Friday, December 6, 2013

Plan now to avoid new, higher taxes / Changes this year may affect what you'll pay next tax season

Tobie Stanger / Consumer Reports writes: For some taxpayers, the chickens come home to roost for tax year 2013. Two laws—the American Taxpayer Relief Act of 2012 and the Patient Protection and Affordable Care Act of 2010—mandate higher taxes for top earners. But even some with modest incomes could be affected.
The 2012 law—signed on Jan. 2 of this year—set a new top federal income tax rate of 39.6 percent on adjusted gross income (AGI) starting at $450,000 for couples and $400,000 for unmarried individuals. It also boosted the maximum capital gains rate to 20 percent from 15 percent. Couples and surviving spouses with AGI over $300,000 and unmarried individuals with AGI above $250,000 will also see their itemized deductions and personal exemptions gradually phased out as their incomes rise.
And for individuals with annual incomes above $200,000 per year and couples with incomes above $250,000, the Affordable Care Act added a Medicare payroll tax of 0.9 percent, and a 3.8 percent unearned income tax on income sources including interest, dividends, capital gains, passive income, and rental or royalty income.
Taxpayers earning less might not be immune. If, for instance, this year you sell a home that appreciated a lot in value, you’ll pay the higher capital-gains taxes on net profit that exceeds $500,000 for couples and $250,000 for individuals. (The new 3.8 percent tax applies only to profits above those limits.) And if you expect dividends to be as high this year as last, you might be disappointed. Anticipating higher tax rates, many companies paid out more than usual in dividends in 2012. “The dividends that go out this year won’t be nearly as great,” says Brad Hall, a certified public accountant and a managing director at Hall & Co., an accounting firm in Irvine, Calif.

Here’s the good news

Partners in same-sex marriages might get windfalls by year-end because their employers must reimburse them for inflated health-insurance premiums and taxes they paid in 2013 before the Supreme Court nullified a portion of the Defense of Marriage Act. The Internal Revenue Service, which in September said it would honor all same-sex marriages, has offered employers different options on how to repay that money; ask your human-resources department.
Some temporary tax breaks—such as the option to deduct either state income or sales tax—may not survive past 2013. But other aspects of tax planning could become easier. The 2012 law made permanent some temporary tax provisions and clarified others. The law set new estate-tax rates and income floors for the Alternative Minimum Tax, indexed for inflation.
In this relatively stable tax environment, it’s easier to use established strategies, such as deferring income and accelerating deductions, says Mark Steber, senior vice president and chief tax officer at Jackson-Hewitt Tax Service in Parsippany, N.J.

What you can do

Contribute as much as possible to a tax-deferred 401(k) or individual retirement account to shrink taxable income, says Gregg Wind, CPA, of Wind and Stern, an accounting firm in Los Angeles. The maximum IRA contribution for 2013 is $5,500 ($6,500 with the catch-up provision). Contributions to 401(k)s are capped at $17,500 (or $23,000 if you’re catching up).
Sell losing investments to harvest losses, but only if the fundamentals no longer make sense in your portfolio. Prepay property taxes and education expenses before Dec. 31 to maximize deductions and tax credits. (Exception: If you expect to pay the AMT, you won’t get a tax deduction for prepaying property taxes.) Those 70½ and older can still take advantage of a temporary rule that allows individuals to contribute up to $100,000 to a charity from their IRAs, sidestepping income tax on the withdrawal. So think about being generous.
Posted on 5:37 PM | Categories:

4 Steps To Maximize Your Charitable Giving Tax Break

Ashlea Ebeling for Forbes writes: For the 26% of taxpayers who itemize charitable deductions on their tax returns, keeping good records is a must, and Intuit’s TurboTax has a handy free solution: an online software program called ItsDeductible, and an even handier new ItsDeductible App launched this week for Apple’s iphone with iOS7. Given that it’s giving season, why not give it a try to see if you can unlock some extra tax savings. It worked for me.

To sign up, you give your email (if you have a TurboTax account, use the same login) and income range (that’s only used to calculate running tax savings). There are useful reminders sprinkled throughout to make sure you play by Internal Revenue Service rules. Then run through the four categories of giving and see how it adds up.

