How do I Calculate Tax Savings on Mortgage Interest?

Tim Plaehn for  Demand Media writes: Many new home buyers are under the impression that paying mortgage interest will automatically provide a big write-off and tax savings. In reality, that may or may not be the case. For the first-time home buyer, getting a mortgage means that you can now itemize your deductions rather than using the standard deduction. Your tax savings depend on how much more you have to itemize than the standard deduction allows.

Step 1

Note the current standard deduction for your federal tax filing status. For 2013, the standard deduction amounts by filing status are the following: Single: $6,100 Married filing jointly: $12,200 Head of household: $8,950 Married filing separately: $6,100

Step 2

Determine your marginal tax bracket. For 2013, the federal income tax brackets range from 10 to 39.6 percent, with the majority of tax payers falling into the 25, 28, 33 or 35 percent brackets. You pay different rates on different levels of income and your marginal bracket is the highest rate you pay based on your annual taxable income. You can get your marginal tax bracket from tax rate tables or the IRS tax return instructions booklet.

Step 3

Determine the deduction amounts you will have from the purchase and financing of a home. Deductible home-related items include mortgage interest you pay during the year, mortgage insurance premiums you pay and the property taxes on your home. Add up the totals for these costs over the course of a calendar year.

Step 4

Look up or estimate other payments you make that would be deductible if you itemized your deductions. Another likely deduction category is state income tax or the amount of general sales tax you pay during the year. You can deduct one or the other state collected tax type but not both. Another possible deduction is charitable contributions, including cash and donation of goods.

Step 5

Total together the two groups of potential itemized deductions. Most individuals cannot use the second group unless they own a home and the interest deduction puts them near or over the standard deduction, which allows the smaller deductible items to help reduce your tax bill.

Step 6

Subtract your standard deduction amount from your estimated total of itemized deductions. For example, if your status is married filing jointly and your total itemized deductions are $16,000, the different would be $3,800 -- $16,000 minus $12,200.

Step 7

Multiply the amount of your deductions that is greater than the standard deduction by your marginal tax bracket to find the amount of tax savings you would get from having a mortgage and paying tax-deductible interest. For the example if you are in the 28 percent tax bracket, that percentage times the $3,800 in extra deductions means that buying a home with a mortgage would save you $1,064 in federal income taxes.

Could Asset Location Make Your Investments More Tax Efficient?

Michael Smith writes: What happens when you get a group together that consists of financial planners, CPAs, estate planning attorneys and investment managers? Usually when that happens for me, it means that a bunch of my friends are getting together to go watch one of our friend’s bands play or we’re playing poker. And, it also means that the topic is eventually going to become a financial one and inevitably there will be people on opposite sides of an issue so debate is a certainty.  The great thing about the debate is no matter what side you’re on, you learn something you didn’t know before the debate. One of our recent debates was about asset location. 

What is asset location? Simply put, asset location deals with the type of account that holds your various investments. Taxable accounts, IRAs, 401ks, Roth IRAs…where is the best place to hold taxable investments like bonds? Dividend-paying stocks? Growth stocks?  Does it really matter?

This article talks about asset location and how it can be additive to your overall financial life. In fact, Morningstar is tracking a new statistic and they are calling it gamma. Gamma is the additional return that an investor can earn through strategic financial planning efforts, including tax efficiency and asset location.

So what is the answer?  There is some debate in the financial community about the best accounts to hold various investment types, but I’ll share my opinions on the topic:

If you have money in taxable accounts, they are ideal accounts to hold stocks. Why? Stocks don’t always go up. At least, not the ones I buy! Using a taxable account for stocks allows you to take advantage of tax losses and favorable long term capital gains tax treatment.  And, if the stocks pay dividends, the most favorable tax treatment of dividends comes from taxable accounts as well. IRAs and 401ks are great vehicles for holding tax inefficient investments like bond funds, real estate investment trusts and commodities.  The tax inefficient investments get sheltered through a tax deferred account. Roth  are great for holding high growth investments since all of the growth can be withdrawn tax free during retirement.

It’s not always this simple since we don’t all have all of these account types and we all have different tax rates. Your age, your investment philosophy/risk profile, your long term goals as well as other factors may all influence your decisions regarding asset location.  All of your accounts don’t have to be invested identically.

What can you do? Look at your investment holdings. Is your overall stock vs. bond vs. cash allocation appropriate for your goals? That’s always the best place to start.  It’s not the most exciting part of investing (there’s a lot more sizzle in talking about what stocks might be the next Apple or Google) but it’s the part that drives ~90% of your return.

As you make changes to your overall allocation, consider the tax impact of your investment holdings.  If some changes would be appropriate for the location of your assets, think about the opinions above and if you have additional questions, you can always ask us a question on Facebook!  The IRS treats your investments differently.  Maybe you should, too.

Where to Find Cheap Investment Advice

The Experts from the Wall St Journal write: With so many investment services geared toward the wealthy, it can be tough for average investors to find decent investment advice.

So we asked The Experts: How can people with limited assets and income get good investment advice?

