DaVinci Financial DesignsJim Agostini, CFP®, ChFC®Managing Partner & RegisteredPrincipal3200 Devine StreetSuite 200Columbia, SC 29205Office 803-741-0134Mobile 803-530-5375jim.agostini@dav-fd.comwww.davincifinancialdesigns.com

5Cost-of-Living Adjustments: What They Areand Why They Matter

Understanding the New Medicare Tax onUnearned Income

Financial Tips for Obtaining a Mortgage Loan

How can my child get a better financial aidpackage?

Cost-of-Living Adjustments: What They Are and Why They Matter

See disclaimer on final page

The rising costs of food, gas, electricity, andhealth care can strain anyone's budget. Thesituation is even worse if your living expensesincrease while your income stays the same,because your purchasing power will steadilydecline over time. That's why cost-of-livingadjustments, or COLAs, are especially valuableto retirees and others living on fixed incomes.

How COLAs workA COLA is an increase in regular income youreceive (such as a Social Security or pensionbenefit) that is meant to offset rising prices. It'simportant protection because price inflation hasoccurred almost every year in the last 40 years.

Data Source: Bureau of Labor Statistics

It's easy to think of a COLA as a "raise," but aCOLA is meant to help you maintain yourstandard of living, not improve it. For example,let's say you receive a $2,000 monthlyretirement benefit, and the overall cost of thethings you need to purchase increases by 3%during the year. The next year, you receive a3% COLA, or an extra $60 a month, to help youmanage rising prices.

That 3% COLA doesn't sound like much, butwithout a COLA, inflation can seriously erodeyour retirement income. Assuming a 3%inflation rate, in just 10 years, the purchasingpower of your $2,000 benefit would drop to$1,520, and in 25 years, the purchasing powerof your benefit would be only $963, less thanhalf of what you started with.

Who receives COLAs?Social Security is the major source (and insome cases the only source) ofinflation-protected retirement income for manyAmericans. Social Security COLAs areannounced each October, based on increasesin the average Consumer Price Index for UrbanWage Earners and Clerical Workers (CPI-W)from the third quarter of the last year a COLAwas payable to the third quarter of the currentyear. For example, because the CPI-W rose1.7% between August 2011 and August 2012,Social Security and SSI beneficiaries receiveda 1.7% COLA, beginning with December 2012benefits. However, if there is no rise in theCPI-W, then beneficiaries will not receive aCOLA.

COLAs are also commonly paid to retirees whoare covered by state or federal pensions.However, most private pensions do not offerCOLAs.

Less commonly, employers offer COLAincreases as part of compensation packages.You may also purchase riders to certaininsurance policies (such as disability incomeand long-term care policies) that ensure thatbenefits you receive keep pace with inflation.

Should you count on COLAs?As important as COLAs are, they are stillvulnerable to cutbacks. For example, pensionplans that are underfunded may view reducingCOLAs as a relatively simple way to cut costs,and some plans have attempted to eliminateCOLAs altogether, although there have beenlegal challenges. Changing the COLA formulathat the Social Security Administration uses hasalso been proposed as a way to save moneyand strengthen program reserves.

So while you should appreciate the value ofCOLAs, you should also take other measuresto account for the effect of long-term inflation.These include using realistic inflation andinvestment return assumptions when planningfor retirement, maintaining a diversified portfoliothat reflects your time horizon and tolerance forrisk, and considering investments that havehistorically held their own against inflation.

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Understanding the New Medicare Tax on Unearned IncomeHealth-care reform legislation enacted in 2010included a new 3.8% Medicare tax on theunearned income of certain high-incomeindividuals. The new tax, known as theunearned income Medicare contribution tax, orthe net investment income tax (NIIT), tookeffect on January 1, 2013.

Who must pay the new tax?The NIIT applies to individuals who have "netinvestment income," and who have modifiedadjusted gross income (MAGI) that exceedscertain levels (see the chart below). (Estatesand trusts are also subject to the new law,although slightly different rules apply). Ingeneral, nonresident aliens are not subject tothe new tax.

Filing Status MAGI over ...

Single/Head ofhousehold

$200,000

Married filing jointly/Qualifying widow(er)

$250,000

Married filingseparately

$125,000

What is MAGI?For most taxpayers, MAGI is simply adjustedgross income (AGI), increased by the amountof any foreign earned income exclusion.

AGI is your gross income (e.g., wages, salaries,tips, interest, dividends, business income orloss, capital gains or losses, IRA and retirementplan distributions, rental and royalty income,farm income and loss, unemploymentcompensation, alimony, taxable Social Securitybenefits), reduced by certain "above-the-line"deductions (see page one of IRS Form 1040 fora complete list of adjustments).