Cash. You start by entering charities (if you’re a repeat giver, you only have to do this once), then the date and amount of gift, whether in hard cash, or by check, credit card or payroll deduction. You still need to hold on to proof of the gift as backup of your entries—a statement from your bank or credit card company showing the date of the donation, the amount and the name of the recipient. If the gift is $250 or more, you need a written acknowledgement from the charity.

Stuff. From books to vacuum cleaners, ItsDeductible gives you drop down menus with estimated values for the stuff you donate to charities like Goodwill or your local thrift shop. You have to use your judgment and your conscience, whether an item is in high or medium value. Friendly reminder: Tax laws do NOT allow charitable deductions for contributions of household items and clothing NOT in used condition or better; in other words, your stuff better be in good used condition to garner a tax break.

Stock. This is often seen as a taxwise giving strategy just for big donors but donating appreciated stock held long-term (one year or more) is a savvy way to stretch your giving dollars, even for smaller gifts of stock. You avoid paying any capital gains tax due on the appreciation, and you get a deduction for the fair market value of the stock on the date of the gift.

Mileage. Recording mileage is overlooked because it seems petty, but it can still add up at 14 cents a mile (not the 56 cents a mile business expense mileage rate). You can enter one trip or recurring trips, say you drive 200 miles roundtrip drive to a charity board meeting three times a year. You can add other expenses like parking, tolls or train fare too.
When you’re done logging (you can download a summary report as a PDF or export it into your TurboTax tax return) you might wonder, how your charitable deductions stack up to your peers. The Internal Revenue Service tracks the average charitable contribution deductions made by itemizers by income range. Here’s a summary chart, courtesy of tax publisher, CCH, a Wolters Kluwer business:

$15,000 to $30,000: $2.058
$30,000 to $50,000: $2,285
$50,000 to $100,000: $2,815
$100,000 to $200,000: $3,857
$200,000 to $250,000: $5,824
$250,000 or more: $19,651

The IRS take a “dim view” of taxpayers who base their claimed deductions on these figures, notes CCH, but the averages are useful to see if your deductions are out of line so you can take extra care to document your claims.
Posted on 5:36 PM | Categories:

MYOB vs Reckon vs Xero: The 44-page Australian small business accounting software toolkit

Business IT Australia writes: Today we're announcing that our Small Business Accounting Toolkit - the 44-page essential guide comparing MYOB, Xero and others, as well as payroll, bookkeepers and other software basics - is free to download.  The Accounting ebook contains all our best articles, guides, feature charts and more; many written specifically for this ebook.
Posted on 8:18 AM | Categories:

