Year-end Planning Tips 5/10 - Small Business owners and Sole Proprietors

Whether you choose to go it alone or you hand over your records to an accountant for tax preparation, how you keep your records is of paramount importance for various reasons.  On the forefront of these reasons is the ability to see how profitable your business venture is and without accurate records you are unlikely to know the true extent of your expenses.  But profitability aside we all strive to shelter as much of our income from taxes as possible.

Most tax shelters are useful if your timing is right but in order for the timing to be right you need all relevant information available to you so that your decision is an informed one.  Take for an example making contributions to a retirement plan, now there are various options open for small business owners from Defined Benefit Plans to Simple IRA, to name but a few.  Both the tax reporting requirement and allowable contribution will differ from plan to plan.  Knowing what your projected income is for the next two to five years can sway maximizing your contribution amount in Defined Benefit Plan, for the older business owners, to opting for a more restrictive Defined Contribution Plan.  On the other hand younger people just beginning might find that a SEP IRA’s minimal costs for maintaining a plan a more attractive.

Choosing a platform for record keeping will always depend on your needs as well as what is easier for you to use. Speaking to your accountant about which software to use will probably go a long way toward reducing your tax preparation costs.  Take for an example QuickBooks, which is an Intuit product, has some reasonable monthly packages for online services.  For those that prepare their own taxes using Turbo Tax the two programs work seamlessly.

Year-end Planning Tips 4/10 - Changes to Itemized Deductions for 2013

For those that itemize their deductions on the individual income tax returns it is important to pay special attention to some of the changes that came into play in 2013.

1.       High-income earners will need to keep in mind the phase-out provision of the American Taxpayer Relief Act of 2012.  The phase-out kick in once your AGI's (adjusted gross income) reaches $250,000 for single filers and $300,000 for married filing jointly.  The phase-out of itemized deductions will also raise tax bills for high-income earners by reducing the tax benefit of the certain itemized deductions. These deductions include: mortgage interest; property, income and sales taxes; contributions; and miscellaneous deductions

2.       Medical deduction – beginning January 1^st 2013 unreimbursed medical expenses threshold has been increase to 10% of AGI (adjusted gross income).  For tax payers over 65 years of age or with a spouse who is over 65 the threshold remains at 7.5% until December 31, 2016.

3.       To claim a charitable deduction for cash donation above $250 you are required to have written acknowledgement and/or cancelled check.  In short keep good records!

4.       For 2013 those tax payers that are over 70½ and do not itemize you can still take advantage of charitable donations by making RMD (required minimum distribution) directly to a charitable organization.  This will not be considered a charitable deduction on your tax return but the distribution will be tax-free.

Again year-end tax planning is an essential tool if one is to reduce their tax bill.

Budgeting for Thanksgiving Dinner

Most of us will be heading out over the next few days to fill our grocery carts with Thanksgiving Dinner ingredients.  Whether your goal is to maintain traditions or you are creating new ones, either way sticking to a budget is important.

First plan your meal and before leaving home make a list of the ingredients you will need to buy.  While you can do one-stop-shopping but this is hardly the best way to take advantage of all the lower prices on offer.  Most groceries stores will be running ads that will serve as a good guideline of where to get the best prices. If you have given yourself a target amount then go a step further and divide this amount by the different stores you will need to go to.

Some stores have club membership that offer discounted pricing while others will offer free turkeys with purchases of a certain amount.  Either way for a effective budget comparison shopping is essential and it need not be tedious so make the most of family assistance and remember to be thankful.

Thanksgiving shopping - making the most of the deals!

As we draw closer to Black Friday, correction - do we now call it "Black Week"?  We are already overwhelmed with unending ads as retailers go all out to draw us into their stores. While most of us use this time to buy gifts for family and friends for the upcoming holiday season.  Whether you are looking for gift ideas for the 12 Days of Christmas; or your gifts for 8 Nights of Hanukkah, (which this year starts the night before Thanksgiving) creating a budget will definitely serve you well.  

For those of us using these “door busters” for personal shopping it is important to make a list as things can easily get out of hand.  While credit cards are convenient to have they are not designed to aide you in controlling your spending.  Prepaid cards on the other hand allow you to put on them the exact amount of money you intend on spending. 

Making a list beforehand would be the best way to go.  You can itemize how much you want to spend on each family member  as this is will help you track what your true savings are at the end of your shopping spree.  Using that list you can surf the net and see with retailers are offering the best deals.   Most of us enjoy a good challenge so coming in under your budget should be most rewarding.

In today's world of ultimate convenience do not get caught paying more than you should for a product. Below are links to some apps that you can utilize to comparison shopping before heading out.  And for those of that want to do online shopping these are a perfect tool.  Please note the list is totally random - definitely not rated nor am I endorsing them.  If anyone has other suggestions please share.  Would definitely love to hear from you on what you use.

1.   The Find

2.  RedLaser

3.  Shop Savvy

4.  Amazon

Year-end Planning Tips 3/10 - Medicare Surtax & Net Investment Income Tax

With all the uproar on the Affordable Care Act - the individual mandate and employer's requirement to provide health insurance for their employees have been on the forefront of the battlefield.  Surprisingly the Medicare Surtax and Net Investment Income Tax came into play without what would have been the expected pomp and circumstance.  Could it be that until people actually sit down and work through what these two taxes mean to their final tax bill for the 2013 tax year, will the reality of it all sink in.

Without too many financial changes most of us go on the assumption that our tax bill will be the same as last year but unfortunately this year there are two new taxes that require thorough tax planning before the close of year.  Some might say planning should really have started during the year as people made changes to their portfolios.

Net Investment Income Tax - 3.8% - using a Form 8960 (still in draft form) - will be used to report the income on the US Individual Income Tax Return beginning with the filing of the 2013 tax return.  Individuals with income threshold of $250,000 and up for those married filing jointly and $125,000 for single filers will be required to pay this tax on their investment income.  Investment income includes the following listed items but by no means limited to this list interest:

• Gains from the sale of stocks, bonds, and mutual funds.
• Capital gain distributions from mutual funds.
• Gain from the sale of investment real estate (including gain from the sale of a second home that is not a primary residence).
• Passive income - income from partnerships and S Corporations

All in all these are big changes that will have a sizable impact on one's tax bill and unfortunately are not only limited to individual income but also Estates and Trusts will be subject to the Net Investment Income Tax, if they have undistributed Net Investment Income.  The threshold for Estates and Trusts is $11,650.

Medicare Surtax - 0.9% - Since employers should have built into the withholding for all $200,000 threshold employees an additional 0.9% medicare withholding the people most impacted by this will be individuals have more than one job (two or three jobs accumulative income above the threshold).  These individual will not have made the necessary withholding adjustments.  Another group of tax payers that might be caught short here will be joint filers as your employers are not necessary going to make adjustments for income that is not earned through them.

Filing Status	Threshold Amount
Married filing jointly	$250,000
Married filing separately	$125,000
Single	$200,000
Head of household (with qualifying person)	$200,000
Qualifying widow(er) with dependent child	$200,000

Year-end Planning Tips 2/10 - Health Insurance

With the year coming to an end it is time to do the dreaded year-end planning.  Depending on one’s source of income the planning will vary.

With the buzz lately being centered on the "flawed" launch of the "Health.gov" website it goes without saying planning this year is an across the board necessity.  Regardless of which side of the political aisle you place yourself health insurance is not a political tool.  It is as with other forms of insurance a risk management tool.  One generally does not wait to buy flood insurance as your basement is flooding.  Instead of personally taking on the risk to having to use your hard earned savings to pay for emergency hospital care would it not be better to pass the risk on.

For those entering the health insurance industry for the first time estimating income for the coming year along with a thorough review of the types of policies available is necessary.  It may all seem daunting but since it is an investment into your own future health care coverage it to tg a sie when he look at siais worth the effort.  If your state does not have alternatives maybe try and go directly to the different health insurance providers.

For those retaining their employer sponsored health insurance a thorough look at your coverage is still necessary as there may be some slight changes that can have financial ramifications.  If you do not understand anything - even if it is just one sentence it is better to ask for clarification.  Asking your neighbor or someone at your local gym does not qualify as getting proper clarification.    Your employer should have a contact person at the insurance company for you to speak to.  Make the time so that your decisions are informed decisions.

Most of us use FSA (Flexible Spending Arrangement).  Since this is subject to the "use-it-or-lose-it” a thorough review of what your particular policy allows is needed. You would not want to differ $2,500 for 2014 only to have allowable expenses amounting to $990.  That would mean that you are losing $490 since the IRS only allows a rollover of only $500 for the following year's allowable expenses.  No amount of money is too little for you to save – you earned it.

Every penny adds up towards your wealth building goal!

Year-end Planning Tips 1/10 – RMD (Required Minimum Distribution)

At age 70 ½ the Internal Revenue Service requires that you begin taking Required Minimum distributions out of your Traditional Individual Retirement Account – IRA.  In most cases either the brokerage house or mutual fund company where your account is held will send you a reminder to you between three and two months prior to year-end.  Generally they will have calculated the amount you must take for the current year.  Failure to take said distribution comes with a penalty of 50% of the amount you should have taken. If your RMD was $4500 for the year and you did not take it then your penalty would be $2,250.   This amount will of course increase your federal taxable income and as such it would be advisable to with taxes withheld that the time of distribution.

Non-spousal inherited IRAs are they tricky ones.  I have yet to come across a financial institution holding the assets of a non-spousal IRA (IRA BDA) that will remind you or calculate the amount for that matter.  The IRS does require that you take withdrawals but the calculation is a little different from how you would calculate your own or a spousal IRA.  In the case of spousal inherited IRA you are permitted to treat that as your own and as such you would not the calculator below.

Beneficiary required minimum distribution Calculator 

It is important to note after attaining age 70 ½ you can no longer make contributions to your traditional IRA.  Roth IRAs, while similar in allowing withdrawals at age 59 ½ without penalty like the regular IRAs but that is where the similarities end.  Roth IRAs allow contributions after age 70 ½ and do not impose required minimum distributions either after attaining age 70 ½.

For employer sponsored plans the Third Party administrator will usually take the responsibility of keeping you in compliance and informing you according as and when distributions are required.  If you are still actively employed you are not required to take RMDs but there is an exception for the owner of the business who has attained 70 ½.  Even though they are required to take RMD on an annual basis they are also permitted to make contributions should they wish to.

Preparing for a disaster - are you?

Along with many of us, I too have been watching with utter shock at the extent of devastation caused by Typhoon Haiyan.  This has become a regular occurrence worldwide - causes ranging from earthquakes, hurricanes to torrential rains.  But this is where the differences end.  The devastation to our way of life is repeated over and over again regardless of where in the world the disaster has occurred. 

All of this begs the question as much as we see this over and over again how prepared are we?  Do we do our part?  We are all too well aware of the limitations of our various governments or the non-for-profit organizations that seem to step in time after time.  Do we realistically think they can save all of us within hours? Or do we have a duty as citizens to do our part to prepare.  

I must confess over the years FEMA puts these ads on radio, TV and newspapers etc about preparing for a disaster but it was not until this morning that I decided to actually take a look at the information offered.  Driven more by the photographs of the people at the airport in Tacloban, Philippines – mind you I am not faulting them.  But I merely understand their desperation enough to question my own expectations.

’Do they want me to die in this airport?’ Chaos in Tacloban as 3,000 try to board two planes

We need to make a concerted effort to be more appreciative of first responders.  But more importantly make their jobs easier by being more personally prepared.  Doing our part.  When disaster strikes “time to gather things and prepare” is a luxury that will not be available to you and besides you will be so panicked that you will not think straight anyway.  Conventional wisdom says practice makes perfect – run drills with your family.  Have a plan!  Know where and how to communicate in case you are separated.  Have cash and batteries to sustain until things come back to normal.

Below is a link to the FEMA website – please make the time read through their guidelines.

http://www.ready.gov/individuals-access-functional-needs

Choosing the perfect partner for you

From a very young age most of us have an idea of the type of person we want to marry.  But for some of us that choice is not ours to make.  On the surface I truly believe there is no right way or wrong way.  Those of us who have arranged marriages are culturally conditioned to accept this as the normal way of life.  With globalization this number is sadly diminishing.  The rest of us are left to our own devices on making one of the biggest decisions of our lives.  We generally go it alone without ever reading the manual.  Not that said manual ever went into print or is on a website somewhere easily accessible.  No such luck!  And people wonder why divorces are on the increase.

Most of us select our life partner for pure love - "how do I feel when I am with them".  I would venture further and ask when say you love someone how well do you really know them?  Yes I know there is "unconditional love" but personally I feel that should only between parents and children. If intending on spending the rest of your life with someone is it not necessary to really know them? Generally we only know of people what they want us to see.  The wealthy tend use prenuptial agreements and this tends to afford certain protections but life being what it is some find ways around said protections depending on how well written they are of course.

Marriage is about bringing two lives together - it goes beyond just the good laughs and happy memories.  Do you know your future spouse's spending saving and spending habits?  Do these habits compliment yours? Some at least ask how many children they want to have before tying the knot but how many ask about credit score?  Do you ask how much debt your future partner is bringing to the table?  Most of us have some sort of debt - student loans etc but it matters how well the debt is serviced because all that they are will become part of who you are too. How well they handle their debt will affect what mortgage interest rates you qualify for.  You can end up paying more – the consequences are tangible.

There are, of course, ways to protect yourself should you find you have married someone who is not quite as responsible as you are.  Take for an example with paying taxes.  Some couples live very independent financial lives having separate bank accounts etc but when it comes to filing taxes it is not easy to go your separate ways.  It is not enough to say "my husband takes cares of all of that" - if you are signing documentation that certifies everything you have disclosed herein is "true and correct" then its the responsible thing to understand whether ALL the income is declared or if the expenses/deductions have all the necessary back up.

Taking a look at what is available to you is always an option - a good example is Injured-or-Innocent-Spouse-Tax-Relief.- but that only covers the actual refund.  Since by filing a joint return you are "joint and several liability" you want to look into protections that go beyond just the one return and Request for Innocent Spouse Relief.

Now I am not saying that you should only marry someone with a great FICO score - no not at all.  All I am saying is go into it with your eyes open.  Make an informed decision about both the love and financial stability of your future.  If one of you has bad financial habits at least you know you have your work cut out for you instead of finding out 3 - 10 years into marriage.

Plan your future as much as you can – do not let it just happen to you!.

Pay day loans... Know your station in life

Pay Day loans and title loans are harmful instruments that the poor more often than not reach out to as a quick solution to their financial woes.  These types of loans are like a savage cancer - a metastatic tumor that just eats into your earnings (present and future - and way into the future).

Procrastination is the biggest enemy because it sets us up for failure.   One is fully aware of when payments are due but seldom do people pay on time or simply acknowledge that they do not have the necessary amount to make the payment.  Thinking ahead affords one the opportunity to reassess one's spending and in turn avails alternatives payments around - staggered or delays offered by the creditor.  People often make the wrong choices of what really needs to get paid, like that young mother in New York who spent $2,500 at Barneys on a purse.  A purse she had no business buying and using her tax refund (bulk of it being earned income credit of course) only goes further to confirm bad or misguided choices.  A few weeks down the road purse put to the side and she will be looking for money to feed the children.  Yet government programs had put in your pocket money as assistance purely because of the income bracket as a single mom.  

A few years ago Prince Charles enraged people by his comments: "What is wrong with people nowadays? Why do they all seem to think they are qualified to do things far above their capabilities?"  Yes MAYBE he should not have voiced out or in his case written such a statement.  But this is not to say that the context of his statement was wrong - there is plenty of truth in that statement - people need to know their station in life - live within your means!

