10 Tax Questions Received from Chris from the North

1. Is any form of bonus depreciation allowed for a new sleigh purchased before 12.31?
2. If Elves work on part-time basis can they be called independent contractors rather than employees?
3. Can the acquisition costs and maintenance costs of a uniform worn once a year be deducted?
4. Can cookies and milk a gift or income under the disinterested property test under Oberstein?
5. If the cookies and milk are income how should they be valued?
6. Are all of the expenses associated with reindeer maintenance deductible or are they pets?
7. What method of depreciation is proper for a toy factory building?
8. Is the North Pole an Enterprise Zone?
9. Is the North Pole a foreign country for tax purposes?
10. If the taxpayer asking these questions resides in Florida for more than 183-days a year and there is no income-tax treaty with the North Pole, is the taxpayer a resident for tax purposes regardless of his citizenship?

Bonus questions: Is the taxpayer engaged in a trade or business in the US? If the taxpayer is subject to US taxes and wishes to set-up a defined benefit plan, what actuarial tables are available to determine the deduction that takes into consideration that the taxpayer is immortal?

Giving Yourself a Tax Cut on Investments - New York Times

THOUGH tax rates have come down in recent years, the government's cut of capital gains and dividend income is still one of the biggest drags on many investors' portfolios.

People know this. Nine in 10 investors surveyed recently by Eaton Vance, the investment firm, said the impact of taxes on their investment returns was important to them. It should be. In mutual funds, taxes can obliterate about two percentage points a year in total return.

The problem is, "while investors say they know that taxes are important, most don't seem to know what they can do about it," says Duncan Richardson, chief equity investment officer at Eaton Vance, which emphasizes tax-efficient investing.

The good news is that investors can do several things at this time of year to minimize the impact of investment taxes. Among them are these:

SEEK OUT TAX-ADVANTAGED ACCOUNTS The easiest way to save on taxes is to stash money in accounts that aren't taxed along the way to retirement, like 401(k)'s and individual retirement accounts.

Yet nearly 30 percent of workers eligible to invest in 401(k)'s don't do so, according to a study by Hewitt Associates, the employee benefit research firm.

If you do participate, it's important to contribute as much as the Internal Revenue Service and your employer's plan permit if you want the maximum tax advantage. For workers 50 and older, this includes using the government's catch-up provision, which permits them to stuff an additional $4,000 into their accounts above the current annual 401(k) limit of $14,000. (In 2006, the annual limit goes to $15,000 and the catch-up limit for older workers goes to $5,000.)

"Not only does this save you taxes, it reduces your adjusted gross income," said Cal Brown, vice president for planning for the Monitor Group, a wealth management and investment advisory firm in McLean, Va. "And if you reduce your A.G.I., you will save more in taxes than just the taxes you save from making additional 401(k) contributions." Reducing income below certain levels permits you to take advantage of certain benefits. For example, Mr. Brown said that if your household adjusted gross income for 2005 exceeded $145,950 (or $72,975 if you are married and filing separately), your itemized deductions are generally reduced by 3 percent of the amount over that threshold.

Reducing A.G.I. can also help investors, especially those with incomes approaching $150,000, to avoid the dreaded alternative minimum tax. That's the so-called stealth tax, which was created to ensure that wealthy households pay their fair share of taxes - but it increasingly snares middle-income families because it is not indexed for inflation.

LOCK IN SOME LOSSES If the government can skim off the top of your investment gains, why not make it foot the bill for some of your losses?

By selling stock or mutual funds that are trading at a loss, you can realize capital losses, which can be used to offset gains elsewhere in your portfolio, thereby reducing your tax bill.

What if you don't have any capital gains to speak of this year? You may still want to take a loss now, because you can use it to reduce up to $3,000 in ordinary income this year and can carry the remaining loss forward for as long as you live.

DON'T JUST SELL LOSERS; REPLACE THEM If you plan to sell an investment that is underwater, it's important to "study the opportunity costs" of being out of a sector or the market, says Rande Spiegelman, vice president for financial planning at the Schwab Center for Investment Research in San Francisco.

Recent history has shown that being out of the market for even a couple of months can be costly. Over the last two years, for instance, the Russell 3000 total stock market index has risen 5.4 percent, on average, from the beginning of December to the end of February.

An easy way to sell losers but to remain fully invested is to consider an exchange-traded index fund that tracks the sector of the stock that you're dumping. If you wanted to sell shares of Merck, for example, at a loss, you might consider immediately replacing that holding with shares of the Healthcare Select Sector SPDR or the iShares Dow Jones U.S. Healthcare Sector Index fund - both exchange-traded funds that track major health care indexes.

By investing in a similar but not "substantially identical" investment, you avoid the I.R.S.'s wash-sale rule, which says investors cannot take advantage of realized losses if they go into the same investment within 30 days of selling.

DON'T BUY AN IMMEDIATE TAX BILL If you're thinking of using a mutual fund to step back into the market after selling stocks at a loss, be careful.

Every year in late November or December, mutual funds distribute to their shareholders the gains they realized by selling stocks that year.

While getting money back immediately sounds good, it's not. You are putting, say, $1,000 into a fund in late December, only for that portfolio to give back $100 of your money - along with a tax bill for that distribution.

In recent years, distributions have been relatively small because stock funds have used losses realized during the bear market to offset gains. This year is likely to be different because "a lot of funds families have used up those tax-loss carry-forwards," said Tom Roseen, senior research analyst at Lipper, the fund tracker.

Be particularly careful this month of stepping into real estate funds, natural resources sector funds, domestic value portfolios, small-cap portfolios and emerging-markets stock funds. According to the fund tracker Morningstar, these categories have some of the highest potential capital gains exposure.

Categories expected to have low distributions include technology sector funds and large-cap growth funds, many of which have had sizable tax-loss carry-forwards since the bear market.

So-called tax-efficient funds, which manage money with taxes in mind, are also considered a relatively safe bet. But be sure to hold these investments outside a tax-advantaged account because they are already tax-efficient.

MAKE CHARITABLE DONATIONS It may be an especially good time for contributions if you have appreciated stock that you want to sell.

You can give the appreciated stock to a charity and claim the full market value at the time of the donation. The charity can then sell the stock without tax consequences.

It's one of the few win-win options the I.R.S. provides to investors. So don't waste the opportunity.

What's the Return on Education? - New York Times

SOCRATES once said that the more he learned, the more he became convinced of his own ignorance. It's a familiar feeling for anyone who tries to make sense of the American education system.

This academic year, the better part of $1 trillion will be spent on education in the United States. That's an awful lot of spending, approaching 10 percent of the overall economy. But what exactly is the return on all of that money?

While the costs are fairly simple to calculate, the benefits of education are harder to sum up.

Much of what a nation wants from its schools has nothing to do with money. Consider the social and cultural benefits, for instance: making friends, learning social rules and norms and understanding civic roles.

But some of the most sought-after benefits from education are economic. Specialized knowledge and technical skills, for example, lead to higher incomes, greater productivity and generation of valuable ideas.

Those benefits are vital to a nation's growth. In recent years, Americans have become keenly aware of the impact of education as freshly educated workers from China and India compete for good jobs once held in the United States.

Today, many parents have a gut feeling that education is the way to ensure prosperity for their children, yet there is surprisingly little certainty about how much education contributes to the nation's overall wealth.

It is largely a problem of measurement. Economists have tried for decades to quantify the impact of education. They still don't have all the answers, but their work can shed some light on what Americans are getting for their investment. That information could serve as a backdrop for debates on how much government should spend on education and what should be left to individuals.

Start with what economists are confident about: the payoff to individuals. By measuring the relationship between the number of years of schooling and income earned in the job market, economists think that they have a good idea of what it's worth.

Alan B. Krueger, an economics professor at Princeton, says the evidence suggests that, up to a point, an additional year of schooling is likely to raise an individual's earnings about 10 percent.

For someone earning the national median household income of $42,000, an extra year of training could provide an additional $4,200 a year. Over the span of a career, that could easily add up to $30,000 or $40,000 of present value. If the year's education costs less than that, there is a net gain.

The payoff, of course, varies by individual. Another year of education will not have the same benefit for everyone. And school resources matter as well. According to studies by Professor Krueger and others, class size, teacher quality and school size can make a difference in the outcome. They have found that the effect of better schools is most pronounced for disadvantaged students.

There is less certainty about the big picture. That is partly because educational benefits accrue to the economy gradually, often showing up years after schooling is complete. Another problem is the difficulty of quantifying indirect benefits. One unknown, for example, is the degree to which formal education fosters new commercial ideas and technological breakthroughs.

While there is little doubt that there are benefits, those measurement challenges have led to big shifts in the conclusions of economic studies over time. In the early 1990's, economists calculated big economic rewards from additional investment in education. A decade later, the conclusions were different: studies suggested that while one individual might gain advantage over another through greater education, there might be no overall economic benefit.

Today, economists suspect that the truth is somewhere in the middle. Jonathan Temple, an economist at the University of Bristol in England, says the research trend is moving back toward the earlier findings. The latest attempts to quantify the impact of education on total economic growth have tended to conclude that it is at least as significant as that measured for individuals.

Because indirect benefits can't be counted accurately, Professor Temple suspects an even bigger impact. Insofar as education enhances worker productivity, there is a clear benefit to the economy.

Two Harvard economists, Lawrence F. Katz and Claudia Goldin, studied the effect of increases in educational attainment in the United States labor force from 1915 to 1999. They estimated that those gains directly resulted in at least 23 percent of the overall growth in productivity, or around 10 percent of growth in gross domestic product.

The most important factor was the move to universal high school education from 1910 to 1940. It expanded the education of the work force far more rapidly than at any other time in the nation's history, creating economic benefits that extended well into the remainder of the century, according to Professors Katz and Goldin. That moved the United States ahead of other countries in education and laid the foundation for the expansion of higher education.

Today, more Americans attend college than ever before, but the rest of the world is catching up. The once-large educational gap between the United States and other countries is closing - making it increasingly important to understand what education is really worth to a nation.

If economists are right, it is not just part of the cost of maintaining a functioning democracy, but a source of wealth creation for all. That means that investing in the education of every American is in everyone's self-interest.

Still, we're a long way from being able to judge the right level of spending on education - and how to achieve it. With a college degree more important than ever, the cost of higher education is rising steeply, creating growing stress for many American families. With more study, researchers may be able to identify ways of reducing costs while increasing the payoff from education.

Taking our cue from Socrates, the first step may be to recognize what we don't know.

The Next Retirement Time Bomb - New York Times

SINCE 1983, the city of Duluth, Minn., has been promising free lifetime health care to all of its retired workers, their spouses and their children up to age 26. No one really knew how much it would cost. Three years ago, the city decided to find out.

It took an actuary about three months to identify all the past and current city workers who qualified for the benefits. She tallied their data by age, sex, previous insurance claims and other factors. Then she estimated how much it would cost to provide free lifetime care to such a group.

The total came to about $178 million, or more than double the city's operating budget. And the bill was growing.

"Then we knew we were looking down the barrel of a pretty high-caliber weapon," said Gary Meier, Duluth's human resources manager, who attended the meeting where the actuary presented her findings.

Mayor Herb Bergson was more direct. "We can't pay for it," he said in a recent interview. "The city isn't going to function because it's just going to be in the health care business."

Duluth's doleful discovery is about to be repeated across the country. Thousands of government bodies, including states, cities, towns, school districts and water authorities, are in for the same kind of shock in the next year or so. For years, governments have been promising generous medical benefits to millions of schoolteachers, firefighters and other employees when they retire, yet experts say that virtually none of these governments have kept track of the mounting price tag. The usual practice is to budget for health care a year at a time, and to leave the rest for the future.

Off the government balance sheets - out of sight and out of mind - those obligations have been ballooning as health care costs have spiraled and as the baby-boom generation has approached retirement. And now the accounting rulemaker for the public sector, the Governmental Accounting Standards Board, says it is time for every government to do what Duluth has done: to come to grips with the total value of its promises, and to report it to their taxpayers and bondholders.

The board has issued a new accounting rule that will take effect in less than two years. It has not yet drawn much attention outside specialists' circles, but it threatens to propel radical cutbacks for government retirees and to open the way for powerful economic and social repercussions. Some experts are warning of tax increases, or of an eventual decline in the quality of public services. States, cities and agencies that do not move quickly enough may see their credit ratings fall. In the worst instances, a city might even be forced into bankruptcy if it could not deliver on its promises to retirees.

"It's not going to be pretty, and it's not the fault of the workers," said Mayor Bergson, himself a former police officer from Duluth's sister city of Superior, Wis. "The people here who've retired did earn their benefits."

The new accounting rule is to be phased in over three years, with all 50 states and hundreds of large cities and counties required to comply first. Those governments are beginning to do the necessary research to determine the current costs and the future obligations of their longstanding promises to help pay for retirees' health care. Local health plans vary widely and have to be analyzed one by one. No one is sure what the total will be, only that it will be big.

Stephen T. McElhaney, an actuary and principal at Mercer Human Resources, a benefits consulting firm that advises states and local governments, estimated that the national total could be $1 trillion. "This is a huge liability," said Jan Lazar, an independent benefits consultant in Lansing, Mich. "If anybody understands it, they'll freak out."

Last spring, the state of Alaska was the scene of a showdown over retirement benefits that those involved said was a precursor of fights to come. Conservative lawmakers who supported scaling back traditional retiree health care and pension benefits squared off against union lobbyists, advocates for the elderly and the schools superintendent of Juneau, the state capital, who defended the current benefits.

After saying that Alaska's future combined obligations for pensions and retiree health care were underfunded by $5.7 billion, Gov. Frank H. Murkowski called a special session of the Legislature and pushed through changes in pension and retirement health care benefits for new state employees. (The state Constitution forbids changing the benefits of current employees.)

Instead of having comprehensive, subsidized medical coverage, new public workers will have a high-deductible plan and health savings accounts. The changes cleared the State Senate and passed by a one-vote margin in the House.

Even the White House weighed in on the Alaska problem. Ruben Barrales, President Bush's director of intergovernmental affairs, lobbied wavering Republican legislators, arguing in favor of replacing pensions and traditional retiree health benefits with private savings accounts for new employees. Mr. Barrales noted that the president was seeking similar changes in Social Security, including a plan for private accounts.

The union that represents state employees in Alaska said the narrower benefits would make it harder to recruit qualified teachers and government workers. "They keep chiseling away" at school employees' pay and benefits, said Julia Black, a single mother and union activist who earns $11 an hour as an aide in classes for disabled children in Juneau.

Actuaries say that about 5.5 million retired public employees have health benefits of some kind - and accountants joke that there are not enough actuaries in the country to do all the calculations necessary to estimate how much all these retirees have been promised.

Though it may seem strange after a decade of double-digit health cost inflation, hardly any public agencies have been tracking their programs' total costs, which must be paid out over many years. The promises seemed reasonable when they were initially made, officials say.

In Duluth, Mayor Bergson said the city actually offered free retiree health care as a cost-cutting measure back in 1983. At the time, Duluth was trying to get rid of another ballooning obligation to city workers: the value of unused sick leave and vacation days. Public workers then were in the habit of saving up this time over the course of their careers and cashing it in for a big payout upon retirement. Compared with the big obligations the city had to book for that unused time, substituting free retiree health care seemed cheap. "Basically, they traded one problem for another," Mayor Bergson said.

WITH some exceptions, most states and cities have set aside no money to pay for retiree medical benefits. Instead, they use the pay-as-you-go system - paying for former employees out of current revenue. Agencies did not have to estimate the total size of their commitment to retiree health care, so few did so.

Under the new accounting rule, local governments will still not have to set aside any money for those promises. But they will be required to lay out a theoretical framework for the funding of retiree health plans over the next 30 years, and to disclose what they are doing about it. If they fail to put money behind their promises to retirees, they may feel the unforgiving discipline of the financial markets. Their credit ratings may go down, making it harder and more expensive to sell bonds or otherwise borrow money.

Parry Young, a public finance director at Standard & Poor's, the credit rating agency, said his analysts look at total liabilities, including pension and now other "post-employment" obligations. Many governments, he added, have already been grappling with big deficits in their employee pension funds.

A few agencies are wrestling with the daunting task of estimating their total retiree health obligations and coming up with a way to slice it into a 30-year funding plan. They are finding that under the new method, the benefit costs for a particular year can be anywhere from 2 to 20 times the pay-as-you-go costs they have been showing on their books.

Maryland, for example, now spends about $311 million annually on retiree health premiums. But when that state calculated the value of the retirement benefits it has promised to current employees, the total was $20.4 billion. And the yearly cost will jump to $1.9 billion under the new rule, according to an analysis for the state by actuaries at Aon Consulting, which advises companies on benefits.

That is because Maryland would not be recording just its insurance premiums as the year's expense, but instead would report the value of the coverage its employees have earned in that year as well as a portion of the $20.4 billion they amassed in the past. After 30 years, the entire $20.4 billion should be accounted for.

Michigan says it has made unfunded promises that are now valued at $17 billion for teachers, part of a possible $30 billion total for all public agency retirees. Other places that have done the math include the state of Alabama; the city of Arlington, Tex.; and the Los Angeles Unified School District. New York City has not yet completed an actuarial valuation of its many retiree benefit plans. But in its most recent financial statements, the city said it expected that the new rule would "result in significant additional expenses and liabilities being recorded" in the future.

The numbers can vary wildly by locality, depending on how rich its benefits are, what assumptions its actuary uses about future demographics and investment earnings, and that great unknown: the cost of health care 30 years in the future.

"Fifteen years ago, who would have projected 10 years of double-digit increases in health care costs?" said Frederick H. Nesbitt, executive director of the National Conference on Public Employee Retirement Systems, an advocacy group in Washington. Mr. Nesbitt pointed out that when the accounting rulemakers began requiring a similar change in financial reporting for companies in the 1990's, it was followed by a sharp decline in the retiree medical benefits provided by corporate America.

Today, only one in 20 companies still offers retiree benefits, according to Don Rueckert Jr., an Aon actuary. The rate for large companies is less than one in three, down from more than 40 percent before the private-sector accounting change, according to Mercer Human Resource Consulting. General Motors and Ford are among the big companies that still offer retiree health benefits. But both automakers recently persuaded the United Automobile Workers union to accept certain reductions.

"We expect the same thing in the public sector, unless we help employers do the right thing," said John Abraham, deputy research director for the American Federation of Teachers.

The Governmental Accounting Standards Board, known by the acronym GASB (pronounced GAZ-bee), is a nonprofit organization based in Norwalk, Conn., and a sister to the Financial Accounting Standards Board that writes accounting rules for the private sector. Karl Johnson, the project manager for the retiree-benefits rule, said GASB began hearing from public employees' unions as soon as it issued a first draft of its new standard. The unions said that if governments were forced to disclose the cost of their plans, they would probably cut or drop them, just as companies have done.

Mr. Johnson said the accounting board had no interest in trying to reduce anyone's benefits, and no power to dictate local policy even if it wanted to. "Accounting is just trying to hold up a good mirror to what's happening," he said. "These are very expensive benefits."

Under the new rule - outlined in the board's Statement No. 45 in June 2004, and known widely as GASB 45 - large public governments and school boards with large health care obligations to retirees will have to start reporting their overall benefits cost in 2007 - either on Jan. 1 of that year or, for most big governments, on the start of the fiscal year beginning June 1, 2007. Smaller governments will start using the new method in the two years after that.

The change comes at a rough time for state and local governments. Spending on Medicaid and education has been spiraling, and Congress continues to cut federal taxes and shift burdens of governing away from Washington. In some areas, including parts of Michigan, governments are also suffering from the financial difficulties of important local industries. Max B. Sawicky, an economist at the Economic Policy Institute, a liberal research group in Washington, called the new requirement "another straw on the camel's back" for state and local governments already straining under their budget burdens.

Mr. Johnson said the accounting board had tried to issue the retiree health care rule 10 years ago, when the economic picture was rosier. It did succeed then in issuing an accounting standard for government pension plans, but before it could turn to the related issue of retiree health care, other urgent accounting issues crowded onto its agenda. The board finally cleared its decks and voted to address retiree benefits in 1999. Coming up with the new methodology took five years.

Now that it is here, "the general sense in the marketplace is that GASB 45 is going to lead to a watershed in public-sector health benefits," said Dallas L. Salisbury, president of the Employee Benefit Research Institute, a nonpartisan research center in Washington.

Indeed, the handful of states and cities that have already calculated their obligations to retirees have concluded they must also rein in the costs. Michigan, for example, with its possible $30 billion in largely unfunded health care promises, is already considering legislation that would shift "a considerable amount of the cost for health insurance to the retiree," said Charles Agerstrand, a retirement consultant for the Michigan Education Association, a teachers union. The legislation would require teachers retiring after 20 years to pay 40 percent of their insurance premiums, as well as co-payments and deductibles, he said.

The pressure is greatest in places like Detroit, Flint and Lansing, where school systems offered especially rich benefits during the heyday of the auto plants, aiming to keep teachers from going to work in them. Away from those cities, retiree costs may be easier to manage. In the city of Cadillac, 100 miles north of Grand Rapids, government officials said they felt no urgent need to cut benefits because they promised very little to begin with. Instead, Cadillac has started putting money aside to take care of future retirement benefits for its 85 employees, said Dale M. Walker, the city finance director.

Ohio is one of a few states to set aside significant amounts. Its public employee retirement system has been building a health care trust fund for years, so it has money today to cover at least part of its promises. With active workers contributing 4 percent of their salary, the trust fund has $12 billion. Investment income from the fund pays most current retiree health costs, said Scott Streator, health care director of the Ohio Public Employee Retirement System. "It doesn't mean we can just rest," he said. "It is our belief that almost every state across the country is underfunded." He said his system plans to begin increasing the employee contributions next year.