This discussion relates to a recent Journal Report article on using the internet to find good investment advice and formed the basis of a discussion on The Experts blog on Sept. 6.

Resources for Do-It-Yourself Investors

GUS SAUTER: There are a variety of ways to get good advice. It may not be customized, or tailored precisely for any particular individual, but as long as one's risk tolerance isn't either extremely conservative or extremely aggressive, an investor can assemble an effective investment strategy.

For investors who are self provisioners and want to create their own portfolio, there is a wealth of education available online. While many people think investing is hard, it doesn't have to be. Just remember three major principles—balance, diversification, low cost. And think long term. Many mutual-fund companies provide tremendous education on their websites for do-it-yourselfers.

For those who don't want to be actively engaged in creating an investment plan, there are a number of mutual funds that essentially provide advice in a product. These so called target retirement funds or target-date funds are designed to be one-stop shopping and represent the fund company's best thinking for asset allocation for an investor of a certain age. For example, a 2050 target retirement fund is designed for someone who will turn 65 in 2050, or a year close to that. Such a fund would likely have a pretty aggressive allocation today, reflecting the investor's young age (28). The fund will become more conservative as the investor ages, reflecting the investor's declining ability to take risk as she gets older. These funds can be very effective for investors that don't have large or complex portfolios.

George U. "Gus" Sauter is a senior consultant to Vanguard Group Inc. where he was chief investment officer from 2003 through 2012.

Learn These Basics

ALEXA VON TOBEL: While it can be hard to distill the "good" information, there is a wealth of investment guidance available online. I would advise people to start by learning the basics of investing. Investing is an industry crowded with complex lingo—often designed to be confusing. Before you dive into implementing any advice, it is key to understand the basics (e.g., discount vs. full-service brokerages, ETFs vs. mutual funds).

Next, it is critical (let me repeat, critical) to assess your overall financial situation to see whether you are even in a position to invest. Do you have any debt to tackle first? And do you have an emergency savings account set up with enough cash to cover your living expenses for six-plus months (or more if you have a family)? If your financial foundation is in check and you're looking to invest for the long term, then it makes sense to seek out more active support around investing.

With the rise of fintech companies, there are now affordable fee-only options for investment guidance, which make advice accessible to people at a wide range of asset and income levels. It's important to look for a service that is fee-only (instead of companies that charge for a percentage of assets‚ which skim a percentage of your potential earnings). It's also important to find an adviser who is not biased, someone whose salary is not tied to your ability to buy the products the adviser may be pushing.

Historically, investment advice has been reserved for the incredibly wealthy. But in order to amass wealth, access to that advice is critical. Average investors should take advantage of the innovation that technology is bringing to the space.

Alexa von Tobel (@alexavontobel) is the founder and CEO of LearnVest.com.

My Favorite Low-Cost Site for Investment Advice

MATT HOUGAN: The good news is you can get better advice and better portfolios at lower costs today than ever before.

My favorite solution? Wealthfront. It's a Silicon Valley startup that offers incredibly well-constructed portfolios through a technological interface at ridiculously low costs. It charges $0 for accounts less than $10,000 and 0.25% for accounts larger than that. For that, you get all-ETF portfolios based on the latest in modern portfolio theory, managed by investing legend Burton Malkiel (author of "A Random Walk Down Wall Street"). The service includes tax-loss harvesting and regular rebalancing, with zero commissions and zero custodial costs. The tax-loss harvesting alone will more than pay for the fee.

You could easily pay a financial adviser 2%, and in 99 out of 100 cases you would get worse portfolios, worse service and worse outcomes (assuming they would even take your call if you didn't have $250k to invest!).

Wealthfront is an incredibly good solution for people with normal bank accounts, and a good solution even for those who are quite wealthy.

(I am not in any way affiliated with Wealthfront—I'm just a big fan of what they do.)

Matt Hougan (@Matt_Hougan) is president of ETF analytics and global head of editorial for IndexUniverse LLC.

Financial Resources for New Investors

MICHAEL KITCES: When you are in the early years of beginning to save and invest, the simple mathematical reality is that the fact you are saving and investing is far more important than how in particular you invest it. In other words, if you've just managed to save your first $2,000 for retirement, the primary benefit is that you actually added a whopping $2,000 to your retirement account, and not trying to generate an extra 1% return (which in the end, will only add up to $20 of "excess" return for the coming year). As your savings and account balance grows, eventually this dynamic begins to shift, and by the final years leading up to retirement the results of your portfolio are dominated by the returns, such that any volatility in the markets can lead to significant "retirement date" risk.

Given this dynamic, then, the best course of action in the early years is actually to focus primarily on getting into the habit of saving, and how to boost your "human capital" by earning more (in fact, when you're young it's often better to invest in your career than your retirement account anyway!), and to maintain a relatively simple portfolio so you can begin to get accustomed to the experience (and volatility) of investing.

