Q&A Series: Reporting Obligations for Individuals with Foreign Assets – THIS MEANS YOU!

This week's question comes from a reader who maintains assets in a foreign bank account.

Q: I am a U.S. citizen with a bank account located overseas. Someone told me that these assets aren’t reportable to the IRS. Is this true?

A: Excellent question! There’s a flourishing industry of unethical (or unknowledgeable) “professionals” advising clients to open accounts overseas because the funds are supposedly not reportable to the IRS. Not so!! This is tax fraud, and it gets a lot of people in trouble and could mean jail time. If you’re a U.S. citizen or resident alien, you are required to report worldwide income, regardless of where your assets are located. So while there’s nothing wrong with having assets in an offshore account, it’s important to make sure you’re following IRS rules on reporting the assets in those accounts. Here are the basics:

To try to stop U.S. taxpayers from hiding foreign assets, the IRS has published Form 8938, “Statement of Specified Foreign Financial Assets.” Beginning with the 2011 tax year, individuals with specific foreign assets with a combined value greater than $50,000 (this threshold increases if you live abroad or if you are married filing jointly), are required to file a Form 8938 with their individual income tax return. At this point, the IRS is only requiring individuals, and not domestic entities, to file the Form 8938. This is strictly an informational report at this time.

If you previously had to file a Report of Foreign Bank and Financial Accounts ("FBAR") with the IRS, it’s important to note that Form 8938 doesn’t replace the FBAR. These filings are undoubtedly similar and there is substantial overlap, but a taxpayer is obligated to also file the FBAR if he or she has a financial interest in (or signature authority over) at least one foreign bank or financial account, and the combined value of all overseas accounts is greater than $10,000 at any time during the calendar year.

Unlike Form 8938, the FBAR isn’t filed with an individual’s annual federal tax return. Instead, it’s due by June 30th the year following the calendar year in which the individual’s account(s) met the $10,000 threshold.

Thanks so much for your question. This post just touches on the tax filing requirements for individuals with foreign assets. To ensure you are complying with IRS filing rules, it is always best to consult with a Certified Public Accountant. In that regard, our sister CPA firm, Rollins & Associates, is always willing to help.

We encourage our clients and readers to send us questions for our Q&A series at contact@rollinsfinancial.com. And as always, we hope you will keep Rollins Financial in mind when seeking professional advice on financial planning and investing.

Best regards,
Joe Rollins

Markets Update – Perspective

In 1979, Business Week ran a notorious and compelling article pronouncing “The Death of Equities.” By the end of the 1970’s, investors had experienced an awful decade for stock returns. As the Dow Jones Industrial Average sat 20% below its all-time high – reached just six years earlier in 1973 – investors grew disillusioned with stocks. High inflation had further destroyed real investor wealth, and optimism was low.

In hindsight, 1979 was an incredible buying opportunity. Valuations were very low and the U.S. was about to embark on 20 years of strong growth. The stock market ended up returning 18% in 1979 and stocks gained 2,500% over the 20 years after Business Week ran that melancholic story. There are certainly many differences between now and the 1970’s, and there are some similarities. We wouldn’t be so bold as to predict a 2,500% return through 2030, but we certainly feel that investors are overly pessimistic about the future return potential of their stock investments.

Investing in 2011 didn’t help to encourage optimism in the future, especially for diversified investors who were whipsawed by alternating psychologies. Erratic emotions were sometimes displayed from one day to the next, as we saw in early August when the Dow Jones Industrial Average moved up and down about 5% for several consecutive days. These outsized moves continued for much of August and September before rebounding in October and stabilizing for most of November and December.

In the end, the S&P 500 actually made a nominal positive return for the year, but that was a standout compared to many investment segments. Some sectors of the market that we view as having very positive long-term prospects were the worst performers in 2011. For instance, we view emerging markets favorably going forward, but these markets suffered losses in excess of 20% in some cases in 2011. Natural resource and commodity stocks were also poor performers, even though gold prices moved significantly higher and oil ended the year close to $100/barrel, about where it started the year.

U.S. Treasury bonds did very well throughout 2011 as investors looked for security in an uncertain environment. The European debt saga, the tsunami in Japan, the Arab Spring and our own domestic tussle over the debt ceiling all led to amplified volatility in the financial markets as investors reached for the safety of U.S. government bonds. Despite the continued strength in U.S. Treasury bonds during 2011, we are not inspired to put a significant weighting towards low-yielding investments that seem likely to produce negative returns after adjusting for inflation in the long run.

We expect that some of the volatility is here to stay as issues like the European debt situation, as well as the elections in the U.S., are likely to affect the markets during 2012. We are still working through an economy that is trying to deleverage from the housing crisis. Bank debts and real estate losses have, in effect, been transferred from private to public hands. There is never a perfect historical precedent to follow, but the financial markets are indicating that there are a wide variety of possible future economic outcomes and that outlook changes – at times significantly – on a daily basis.

The 2012 year has started out with a remarkably positive tone as the S&P 500 has already advanced 4% just a few weeks into the New Year. Many of the worst performing sectors in 2011 have been the market leaders in 2012. Examples include the financials, emerging markets, smaller cap and growth companies which have all done better than the broad large cap indexes this year, reversing the trend in 2011.

Stocks have been buoyed by positive jobs data early this year, as the economy created 200,000 jobs in December. The unemployment rate moved lower to 8.5% and the jobless claims have generally been trending down at consistently below 400,000 in recent weeks. Of course, just a few weeks into the New Year is a very short sample to hang your hat on. We are well aware that the first several months of 2011 were filled with comparatively positive data compared to what developed over the second half of the year. That being said, with earnings high and interest rates low, we are encouraged.

At Rollins Financial, we have increased our holdings in income-producing stocks and corporate bonds, which tend to be somewhat more stable in the face of volatile equity markets. We are trying to balance allocations with those sectors with the greatest investment potential, and therefore, exhibit more volatility with more defensive and income-producing positions. Our objective for each investor is to find the right mix and offset some of the higher volatility positions with more defensive and non-correlated assets, which will hopefully reduce some of the instability of a portfolio. Should the year provide opportunities to reallocate to either a more defensive or offensive position, we are able to do so with a balanced approach.

The future is always uncertain and that uncertainty is a significant reason why investors expect stocks to provide higher long-term investment returns. It is our belief that stock prices are currently reflecting much of the uncertainty, and therefore, are providing good value to patient investors. The S&P 500 is currently trading at about 12 times this year’s expected earnings, which is below the long-term average of 15 to 20 times earnings.

Bonds and cash provide more certainty, but in most cases, don’t appear priced to provide generous long-term returns. The historically low interest rates paid by CDs and government bonds serve as a good incentive to take on additional risk and invest additional capital in equity positions. This should push stock prices higher, so long as the economy can grow, even if the pace of growth is lower than what we have been accustomed to in the 1980s and 90s.

Thank you again for visiting the Rollins Financial Blog. We hope this update has been useful to you, and as always, we hope you will keep Rollins Financial in mind when seeking professional advice on financial planning and investing.

Best regards,
Eddie Wilcox
Partner and Financial Adviser
Rollins Financial, Inc.

Happy Holidays!

Dear Readers,

In celebration of the Christmas holiday, our office will be closed on Friday, December 23rd and Monday, December 26th. Our regular office hours will resume on Tuesday, December 27th.

If you have a matter that requires immediate attention over the weekend, please contact Joe Rollins at jrollins@rollinsfinancial.com or 404.372.2861.

