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Portfolio-related topics are one of the major focuses of tax planning. And there’s a good reason for that: this is the area of your life where you have the most control over taxation. (By way of comparison, there’s isn’t very much you can do to make your home more tax-efficient. Ditto for your job — unless you’re self-employed.)

This week Advisor Perspectives published a great primer on tax-efficient investing from financial planner Allan Roth.

Other Recommended Reading

Thanks for reading!

What is the Best Age to Claim Social Security? Read the answers to this question and several other Social Security questions in my latest book:
Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less

Disclaimer:Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

You may unsubscribe at any time by clicking the link at the bottom of this email (or by removing this RSS feed from your feed reader if you have subscribed via a feed reader).

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A reader writes in, asking:

“At our local Bogleheads chapter meeting, there was a heated discussion about Social Security, specifically, whether it should be counted as a bond in your asset allocation. My view is that it’s not really an asset because you can’t sell it. But one of the more experienced people in our group was emphatic that it’s a mistake to leave Social Security out of an asset allocation analysis and that it should be counted as a bond because it provides predictable payments.”

This question comes up over and over, year after year — both in my email inbox as well as on the Bogleheads forum.

Social Security is an asset. It’s true that it is not a liquid asset (i.e., you cannot sell it). But even illiquid assets show up on balance sheets. Same goes for lifetime annuities. They are assets, even if they are not liquid.

And yes, Social Security is a fixed-income asset. So it’s more bond-like than stock-like.

But it’s definitely not a bond.

There are a lot of differences between a) having a $2,000 monthly Social Security benefit at full retirement age (i.e., a stream of income with a present value of about $350,000) and b) having $350,000 of bonds in your brokerage account.

Social Security is what it is — and it isn’t what it isn’t.

The desire to classify everything as either a stock or a bond is completely bananas.

For example, do you classify your house as a stock, because its value goes up and down considerably over time? Or do you classify it as a bond, because it pays you “interest” in the sense that you do not have to pay rent each month? (I hope the answer is obvious: it’s neither a stock nor a bond, because it is a house.)

The distinctions between different types of assets are real and useful.

Social Security:

  • Is inflation-adjusted,
  • Will last your entire lifetime,
  • Will not extend beyond your lifetime (or beyond you and your spouse’s lifetimes if married, child benefits notwithstanding),
  • Is absolutely illiquid (i.e., it’s not just hard to sell; it cannot be sold at all), and
  • Is subject to political risk.

By shoehorning that into the “bond” category, you are ignoring some or all of those unique characteristics. You are ignoring useful information.

Relatedly, if you have decided, for example, that you want 40% of your portfolio in bonds, but you haven’t yet decided what will count as a bond, how did you decide that 40% was the right number? Perhaps the line of reasoning that went into that decision had some flaws.

Rather than counting Social Security income as part of your bond allocation, I’d suggest using this method for fitting it into your overall retirement plan:

  1. Determine how much money you plan to spend each year during retirement.
  2. From that, subtract any part-time job or business income you expect to earn.
  3. From the remaining amount, subtract your Social Security/pension income to determine how much you will need to spend from your portfolio each year.
  4. Then make any portfolio-related decisions (including asset allocation) with that net required-spending-from-portfolio figure in mind.
What is the Best Age to Claim Social Security? Read the answers to this question and several other Social Security questions in my latest book:
Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less

Disclaimer:Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

You may unsubscribe at any time by clicking the link at the bottom of this email (or by removing this RSS feed from your feed reader if you have subscribed via a feed reader).

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Conventional wisdom states that financial planning is simpler for younger people than it is for people nearing or in retirement.

Michael Kitces argues to the contrary. The portfolio itself may be simpler, but for an actual financial planner (i.e., somebody doing financial planning rather than just portfolio management), there’s still plenty going on, because life circumstances are changing at a fast pace. Insurance needs change as family size or work status changes. Advice could be appreciated regarding a first home purchase. Changes to employment, which are especially common in the early years of a career, require adjustments to plans.

Other Recommended Reading

Thanks for reading!

What is the Best Age to Claim Social Security? Read the answers to this question and several other Social Security questions in my latest book:
Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less

Disclaimer:Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

You may unsubscribe at any time by clicking the link at the bottom of this email (or by removing this RSS feed from your feed reader if you have subscribed via a feed reader).

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A reader writes in, asking:

“As a family courtesy, I recently began completing/filing taxes for two sets of elderly relatives with very small incomes (Social Security, pensions, IRAs).  In reviewing their past years returns, I found they have not had to pay taxes for several years, with their total incomes significantly below the thresholds established by the IRS and state.  Barring a winning lottery ticket, year after year, they owe no taxes, plain and simple.  My understanding from reading the tax code is that they can stop filing altogether, but this idea makes them nervous and even I – after a lifetime of filing taxes – find it contrary to my ‘conditioned response.’  While the codes on ‘Who Must File’ are clear, should we send a one-time letter to the IRS informing them of our intent to stop filing?”

If a person does not need to file, there’s no need to send the IRS any letter indicating such. They can simply not file, and if the IRS later contacts them about the lack of a return, they can reply with a letter indicating the reason (i.e., gross income below applicable threshold and did not meet any of the other “must file” reasons). And, if the person wanted to do so, they could include in that letter a statement indicating that, barring unforeseen circumstances, they will continue to be below the applicable threshold going forward.

I would be cautious about getting into a “not filing” habit though. Circumstances can change in the future. And that applies not just to personal circumstances but also tax law-related circumstances. That is, the rules may change in the future — potentially lowering the “must file” threshold*, potentially adding a new type of tax that the person would have to pay even with a low income, or potentially adding a new refundable credit which the person could claim if they filed. In other words, I would make a point of conscientiously checking every year whether there are any circumstances that would either require filing or make filing beneficial.

As a separate point, even when filing isn’t required, tax returns (even if simply prepared and not actually filed) can often serve as a useful overall record of the person’s finances. A lack of records has a tendency to make things harder at various times down the road — whether for the person in question, heirs, or executors.

*In fact, as the law is written right now, the “must file” threshold will go down significantly in 2026 once the temporary increase in the standard deduction expires.

What is the Best Age to Claim Social Security? Read the answers to this question and several other Social Security questions in my latest book:
Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less

Disclaimer:Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

You may unsubscribe at any time by clicking the link at the bottom of this email (or by removing this RSS feed from your feed reader if you have subscribed via a feed reader).

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The benefit estimate on your Social Security statement assumes that you retire and file for retirement benefits on the same date — and the SSA’s online calculators make the same assumption. So how can you calculate a benefit estimate if you plan to retire prior to (or after) filing for benefits?

Short answer: by using either of two calculators from the SSA and a very slight bit of arithmetic.

Other Recommended Reading

Thanks for reading!

What is the Best Age to Claim Social Security? Read the answers to this question and several other Social Security questions in my latest book:
Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less

Disclaimer:Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

You may unsubscribe at any time by clicking the link at the bottom of this email (or by removing this RSS feed from your feed reader if you have subscribed via a feed reader).

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A reader writes in, asking:

“I have a question regarding Form 8962 (Premium Tax Credit). I am a dependent, received Advance Premium Tax Credit, and have to file 8962 since nobody will actually be claiming me as a dependent. Last year it was simple because publication 974 provided clear instructions for my situation. There was a section that provided instructions for people claiming no personal exemptions, as would be the case for somebody who is a dependent.

This year those instructions are absent since nobody can claim personal exemptions. I’m confused about how to proceed, especially regarding lines 1-5.”

Firstly just to make sure we’re clear on this point: people still can claim dependents, even though the exemption amount is currently set to zero. (Dependents might be claimed for the child tax credit, American Opportunity Credit, or for other assorted purposes.)

If you are claimed as somebody’s dependent, then you are not eligible for the premium tax credit, and you do not file Form 8962. Rather, it is the person who claims you as a dependent who would file Form 8962 for the purpose of calculating any premium tax credit and, if necessary, repaying any excess advance premium tax credit.

If you are confident that nobody is claiming you as a dependent for the year, but you could be claimed as somebody’s dependent for the year, then you would fill out Form 8962 to indicate that you were not eligible for the premium tax credit (because you can be claimed as somebody’s dependent). That is, you would enter zero as your family size (assuming you are not married). And the household income (i.e., MAGI of the people in the household) is zero, because the family size in question is zero. And because the premium tax credit is not allowed to anybody who could be claimed as a dependent, the premium tax credit (line 24) is zero. And then lines 27, and 29 would ultimately reflect the fact that any advance premium tax credit is excess advance premium tax credit.

Now, those are the rules, and that is how I would personally fill out the return in such a situation. But I’m sure I will receive several emails pointing out the following if I do not mention it: some people would encourage you to not check the “I can be claimed as somebody’s dependent” box if nobody else is actually claiming you as a dependent — because if nobody claims you as a dependent, it would be hard for the IRS to be aware of the fact that somebody could claim you as a dependent. And if you are not somebody else’s dependent, then you could be eligible for the premium tax credit.

But again, the Code sections in question (36B, 151, 152) are very clear on this point: if you could be claimed as a dependent, you are not eligible for the premium tax credit. And I would suggest filing accordingly.