That being said, sometimes a little help would be helpful, and there are some resources out there to consider. A number of firms and organizations have personal financial advisers that are specifically targeted at helping newer investors, includingLearnVest and NestWise, and the financial planners available through the Garrett Planning Network. There are also a rising number of online tools that can help you get started building your first portfolio—one of the simplest and easiest solutions isBetterment.

As your savings and investments grow over time, it will become increasingly important to make sure that you're on track towards your goals, and you may wish to explore a broader range of investment solutions. When you're getting started, though, the real keys are just to keep it simple, keep it low cost, get the help that you want and need and remember that the fact you are saving—and continuing to build that habit—will be the biggest determinant of your long-term financial success!

Michael Kitces is a partner and the director of research for Pinnacle Advisory Groupand publisher of the financial-planning industry blog Nerd's Eye View. You can follow him on Twitter at @MichaelKitces, or connect with him on Google+.

Few Assets? Try These Investment Firms.

MICHELLE PERRY HIGGINS: Certainly The Wall Street Journal and The Experts panel are excellent sources. The Journal provides great financial information, and the investment advice given on this panel is appropriate for every income level and any size balance sheet. If an investor with limited resources came into my office and wasn't a perfect fit for me as a client, I would direct them to an investment firm such as Charles Schwab. These types of companies are easily accessible for most people with limited incomes and have capable financial consultants available to guide them with their investments.

Michelle Perry Higgins (@RetirementMPH) is a financial planner and principal at California Financial Advisors.

Two Good Books for Beginning Investors

MIKE PIPER: Naturally, it depends somewhat on how limited the assets and income are.

As a writer, I am of course thoroughly biased here, but I think books are a good place to look for guidance. The cost of reading a few books is minimal, but the rewards can be significant—especially for somebody who is just getting started and who can put the lessons to work over a very long period. If you compare two people at the beginning of their careers, one of whom takes the time to read and fully digest a few good books about investing and the other of whom does not, it's not at all unreasonable to think that the difference in their portfolio values by the time they retire would be a six-figure sum.

If you're looking for a good "getting started" book, you may want to consider "The Investor's Manifesto" by William Bernstein or "The Elements of Investing" by Burton Malkiel and Charles Ellis.

Of course, the drawback of books is that the advice they give is not in any way personalized, so at times it can be a challenge to figure out how to apply the generalized advice to your personal circumstances. If you're looking for personalized advice from a professional, I think one good place to look is the Garrett Planning Network—a group of financial planners who do hourly fee engagements and who make a point of striving to be accessible to the middle-income market.

Finally, I can't pass up an opportunity to recommend the Bogleheads investment forum (named after John C. Bogle, the founder of Vanguard). It's an active community of well-informed DIY investors who are happy to share their time and knowledge. Regardless of your income or asset level, this is one resource you don't want to miss.

Mike Piper (@michaelrpiper) is a Missouri-licensed CPA and the author of the blogObliviousInvestor.com. He is also the author of several personal-finance books, including his latest, "Social Security Made Simple."

Great Resources for Investors With Low Incomes

GEORGE PAPADOPOULOS: There are financial planners out there who specialize in working with people on an hourly consultation basis. Fellow WSJ Expert Sheryl Garrett's firm, Garrett Planning Network, has fiduciary fee-only planners all over the U.S. who do an excellent job, and I often recommend them. I know they put the client first and will not attempt to sell any products. No sales, just quality advice. Paying for a few hours for the help of a good financial planner every year can make a huge difference in financial success.

You can get your pressing finance questions answered by members of NAPFA (National Association of Personal Financial Advisers) during one of their monthly public-service online chats conducted in partnership with Kiplinger's Personal Finance magazine. These chats are always scheduled for every third Thursday of the month from 1 to 3 p.m. Eastern. The upcoming events are scheduled for:

Thursday, Sept. 19, 2013

Thursday, Oct. 17, 2013

Thursday, Nov. 14, 2013

Thursday, Dec. 19, 2013

You can access the chats by clicking here.

In addition, the CFP (Certified Financial Planner) Board conducts Financial Planning Days in many cities across the U.S. every October in cooperation with the Financial Planning Association, the Foundation for Financial Planning, and the U.S. Conference of Mayors.

Finally, some of us take pro bono cases. We don't mind answering a quick general question; just do not ask for a hot tip or where we see the market going next week! I don't mind giving people an hour of my time at no charge once in a while. Most of us got into this business to help people and we get a natural high doing so.

George Papadopoulos (@feeonlyplanner) is a fee-only wealth manager in Novi, Mich., serving affluent individuals and families.

Where to Start if You're Looking for Low-Cost Investment Tips

ELEANOR BLAYNEY: Just about anyone can afford an Internet connection these days. So it's no surprise that the Web is considered the best way for individuals without much money to get the information they need to start investing. Even those with significant income and wealth are attracted by the availability and low cost of financial websites as a primary source of guidance.

But while bursting with a gazillion bytes of information, the Internet cannot make individual eye contact or exercise judgment. For good investment advice, an expert is often needed by low-income, low-net-worth people, as much as by Bill Gates or Oprah.

Just an hour or two with a financial-planning professional can help an individual who is just starting out or has not accumulated significant wealth. With few resources, the individual does not need to consider a lot of investment choices or strategies. He needs advice that is simple, plain-vanilla, sturdy and reflective of his long-term goals. In fact, he may not need investment counsel at all to begin with, but advice on protecting the resources he has before he attempts to grow them.

The financial-planning profession is, I believe, changing to accommodate this need. There are professionals who are moving downstream to focus on those with limited financial means, including younger clients, certain minority groups and individuals in financial crisis, such as divorcées.

Eleanor Blayney (@EleanorBlayney) is consumer advocate of the Certified Financial Planner Board of Standards.

Three Investing Tips for People With Limited Assets

MANISHA THAKOR: "I don't have much money, how can I get help making what I do have grow?" Historically this has been the ultimate financial "chicken and the egg" conundrum. An adviser has only so many hours in a day to work. If utilizing a percent of assets under management fee structure, applying those hours to larger portfolios maximizes profitability. So larger portfolios are where the industry tended to focus. But thanks to technology and new ways of interacting with clients, there are firms that are cracking the code on how to provide solid investment advice to the mass market.

One of my favorite firms in this space is Betterment, which focuses on my preferred investment strategy—the use of low-cost index funds and ETFs. I'd liken this firm to the Southwest Airlines or Target of financial services—striving to provide a high-quality, low-cost customer-service-oriented experience to everyone.

In general, when it comes to getting financial advice when you have limited assets, the three things I'd suggest focusing on are: Identify the appropriate asset allocation for your situation, use low-cost investment solutions to implement that plan and, if needed, work with your adviser to adjust your budget to pay off any debt as fast as you can and rejigger your cash flow to live within your means and save for the future. Those three basic steps can go a long way towards putting you on the path to financial nirvana.

Manisha Thakor (@ManishaThakor) is founder and chief executive of Santa Fe, N.M.-based MoneyZen Wealth Management LLC.

Four Free Investment-Advice Sites to Check Out

CHARLES ROTBLUT: The smaller the amount of wealth, the more resourceful an investor needs to be. Every dollar of expenses accounts for a proportionately larger percentage of assets as the amount of wealth decreases in size. So, the lesser one's wealth is, the more important it becomes to ensure the maximum benefit is realized for every dollar spent on fees and expenses.

This said, a person with lower levels of wealth does have options. There are many websites with various useful free financial and portfolio planning tools. For example, AAII has asset-allocation suggestions, T. Rowe Price has a great simulator for determining when and how to take Social Security benefits, Yahoo has a retirement budget tool, and Mint.com can help you track your spending so you might be able to figure out ways to save more.

Depending on the type of benefits package, a person's employer might have some useful resources. Additionally, some financial planners will work on a fee basis, and it may be worth paying the consultation fee if to get a good long-term strategy.

Charles Rotblut (@charlesrotblut) is a vice president with the American Association of Individual Investors.

Free Tips from Bogleheads

RICK FERRI: Go to Bogleheads.org for advice. It's an online organization of knowledgeable investors who are ready to help anyone who asks. The site is operated by a nonprofit organization, so there is no commercialism and no hassles, and here is the best part—it's free. You can read without logging on, but if you wish to ask a questions, you'll have to log on.

The Bogleheads site consists of the wiki and the forum. Both were built by volunteers who are dedicated to helping people begin or improve their investing journey through the application of sound investing principles. These values come from the investing philosophy of Vanguard founder Jack Bogle, who strives "to give ordinary investors a fair shake."

You won't find a better investing site on the Internet than Bogleheads.org. I've been an active member of the community for more than a decade.

Rick Ferri is founder of Portfolio Solutions LLC and the author of six books on low-cost index-fund and ETF investing. His blog is RickFerri.com.

How to Find Cheap Investment Advice at Your Library

TOM BRAKKE: Generally, I think that "people with limited assets and income" need planning advice much more than investment advice. (That's true for almost everyone, actually.) Pay down debt as fast as you can, save as much as you can and resist pie-in-the-sky investment projections and "opportunities."

It is unfortunate that sound financial advice can be hard to find unless you have something more than "limited assets and income." Start at the library and focus on savings and planning books first, rather than investment ones. There may also be charitable and governmental organizations that provide services for free, and some financial planners do pro bono work for those in need.

Tom Brakke (@researchpuzzler) is a consultant, writer and investment adviser who specializes in the analysis of investment decision making and the communication of investment ideas.

Basic Investment Advice for People on a Budget

TERRANCE ODEAN: There are several online sources of basic investment advice as well as low-cost financial advisers. I don't know enough about any one of these to make recommendations. Good generic advice is to try to save 20% of your after-tax income, invest in low-cost, broad-based equity- and bond-index funds, such as total stock-market index funds or total bond-market index funds. The right mix of equities and bonds depends upon a person's goals, age, income, wealth and psychological ability to tolerate losses. Pay attention to fees. For U.S. equity- or bond-index funds, the expense ratios should 0.20% or less. If you are advised to pay higher fees, find better advice. If you are advised to buy Exchange Traded Funds (ETFs), make sure that these funds track broad-based indexes and that you don't pay high commissions when buying them.

