLES. The maximum contribution is $17,500 for 2013, and for taxpayers born before 1964 it is up to $23,000. The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $5,500. The limit on SIMPLEs is $12,000, and taxpayers 50 or older in 2013 can contribute an additional $2,500. For more on 401(k) plans, check out the 401khelpcenter.com.

Contribution and income limits for IRAs and Roth IRAs. For 2013 the contribution limits for IRAs and Roth IRAs is raised to $5,500, $500 more than for 2012. Anyone who was born in 1963 or earlier can put in an extra $1,000. In addition, the income ceiling on Roth IRA contributions goes up. For 2013, contributions phase out for Roth IRAs at AGIs of $178,000 to $188,000 for couples and $112,000 to $127,000 for singles.

For 2013 the phaseout range for deducting an IRA contribution when you are covered by a retirement plan at work ranges from $95,000 of AGI to $115,000 for couples and from $59,000 to $69,000 for singles.

Education:

For 2013 the lifetime learning credit starts now phase out over the range from $53,000 to $63,000 of AGI for singles and $107,000 to $127,000 for couples. In addition, for 2013, the income caps for EE bonds tax free for education are higher, with the exclusion starts phasing out above $112,050 of AGI for married couples and $74,700 for singles and ends when AGI hits $142,050 and $89,700, respectively.

Adoption:

Adoption Credit.  For 2013, the adoption tax credit can cover up to $12,770 of costs, a $120 boost.   If the credit is more than a filer’s tax liability, the excess is not refundable.

When the adoption is for a special needs child, the full $12,770 credit is available, even if it cost less.

Continued Tax Breaks:

American Opportunity Tax Credit.  The American Opportunity Tax Credit was continued.

Mortgage debt tax relief.  Mortgage debt tax relief was extended.  As a result, home owners facing short sales, reduced loan principals, or foreclosures avoid paying taxes on any debt still owed to the bank.  If this tax feature had not been extended, the debt would have been taxed by the IRS as income.

State and local sales tax.  Another tax feature that was continued was the election to write off state and local sales taxes in lieu of state income taxes.

Teacher’s supplies. Also, the ability for teachers to deduct class supplies was extended.

If you’re in college now, chances are that you either have a pet or you’re going to get one.  After all, pets are comforting, and you’re away from home.  And let’s face it, you can probably get one pretty cheap.

There’s no question pets are great, but they come with a lifetime commitment as well as with some serious financial responsibilities.  If you’re like most people, it’s pretty hard towrap your head around the idea of a lifetime commitment let alone to look at a cute little puppy or kitty and see future financial responsibilities.  So what are those financial responsibilities?  If it’s a horse, according to the New York Times article “Animal Lovers, Beware of Ownership Costs,” you are looking at about $42,000 per year, and it doesn’t matter if you paid $500 or $1 million for the horse.  But most students don’t go for a horse, they generally bring home dogs or cats, and on occasion they’ll go for a bird or a tank of fish.  As we learned in Personal Finance Turning Money into Wealth, Principle 6: Waste Not, Want Not – Smart-Spending Matters, you really shouldn’t be buying something, or adopting a pet, when you don’t know the true cost.

The ASCPA provides a financial breakdown of the annual costs of caring for a variety of pets at its Pet Care Costs website.  In addition, Mint.com, using data from the ASCPA, has put together a great Infographic on the “Lifetime Cost of Pets.”

Discussion questions:

1. Have you ever adopted a pet, if so what kind, and in the process of choosing your pet did you give consideration to the cost of pet ownership?
2. What do you think the lifetime costs of a cat are?  How about a dog?