What is the Best Age to Claim Social Security? Read the answers to this question and several other Social Security questions in my latest book:
Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less

Disclaimer:Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

You may unsubscribe at any time by clicking the link at the bottom of this email (or by removing this RSS feed from your feed reader if you have subscribed via a feed reader).

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Schwab announced yesterday that they will be switching to a flat, low-cost price for financial planning services via their “Schwab Intelligent Portfolios Premium” program. For a cost of $30 per month, plus a one-time $300 initiation fee, the client will receive a “comprehensive financial plan” and “unlimited one-to-one guidance” from a CFP.

Other Recommended Reading

Thanks for reading!

What is the Best Age to Claim Social Security? Read the answers to this question and several other Social Security questions in my latest book:
Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less

Disclaimer:Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

You may unsubscribe at any time by clicking the link at the bottom of this email (or by removing this RSS feed from your feed reader if you have subscribed via a feed reader).

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A reader writes in, asking:

“What is the relationship between the new ‘pass-thru’ income deduction for ‘qualified business income’ and the contribution limits for self-employed retirement plans such as a Solo 401-K?”

Firstly, the new deduction does not have any effect on how much you can contribute to a solo 401(k) — or to a SEP or SIMPLE.

Contributions to such accounts do, however, affect the amount of your qualified business income (QBI) deduction. That is, the deduction you get from pre-tax contributions to such accounts reduces your qualified business income, which reduce your deduction for such income.

Why Do Pre-tax Contributions Reduce Qualified Business Income?

Given that deductions for a self-employed person’s own contributions to a SEP IRA, SIMPLE IRA, or solo 401(k) do not appear on Schedule C (i.e., they do not reduce self-employment income) it surprises many people that such contributions are considered to reduce qualified business income. Nonetheless, they do.

According to the instructions to Form 1040, qualified business income is reduced by “other deductions attributable to the trade or business including, but not limited to, deductible tax on self-employment income, self-employed health insurance, and contributions to qualified retirement plans.”

The Regulations on the topic say essentially the same thing: “In general, deductions attributable to a trade or business are taken into account for purposes of computing QBI to the extent that the requirements of section
199A and §1.199A-3 are otherwise satisfied. Thus, for purposes of section 199A, deductions such as the deductible portion of the tax on self-employment income under section 164(f), the self-employed health insurance deduction under section 162(l), and the deduction for contributions to qualified retirement plans under section 404 are considered attributable to a trade or business to the extent that the individual’s gross income from the trade or business is taken into account in calculating the allowable deduction, on a proportionate basis.”

Those two references only mention contributions to qualified plans (i.e., 401(k) plans, rather than SEP/SIMPLE IRA accounts) explicitly, but it’s clear that the same line of reasoning would apply to SEP IRA or SIMPLE IRA contributions. (Also, for what it’s worth, TurboTax clearly takes that position in its tax calculations.)

Financial Planning Implications

Essentially, your marginal tax rate for qualified business income is lower than it would be without the deduction (because each additional dollar of income causes you to get $0.20 of deduction, subject to phaseouts). In other words, pre-tax SEP/SIMPLE/solo 401(k) contributions aren’t as valuable as they would be without accounting for the QBI deduction.

As a result, Roth contributions would now make sense in some cases where tax-deferred contributions would have made sense before.

Also, if your household is doing some tax-deferred contributions and some Roth contributions, it will be advantageous to make sure that, to the extent possible, your tax-deferred contributions are to accounts that will not reduce your qualified business income. For example if you are self-employed and your spouse has a “regular” job as an employee, it would be preferable for your spouse to make tax-deferred 401(k) contributions while you make Roth solo 401(k) contributions rather than vice versa or doing 50/50 each.

Example: You’re in the 22% tax bracket. A $10,000 pre-tax contribution to your spouse’s 401(k) saves you $2,200 (ignoring state/local income taxes for simplicity’s sake). Conversely, a $10,000 pre-tax contribution to your solo 401(k) only saves you $1,760. That is, at first glance it saves you $2,200, but it also reduces your QBI by $10,000 and therefore reduces the size of your QBI deduction by $2,000 (i.e., 20% of $10,000), which causes an additional $440 of income tax (i.e., 22% of $2,000).

If your business is a specified service business and your taxable income is in the phaseout range, the key message is the same: your marginal tax rate for your qualified business income will be something other than simply your tax bracket. So it will be important to actually do the math before making any related decisions.

What is the Best Age to Claim Social Security? Read the answers to this question and several other Social Security questions in my latest book:
Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less

Disclaimer:Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

You may unsubscribe at any time by clicking the link at the bottom of this email (or by removing this RSS feed from your feed reader if you have subscribed via a feed reader).

