From The Corner Office By Mitchell Freedman, CPA/PFS

No! Don't worry! this isn't a column about porn. Nevertheless, as the title suggests it carries a connotation about stripping...the wealth of unsuspecting investors. Bubbles are very light and rise quickly. They have thin skin. And, they burst when they expand too much or if pressure is put on them.

In recent years we have heard about and seen the affects of financial bubbles. I'm referring to "the tech," "the dot-com," and the "large cap bubbles." Recently the financial bubble the media has been talking about is a potential "real estate bubble." However, there is another bubble growing and, as is typical, investors are getting in the game late. The bubble to which I'm referring is the "bond (or fixed income) bubble." Investors are pouring money into bonds and bond mutual funds in what has been referred to as the "flight to safety." In fact, the PIMCO Total Return Fund, a bond mutual fund, is now the largest mutual fund in the U.S. measured by total value. It's funny, albeit tragically so, that investors have recently begun purchasing bonds when they are priced higher than they have been in more than 40 years. Such investors have already missed the substantial increase in bond values of the last several years. And, to add insult to injury, they are selling stocks and stock mutual funds when they are valued less than they have been in more than 6 years. It seems to me they are buying high and selling low...just the opposite of a winning strategy.

Regular readers of The MFAC Report know that I have always recommended that clients' portfolios include fixed income investments. They also know that I am not a market timer. However, there are times when it makes sense to examine markets in order to avoid major mistakes. That is why I have been advising that the fixed income portion of clients' portfolios be positioned in intermediate and short term bonds. I believe that we are watching the "bond bubble" grow and when it bursts the average investor will lose money even though she wants to make money.

With bonds, investors should not only be concerned with market risk, they should also be wary of credit risk. This is the risk that an issuer of bonds may default on payments thus severely diminishing or even entirely wiping out the bond's value. In recent years, as a result of the depressed state of the economy coupled with the pace of financial statement restatements from companies which were thought to be secure, many companies have defaulted on their bonds. Diversification among issuers of bonds via the use of bond mutual funds helps to mitigate credit risk.

So, watch out for "bubbles." She could strip you of your hard earned wealth. Remember to diversify. At any time certain asset and sub-asset classes are hot and some are not. But, being exposed to all of them will reduce volatility. So don't bet the farm on just one asset class. "Bubbles" just loves to hoodwink farmers.

Tips and Alerts Don't Wait! Get Organized By Stacie Hancock

You will appreciate having your financial records and other important documents organized should the day come that you or someone else may need to have access to them.

Here are some of the most critical records you should keep organized in a safe place: wills, trust documents, Social Security cards, insurance policies, driver's license numbers, marriage/divorce papers, car titles, passports, deeds, mortgage records, home improvement records, retirement plan documents, and tax returns. These documents should be in an accessible place and a family member or loved one should know where they are.

A filing system with clearly marked files is a good place to start. Many items can be stored on your computer (make sure you keep an updated backup disc). A master list can help: List account numbers, financial institutions, insurance policies, etc. Let a family member or trusted friend know where this list is kept in case of emergency.

A document checklist is useful in determining what (and where) important documents should be stored. AARP has an excellent one on their website at www.aarp.org/finance/persfamdocs.html. The checklist may also alert you to items that you do not have but should, for example a durable power of attorney, inventory of your property, etc.

Tax Notes Nice Try By Tom Trent, EA

A 2001 Tax Court case emphasizes the importance of keeping good, detailed records. The taxpayer had claimed (among other things) a deduction for business mileage and on audit produced a computer printout “mileage log” with daily listings of business trips identified only by abbreviations. Although he insisted that all of the miles listed were related to his employment, the Tax Court concluded that “nowhere does the record reveal the ... business purpose of each trip...” The Court noted that the tax code “imposes strict substantiation requirements for deducting expenses related to ... automobiles” and that “no deduction is allowable on the basis of any approximation or the taxpayer's unsupported testimony.” The Court stressed that the claimed deduction must be substantiated “with adequate records, or by sufficient evidence corroborating the taxpayer's own statement, showing the amount of the expense, the time and place..., and the business purpose.” The moral? Make sure your documentation is sufficient to “connect the dots” between the expenditure and the business purpose.

Save For Your Children By Karen Cho

The skyrocketing costs of a college education are staggering. In 2001, the tuition component of the Consumer Price Index increased 6.1%, several times more than the general rate of inflation. As the parents of two young children, my husband and I are greatly concerned about the cost of their education when it's time for them to go off to college. Fortunately, Congress has "felt our pain" and provided educational tax breaks. As an accountant, I'm aware of these incentives and thought our clients and readers might be interested in learning about these opportunities. The particulars are complex, so this article is merely an overview of some of the options available.

Until a few years ago, basically the only options available to parents (or others concerned with setting aside money for a child's education) were to set up a Uniform Transfers to Minors Act/Uniform Gifts to Minors Act (UTMA/UGMA) account or to establish a trust for the benefit of the child. But now, there are two new ways: Coverdell Education Savings Accounts (ESAs, formerly known as Education IRAs) and Qualified Tuition Plans (QTPs, also known as ‘529 Plans,’ after the Internal Revenue Code section that governs them). Both of these plans are excellent tools to make gifts to children, grandchildren, or other minors.

Coverdell ESAs

Education IRAs were established a few years ago after constituents, concerned about higher education costs, started applying pressure on their representatives in Congress. And they were a good first start. Their advantages are as follows:

• Earnings grow tax-free and are not Federally taxable when withdrawn for qualified expenses;
• Qualified education expenses cover elementary and secondary schools, as well as college and include tuition, room and board, fees, books, and even the costs of personal computers, educational software, and Internet access;
• Corporations and other entities (including tax-exempt organizations), as well as individuals, can make contributions.

Until this year, ESAs were limited to an underwhelming overall per-year limitation of $500 per beneficiary. In 2002 however, that limit has been raised to $2,000.

The biggest limitation on ESAs is that the ability of individuals to make contributions to an account begins to phase out when Adjusted Gross Income (AGI) reaches $190,000 per year (for a married couple) and the option is completely eliminated at $220,000 AGI.

Qualified Tuition Plans

QTPs can be established to fund a beneficiary's post secondary education, including tuition, room and board, books, and fees. Some of the advantages of QTPs are: