Archive for the ‘Financial Planning’ Category

You probably feel good that you filed your tax returns on or before April 15 and that you can forget about taxes for another year. Not so fast. Remember the struggles involved with the preparation of 2009 returns, took a look at them again, and determine how better record keeping and planning throughout the year could have assisted you during preparation time.

Tax planning begins with good organization. Valuable deductions are lost as a result of poor record keeping. Also, effective tax planning is a year-round undertaking that works best if started early.

Keep good records.

Maintaining good records for your investments is imperative. Most people still have losses as a result of the prolonged bear market and subsequent recovery that began in March of 2009. Keeping track of your cost basis will enable you to readily determine your capital losses or determine the amount of gains for those so fortunate.

With regard to year-round tax planning, start by determining your short and long term goals and objectives. Quantify your goals and objectives so that you can determine what it will take to get there based upon your time line. Almost everyone wants to save for a comfortable retirement, save for a down payment for that first house, or save for their children’s college education.

Take advantage of every opportunity that exists to put money into a tax favored program. Do it as early in the year as possible. Use your employer’s 401(k) plan, start an IRA, or add to an existing IRA. Consider a Roth IRA conversion. 

Tax favored education accounts allow you to contribute after tax dollars currently for subsequent tax free withdrawals for qualified education expenses. Education Saving Accounts allow you to contribute up to $2,000 per year, per child, under age 18 to cover costs of pre college education expenses as well as college expenses. State 529 plans allow you to contribute to the plan for qualified college expenses. Contributions are subject to gift tax. The $13,000 annual exclusion ($26,000 per married couple) can be used for this purpose.

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.

Every year thousands of taxpayers overpay their income taxes because they use the standard deduction when itemizing deductions would be more advantageous. The causes are bad record keeping and simply not knowing or understanding the law. What follows is a basic review of what expenses qualify:

Taxes: State and local income taxes, real estate taxes, and personal property taxes are all deductible. Federal taxes, social security tax, and sales tax are not deductible.

Medical Expenses: You can deduct unreimbursed expenses for you, your spouse, and your dependents to the extent they exceed 7.5% of your adjusted gross income (AGI). This includes expenses for doctors, dentists, hospital care, prescriptions, nursing services, and medical aids. Also included are, insurance premiums, long term care premiums (within limits), and transportation and lodging.

Interest Expense: You can deduct interest paid on your primary residence and one second home. Also included are, first and second mortgages up to $1 million and home equity loans up to $100,000. Points are generally deductible and points incurred to refinance are amortized over the term of the loan. Interest paid on money used to acquire investments are deductible within certain limits.

Contributions: Donations to qualified organizations are deductible to the extent you receive no benefit in return. The organizations include churches, schools, libraries, and qualified charities. You can make donations in cash, check, or credit card. You can also deduct the fair market value of property other than cash. You must keep detailed records for donations of property other than cash, moreover you need a receipt for cash donations of $250 or more. All organizations must be located within the USA.

Casualty and Theft Losses: Losses from a fire, theft, or disaster are deductible within certain limits.

Miscellaneous Deductions: Included are certain unreimbursed employee expenses, investment expenses, gambling losses, and tax planning and tax preparation fees. Most of these expenses are subject to a 2% AGI floor.

To benefit the most, an awareness of the deductions that apply to you and good records are very important. If you have questions, please contact us.