Through sheer desperation people search for quick fixes to their problems without a second thought to the ramifications. It is important to understand what the $100 you are borrowing is going to cost you.  Interest rates for payday loans range from 300% - 750% - the question would then be - 'Is the item that I am borrowing the money for going to give me a return that surpasses the 750%  it has cost me to borrow?' 

In money issues one needs to learn how to make their money work for them and not the other way round especially if you are spiraling into an unending debit cycle.

90 Days Same as Cash

Just how many of us understand the term and all it encompasses and how many take it at face value – “but they say its……”   As holiday season approaches it might a good time for us to review how we choose to pay for those precious holiday gifts that end up under the tree.

The majority of us are efficient readers and we comprehend quite well but usually that only applies to the things that interest us.  Pages and pages of disclosures do not qualify as interesting reading.  Therein the problem lies.

The cashier (or Sales Transaction Associate – as some “big box stores” call them) - is neither your friend nor family member looking out for your best interests.  They have targets to meet and you are prey for the hunters. Simple!  They will smile ever so sweetly – treat you like you are the only customer in the world and it’s just that feeling that your ego has been craving for.  You and only you know what you can afford to buy and what you need to take a pass on.  Sometimes the thought of taking the item home with you that day becomes all too irresistible - you want to please your family so any cautionary note that someone might give you at the point only falls on deaf ears.

While “Same as cash” may seem appealing option to you, taking it means going forward on a lot of assumptions.  On the date of purchase you do not have available to you the required amount, so they give you terms so that they do not lose the sale.  An account is opened for you to make regular payments.  The understanding here is that you will make full payments within the given time – 90 days.  Some may give you six to twelve months – depending on the size of your purchase of course.

You will then receive a statement in the mail stating what the minimum payment required by the next billing cycle is.  And this is where most of us starting going downhill on this supposedly attractive offer.  If you add up the minimum payment over the time you need to pay you will definitely not have paid it off in 90 days.  The ugly side of the transaction is that if you do not pay off the ENTIRE amount due within the 90 days your interest is backdated to the date of purchase and added to the balance due.

Retirement at age 30?

I do not ordinarily listen to the radio on Sundays but yesterday I was stuck in my car waiting on friend. Flipping through my radio channels I came across a talk show on money issues.  Being interviewed at the time was a young woman who had recently lost her job and is currently exploring not looking at not going back onto the job market and retiring.  She feels she has enough in retirement assets and savings to make that choice.  Many questions started running through my mind and I decided to continue listening.

Now I have no idea what she did for a living or how much she was earning either.  Her savings and retirement assets were said to be in the six figures.  I waited and waited for some indication of whether this young woman had taken a close look at her expenses vs her "accumulated wealth". I waited also to find out if she had calculated the possibility of outliving her accumulated wealth.  No answers came.  So I thought maybe she is a trust fund kid so none of my questions come into play.

For those of us that are not trust fund kids to retire at 30 you need to make some serious adjustments to the target generally made by people who retire at normal age 65-70 years old.  The latter needs to accumulate wealth to last 30 - 35 years but with a retirement age of 30 your life in double ordinary retirement numbers. General questions that come up would include things like your current living expenses and what items would not be there once you stopped working.  And on the reverse what expenses are present in retirement that are not necessary there while you are gainfully employed.

Another question I would have loved to ask this young woman is - at age 30 and having had an extremely well paying job you could not have had time to build a family?  Do your retirement assets also include children?

I do believe people tend to causally speak about retirement but seldom do they do the necessary preparation for it because its not only the money but also the quality of life for you and your family.  Not to forget today's hot topic - health insurance.  At age 30 she does not qualify for Medicare as such that is an added expense that will probably drain her accumulated wealth.  I am thinking her employer has offered that to date and as such it has not been an issue she has had to deal with.

Yes most of would like to retire early and do the things we love - travel is a common one but that too cost money.  Even the option of the entertainment locally that too costs money. As the program drew to a close I was convinced that if this young woman does go ahead and retire and she is not a trust fund kid then she maybe moving to some remote country where the standard of living is so low that with her six figures she will be one of the wealthiest residents.