Terrance Odean is the Rudd Family Foundation professor and chair of the Finance Group at the Haas School of Business at the University of California, Berkeley.

Warning Signs You Should Switch Financial Advisers

The Experts from the Wall St Journal write: You entrust your financial adviser with a lot of important information. While it's crucial to maintain a good relationship, it isn't always easy to tell when to jump ship.

With this issue in mind, we asked The Experts: What are key warning signs that should make you consider switching financial advisers?

This discussion relates to a recent Journal Report on how to fire your financial adviser and formed the basis of a discussion on The Experts blog on Sept. 19.

7 Signs Your Financial Adviser Is a Flake

MICHELLE PERRY HIGGINS: Having a trusted financial adviser and someone that is always working in your best interest is imperative. They can make or break your financial planning and investment experience. Here are just a few red flags that it might be time to leave your adviser:

1. It takes several days or weeks for them to call you back. Or worse, they never follow up on a request you made.

2. They switch firms every couple of years, which may indicate that they lack stability.

3. Every time you see them they continually push products on you. That is a salesperson, not a financial adviser.

4. Financial planning is low priority for them and they fail to discuss your situation in detail: debt, cash flow, retirement, insurance, estate and tax planning. Having a comprehensive financial plan is a necessity with a good adviser.

5. They fail to send a quarterly portfolio-performance statement that also shows exactly how they are paid. Caveat emptor.

6. They appear to be an emotional adviser who constantly changes investment strategy.

7. They have no consistent client-review cycle.

Michelle Perry Higgins (@RetirementMPH) is a financial planner and principal at California Financial Advisors.

Beware of Financial Advisers Who Won't Talk About Fees

RICK FERRI: Key #1: It's time to consider switching when you can't figure out how much you're paying in fees and expenses, and your adviser avoids the issue. Investment costs are important. You should know exactly what you're paying and to whom. This includes the adviser fees, commissions, mutual-fund fees and any administrative costs.

Key #2: It's time to consider switching when you can't figure out how your portfolio has been performing or how this return compares to appropriate market indexes. Top advisers disclose their performance to clients for better or worse, and they create clear and concise reports that compare returns to appropriate benchmarks. These reports show net-net, meaning they include the adviser's management fee in addition to all other costs.

Key #3: It's time to consider switching when you ask your adviser about low-cost index funds, and they scoff at the idea. The benefits of using low-cost index funds are well documented, and every learned adviser knows the facts (see "A Case for Index Fund Portfolios"). I'm not suggesting that all advisers should use index funds, but they should acknowledge that index funds are tough to beat and that there is no sure way to pick winning active fund managers.

Rick Ferri is founder of Portfolio Solutions LLC and the author of six books on low-cost index-fund and ETF investing. His blog is RickFerri.com.

A Financial Adviser Has to Be More Than Knowledgeable

RAFAEL PARDO: When your financial adviser becomes either inattentive or nonresponsive to your requests, particularly those relating to information and explanation, an alarm bell should immediately go off in your mind. In hiring a financial adviser to guide or control your investment decisions, you presumably have done so because he or she has superior information about money management and will use that information to deal on your behalf with others who likewise have superior information. But your adviser's acumen, without more, should be insufficient to establish the level of trust necessary for inspiring confidence that your adviser will champion your best interests in managing your money. Ideally, your adviser will cogently explain his decision-making process in recommending and taking courses of action on your behalf. Such an explanation should leave you assured that your adviser conceives of himself as your alter ego—that is, that his decisions would be no different if he were managing his own money and had similar risk preferences and financial goals as you.

Conceptualizing the adviser-client relationship in this way highlights that your adviser's communications are a critical lens for evaluating the performance results achieved by his recommendations and actions. (After all, sometimes good decision making can lead to poor results, and sometimes poor decision making can lead to good results.) At the end of the day, you should want to know why it is that your adviser has suggested or adopted a particular investment strategy over others. If he fails to communicate his reasoning or if he provides an explanation that is cavalier or nontransparent, that may be a red flag indicating that it is time to find a new adviser.

Rafael Pardo (@bankruptcyprof) is the Robert T. Thompson Professor of Law at Emory University, where he specializes in bankruptcy and commercial law.

The Most Important Quality in a Financial Adviser: Communication

ELEANOR BLAYNEY: 1. When you do not understand what the adviser has communicated to you.

2. When your adviser has not asked you if you understand what has been communicated to you.

3. When your adviser has not communicated to you whether he or she is a fiduciary adviser.

4. When your adviser does not communicate what "fiduciary" means in the context of your advisory relationship.

5. When your adviser is not communicating with you, period.

Eleanor Blayney (@EleanorBlayney) is consumer advocate of the Certified Financial Planner Board of Standards.

Why Dump a Financial Adviser? Let Me Count the Reasons.