We wish you and your families a holiday weekend filled with peace, joy and laughter! Here's a clip from "Elf" -- a great new Christmas classic -- to get you in the holiday spirit:

Warm Regards,
Joe Rollins, Robby Schultz and Eddie Wilcox

Too Many Cooks Spoil the Broth

From the Desk of Joe Rollins

Last week, while speaking with my son, Josh, he made a very interesting observation which, in retrospect, should have been quite obvious. His education costs have definitely not been wasted. He indicated that he’d been studying the history of the United States in school and that the confederation of our sovereignty, drafted in 1776, was ineffective. It was not until the actual Constitution was signed thirteen years later that the United States was recognized as a functioning institution.

His thoughts were that the problems that the European Union is going through today are similar to the problems that the United States incurred when they tried to create a unified government, and he’s right. A confederation of sovereign states proved to be ineffective with the introduction of the Articles of Confederation in the 1770s and, to no surprise, has once again been proven inadequate, as made obvious by the financial crisis facing the European Union and its eurozone today. While hoping to stabilize the future of Europe by acting as a single entity, the EU must face the realization that they are, in fact, not a country and “lack the political legitimacy to undertake major institutional changes.”

As a result of the Articles of Confederation, the 13 founding states of the United States of America “retained sovereignty over all governmental functions not specifically relinquished to the national government.” Before any action could be taken, however, all decisions had to be agreed on by all 13 states, ultimately creating a weak and powerless government. The ratification of the Articles, alone, took 2 years to be unanimously agreed upon.

And that is, essentially, the challenge that the European Union has to deal with today, as all 27 nations must give their approval before any major decisions are made. Their attempt to “rely on fiscal policy alone has failed,” so they must move on to plan B in order to remedy this current crisis. In 1789, the United States, aware of the shortfalls of the Articles of Confederation, replaced it with the Constitution; unfortunately, the European Union did not learn from the original naivety of the States and certainly does not have 10 years to overhaul the infrastructure of its divergent currency union.

The longevity of the euro has been called into question; can it continue without a centralized government put in place? The European Union currently does not have their own constitution, government, foreign policy, taxation system or military and many say a political union such as that will never happen as “persistent national identities” will make it nearly impossible. There will never be a United States of Europe; the thought of 27 different countries with different cultures, languages, foreign policies and political structures eagerly willing to band together as ONE just isn’t plausible.

So where does the European Union go from here? Does a functional, middle ground truly exist that will allow the euro to once again thrive for those 17 nations that make up the eurozone , while simultaneously serving the best interests of all 27 independent nations in the European Union?

In the United States we do not spend a lot of time worrying about whether one specific state is having economic problems such as Greece in the European Union. In fact, since we are unified in a centralized government with taxing and spending capabilities, the fact that one state is more economically successful than the others does not create problems. Since all of the money is pooled and the taxing authority stays within the centralized government, each state is supported and, therefore, issues with each individual state are irrelevant overall.

This is the where the problem lies with the EU today. Each country is divided in much greater ways than just location and language and their desire to maintain their own sovereignty prohibits them from accepting the idea of a future that would lie in the hands of a centralized European government. The problems today have been emphasized by the wide divergence of each of these countries and their ability, or inability, to function in a very competitive world.

For the last decade, Germany, with its highly qualified labor force, has taken great strides to modernize their work ethic, productivity and formerly rigid work rules in order to remain as a major player in a more competitive world economy. Due to the lack of trade restrictions within the European Union, Germany has been able to manufacture and sell throughout the EU without tariffs or restrictions, allowing them to successfully reap the benefits of free trade. However, countries like Greece have done nothing to be competitive; they continue to impose severe work restrictions and maintain a general “laissez-faire” attitude regarding business. Short of tourism, Greece has very little capacity to overcome the issues associated with their failing economy.

It is not surprising that the European Union, after following in the missteps of the United States, is now in the same predicament that our forefathers faced over 200 years ago. With 27 nations that are essentially related by name only and no one with the authority to control the actions of the others, failure appears to be inevitable. Only after the European Union acknowledges that they need to have a strong central government, will these issues facing smaller countries then be resolved. I do not think this process will happen overnight and it may, in fact, take many years, but that is the only way they will solve these financial problems. Just as the United States learned in the 1770s, a group of independent countries with the desire of sovereignty and preservation of self-worth cannot effectively govern in the best interest of all.

I appreciate Josh for recommending this issue, and I have thoroughly enjoyed discussing the parallels between the United States in its early years and the growing pains of the European Union with him, and now you.

On a side note, here is a recent picture of my two children, Josh and my daughter, Ava, with Santa. I have one child that is 6’4” and another one that is 27”.

As always, the foregoing are my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best regards,
Joe Rollins

Despite the Negativity, Feeling Thankful

From the Desk of Joe Rollins

I hope you had a wonderful Thanksgiving and that the weather was as beautiful in your neck of the woods as it was here in Atlanta this past weekend. There are many things that I am thankful for – my family and our clients topping the list. We recently celebrated Ava’s six-month birthday, and she gets cuter by the day. She’s up to a whopping 20 pounds and sleeps 10 hours a night uninterrupted. We’re thankful that she’s healthy and happy, and she brings us much joy. She is not spoiled yet – but she will be soon. Life is good!

In economic news, however, there may not seem to be a lot to be thankful for this year. Nevertheless, I’m still optimistic, and in this post I’ll share some of the positives that the media has seemingly swept under the rug. Admittedly, I’m an economic nerd, and while most people probably don’t enjoy researching economic statistics, I find it fascinating. After reading the back page of Barron’s over the weekend, I am more convinced than ever that the economy is doing okay and that the stock market is overreacting to current events.

Over the last two weeks, the broader stock market has gone down approximately 8%, although none of the economic news concerning the United States warranted such a decline. Rather, and as many financial commentators explained, the decline centered on the problems in Europe. After years of a “cradle to grave” mentality, many of the Eurozone countries are now faced with the economic reality that they cannot deliver on their socialist promises. But as I’ve said before, the impact to the U.S. economy and its stock market from Europe’s woes is a mystery to me. I’ll explain why below.

First, the U.S. only exports about $1.5 trillion a year to foreign countries. Of that $1.5 trillion, about 25% -- or $375 billion -- is to European countries. The U.S. GDP is now roughly $15 trillion of which exports are only 10%. How can any reasonable economist think that the $375 billion exported to Europe is going to have any major affect on the U.S. economy?

I don’t understand why anyone would think that just because the European banks are having trouble, European consumers would be any less inclined to buy. It’s perfectly possible that Europe might fall into a mild recession, but even so, it’s likely that consumers throughout Europe will still continue to spend. If that’s the case, exports from the U.S. will continue. However, the real focus for investors should be what the U.S. corporations are doing insofar as the profits they are earning and what prospects there are for the U.S. economy. Those are the facts that affect stock prices.

Noted lifetime bear economist Nouriel Roubini has essentially guaranteed that the U.S. will fall into recession next year due to the European problems. Since Roubini has basically been forecasting a U.S. recession since the turn of the 21st century, however, this proclamation from him should not be a surprise. After all, even a broken clock is correct two times a day.

As I’ve said before, it’s unwise to invest for your future based upon public sentiment and conjecture. The only true catalysts for stock prices are earnings, interest rates, and the economy. These are the hard facts upon which I will bore you with today.

The economic data makes it absolutely clear that the U.S. economy is sound. Except for the residential construction industry, most facets of the U.S. economy continue to operate in a positive fashion. The growth in GDP for the third quarter of 2011 was 2%, and it is a common belief among economists -- and me -- that we should see between 2% and 3% GDP growth for the fourth quarter of 2011 and all of 2012. While this can’t be considered robust growth, it is more than adequate to generate profits.

Let me give you some real numbers. When they announced last week the GDP growth had been revised down from 2.5% to 2%, the market took a major hit. I am positive most of the traders sold on the news without even reading the actual report. I read the report. During the quarter, private business inventories fell by $8.5 billion. This could be for a lot of reasons, but maybe it was due to high sales liquidating inventory.