Don’t Miss This 2013 Opportunity! Tax-Savvy Strategies for Roth IRA Conversions

Lisa Hay for Yahoo writes: You have probably heard of the Roth IRA. You may have even heard that a Roth IRA is “better” than a traditional IRA.
You fund a Roth with after-tax dollars, which means that you’ve already paid taxes on the money you put into it. In return for no up-front tax break, your money grows tax free. That means that when you withdraw it at retirement, you pay no taxes.
This article assumes that you have a basic understanding of the other advantages and disadvantages of a Roth IRA.
There are two ways to get money in your Roth IRA: a Roth contribution or a Roth conversion.
There are income restrictions on making contributions to a Roth IRA. However, these income restrictions do not apply to Roth IRA conversions. So while not everyone may be able to contribute to a Roth IRA, most people can convert to a Roth IRA. But, a common roadblock to conversion is having cash flow to pay the tax liability.
A Roth conversion is treated as a taxable liquidation of your traditional IRA followed by a non-deductible contribution to the new Roth account. So the “cost” of a Roth conversion is paying income taxes on the amount you convert in the year of conversion. The “benefit” is that you give that money the potential to grow tax free and ensure that you have tax-free withdrawals for you and your heirs.
There are two key ways to help you manage the tax bite and reduce the tax cost of a Roth conversion.
Spreading the conversion over multiple years may help reduce the tax cost of a Roth conversion
A common way to manage taxes on a Roth IRA conversion is to spread the conversion over a few years. This may prevent the income from the conversion from bumping you into a higher tax bracket and allow you to spread the tax bill over multiple years.
For example, if you are a married couple, filing jointly, with $106,400 in taxable income in 2013, you could convert up to $40,000 to a Roth IRA and stay within the 25 percent tax bracket (which for 2013 is taxable income between $72,501 and $146,400).
If you converted more than $40,000, additional amounts would be taxed at the 28 percent marginal rate.
As long as your tax rate and taxable income generally stays the same, and tax rates don’t change, you could convert $40,000 each year until you reach the total amount you want to convert.  (Note: Although you may have some control over your taxable income, future tax rate increases are outside of your control.)
However, things aren’t always as simple as in the example above. For higher-income filers, phase-outs on itemized deductions and personal exemptions can make computing taxable income more complex.
Also, because the Roth conversion must be completed by December 31, it may be difficult to estimate your taxable income.  Tax reporting documents are typically not available until well after Dec. 31. So your income may end up being higher or lower than you expected.
But there is still a potential “way out” should you change your mind: a re-characterization  allows you to “undo” some, or all, of a conversion. In fact, you have until October 15 of the year following conversion to re-characterize. A conversion completed in 2013 can be partially or fully “undone” until Oct. 15, 2014.
A charitable donation may help reduce the tax cost of a Roth conversion
Another tax-savvy strategy is to use the tax deduction for charitable contributions to offset the income from a Roth conversion. Used effectively, tax deductions for charitable contributions can allow you to convert a larger amount at a lower tax cost.
The tax deduction for a contribution to a public charity can be up to 50 percent of your adjusted gross income (AGI) for cash donations and up to 30 percent for donations of securities (generally deductible at fair market value when long-term appreciated securities are gifted) in a given year. If your charitable contribution exceeds these limits, the excess can generally be carried forward for up to five years.
To estimate the amount of the charitable deduction you may be able to claim, you add the taxable portions of your conversion amount to your AGI. For example, if you are planning to convert $200,000 to a Roth IRA and expect your AGI before the conversion to be $150,000, your estimated adjusted gross income (AGI) would be $350,000 after the conversion.
Therefore, you could potentially deduct up to $175,000 (50 percent of $350,000) of a charitable cash contribution, or $105,000 (30 percent of AGI) of a charitable donation of securities with long-term appreciation.
Contributing securities with capital gains would result in an even more savvy tax move.  If the donation to charity includes securities with long-term appreciation, you would also avoid taxes on the realization of those gains.
If you prefer giving regularly rather than making a single large gift to charity when you convert to a Roth IRA, you may want to consider a donor advised fund.
DAFs allow you to make a charitable contribution to the DAF in a given year, and take a tax deduction that year. In effect, you create a reserve of charitable dollars that you distribute over time to support charitable causes.
Using a DAF as part of a Roth conversion strategy would mean that you could take a tax deduction for the entire amount of the contribution to the DAF in the year that you do a Roth conversion, which could help offset the taxes in that year.
A final point to note: charitable deductions may be worth more if taxes go up in the future, because they may be deducted against a higher tax rate.
In summary, although you take a current year tax hit from a Roth conversion, it could be a savvy tax move in terms of future tax savings. Using the strategies above can help reduce the tax cost of a Roth conversion.
Please consult with your tax professional regarding your particular situation. A tax professional who takes a holistic view of your financial situation can provide guidance on whether you’re likely to benefit from a Roth IRA conversion and how to execute the conversion as one aspect of comprehensive tax planning strategy.
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  • TSparky 9 hours ago
    0 
    1 
    OK, so if I want to roll over 100,000 into a Roth IRA, to offset the 25,000 in taxes I need to donate 100,000 to charity. Sure, that makes a lot of sense.
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  • Realist 18 hours ago
    0 
    6 
    This is good advice for fairly wealthy people, but for most of us, we can't afford the $10,000 tax bill on a $40,000 conversion nor a charitible donation large enough to offset the $40,000 conversion. Most people with this type of wealth already have tax advisors at the ready. We need more articles for the average Joe making $25,000 - $50,000. Show us what we can do to prepare for retirement.
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  • Hondo 18 hours ago
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    4 
    So you have to be rich enough to give away a lot of money to charity to get partial break in tax? That is the strategy?
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  • Dennis 18 hours ago
    4 
    3 
    Pensions are no longer sacred, so what makes you think that Roth IRA's won't be taxed in the future?
    Even though the government is printing money, it still doesn't have enough!

    It seems like 1/2 the world is in civil war against their governments, I can see why some people are renouncing their citizenship because it's going to be ugly.
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  • privateeye 7 hours ago
    0 
    1 
    If you have money, they (government) will eventially take it
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Posted on 8:18 AM | Categories:

Tax Moves Boomers Should Make Now

Casey Dowd for Fox Business writes: No one likes to talk taxes amidst all the holiday cheer and end-of-year festivities, but for baby boomers who are on a fixed income and are either nearing or in retirement, year-end tax planning is the key to avoid overpaying on their taxes.
Yes, the official deadline is still four months away, but making a few tax moves now can bring significant time and money savings in April.
Grafton "Cap" Willey, managing director at accounting and professional services firm CBIZ MHM, offered the following tax tips for boomers to avoid giving Uncle Sam more than his fair share of your hard-earned income
Boomer: What are some things boomers can do to minimize overpaying on taxes?
Willey: We’ve seen significant tax changes this year such as phase outs of exemptions and itemized deductions, new tax rate structures, the alternative minimum tax (AMT) and the Medicare surtax on investment income, and all of these might require new planning strategies.
A smart strategy is to plan around capital gains and losses to reduce your tax bill. Depending on your filing status and income, it could make sense to harvest gains in 2013, especially if you expect a higher tax rate in the future. Individuals can use losses to offset both short and long-term gains.
Another tip is to convert to a Roth IRA--this will help future tax planning. Roth IRA withdrawals are tax-free, and there are no required minimum distributions. However, note that you will have to pay the tax on the conversion now, so only convert if you have losses or deductions from previous years.
Don’t wait until the last minute to make tax planning decisions. You have until Dec. 31 to take steps to reduce your tax bill in 2013.
Boomer: What tax provisions are set to disappear at the end of the 2013 year?
Willey: When Congress passed the extender bill last year, it made some of the more critical changes permanent, such as the estate tax changes and the AMT patch. This has taken some of the pressure off passing an extender package this year because there is not the overwhelming outcry from the public.
Knowing how well Washington is working nowadays, I am concerned that many of these issues will not be addressed. Some of the more important provisions that are set to expire at the end of 2013 are the following:
  • Sales and use tax deduction instead of state income tax deduction
  • Deduction for higher education tuition expenses up to $4,000
  • Tax free IRA distribution to a charity of up to $100,000 for those who are at least 70.5 years old
  • Deductibility for mortgage insurance premiums
  • Direct expensing of assets (Sec 179 deduction)-reduced from $500,000 to $25,000
  • Bonus depreciation deduction
  • 15 year depreciation on qualified lease and restaurant and retail property
  • A number of energy incentives and credits
  • Health coverage tax credit
Boomer: What deductions and credits are especially important to know about for those on a fixed income?
Willey: Those on fixed incomes have to be concerned about the impact that additional income has on the taxability of their Social Security and the deductibility of their rental losses. Large capital gains can push incomes over the limits for the phase outs of itemized deductions and exemptions as well as pushing higher income taxpayers into the new higher income tax rates and the Medicare surcharge tax.
Another unforeseen issue may arise for seniors on Medicare. A bump in income (one-time capital gains) can increase their Medicare premium substantially for the following year because the premium is based on adjusted gross income. It often comes as a surprise because it does not show up on the tax return, but it is billed as an increased premium paid throughout the following year.
The deductible medical costs now must exceed 10% of adjusted gross income -- not 7.5% as in prior years. This change may make it more difficult to get a medical deduction. You may want to consider bunching deductions in the year that you will meet the limitation.
Boomer: Will boomers tax rates change for 2014?
Willey: Many of the tax rates and brackets will be indexed for 2014 as well as the phase out limitations. Not all are indexed so you need to check as to what the changes are. The taxable wage base for Social Security will go up from $113,700 to $117,000 so boomers may be paying more in Social Security taxes if they hit the maximum.
Boomer: What should we know about the gift tax exclusion differences between 2013 and 2014?
Willey: Right now, the gift tax rules allow certain gifts of up to $14,000 per recipient. The annual gift tax exclusion will stay at $14,000 for 2014 after going from 35% in 2012 to 40% in 2013 and beyond. The unified estate tax credit used against the estate tax has gone from a value of $5.12 million in2012 to $5.25 million in2013 and will be $5.34 million in2014. One of the items that the IRS is looking at is the transfer of houses from parents to kids. The IRS is finding that very often gift tax returns have not been filed on these transactions. They should be filed.
One way to get around the gift tax ceiling is to pay tuition and medical expenses for others. The IRS doesn’t view these as gifts – only if you make payments directly to the institution, not to the person who would benefit from the money. So, for example, if you’d like to pay a grandchild’s college tuition, you would need to write the check directly to the school he or she attends.
Posted on 8:18 AM | Categories:

Save Money on Investing & Financial Planning / Here are ten ways to keep more money for your future.

Kiplinger writes: Here are ten ways to build the biggest nest egg possible.

1. MAKE THE MOST OF YOUR SHELTER

Uncle Sam wants YOU to pay fewer taxes. If you're investing for retirement or college in taxable accounts -- before your IRAs, 401(k)s or 529 college-saving plans are maxed out -- you're wasting money. You should first cram as many dollars into these tax-sheltered investments as you can.
For instance, say a 25-year-old invests $5,000 each year into a Roth IRA until she retires, and she makes an average annual 8% return on her investment. She'll have $1.4 million saved by the time she turns 65. However, if she stashes that cash in a taxable account earning the same return, she'd only have about $1 million (if her earnings were taxed at 15%). That's 28% less money.

2. TRIM THE FAT

Mutual fund fees can weigh down performance. The average diversified U.S. stock mutual fund charges 1.3% a year in expenses. If your fund isn't beating its benchmark, you're better off buying a low-cost index fund or exchange-traded fund that matches the benchmark.
For example, you'll pay an annual expense ratio of just 0.07% to invest in the Vanguard Total Stock Market ETF (VTI), which tracks Standard & Poor's 500-stock index. On a $50,000 investment, that's a savings of $615 per year.

3. GET ADVICE A LA CARTE

Paying a fee-only financial adviser to create a comprehensive plan and manage your investments for long-term goals can get pricey. Many set investment minimums of $250,000 or more and charge 1% of assets under management per year.

4. TRADE STOCKS FOR FREE

Zecco.com offers ten free stock trades per month with a balance of $25,000 or more. Wells Fargo offers 100 free trades per year to customers with $25,000 in brokerage accounts, loan balances or bank deposit accounts.

Don't qualify for the freebie? Go for the deep discount. Just2Trade.com charges $2.50 per online trade, SogoTrade.com charges $3, and TradeKing.com, $4.95. Compare that to $30 or more per trade at a full-service broker. If you don't need the extra perks and attention at the big guys, don't pay for it.

5. ELIMINATE THE GUESSWORK

Trying to time the market is often a losing game. In trying to buy low and sell high, many people actually do the opposite. Instead, employ the simple strategy of dollar-cost averaging.

By investing a fixed dollar amount at regular intervals, you smooth out the ups and downs of the market over time. Take out the emotion and guesswork, and investing can become less stressful and more successful.

6. ESCAPE TAXES ON BONDS

Bond investors have an escape not available to stock owners. They can buy municipal bonds and pay no federal taxes at all on the interest. And if you buy muni bonds from in-state issuers, you can avoid state and local taxes as well.
A 4% yield on a muni is the equivalent of a 5.6% payout on a taxable bond if you're in the 28% tax bracket and 6% if you're in the 33% bracket. And these yields are relatively safe. Muni defaults have been rare over the years. Learn more.

7. WATCH OUT FOR NICKEL-AND-DIMING

Make sure your investment performance isn't tripped up by fees. Watch for inactivity fees, low-balance charges or even fees to receive a paper account statement.

If you're getting nickel-and-dimed, find a new firm that fits your trading style and account balance.

8. DON'T LOAD UP

If you build your own portfolio, selecting no-load mutual funds can save you more than 5% in sales charges. Here are our our favorite no-load picks.