GEORGE PAPADOPOULOS: My newest clients decided to leave their wirehouse broker because, in their words, they faced a "crisis of trust" and now wanted to work only with a fiduciary adviser. According to them, a combination of factors had built up over several years. They aren't alone. Although any one specific factor may be the spark that ignites the decision to switch, by the time that happens several other factors have already begun smoldering. They include:

1. Not knowing how much and/or how your adviser is getting paid

2. Feeling you are not being listened to

3. Not getting your phone calls or emails returned promptly

4. Being proactively contacted only to be sold different products (usually involving some type of annuity or life insurance)

5. Not understanding what you are advised to invest in

6. Not having an overall plan

7. A nagging feeling that your adviser's interests are not aligned with yours

8. Not being offered advice on matters involving taxes and estate planning

George Papadopoulos (@feeonlyplanner) is a fee-only wealth manager in Novi, Mich., serving affluent individuals and families.

Why Performance Isn't the Main Factor in Picking a Financial Adviser

JOHN ROGERS: The red flags should go up if you are concerned whether your adviser is acting ethically and in your best interests. Studies we have done show that establishing a relationship of trust is at the top of the list for investors when meeting with a financial adviser, leaving investment performance, the firm's name, and other factors as also-rans. It seems investors are already clear about what they want and need in order to get good investment advice: Transparency, the adviser's commitment to act in your interests, and committing to ethical business best practices come out on top, according to the recent CFA Institute/Edelman Investor Trust Study. Complex financial products that have layers of fees, sanctions by regulatory agencies or professional bodies on the adviser or the firm, high and short-term investment turnover in the account, changes in key personnel, ownership-structure changes, and infrequent or incomplete communications are all warning signs for investors to start asking tough questions.

John Rogers is the president and chief executive of the CFA Institute.

Unwinding Estate Tax Trusts Gets Tricky / Unraveling trusts is a tricky business, and a bigger one right now for estate planners.

Arden Dale for the Wall St Journal writes: Many estates are exempt from federal tax under rules that went into effect this year, so some of the trusts created to protect that wealth from taxes are no longer needed.

But terminating a trust without breaking the Internal Revenue Service's rules can get complicated. So can steering the assets in one trust to another, which is often what an adviser recommends.

Ohio adviser John E. Roessler has suggested to numerous clients that they terminate so-called AB trusts that were set up to avoid or postpone federal estate taxes. These involve two vehicles: an "A" trust, also known as the bypass trust, and a "B" trust, also called a survivor's trust. Together they shield the estate from estate taxes, let it grow while the surviving spouse is alive, and then be passed on to heirs.

The arrangement protects wealth up to the federal estate tax exemption, and now that that exemption is so high--$5.25 million ($10 million for couples)-- fewer people need it. They are also relatively easy to unwind when both spouses are still alive, because AB trusts are still considered legally revocable during that period. When a spouse dies and assets shift from A to B, that status changes to irrevocable.

One client couple of Mr. Roessler, a 71-year-old radiologist and his 72-year-old wife, has a total estate of about $7.5 million. They had an AB trust that they were planning to modify, but had put off those changes for a while. After Congress acted in March on new tax rules, the plan was changed.

"In this instance, the client's procrastination paid off, because they abandoned the AB trusts," says Mr. Roessler, a senior wealth manager at Budros, Ruhlin & Roe, an advisory firm in Columbus, Ohio, that manages around $1.8 billion.

The couple's wealth was moved to another kind of trust, called a contingent qualified terminable interest property trust, he says. These let the spouse who sets up the trust decide how his or her assets will be divided among heirs, rather than leaving those decisions to the surviving spouse. This can help ensure that children of a first marriage get their fair share. It also gives more power to an executor or trustee--more likely to be a tax professional--than to the surviving spouse.

In other cases, Mr. Roessler has recommended what is called a disclaimer trust. Also a kind of AB trust, this lets a surviving spouse "disclaim," or decline to accept, some property that would have gone into the survivor's trust, so that it instead goes directly to the bypass trust. This effectively gives the surviving spouse more control over the estate, and can also be useful in situations of second marriages.

In many cases these days, it's the client who is starting the conversation with their advisers on revamping their trust arrangements, says Ted Kutscher, a financial adviser in Seattle.

"People say 'I know it's time for us to look at our wills because I know the estate laws have changed and I need to brush up' -- that happens all the time," says Mr. Kutscher, a tax lawyer and principal at Kutscher, Rhodes and Benner, Inc., an advisory firm with about $300 million under management.

Many of his clients also have AB trusts, and he is encouraging some of them to use qualified terminable interest property trusts instead. "It removes the decision-making your spouse has to do and leaves it in the hands of the best advisers to make the right elections at the time," said Mr. Kutscher.

Many advisers and tax attorneys are dealing with terminating clients' qualified personal residence trusts, or QPRTs. These pass ownership of a home, often from a parent to a child, while the owner is alive. A lot of people created QPRTs earlier in the decade when the federal tax exemption was lower, to remove their homes from their estates for tax purposes.

Now, these homeowners may no longer need to worry about federal estate taxes since the exemption is so high. Indeed, some would save more tax by ending the trust before its stated term (often 10 or 15 years), so that the home goes back into their estate. That way, heirs would pay less capital gains when they sell the home eventually.