If inventories had not dropped, the GDP growth would have been 1.55% higher. Therefore, rather than 2% for the third quarter it would’ve been 3.55%, which would have been extraordinarily good. For those that do not find reading the GDP report intellectually stimulating, it is likely that this inventory number will be reversed in the fourth quarter and that gain of 1.55% will then be realized. If so, fourth quarter GDP should be excellent.

For the month of October, the manufacturing capacity utilization has jumped to 77.8%. The full capacity rate is met when capacity utilization is at 80, and so we are just shy of full capacity. Non-residential investment is up year-over-year with close to a 9% jump for the first quarter year-over-year. This is a positive move for any type of building trade other than residential housing.

Automobile production is also up this year. Total automobile product manufacturing (cars and trucks) is up roughly 9.3% year-over-year. Manufacturing of automobiles is a major employment source, yielding a positive sign for new jobs in this industry.

There have been numerous articles in major publications over the last thirty days regarding the increase of oil and natural gas drilling in the U.S. We are seeing an enormous increase of oil production in this country right now – more than anything this country has seen in decades. Natural gas is being located and drilled in many parts of the U.S., forcing the cost of natural gas to all-time lows. This production of new oil in the U.S. has already forced a reduction of our foreign oil imports by 15% in the last two years. This is rarely in the press, however, since environmentalists frown upon drilling for oil and natural gas. However, if we are ever going to be economically independent from our current oil suppliers of oil (many of these are not friendly to the U.S.), we must produce it in the U.S.

Even with the current administration’s attempts to diminish the value of oil produced in this country, drilling is producing jobs unlike any sector of the U.S. economy. While the administration’s “green” job efforts have been a total bust, the traditional jobs created by natural gas and oil productions in the U.S. have been quite lucrative.

U.S. exports are up close to 6% year-over-year while imports are only up less than 2%. We are definitely a long way from balancing our trade budget, but it’s clear that the trend is moving in a positive direction. With further reductions of imported oil, we could get close to balancing the trade budget within this decade. If we did not have an administration in Washington that was against the U.S.’s production of natural resources, we would be closer to accomplishing this goal than we are today. These industries create good, high-paying jobs. The administration’s nearly $90 billion expenditures on green job efforts, in the last three years, has been a complete failure. It has created neither significant energy nor hardly any permanent jobs.

It’s true that unemployment continues to be stubbornly high, but it is trending in a more positive direction. With new unemployment claims falling below 400,000 a week, employment appears to be increasing slowly. Only a year and a half ago, weekly claims for new unemployment were 700,000 per week, and therefore, the current numbers are a significant improvement. In October, the index of leading indicators was up 5.5% year-over-year. This evidence is overwhelming positive for the economy based on economic statistics alone.

The major alternatives to stocks are interest-bearing investments. Of course, interest rates are currently at all-time lows. The Federal Reserve announced that the year-over-year inflation rate is 3.5%. This week, a 30-year Treasury bond was yielding 2.91%. Therefore, by virtue of buying a 30-year Treasury bond, you will have built-in loss of purchasing power over the entire 30-year term. A 10-year bond is yielding roughly 1.9% and a 5-year CD, at its best rate, is yielding only 2.8%. These instruments only assure investors that they will lose purchasing power over their term with inflation at 3.5%.

Earnings this quarter will again set a new record for the highest earnings ever in the history of U.S. finance. Corporate buy-backs and dividend increases have never been higher. It is very easy to purchase utility stocks and other great growth stocks with dividend rates above 3% and many at 5%. As of Friday, the Dow Jones Industrial Average was selling for a price/earnings ratio of 10.6% for the 2012 year. That’s almost a historic low for high quality earnings on large companies. Additionally, the dividend rate for the same group of stocks is greater than 2%, which is higher than the 10-year Treasury bond. This has only occurred a few other times in U.S. financial history.

The FDIC recently announced that bank net earnings during the third quarter were a cool $35.3 billion. U.S. banks are expected to have net profits in excess of $120 billion for the 2011 year. However, bank stocks are selling at a small fraction of their intrinsic value. As of today, Bank of America has a book value of $20.96 per share and has on its balance sheet over $1 trillion in cash. However, the current market value of the stock languishes at $5.50 per share. JP Morgan Chase, one of the great banks of our country, has a book value of $43 per share and the stock sells for $29 per share. Therefore, these two major financial institutions are selling at a discount of nearly 50% of their book value. These types of discounts are rarely seen in the U.S. Furthermore, U.S. banks have never been as financially sound or as financially able to lend as they are today.

It’s easy to be confused by all of this positive economic news when the market was down close 8% in the last two weeks. Like I’ve said before, however, the traders on Wall Street don’t care about economic trends or positive economic results; their only concern is movement (either up or down). Once the market moves, they can adjust either up or down by trading millions of shares for a minuscule gain. Long-term investors like us should not be concerned with day-to-day movements that really mean nothing in the end.

Yes, there are negatives stemming from the crisis in Europe. But in my opinion, even if Europe were to implode, it might actually be good for U.S. companies. How? If the Eurozone countries split up and started creating tariffs among themselves, it would likely benefit American companies. Moreover, the reestablishing of central governments in each of these European countries would be a positive economic benefit for the U.S. because we would have a competitive advantage on currency and corporate strength. To me, the biggest concern is the uncertainty of it all. At the speed they are moving at in Europe, it doesn’t appear that we will see a complete resolution for months, if not years.

I believe that the major negative facing our country is Washington’s complete ineptitude. The Congressional super committee’s failure to come up with a compromise on a financial plan is a classic example. The U.S. is facing $44 trillion in deficits over the next decade and this group of twelve could not agree on a mere $1.2 trillion in reductions. While the issues in Europe are wreaking havoc on the financial markets, at least they are dealing with their problems; U.S. leaders have yet to step up to the plate to deal with ours. In spite of Washington’s incompetence, however, the extraordinarily high levels of corporate profits, rock bottom interest rates, and a stable banking environment provide for a favorable appreciation in the stock market. If we want “real change” in Washington, we need to make a change.

As always, the foregoing are my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best regards,
Joe Rollins

Let it grow. Let it grow. Let it grow.

“Real generosity toward the future lies in giving all to the present.” – Albert Camus

This holiday, give your younger loved ones the gift of higher education with a 529 plan. Let’s face it, they’re never going to put it on their wish list over an iPad or a Kinect, but, fortunately for them, they have someone as sagacious as you in their lives. They may not appreciate it now, but they will one day (and if they never do, well you have the option of passing it on, penalty-free, to someone more deserving)!

You can start a 529 plan by simply setting up recurring, monthly payments of as little as $50, or by an initial contribution of at least $500, with no mandatory monthly deposits. And if the low minimums aren’t incentive enough, please note that your investment is never taxable if used for higher education purposes such as tuition, books, supplies, fees, etc. “For 529 plan purposes, an eligible educational institution is any college, university, vocational school or other post-secondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education.”

In the past, we have done numerous, in-depth blogs about 529 plans and we encourage you to peruse these for more detailed information:

• Q&A Series - Tax Considerations for Establishing 529 Plans
• Q&A Series – College Savings Plans
• To 529, or not to 529 – That is the Question
• Q&A Series - Which Assets Affect Financial Aid Eligibility?

Please feel free to contact us with any questions about setting up an account that’s right for you, or if you’d like to make a contribution towards an existing one. And remember, life isn’t always too short, so don’t forget to give your own retirement plan a gift as well!

Have a wonderful Thanksgiving and please note, our office will be closed on Thursday, November 24th and Friday the 25th.

Best Regards,

Rollins Financial, Inc.