In Duluth, Mayor Bergson grew quiet for a moment at the thought of a robust trust fund. "There was not a nickel set aside" in Duluth, he said. "The reason was, if you set money aside, you'd do less 'pretty projects.' Less bricks and mortar. Fewer streets. Fewer parks. So no one set the money aside. "If the city had set $1 million aside every year for those 22 years" since the promise was made, he added, "we'd be in really good shape right now."

Mayor Bergson said his city intends to start setting aside money for the first time in 2006, but he is also trying to rein in the growth of new obligations. He raised to 20 from 3 the number of years that an employee must work for the city in order to qualify for retirement benefits.

He also imposed a hiring freeze and pledged not to lift it until Duluth could hire employees without promising them free lifetime health care. As the city has lost police officers, firefighters, an operator of its huge aerial lift bridge and other workers, the remaining employees have racked up more than $2 million in overtime. But Mayor Bergson says that this is still cheaper than dealing with free retirement health care once the new accounting rule takes effect.

Most recently, he reached out for what may prove a political third rail: he took issue with the idea that once a public employee has retired, his benefits can never be reduced. This idea, as applied to pensions, is rooted in the constitutions of about 20 states, and unions argue that it also protects retiree health care.

Active employees in Duluth have had to start paying more for their health care under the city plan, Mayor Bergson said. If active workers must make concessions, he said, retired workers should make concessions, too. Otherwise, in relative terms, they are pulling ahead of the active work force.

"That's not a popular thing to say," Mayor Bergson said. "I'm getting kicked hard by retirees. I'm getting beat up by active employees. The people who are kicking me are the ones I'm trying to protect."

ATTEMPTS to balance the competing interests of retirees, active workers and taxpayers are building tension. Ross Eisenbrey, a former Clinton administration official who is now at the Economic Policy Institute, said that "when taxpayers wake up to these obligations, their first inclination is often to escape them or reduce them."

The problem is that people have counted on those benefits, and many have accepted lower salaries in exchange for better retirement benefits, said Teresa Ghilarducci, an economics professor at the University of Notre Dame. If they are close to retirement, said William R. Pryor, a firefighters' union official who is an elected board member of the Los Angeles County Employees Retirement Association, it may well be too late for them to make up for the loss with their own savings.

The clock is ticking. In Duluth, a city official approached the actuary who made the city's estimate in 2002 and asked her to refine and update her numbers because economic conditions had changed and the new accounting rule had been announced. This time the obligations worked out to $280 million, a 57 percent increase in less than three years.

Paying for What Financial Advice?

By Stuart Kahan, Executive Editor, CPA Wealth Provider

There is a brouhaha going on down under. It seems that the Australian Consumers Association has leveled its guns at the financial planning industry to rid it of taking commissions. These are the amounts that are paid to some financial planners for such things as servicing an investment portfolio. In that neck of the woods, it may be something like a half of one percent but the Association claims that when it is based on a total portfolio it can add up over a long period of time.

Now, understand that no one is claiming that financial planners shouldn't be paid for their services; it really comes down to the method of payment.

This consumer group says that commissions actually create a kind of structural conflict of interest for financial planners. What else is new? This claim has been going on for decades, it seems. The argument is that financial planners are supposed to be independent, objective advisors and not to be in the position of selling a specific plan just to reap a reward.

Many argue that the answer is a relatively simple one: have financial planners take a fee for services, the same way that attorneys and accountants do. The Financial Planning Association in Australia has been looking at that model for years now and in fact, has been encouraging its members to take the fee-based route.

What is happening here, and what will happen all over the globe, is a set of disclosure rules that require fees to be spelled out in dollar terms. It is no secret that for the longest time the industry itself seemed to the public that its advice is basically free but the specific selection of a stock is where the fee resides. However, most financial planners worth their salt realize all too well that what they offer in advice is really built around tax, Social Security, portfolios, risk levels, estate planning et al, understanding that the heart of what they should be doing and where their real value resides, is not simply what stock to buy.

Of course, I have friends who will simply take the free advice and then buy stocks themselves on the Internet.

What seems to be coming out of the debate in Australia centers around a key message for investors that they must understand what they are paying for and with financial planners to recognize completely what a full-blown financial plan is really worth.

Robin Bowerman who heads the retail index fund at Vanguard Investments, says that the key to making the successful transition from a commission-based business to a fee-based one is the ability to articulate where the financial planner adds value to the client. In short, "stop peddling the illusion that they hold some magical key to picking future investment winners."

WebCPA | Tools and Resources for the Electronic Accountant

YOU get what you pay for.. and TANSTAAFL - there ain't no such thing as a free lunch. Professional financial advice is probably money well spent.

So if someone promises you advice that will yield 10-20% monthly returns, perhaps at a price of some $3,000, you should immediately get suspicious. If this were really true - i.e., if you pay for the advice you'll immediately start getting these returns - you would be making over 300% annually (compounded). Hey, that would sure be great, I wouldn't have a day job anymore. And if it were true, wouldn't you think that the person trying to sell it to you would forget all about selling and just watch his or her money triple every year? But they're not doing that, which should give you a pretty good idea about where the money's being made, namely from you.

Getting advice from someone who doesn't know you and is asking you significant sums of money? Ask yourself why the person is selling or giving it to you. If it sounds like a sure ticket to riches, then why is the person wasting their time on YOU when they could be out there making piles of dough?

My personal opinion is that people today don't have a clue about what it takes to gather their financial data, analyze it, and prepare a plan of actions, then carry out and monitor that plan. hire a financial planner-- but be careful because all financial planners are not alike.