But the IRS will look closely at anyone who tries to terminate a QPRT before its term, according to numerous advisers. The agency might look suspiciously, for example, if the original owner lived rent-free in the home after the QPRT transferred ownership to someone else.

Offshore Accounts: No Place to Hide? / The U.S.'s intense crackdown on tax evasion is entering a new phase.

Laura Saunders for the Wall St Journal writes: What a difference a few years can make.

For decades U.S. tax authorities did little to enforce laws on offshore accounts. Some people felt free to hide assets abroad in a web of secret accounts, and many U.S. citizens living abroad didn't bother to file returns with Uncle Sam as long as they paid local taxes.

All that changed in 2009, when U.S. officials began an intense campaign against undeclared accounts after UBS AG UBSN.VX -0.82% admitted that it helped U.S. taxpayers hide money abroad. The Swiss bank paid $780 million and turned over more than 4,000 names to avoid criminal charges.

Now, international tax lawyers like Henry Christensen are telling clients with offshore accounts that "tax havens where people can hide money are a thing of the past." Mr. Christensen, of McDermott, Will & Emery in New York, represents many wealthy multinational families. "Forget about confidentiality," he says he and his peers are telling clients. "Transparency is here to stay."

The crackdown has brought momentous changes. Among other things, the once-impenetrable veil of Swiss bank secrecy is in tatters, following an agreement in late August between the U.S. and Switzerland that will cause dozens of Swiss banks to pay penalties and name names to atone for past misdeeds.

In the U.S., tens of thousands of taxpayers have admitted to having undeclared accounts and paid stiff penalties since 2009. More than 80 of them have been criminally prosecuted, and some have gone to prison. This past week, Ty Warner, the owner of Ty Inc., the maker of Beanie Babies, paid the highest offshore-account penalty ever disclosed: $53.6 million.

Yet the most far-reaching element of the U.S. offshore-account crackdown is still to come: a provision of the Foreign Account Tax Compliance Act, known as Fatca, which Congress passed in 2010.

Set to take effect next July, it requires foreign financial institutions to report information about their U.S. account holders to the Internal Revenue Service. That group includes U.S. citizens and "green card" holders living both in the U.S. and abroad.

That means the new reporting rules could affect a U.S. citizen who has retired to Mexico, a German-born green-card holder working in the U.S. or even a Hong Kong-born green-card holder studying in the U.K.—as long as each has a non-U.S. financial account.

Failing to comply with Fatca will bring stiff consequences. Foreign financial firms that don't cooperate could lose access to U.S. markets, and individual account holders who aren't known to the IRS could face a 30% automatic withholding rate on payments such as interest and dividends. Institutions making such payments are supposed to verify whether the recipient is exempt from withholding, with help from a large public database of entities maintained by the IRS.

Account holders hit by that 30% levy will face a difficult choice: either forfeit the money or file a U.S. tax return to claim a refund, in effect waving a red flag at the IRS. Even if a refund is due, it could be hard to get, says Christine Ballard, an international tax specialist at the accounting firm Moss Adams in Campbell, Calif.

For people engaged in willful evasion, the costs could be steeper yet—including severe financial penalties many times the value of the account, or even prison. U.S. officials hope Fatca will make these people easier to find. "The law is designed to shine light in dark corners," says Bryan Skarlatos, a lawyer at Kostelanetz & Fink in New York who has handled hundreds of offshore-account confessions.

Experts say it is hard to overestimate Fatca's reach or revolutionary intent. "Fatca is a dragnet meant to force transparency and curtail tax evasion around the world," Ms. Ballard says. "It affects millions of U.S. taxpayers both here and abroad. Some people are willfully evading U.S. taxes, while many others aren't aware of the complex rules."

The law's massive changes are being felt already. Nearly 20 countries or other jurisdictions, including longtime havens such as Switzerland, the Cayman Islands and the island of Jersey, have signed or are close to signing agreements with the U.S. to ease the transfer of tax information under Fatca. Almost 30 more, including Israel and Singapore, are in talks to do so (see list on this page). China has taken tentative steps toward a Fatca agreement, and this summer Hong Kong enacted legislation that could lead to one.

Why are these countries willing to help the IRS? Unfettered access to U.S. markets is one reason. Another is that in some cases U.S. officials will provide "reciprocal" information to a country about its citizens who may be using the U.S. as a tax haven. Mexico, for example, has signed a two-way Fatca agreement. U.S. Treasury Department officials have said they would not provide information to countries where it could be misused, however.

For millions of U.S. taxpayers with international ties, Fatca is a reminder of Uncle Sam's long reach. Most countries don't tax nonresidents' earnings abroad, but the U.S.'s world-wide system does. The issues are compounded by the broad U.S. definition of who is a citizen, which includes people born on American soil and to U.S. citizens abroad.

As a result of Fatca, some Americans living abroad say they are finding it hard to open or keep financial accounts. Thomas Ruta, a CPA at Raich Ende Malter in New York, which advises hundreds of international clients, says he is aware of people who have had such difficulties in Switzerland, Sweden, Australia, the Netherlands and Canada.

Other citizens and green-card holders are considering cutting official ties with the U.S. This year reported renunciations are on pace to double the previous high of nearly 1,800, set in 2011—and there are more that aren't reported.

Will Fatca achieve its vast aims? Anthony Cetta, a tax director who advises clients ofCitigroup's C -1.42% Citi Private Bank in New York, thinks it will. Many experts agree, although they think transparency will come sooner to Western Europe than to Asia. Lawyers will always look for loopholes, but there aren't large and obvious ones yet, they say.

Experts also point out that Fatca's approach is going global. In April, France, Germany, Italy, Spain and the U.K. announced their intention to exchange Fatca-type information among themselves. By early June, 19 countries had endorsed the plan. The U.K. also is making arrangements to exchange information with dependencies and territories such as Guernsey, Gilbraltar and the British Virgin Islands.

The upshot: "Taxpayers will have to ask themselves, 'Why do I have a foreign account, and do I really need it?'" Mr. Christensen says.

For people with foreign accounts worried about the new enforcement regime, here are suggestions from experts.

If you have international ties, seek expert help about what you do—and don't—have to report to the IRS.

It can be hard to know, at least initially. At a minimum, many U.S. taxpayers with international ties already should be filing two forms. One is the Foreign Bank Account Report, or Fbar, due at a special Treasury unit by June 30 every year.

The other is Form 8938, required by Fatca for reporting foreign financial accounts, which is attached to the tax return. On its website (www.irs.gov), the IRS has a useful comparison of the two forms' requirements.

They differ in important but subtle ways. The Fbar reporting threshold is $10,000, which applies to the total of all accounts. The threshold for Form 8938 is higher and more variable—as low as $50,000 for single people living stateside but as high as $600,000 for couples living abroad. The amounts aren't indexed for inflation.

The Fbar form can require reporting of indirect interests, such as signature authority over an account, while Form 8938 focuses on direct holdings. But the latter often requires reporting of more types of assets.

Neither form requires reporting of assets such as art, real estate or foreign currency that are held directly. But beware of quirks: PricewaterhouseCoopers tax expert Evelyn Capassakis says that many homeowners in France put their residence in a legal structure that could have to be reported on Form 8938.

While safe-deposit boxes don't have to be reported, they are often tied to bank accounts that could be.

Compliance will bring new costs for many, but helpful advice doesn't have to be high-priced. H&R Block, for example, has a special site devoted to expatriate taxpayers (expats.hrblock.com) and has expanded its services for them.

Consider whether past noncompliance was "willful."

That is the key standard in tax law for the most serious penalties and offenses. For offshore-account holders, evidence of willful behavior could include having an account in a known tax haven; secreting it within a trust or foundation, or both; and moving it from one institution under scrutiny to another perceived to be less so.

The IRS has a continuing Offshore Voluntary Disclosure Program for such taxpayers. It levies stiff penalties but offers protection from criminal prosecution.

"Accidental" tax cheats face tough choices for now.

Experts say the IRS has been slow and stingy in helping nonfiling U.S. taxpayers who weren't truly willful cheats get into compliance. This is a huge group: The U.S. State Department estimates that 7.2 million U.S. citizens live abroad, many of whom surely have reportable bank accounts, yet only a total of 825,000 Fbar reports were filed for 2012.

Fatca reporting will put pressure on these nonfilers, but many face bleak options. Some are choosing to give up their green cards or citizenship, but that means cutting ties and possibly triggering an exit tax. People who want to retain their U.S. ties can comply in the future, but that doesn't protect against past issues.

Expat groups have raised an intense outcry over their plight, however, and Mr. Skarlatos, the lawyer, says that expats' sheer numbers could move the IRS to make it easier for them to become compliant. In 2012 U.S. officials responded to pressure from Canada that eased the burden for some Canadian-Americans.

Keep an eye on foreign pension plans.

Although the rules exempt reporting for foreign Social Security-type programs, that definition leaves out many other plans, such as self-managed Australian "superannuation" funds.

These plans may be subject to U.S. tax or information reporting or both. PwC's Ms. Capassakis notes that some foreign pension plans, such as Canadian retirement accounts, are exempt from U.S. taxes due to treaty provisions, but they could still have to be reported on an individual's U.S. tax return.

Trusts are a target.

It isn't a secret that one of Fatca's central aims is to "out" offshore trusts that have concealed assets from the IRS and others. As a result, says Steven Cantor, a lawyer at Cantor & Webb in Miami who often advises multinational families, "Trusts are the area of most complexity and uncertainty" in Fatca for individuals.

He and others say the law even could require reporting of a foreign trust that a beneficiary doesn't know about or receive money from—if that person has a green card or is a U.S. citizen.

At the same time, smart planning can reduce compliance burdens and avoid the 30% withholding rate, he says. In addition, it also can avoid identifying non-U.S. beneficiaries of the trust.