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I know that many readers are currently in the process of planning a next career (in many cases, as part of a phased retirement process). There’s no shortage of advice on career selection, but this week I encountered a brief article that actually has some evidence-based advice on the matter.

Relatedly, if you are currently trying to improve the satisfaction/fulfillment you derive from your existing line of work, you may enjoy Cal Newport’s book Deep Work.

Other Recommended Reading

Thanks for reading!

What is the Best Age to Claim Social Security? Read the answers to this question and several other Social Security questions in my latest book:
Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less

Disclaimer:Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

You may unsubscribe at any time by clicking the link at the bottom of this email (or by removing this RSS feed from your feed reader if you have subscribed via a feed reader).

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Last week I was a guest on Rick Ferri’s Bogleheads on Investing podcast. You can listen to that podcast here. (The Bogleheads discussion thread is here, if you want to post any comments.)

One question that a few Bogleheads had asked was about how a US citizen can qualify for U.S. Social Security benefits if they were covered under a foreign social security system for a portion of their working career.

I gave a very brief answer on the podcast, but I wanted to discuss that topic more thoroughly here.

In short, how exactly it plays out depends on which other country you worked in. The U.S. has “totalization agreements” with many countries that provide the rules for how a worker will be treated, but the exact details vary from one agreement to another. (There’s no way around such a situation, given that each country has its own unique tax and social security systems.)

And, unfortunately, given that the specifics vary for each of the agreements, it’s unlikely that you’ll find anybody who is a true expert on any one of them. (I most definitely am not. Despite dealing with Social Security topics all the time, it would be rare for me to get even two people asking about the same totalization agreement in a given year.)

Generally speaking, however, the effects of the totalization agreements are to:

  1. Eliminate dual taxation that would otherwise occur (i.e., simultaneously paying into two countries’ social security systems), and
  2. Allow you to qualify for benefits when you might not otherwise qualify.
Qualifying for Benefits (“Totalization”)

If you meet all the basic requirements under one country’s system, you will get a regular benefit from that country.

If you have at least 6 credits (“quarters of coverage”) under the U.S. Social Security system, but you do not have the 40 credits that would ordinarily be necessary to qualify for a retirement benefit, your credits will be “totalized.” That is, your credits under the foreign social security system will be counted toward qualifying for U.S. Social Security.

And the opposite would happen as well — if you don’t quite qualify for coverage under the foreign social security system, totalization would allow your U.S. periods of coverage to be counted toward qualifying there.

Calculating Benefits

If you end up qualifying for U.S. Social Security benefits via totalization, there is a special set of rules for calculating the benefit. You can find the exact details here, but very roughly what’s going on is that:

  • Only your U.S. earnings are included in the calculation, and
  • The benefit that is calculated based on those U.S. earnings is ultimately multiplied by a fraction, which represents the portion of your career for which you were paying into the U.S. system.
Windfall Elimination Provision and Government Pension Offset

Usually, when you receive a pension from employment for which you did not pay U.S. Social Security taxes, the windfall elimination provision (WEP) applies, reducing your primary insurance amount. With regard to foreign social security benefits, however, the WEP will not apply if you are:

  • Entitled to a U.S. totalization benefit (i.e. you only qualified for a U.S. Social Security benefit by counting your credits from the foreign social security system), or
  • Entitled to a regular U.S. benefit, as well as a foreign benefit which is based on a totalization agreement with the U.S. (i.e. you only qualified for the foreign social security benefit via counting your U.S. credits), and you are not receiving any other pension based on non-covered work (e.g., a pension from the state of Illinois).

Finally, a foreign social security benefit will not trigger the government pension offset (GPO).

What is the Best Age to Claim Social Security? Read the answers to this question and several other Social Security questions in my latest book:
Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less

Disclaimer:Your subscription to this blog does not create a CPA-client or other professional services relationship between you and Mike Piper or between you and Simple Subjects, LLC. By subscribing, you explicitly agree not to hold Mike Piper or Simple Subjects, LLC liable in any way for damages arising from decisions you make based on the information available herein. Neither Mike Piper nor Simple Subjects, LLC makes any warranty as to the accuracy of any information contained in this communication. I am not a financial or investment advisor, and the information contained herein is for informational and entertainment purposes only and does not constitute financial advice. On financial matters for which assistance is needed, I strongly urge you to meet with a professional advisor who (unlike me) has a professional relationship with you and who (again, unlike me) knows the relevant details of your situation.

You may unsubscribe at any time by clicking the link at the bottom of this email (or by removing this RSS feed from your feed reader if you have subscribed via a feed reader).

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