WebCPA | Tools and Resources for the Electronic Accountant

Dangerous to dabble in anything important. This past week, I hired painteres to paint my house, not because I couldn't do it, because I have. But they work fast, clean and know what they are doing.

The same applies to personal financial planning. we want our children to know about their finances so they can make plans and end up in their golden years with some gold. Howard's article below reminds us why we need to hire professionals and that even they need supervision!

The Dangers of Dabbling

By Howard Wolosky, Executive Editor, Practical Accountant

Financial planning can be a very lucrative area for accountants. But take care! Unlike in traditional tax and accounting work, special pitfalls await. Here's one example:

The NASD recently announced that it has ordered Ameriprise Financial Services, Inc., formerly American Express Financial Advisors, to pay a fine of $500,000 for failing to adequately supervise the firm's sales of 529 plans. NASD also directed it to pay approximately $750,000 to compensate more than 500 customers.

According to the NASD's press release, during the period May 2001 through October 2003, when the firm was American Express Financial Advisors, only one 529 plan was reportedly being sold, a plan sponsored by the state of Wisconsin, and approximately 32 percent of the sales were to customers who lived in state tax-advantaged 529 plan jurisdictions. As a result, those customers didn't receive state income tax benefits available to 529 plans purchasers. The $750,000 is to compensate those accounts that experienced substantial lost state tax benefits. In settling, Ameriprise neither admitted nor denied the allegations, but consented to the entry of NASD's findings.

Something like this is most likely to rise when a CPA is a registered representative of a broker/dealer, and is limited as to what 529 plans he or she may offer clients. In investigating whether to enter a relationship with a broker/dealer, CPAs should look out for possible limitations and restrictions as to what investments or products they can recommend or sell to a client.

It should come as no surprise that NASD found that the firm's procedures during this period were not reasonably designed to achieve compliance with suitability obligations in the sale of 529 plans. Not to recommend investments in 529 state plans where the clients reside and can obtain a substantial state income tax deduction, and instead actively encourage investment in another state plan where there is no deduction, seems to be obviously bad advice.

This reinforces my belief that CPAs can't really dabble in financial/investment planning. The commitment has to be substantial, and an extensive due diligence must be performed for any potential business partner.

A fear that many CPAs have who are considering getting involved in financial and investment planning is that if an existing traditional tax or accounting client has a bad experience as a result of the financial/investment planning advice, the CPA will then lose all the other work from that client. The NASD action shows that the fear might be well founded.

How to Make Your (Accounting) Relationship Work - New York Times

This article quotes a friend of mine. Glad to see that Sunday was not a big news day, and too bad they did not say Eisenberg was a PFS...

How to Make Your (Accounting) Relationship Work
By ERYN BROWN
WHEN Lisa Ludovici, 45, received a letter of inquiry from the Internal Revenue Service last year regarding her 2001 taxes, she immediately forwarded it to her accountant, who said he would take care of it, she recalled. Months passed, she said, and nothing happened: the accountant failed to return her calls, even when the government eventually billed her $1,500 for the supposed discrepancy. In the end, Ms. Ludovici said she consulted another tax preparer who told her that the problem was minor and said that it appeared that the I.R.S. had made an incorrect assumption.

Ms. Ludovici, a manager of government affairs for Comcast in Los Angeles, cleared everything up with a single phone call, and she said the I.R.S. dropped the matter. She did not owe any money.

But until then, she rode an emotional roller coaster. "I'm scared of anything from the I.R.S., so I was anxious. And I got more flipped out progressively. Maybe he flipped out because I was flipping out," she said, referring to her first accountant. "I really just needed someone to tell me, calmly, that it was O.K. At least he could have called me back and told me it would be easy to deal with."

Accountant-client relationships can often be fraught with emotion, said Thomas P. Oschenschlager, vice president for taxation at the American Institute of Certified Public Accountants, a trade association in Washington.

"Just doing tax returns can be a very highly personal situation," he said. "The person who does your taxes knows more about you than your doctor or your minister."

Accountants like Mr. Oschenschlager, who worked at Grant Thornton for 23 years, urge taxpayers who hope to avoid trauma to choose their preparers wisely.

The nuts and bolts of the process are straightforward enough. Ask for referrals, accountants say, especially from friends and associates in similar financial circumstances. Interview candidates to ensure that they have relevant experience. Make sure that you understand tax preparers' fee policies, and don't be afraid to ask how the working relationship will proceed: Will the accountant you interview, or a junior person, be completing the return? Will the return be outsourced to a site in India? What is the firm's policy on returning phone calls?

But advice on how to handle the softer side of the accounting relationship is harder to come by.

Customer service in the accounting field is seldom studied systematically. "Little has changed since 1992," said August J. Aquila, a consultant at the Growth Partnership, which advises accounting firms about marketing and expanding their practices.

That year, Mr. Aquila, who is based in Minnetonka, Minn., wrote an article for the Journal of Accountancy detailing reasons that firms lose clients. The reasons, he said, include ignoring clients, cutting them off from contact with partners and using a lot of technical jargon during consultations.

While some individual firms conduct customer satisfaction surveys, he said, the profession has done little to track satisfaction on the macro level.

But anecdotally, there is much evidence of problems. Some may be a result of rudeness or laziness. Others can arise because practitioners may not be equipped to handle clients' complicated finances.

Linda Beamish of Ogdensburg, N.Y., owner of DeFelsko Inc., a manufacturing company, eventually outgrew the local firm she had been dealing with. She sought out an adviser familiar with the challenges that family businesses face, including preparation for succession. "We needed a firm with broader experience," she said.

Claude Finch, who owns Rodeo City Wireless, a retail store in Ellensburg, Wash., recently began working with a certified public accountant, Scott E. Pernaa. Mr. Finch said his former accountant had spent a lot time helping him with do-it-yourself software. "I needed someone to do more accounting for me; she really didn't respond to my needs." When Mr. Finch and his wife, Katy, called and asked for additional assistance, he said, they were told that "it wouldn't be until two weeks, and that was too late."

Some people in the industry say that customer service problems arise because fewer people are entering the field. "There is a shortage of accountants in this country," said Shannon Vincent, chief executive of the ReNew Group, an accounting-practice consulting firm in Oakland, Calif. "As a result, they don't necessarily have to treat their customers well."

According to the accounting institute, 53,760 accounting degrees were awarded during the 2003-04 school year. That was up 20 percent from 2001-02, but it was short of the industry's peak of 61,220 in 1994-95.

To ease personal relationships with clients, many accountants stress the importance of clear communication.

"Accountants are trained in the technical side, so they always feel better on that turf," Mr. Aquila said, but he added that "firms are beginning to realize that the soft side is as important as the technical side."

Ms. Beamish's new C.P.A., William J. Killory of Dermody, Burke & Brown, based in Syracuse, said he viewed his job "as being a problem-solver." "It's not just numbers and debits and credits," he added. "It's being able to talk to the client in a language they understand."

Michael M. Eisenberg, a C.P.A. who runs an accounting and financial-planning practice in Los Angeles, says he likes to use props: for example, a set of laminated flash cards to illustrate market trends, and an exhibit of a 7-cent postage stamp from 1970 to bring inflation to life. "Teaching clients holds down the number of emotional phone calls, cuts down on panic calls," he said. "It's common sense. Treat someone like you'd like to be treated."

But Mr. Eisenberg also said he depended on clients to meet him halfway when it came to keeping meltdowns at bay. "I have a rule: call me before the issue happens," he said. Submitting tax and other paperwork on time, and in good order, also helps.

Another strategy is to start the search for a new adviser early. As filing season nears, most accountants have less time to get to know their clients. What's more, many last-minute chances to save on taxes - like making charitable gifts to maximize deductions - disappear at the close of the calendar year.

"It is not too late to choose, from a practitioner standpoint," said Leslie Michael, a C.P.A. based in Indianapolis. "You can take advantage of last-minute planning opportunities. Come January and February, you're stuck with the cards you're dealt."

IN the end, the best that careful clients can do is trust their gut.

"Basically, you're not going to know until you work with the person," Mr. Eisenberg said.

Mr. Finch, the owner of Rodeo City Wireless, said Mr. Pernaa's enthusiasm had convinced him. "We didn't do a lot of research," he said. "We met him, and we knew it would work out. You can see it and you can feel it when you pick the right partner in business."

But Ms. Ludovici looked for a more practical way to keep her new accountant in line: potential shame. "I went with someone I knew, someone who wasn't going to be able to duck my calls," she said. "Someone I see at parties."

In Search of Courage

Finding the courage within you.
From: Issue 86| September 2004 | Page 56 By: John McCain Photographs by: Frank W. Ockenfels 3

Over the past 30 years, American culture has defined courage down. We have attributed courage to all manner of actions that may indeed be admirable but hardly compare to the conscious self-sacrifice on behalf of something greater than one's own self-interest. Today, in our excessively psychoanalyzed society, sharing one's secret fears with others takes courage. So does escaping a failing marriage. These are absurd examples of our profligate misidentification of the virtue of courage. There are many other closer calls. Is the athlete's prowess and guts on the playing field an example of courage? Is suffering illness or injury without complaint courageous? Not always. They may be everyday behavior typical of courageous people. They may be evidence of virtuousness. But of themselves, these acts, admirable though they are, are not sufficient proof of courage.

Courage is like a muscle. The more we exercise it, the stronger it gets. I sometimes worry that our collective courage is growing weaker from disuse. We don't demand it from our leaders, and our leaders don't demand it from us. The courage deficit is both our problem and our fault. As a result, too many leaders in the public and private sectors lack the courage necessary to honor their obligations to others and to uphold the essential values of leadership. Often, they display a startling lack of accountability for their mistakes and a desire to put their own self-interest above the common good.

That means trouble for us all, because courage is the enforcing virtue, the one that makes possible all the other virtues common to exceptional leaders: honesty, integrity, confidence, compassion, and humility. In short, leaders who lack courage aren't leaders.

Lack of courage is not the exclusive failing of political leaders, but our failings as well as our virtues set a national example. We may have learned important lessons from the intelligence failures that preceded the terrorist attacks of September 11 and the fruitless search for weapons of mass destruction in Iraq. But I'm not sure we set a reassuring example to the rest of the country by declining to punish anyone involved in those failures. Not one person was fired or was moved by his or her conscience to resign. Similarly, the prisoner abuse scandal at Abu Ghraib has occasioned much soul-searching but little in the way of personal accountability. The enlisted people responsible for the abuses are facing courts-martial, as they should. But others higher in the chain of command have yet to face serious disciplinary action or offer their resignations. No one has had the courage to stand up and say, "It's my fault, I'm going to resign."

When no one takes responsibility for failure, or when responsibility is so broadly shared that individual accountability is ignored, then failure in public office becomes acceptable. It's hard to see how that serves the country.

The same holds true for the business world. Corporate America has taken significant blows to its reputation, because too many executives don't have the courage to stand up for what they know is right. The perception among many is that corporate leaders are committed only to their own self-enrichment. In 2002, Leo Mullin, the former CEO of Delta Air Lines, received a bonus of $1.4 million plus $2 million in free stock, even as the airline laid off thousands of employees. He left Delta with a huge severance package that was in no way justified by his performance. More recently, we've learned how Enron's traders bragged about gouging California ratepayers during that state's energy crisis. Those traders weren't executives, but they were inspired to behave the way they did by the "me first" climate of self-aggrandizement that Enron's leaders had created. When there's an absence of courage, greed and selfishness take over. And it's not without consequences. There's a growing disdain -- if not contempt -- for much of corporate America. And that's not healthy for the country's future.

If courage is in scarce supply, then demand is down as well. We are a strong, mostly lawful, prosperous country. We don't have as much to fear as we did in the past -- despite the events of September 11 and despite the ongoing war in Iraq. Approximately 200,000 Americans went to Iraq to destroy the regime of Saddam Hussein. From a country of 270 million people, that's less than 1% of the population. Very few of us are called upon to test our courage in the crucible of fear and hard moral choices. And yet, courage still matters -- more than we think.

Without courage, all virtue is fragile: admired, sought after, professed, but held cheaply and surrendered without a fight. Winston Churchill called courage "the first of human qualities . . . because it guarantees all the others." That's what we mean by the courage of our convictions. If we lack the courage to hold on to our beliefs in the moment of their testing, not just when they accord with those of others but also when they go against threatening opposition, then they're superficial, vain things that add nothing to our self-respect or our society's respect for the virtues we profess. We can admire virtue and abhor corruption sincerely, but without courage we are corruptible.

Courage is not always certain, and it is not always comprehensible. As courage demands great sacrifice, so does it demand great economy in its definition. General William Tecumseh Sherman defined courage as a "perfect sensibility of the measure of danger and a mental willingness to endure it." That seems to me as apt a definition as any. Courage is that rare moment of unity between conscience, fear, and action, when something deep within us strikes the flint of love, of honor, of duty, to make the spark that fires our resolve. Courage is the highest quality of life attainable by human beings. It's the moment -- however brief or singular -- when we are our complete, best self, when we know with an almost metaphysical certainty that we are right.

One thing we can claim with complete confidence is that fear is indispensable to courage, that it must always be present for courage to exist. You must be afraid to have courage. Suffering is not, by itself, courage; choosing to suffer what we fear is. And yet, too great a distinction is made between moral courage and physical courage. They are in many instances the same. For either to be authentic, it must encounter fear and prove itself superior to that fear. By fear, I mean the kind that entails serious harm to ourselves, physical or otherwise, the kind that wars with our need to take action but which we overcome because we value something or someone more than our own well-being. Courage is not the absence of fear, but the capacity to act despite our fears.

"You can live with pain. You can live with embarrassment. Remorse is an awful companion."

In the past, I've been able to overcome my own fears because of an acute sense of an even greater fear -- that of feeling remorse. You can live with pain. You can live with embarrassment. Remorse is an awful companion. And whatever the unwelcome consequences of courage, they are unlikely to be worse than the discovery that you are less than you pretend to be. I can recall all too well those times I've avoided the risk of injury or disappointment by overruling the demands of my conscience.

One such time came during the 2000 campaign for president, when I failed to say that the Confederate flag that flew over the state capitol of South Carolina should be taken down. I rationalized, in a moment of cowardice, that that decision should be left to the people of South Carolina. After the campaign, I returned to South Carolina and apologized, which didn't mean much since the apology came after the fact. The lesson that I took from that experience was this: In the long run, you're far better off taking the courageous path. I don't know if I would have won South Carolina, but taking the position I did, I lost. Maybe I would have lost by more if I had spoken out -- so what? At least my conscience wouldn't have bothered me long after the disappointment of a lost election had worn off.

If fear is a condition of courage, so too is love. It is love that makes us willing to sacrifice, love that gives us courage. And it was love that helped me endure five years of captivity in a Hanoi prisoner-of-war camp, the love and compassion that came from my comrades. Whenever I was down, my fellow prisoners picked me up, many times at risk to themselves. I learned what I didn't want to learn: that I had failings that required the assistance of others. The great privilege of my life is to be associated with men of courage who tried to impart their own courage to me.

"Don't let fear convince you that you're too weak to have courage. Fear is the opportunity for courage, not proof of cowardice."

Love makes courage necessary. And it's love that makes courage possible for all of us to possess. You get courage by loving something more than your own well-being. When you love virtue, when you love freedom, when you love other people, you find the strength to demand courage of yourself and of those who aspire to lead you. Only then will you find the courage, as Eleanor Roosevelt put it, "to do the thing you think you cannot do."

If you do the thing you think you cannot do, you'll feel your resistance, your hope, your dignity, and your courage grow stronger. You will someday face harder choices that very well might require more courage. And when those moments come and you choose well, your courage will be recognized by those who matter most to you. When your children see you choose, without hesitation, without remark, to value virtue more than security, to love more than you fear, they will learn what courage looks like and what love serves, and they will dread its absence.

We're all afraid of something. The one fear we must all guard against is the fear of ourselves. Don't let the sensation of fear convince you that you're too weak to have courage. Fear is the opportunity for courage, not proof of cowardice. No one is born a coward. We were meant to love. And we were meant to have the courage for it.

U.S. Senator John McCain is the author, along with Mark Salter, of Faith of My Fathers, Worth the Fighting For, and Why Courage Matters, from which portions of this essay were adapted.