Note that AGI (and therefore MAGI) isdetermined before taking into account anystandard or itemized deductions or personalexemptions. Note also that deductiblecontributions to IRAs and pretax contributionsto employer retirement plans will lower yourMAGI.

What is investment income?In general, investment income includes interest,dividends, rental and royalty income, taxablenonqualified annuity income, certain passivebusiness income, and capital gains--forexample, gains (to the extent not otherwiseoffset by losses) from the sale of stocks, bonds,and mutual funds; capital gains distributionsfrom mutual funds; gains from the sale ofinterests in partnerships and S corporations (to

the extent you were a passive owner), andgains from the sale of investment real estate(including gains from the sale of a secondhome that's not a primary residence).

Gains from the sale of a primary residence mayalso be subject to the tax, but only to the extentthe gain exceeds the amount you can excludefrom gross income for regular income taxpurposes. For example, the first $250,000($500,000 in the case of a married couple) ofgain recognized on the sale of a principalresidence is generally excluded for regularincome tax purposes, and is therefore alsoexcluded from the NIIT.

Investment income does not include wages,unemployment compensation, operatingincome from a nonpassive business, interest ontax exempt bonds, veterans benefits, ordistributions from IRAs and most retirementplans (e.g., 401(k)s, profit-sharing plans,defined benefit plans, ESOPs, 403(b) plans,SIMPLE plans, SEPs, and 457(b) plans).

Net investment income is your investmentincome reduced by certain expenses properlyallocable to the income--for example,investment advisory and brokerage fees,investment interest expenses, expenses relatedto rental and royalty income, and state andlocal income taxes.

How is the tax calculated?The tax is equal to 3.8% of the lesser of (a)your net investment income, or (b) your MAGIin excess of the statutory dollar amount thatapplies to you based on your tax filing status.So, effectively, you'll be subject to the additional3.8% tax only if your MAGI exceeds the dollarthresholds listed in the chart above.

Example: Sybil, who is single, has wages of$180,000 and $15,000 of dividends and capitalgains. Sybil's MAGI is $195,000, which is lessthan the $200,000 statutory threshold. Sybil isnot subject to the NIIT.

Example: Mary and Matthew have $180,000 ofwages. They also received $90,000 from apassive partnership interest, which isconsidered net investment income. Their MAGIis $270,000, which exceeds the threshold formarried taxpayers filing jointly by $20,000. TheNIIT is based on the lesser of $20,000 (theamount by which their MAGI exceeds the$250,000 threshold) or $90,000 (their netinvestment income). Mary and Matthew oweNIIT of $760 ($20,000 x 3.8%).

Note: The NIIT is subject to the estimated taxrules. You may need to adjust your income taxwithholding or estimated payments to avoidunderpayment penalties.

Health-care reformlegislation passed in 2010included a new additional0.9% Medicare tax onwages, compensation, andself-employment incomeover certain thresholds. Thisnew tax also took effect onJanuary 1, 2013. The 0.9%tax does not apply toincome subject to the NIIT.So while you may besubject to both taxes, thetaxes do not apply to thesame types of income.

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Financial Tips for Obtaining a Mortgage LoanIn January 2013, the Consumer FinancialProtection Bureau released a new mortgageregulation, which sets forth stricter underwritingrequirements for mortgage lenders. Theregulation requires lenders to ensure aborrower's ability to repay a loan by taking avariety of underwriting precautions, includingverifying income and assets and increasingdebt-to-income ratios.

The regulation implements sections of the 2010Dodd-Frank Act, and is aimed at protectingconsumers by providing for a standardization ofthe mortgage loan underwriting process.However, some mortgage-industry experts fearthere's a chance that the regulation may end upmaking obtaining a mortgage loan more difficultthan it has been in the past. And while lendershave until January 2014 for final compliancewith the regulation, some have already begunto tighten up their mortgage lendingrequirements. As a result, you may want toconsider the following tips when applying for amortgage loan.

Clean up your credit reportA borrower's credit history is the cornerstone toany lender's underwriting process. As a result,it's important to make sure that your creditreport is in good shape before you apply for amortgage loan. Your credit report containsinformation about your past and present credittransactions and is used by mortgage lendersto evaluate your creditworthiness. A positivecredit history will not only make it easier toobtain a mortgage loan, but can also result in alender offering you a lower interest rate.

You should review your credit report and checkit for any inaccuracies. If necessary, you mayneed to take steps to improve your credithistory. To establish a good track record withcreditors, make sure you always pay yourmonthly bills on time. In addition, try to avoidhaving too many credit inquiries on your report,which are made every time you apply for newcredit.

Improve your debt-to-income ratioIn the past, lenders looked for borrowers tohave a debt-to-income ratio of no greater than36%. The new mortgage regulation suggeststhat borrowers have a debt-to-income ratio thatis less than or equal to 43%. That means youshould be spending no more than 43% of yourgross monthly income on longer-term debtpayments. If you find that your debt-to-incomeratio is too high, there are a couple of steps youcan take to lower it.

Your first step should be to look at yourlong-term debt payments. These include

student loans, credit cards, and carpayments--any loans that won't be repaid withina year. Try to make it a priority to pay downyour long-term debts as quickly as possible.This may require you to review your budget andmake adjustments. If you are having troublecoming up with the extra money, take a look atyour discretionary spending. By cutting back ondiscretionary expenses (e.g., going out to eat orto the movies), you may be surprised at howquickly you can free up money to put towardspaying down your debt.

Another way to improve your debt-to-incomeratio is to increase your income. Perhaps youcan earn extra income by taking a second jobor performing part-time consulting work in yourchosen profession or field of expertise. If youare married and either you or your spouse iscurrently not working, you or your spouse maywant to consider the possibility of reentering theworkforce.

Increase the size of your down paymentWhile it is possible to obtain a mortgage with aminimal down payment--for example, FederalHousing Administration (FHA) mortgagesrequire down payments of as little as 3.5% ofthe home's purchase price--a larger downpayment will usually assure you a moreattractive mortgage loan. In addition to requiringprivate mortgage insurance (PMI), lendersgenerally offer lower loan limits and higherinterest rates to borrowers who have a downpayment of less than 20% of a home'spurchase price.

If you find that you don't have enough for adown payment, you may want to considerholding off on purchasing a home to give youtime to increase your down payment fund. Inthe meantime, you can invest your downpayment in a low-risk, interest-bearing accountsuch as a money market deposit account.

Or, consider looking into alternative ways tofund your down payment, such as:

• Converting/liquidating assets to cash.• Using gifts.• Borrowing from a cash value life insurance

policy or employer-sponsored retirementplan. (Keep in mind, however, that if you takea loan against your cash value, the deathbenefit available to your survivors will bereduced by the amount of the loan. Inaddition, policy loans may reduce availablecash value and can cause your policy tolapse. Finally, you could face taxconsequences if you surrender the policy withan outstanding loan against it.)

You're entitled to a freecopy of your credit reportonce a year from each ofthe three major creditreporting agencies. Visitwww.annualcreditreport.comfor more information.

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DaVinci Financial DesignsJim Agostini, CFP®, ChFC®Managing Partner & RegisteredPrincipal3200 Devine StreetSuite 200Columbia, SC 29205Office 803-741-0134Mobile 803-530-5375jim.agostini@dav-fd.comwww.davincifinancialdesigns.com

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2013

IMPORTANT DISCLOSURES

Broadridge Investor CommunicationSolutions, Inc. does not provideinvestment, tax, or legal advice. Theinformation presented here is notspecific to any individual's personalcircumstances.

To the extent that this materialconcerns tax matters, it is notintended or written to be used, andcannot be used, by a taxpayer for thepurpose of avoiding penalties thatmay be imposed by law. Eachtaxpayer should seek independentadvice from a tax professional basedon his or her individualcircumstances.

These materials are provided forgeneral information and educationalpurposes based upon publiclyavailable information from sourcesbelieved to be reliable—we cannotassure the accuracy or completenessof these materials. The information inthese materials may change at anytime and without notice.

How can my child get a better financial aid package?If your child is accepted at acollege, he or she will get afinancial aid award letter thatcontains: (1) the college's costof attendance (COA) (this

figure is different for every college); (2) yourexpected family contribution (EFC), which iscalculated from the federal government's aidapplication (this figure is constant); and (3) thespecific types and amount of aid being offered.The difference between the college's COA andyour EFC equals your child's financial need.The college's financial aid administrator willattempt to meet this need by offering aid thatincludes a mix of loans, grants, scholarships,and work-study.

Let's assume you and your child are comparingfinancial aid awards from several colleges. Is itpossible to request a more favorable aidpackage? The answer is yes. Financial aidadministrators have the authority to exercise"professional judgment" to reduce the loanportion of an aid award and increase the grant,scholarship, and/or work-study component.Your chances of prevailing are best in twosituations:

(1) You have a special circumstance thataffects your ability to pay. Examples include arecent job loss, high medical bills, or someother factor that puts above-averageconstraints on your income.

(2) Your child has been accepted at twocompeting colleges, and one has offered amore generous aid package. Many collegesdon't mind losing an applicant to a more (orless) selective college, but they generally don'tlike to lose an applicant to a direct competitor.

Even if neither of these situations applies, youcan still contact the college's aid administrator.In any case, the best approach is to send apolite business letter, with a follow-uptelephone call or meeting. Explain in positiveterms how much your child wants to attend thatcollege and highlight your child'saccomplishments. Your success will likelydepend on whether your child will help thecollege meet its enrollment goals, and theamount of discretionary aid the college hasavailable.

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