As Certified Public Accountant and CERTIFIED FINANCIAL PLANNER^TM certificants, Karl W. Blovet & Associates has a full range of knowledge, experience and services to offer Chicago area individuals and small businesses in the areas of financial planning, retirement planning, investment planning, tax planning, education planning and accounting.

Our mission as your Chicago accountant and Chicago financial planner is to provide the highest quality services in the financial planning, retirement, investment, tax, and accounting sectors for individuals and small business owners in Chicago. Based upon our experience, technical competence, analytical ability, professional objectivity, and integrity we are uniquely qualified as a financial planner and a accountant to provide these services to our clients. We have a passion for people and a passion for great ideas and creative solutions.

Effective tax planning should be a year-round undertaking and should always begin with good record keeping habits. Valuable deductions are lost as a result of poor organization. Fortunately, there is still time left to review your taxes prior to year end and for you to take action. Volatility in the economy and the markets makes this year more important than most previous years. Also, next year may bring major tax changes as lawmakers confront the record deficit.

Here are a few areas especially relevant today:

Investments

Assess were you stand relative to the value of your investments in taxable accounts. Even after the run-up following the lows of March, many people still have significant losses. When you sell an investment at a loss, you may deduct up to $3,000 of capital losses against ordinary (wages and salary) income, and the unused loss may be carried forward to 2010 and years beyond.

Retirement Savings

Have you recently started a new job or underfunded your current retirement account? If you have adequate earnings, you can still contribute an entire year’s contribution, or provide for the underfunded amount, to a 401(k) or 403(b), which is $16,500 ($22,000 if 50 years of age or older on December 31, 2009) for the year 2009.

Charitable Gifts

If it is benficial to itemize your deductions you can help your favorite charity by making a contribution by year end. For all contributions, you must have a bank record or a receipt showing the name of the charity, the date, and the amount of the contribution. For those so fortunate, consider giving shares of publicly traded stock or mutual fund shares that have substantially increased in value. Provided you have owned the shares more than one year on the date of the donation, you can deduct the fair market value and not have to recognize capital gain on the increase in value on your Form 1040. Also, if you are considering donating cash but will not have the money until next year, charge your gift to a credit card this year. As a result, your donation is deductible this year even though you do not pay your credit card debt until next year.

Medical Expenses

You are allowed an itemized deduction for un-reimbursed qualified medical expenses. This includes medical insurance premiums, Medicare Part B and Part D premiums, co-payments and deductibles for medications and treatments, and medical travel. You must have incurred expenses in excess of 7.5% of your adjusted gross income (AGI) in order to receive a benefit. This is a difficult threshold to overcome unless you, your spouse, or a dependent family member was seriously ill or in a nursing home and not adequately covered by insurance.

IRA Losses

If you suffer a loss on investments you hold inside your IRA, you may be able to treat the loss as a deduction on your individual tax return. In order to qualify, all amounts in all of your accounts (Traditional and ROTH) must be distributed to you prior to year end and the total distributions must be less than your un-recovered basis. Your basis is the total non-deductible contribution in all of your IRA accounts.The resulting loss may be claimed as a miscellaneous itemized deduction, subject to the 2% floor, on Schedule A, of  Form 1040. Any such losses are added back to taxable income for purposes of calculating your alternative minimum tax. Before deciding to distribute your IRA accounts in order to deduct a loss, you should consult with your advisor about the long-term implications of your retirement objectives.

Making Work Pay Credit: This provision allows a credit against income tax up to $400 for individuals whose modified adjusted gross income does not exceed $75,000 and $800 for married couples whose modified adjusted gross income does not exceed $150,000. It applies retroactively to January 1, 2009 and will be repeated in 2010. Taxpayers may take this credit through a reduction in payroll withholding or when filing their returns for the year.

$250 Economic Recovery Payment: This provision allows a one-time payment of $250, for 2009 only, to taxpayers on fixed incomes (primarily Social Security recipients).

First Time Home Buyer Tax Credit: The credit is increased to $8,000 for purchases made after December 31, 2008 and before December 1, 2009. It also eliminates any required repayment to the IRS. The credit is phased out for taxpayers with income in excess of $75,000 for individuals and $150,000 for married couples.

New Car Deduction: For the purchase of a new car in 2009, taxpayers are allowed a deduction for state and local sales taxes and excise taxes. Taxpayers do not need to itemize deductions to take advantage of this benefit. The deduction is phased out for individuals with income in excess of $125,000 and married couples with income in excess of $250,000.

Alternative Minimum Tax: This provision raises exemption amounts above the 2008 levels. The patch was designed to insulate approximately 26 million middle-income taxpayers from the AMT in 2009.

Unemployment Compensation: The provision excludes up to $2,400 of unemployment compensation from the recipient’s gross income for 2009.

Transit Benefit: The new law increases the current $120 per month income exclusion amount for transit passes to $230 per month.

COBRA Benefits: The provision allows individuals who are involuntarily separated from employment between September 1, 2008 and January 1, 2010 to elect to pay 35% of his/her COBRA coverage and have it treated as paying 100%.

If you are creating a new business or unhappy with your current business structure, you need to consider the appropriate business entity. Whether to incorporate or form a limited liability company (LLC) is not always obvious. Under the Internal Revenue Code (IRC), a corporation is either a “C Corp” or an “S Corp.” An LLC is either a sole proprietorship (single member), a partnership (two or more members), a “C Corp,” or an “S Corp (if it meets all of the requirements and files a timely election).”

Tax issues to consider when choosing an entity: Sale of the business/liquidation. Tax rate exposure. Utilization of losses by the shareholders/members. Compensation/fringe benefit packages. Payroll tax liabilities and associated complexities. And state taxes.

Non-tax issues to consider: Limited liability protection for shareholders/members. The capital structure of the entity. Buy-sell agreements. The type of business/investment activity. And the applicable state law and other corporate legal formalities.

As indicated, there are many reasons to choose one structure over another. With that in mind, here is a brief description of these business entities

Sole Proprietorship

The simplest and least expensive structure. Works best if you are on your own, in a low risk business. No double taxation on profits, such as under a “C Corp.” Profits/losses reflected on Form Schedule C of the Form 1040. Unlimited liability for the owner and all income subject to the onerous “self-employment” tax.

Partnership

An unincorporated business that has two or more partners. There are two types: general and limited. In a general, partners share in management and are each 100% responsible for the partnership obligations. In a limited, there are general and limited partners. The general partners manage the business and are personally liable for obligations. The limited partners cannot participate in management, but share in the profits. Their liability is limited to the amount of their capital contributions. Profits are taxed only once, at the partners’ marginal tax rate.

C Corporation

They are taxed (federal and state) at the entity level and are subject to taxes on income generated by the business. Shareholders pay taxes (double taxation) on the profits distributed (dividends) to them. Liability is limited to the shareholder’s investment. They have an unlimited life and possess ease of transferability of ownership. Employment taxes can be minimized. Although, a reasonable salary must be paid.

S Corporation

Corporations with fewer than 100 shareholders can elect to be taxed under Subchapter S of the IRC. With some exceptions, the “S Corp” is not subject to federal tax at the entity level. Profits and losses flow through to the shareholders, to be reported on their tax returns at their marginal tax rates. Some states tax “S Corps” at the entity level. Employment taxes can be minimized for owners receiving a salary. Although, the amount of the salary must be reasonable compared to the profits being generated by the entity.

Cashing out when changing employers: This act will cost you ordinary income taxes on your savings, as well as a 10% penalty. This should be an act of last resort only.

Doing nothing when changing employers: There are many reasons people leave their savings with former employers. Some fear of making a mistake, fear the amount of paper work involved, and some people are satisfied with the performance of their investments in their former plan. In general, by creating a new account and doing a direct transfer of your savings, you will have better investment options, you can consolidate your retirement savings accounts (easing your administrative burden), and better control the related expenses.

Not updating beneficiary designations: Because the inheritance rules regarding IRAs are so complex, it is imperative to make sure that your not creating a disaster for your loved ones by ignoring beneficiary designations.

Forgetting to invest the savings transferred: The last step is to choose the appropriate asset allocation after you have created the new account and transferred the savings. According to the Vanguard Group, many people forget to actually invest the savings once its been transferred. Instead, it sits in low-yielding money market accounts.

US Large Cap Stocks: Large US companies generate a significant portion (41% of revenues for the S & P 500 in 2005) of their revenue abroad. When the dollar is weak, international sales denominated in foreign currency translate into more revenue in dollars.

Foreign Stocks: US investors with a reasonable allocation to international stocks should get help as well. When the dollar declines in value, the value of international stocks goes up in dollar terms.

Foreign Bonds: Having a small portion of your allocation invested in bonds denominated in foreign currencies could provide a boost as well.

The key to compensating for the weak dollar is to maintain a globally well-diversified allocation. We recommend using no-load, low expense ratio index funds, or ETFs for those seeking broad international exposure.