9. CONSIDER TAX SOFTWARE

You'll pay $400 to $500 for a certified public accountant or enrolled agent to prepare your tax return. But if your financial situation is fairly straightforward, you can save big bucks with tax-prep software, such as TurboTax, TaxAct or H&R Block At Home. Prices range from free to about $50 for the most popular tax programs.
You simply answer interview-style questions and the software automatically fills in your tax forms. It can even import investment data directly from your broker and give you tax-planning advice for next year. (For complex matters, however, such as real estate investments or stock options, it's best to stick with a pro.)

10. KNOW WHEN TO WALK AWAY

The right time to unload shares is one of the toughest calls investors have to make. Hold a stock too long and it could become a loser. Sell too early and you could miss out on superior gains.
But if you know the signs to look for, you can boost your chances of making a good decision -- and saving (or making) some serious cash. For example, keep an eye out for a change in the company's fundamentals and how the stock performs relative to its peers.
Posted on 8:17 AM | Categories:

5 estate planning tasks your clients should do before 2014

 TOM NAWROCKI for LifeHealthPro writes: As we enter into the holiday season, probably the last thing people want to deal with is their estate plan. But the end of the year also provides an opportunity for many clients to revisit and reconsider aspects of their estate planning, since there are many asset-protecting strategies that can be put in place at this time of year. The following five topics are ones you may wish to bring up with your clients before we ring in 2014.


1. Give away tax-free gifts.

The easiest and probably most popular year-end tax planning tactic is making use of a client’s gift tax exemptions. A married couple has the right to donate up to $28,000 apiece ($14,000 for a single person) to as many deserving beneficiaries as they can find, tax-free for the recipients. This also has the side benefit of moving those assets out of the client’s estate.
Of course, that exemption is purely per year, so if the client hasn’t made any gifts yet in 2013, now is the time to consider them. One variation to consider: The gifts don’t have to be directly made to a person. They can go to a trust, or into premiums for an irrevocable life insurance trust. A perfectly practical Christmas gift this year could be a sizable donation to a grandchild’s 529 plan.

2. Begin a business succession.

A structured gifting program can also help the transition of a family business. An owner is entitled to give away equity worth up to that $14,000 each year without incurring any gift taxes. That can help make anylong-term succession plan smooth, gradual, and subject to a lot fewer taxable events.
It can also allow the client or the client’s ownership group to maintain control of the business even as they are transferring chunks of equity. A gifting program can be used in combination with a family limited partnership or family limited liability company for a full-service transition plan. Proactive advisors might want to mention the possibility of a gifting plan to start before year end to their business-owning clients if only to plant the seed for future years and a far-off succession plan. 

3. Schedule an annual meeting.

Many wealthy clients have established one of those family limited partnerships or limited liability companies, even if they exist largely in name only for tax purposes. If one of these entities hasn’t held an annual meeting yet this year, December would be a good time to do it. The IRS looks much more kindly on these organizations if the participants treat them like serious business entities.

4. Set up a GRAT.

Another option for clients trying to reduce their tax bills — particularly those with stock options or other assets that they expect to appreciate in the near future — is to establish a Grantor Retained Annuity Trust (GRAT). This is the strategy Facebook founder Mark Zuckerberg used to shave back his tax burden. It transfers the so-called “hot assets” to a family member, but allows the client to retain income from the property and legally avoid any transfer taxes.
The trust guarantees the grantor the right to receive an annuity based on the worth of the asset for a fixed period of time. The appreciation rate for the asset is determined by IRS rules. When the term expires, the beneficiary takes full ownership of the property, free of any taxable obligation.
Zuckerberg had the foresight back in 2008 to transfer $3 million worth of Facebook equity into a GRAT. In 2012, Forbes magazine calculated the value of Zuckerberg’s tax-free transferred asset at $37 million. The clever strategy was not enough, though, to keep Zuckerberg from paying the biggest tax bill in history in 2012, at more than $1 billion.

5. Review your estate plan.

Then there’s the simple matter of reviewing a client’s estate plan to incorporate changes that may have happened over the year. This provides the perfect excuse for advisors to reach out to clients they haven’t heard from during 2013, just to check up on any family changes, financial adjustments, or other life matters that may affect their estate planning. At any rate, it’s something else to say after “Happy Holidays.”
Posted on 8:17 AM | Categories: