Year-end Planning Tips - 9/10 - Review prior year tax returns

They say hindsight is always 20/20 vision.   Sometimes we use it to beat ourselves up on how wrong we read a situation and other times it is to pat ourselves on the back.  With your taxes, however, a timely review of prior years can prove beneficial, for both past, current and future years.  With a through review of our prior year tax returns overlooked tax credits, deductions or tax treatment of income can be highlighted. Amending your tax return may bring about a refund if you had made errors such as not reporting income, dependents, filing status or tax credits.  While you cannot amend a return for maths errors always keep in mind when you can there is a three year statute limitation from the original due date of the return,

Any omissions found in a prior tax return must be noted to see applicability for current and future years.   Depending on the complexity of your tax return it would be advisable to employ the services of an accountant specializing in individual income taxes for qualified competent assistance as this almost always serves you well.

Most of us procrastinate with the preparation and filing of our personal income tax returns.  We go through the year making mental notes as we come across things that can affect our taxable income and yet we seldom take the necessary action that will make these advantageous.  Precious few do any  do any tax planning before year-end.  The new year rolls in, we received our Form W2; 1099 or K1s and we stash them away as April 15th seems so far away.....

Not until we start hearing the final count down on the news channels and commercials for tax preparation software blaring through the airwaves a  few days prior to "Tax Day" do we pay attention and start hastily putting our records together.  This is no way to ensure that the tax return we file in any given year aids us in having tax-efficiency.  Any tax efficiency achieved translates into savings and in turn increases your accumulated wealth.  

Target Security breach - credit and debit cards

It is not as simple as cash vs plastic.  The security breach at Target has many shoppers worried and questioning these security breaches continue to happen and appear to be more grandeur size.  Instead people should be asking what can one do as an individual to minimize such vulnerabilities.  It is not enough to throw it all at the retailers – we, the consumers have made the choice to use plastic instead of cash.   Now I am not saying that the retailers are not obligated to provide an environment as close to secure as possible, where we can shop with minimal worries. For we have, for all intents and purposes, been courted, cultured and nurtured by the same retailers into using plastic.  The convenience of plastic has become sealed into our very being.  But the convenience cuts both ways and therein lies the conundrum.  

 Those of us who are “old school” have held onto using cash and are now patting themselves on the shoulder for not having opened themselves up to the anxiety 40 million shoppers are experiencing today.  Little about the perpetrators is known as yet.  We wait with baited breath as the Secret Service investigates.  For the shoppers themselves none of the above is really important outside from some significant punishment being metered on those who carried it out.

It is important for the 40 million people who are at the heart of this to put into practice simple checks and balances to either keep a close look on the activity of the related accounts.  Some will quickly jump to closing the account opening a new one effort to lessen the anxiety.  It is not every breach that we hear about and therefore our vulnerabilities are there every day.  

In some instances the organizations offer basic credit monitoring but according to the reports when date is stolen in the manner that it was in the Target case fake credit cards are made.  This is why it is essential to monitor your accounts.  

Good practice:

1.  Review your credit statements or bank statement for those using debit cards.

2.  Review your credit card account policy, specifically identity theft coverage

3.  Signing up for alerts is also an option offered by many financial institutions.

4.  If you do decide to close the account and replace it be sure to update all automatic transactions linked to the card being replaced

Is it possible to reinvent yourself - Avoid the pitfalls of the Long term Unemployed

At a holiday party over the weekend I sat next to an economist and the conversation ended up focused on the long-term unemployed.  Quickly one realizes that economist have a brutally different way of thinking.  The gentleman I sat next to said there is nothing that can be done for approximately 40% of the long-term unemployed.  For a staggering number of people like that to be allowed to just fall off and never to be counted again is somehow at minimum unacceptable for me.  Unfortunately, though he is right when you are looking at it from an employer's point of view.  When employers are seeking to hire they do not see through a lens that accommodates for the Great Recession.  But more from a bargaining view as this allows them latitude to negotiate wages better, as such big gaps in employment history are frowned upon.

With what appears to be the end of extended unemployment benefits questions on how this will affect the unemployed in an economic that appears to have found a rhythm without their participation.  For some the economy itself is still in great need of stimulation to create jobs for those who without the benefits will most likely end up on the fringe of a population that is gainfully employed.  Keeping the benefits going is for some its purely unsustainable.  It was a temporary measure used during extraordinary times that should be shut off now.  For others it is a moral issue.  How do you just dump that many people into "wilderness" without offering viable options.

While most of us agree that the job front has changed dramatically over the last two decades -  Gallup shows unemployment - 30-Day Rolling average  of 7.3% and 17.3% underemployed but we are also constantly hearing of 3 millions jobs that employers are finding difficulty in filling.  These 3 million jobs that remain unfilled represent a staggering skills gap where the majority of the unemployed are coming from manufacturing background and the available positions very technical.  There are many suggestions out there on reinventing oneself to meet the needs of the new job market but precious few are psychologically prepared to go through the necessary steps/training.

Failing to reinvent oneself leaves many with the undesirable option of accepting compensation that is way below what they were accustomed to prior to the Great Recession.  Few are able to come to terms with this decrease in earnings and adjusting their living standards accordingly.  Those that fail to make said adjustments then use their IRAs and 401(k) as bank accounts draining all their retirement assets. 

People general misrepresent "wants" and "needs".  At the beginning of our professional lives we generally do not earn a huge amount.  When we first start working we are grateful for income and we general budget and stretch things here and there.  As our income increases so too does our spending.  Living in a retail society are pressured by the constant bombardment of commercials; special offers and introductory prices that soon wants becomes needs.  

Who truly needs 50 pairs of shoes?  Or a brand new television, cell phone, tablet or game?  I often hear people speaking of upgrading - the shows you watch on your TV do not upgrade nor do the conversations you have on your cell phones.  As such that "upgrading" is all about keeping up with the Jones. But the question to ask here would be - do you know what the Jones' true earning power is?  As the economist so love to say - "All things being equal", or as the rest of us love to say but seldom apply appropriately, "comparing apples and oranges".  If your possessions must be on equal footing with those you wish to emulate in the retail world shouldn't first strive to earn as they do?

Year-end Planning Tips 8/10 - Estimated Taxes for 2013

Quarterly estimated tax payments are not only applicable to self-employed income earners.  Alimony and investment earnings, dividends etc, for any income that is not subject to withholding you are required to pay estimated income tax periodically, as you earn it.

Whether you use a tax professional or not, understanding the requirements is of paramount importance as compliance is essential in avoiding penalties and interest.  

Most people find it easier to calculate their current year estimated tax payments at the time their prior year tax return is prepared.  This allows you to use your prior year taxable income as a guide to what you will be paying for the current year.  It is also important to review your income at the end of the year to ensure that any increase income that might not have been calculated at the beginning of the year is taken into consideration when you make your fourth and final quarterly estimated tax payment.

Should you be in a refund position in the prior year applying the funds as a prepayment of current year taxes might be an option worth exploring.  This amount will reduce the safe harbor amount you are required to pay in estimated tax to be compliant for the current year.

Guidance on what is a current year safe harbor amount to pay use the smaller of the following amounts for those with a tax liability of $150,000 or less:

i)  90% of the tax of the current year liability 

ii) 100% of the prior year's liability.

If you tax liability in the prior year was over $150,000 then you are required to pay 110% of the prior year's liability or 100% of current year.

The IRS Form 1040-ES (Estimated Tax for Individuals) is useful in calculating how much you need to pay.  Due dates are as follows - keeping in mind of course that payments must be date stamped on or before the listed dates:

Earnings for period:

January 1           - March 31        - payment due April 15th

April 1              - May 31           - payment due June 15th

June 1               - August 31       - payment due September 15th

September 1     - December 31  - payment due January 15th 

While most of feel they want to delay parting with their money to Uncle Sam as much as is possible it is important to apply a little bit of risk management in this instance. If it just a delaying strategy then you should also think about whether the penalties that come with this delay are worth paying.  If you want to utilize the funds for something else then the gains you earn wherever you are using the funds in the meantime must also earn you enough to cover the penalties.

The IRS will assume you earned evenly throughout the year and therefore will expect quarterly payments. When sending in your payment use a payment voucher.  

Should your earnings be uneven during the year you can use Form 2210 - Underpayment of Estimated Tax by Individuals to annual your earnings thereby avoid penalties.

Tax Avoidance -vs- Tax Evasion

Just because a friend claims to file a particular form and have a particular deduction on their individual income tax return it does not necessarily follow that you too will receive the very same benefit.  No matter how simplified people tell you tax returns are the U. S. Internal Revenue Code is complex. The best way to work around the various forms that feed into Form 1040 on your own is by using tax preparation software that walks you through the process by asking you relevant questions.  TurboTax is one of many that are available.

What others have done in the past is not a justifiable defense should you be audited by the Internal Revenue Service.  That is not to say when someone brings something to your attention that you do not do the necessary research to see how it may affect your personal taxable income.  All things being equal know and understand the difference between tax avoidance (which is working within laws to reduce your taxable income) and tax evasion (which is the deliberate concealment and/or misrepresentation of relevant information in an effort to reduce your taxable income and this is illegal).

Tax planning is all about employing strategies that will reduce your taxable income within the parameters of the law.  In special circumstances where you have done the necessary research within your tax strategies if come across a tax law that is unclear you can apply for a Private Letter Ruling but these are only for a particular tax issue and only for that tax payer that applies for the ruling.  Most situations are covered fully within the Internal Revenue Code.  If you do not utilize the services of a tax professional then make use of the Internal Revenue Service website (IRS website) or alternatively telephone Toll-Free, 1-800-829-1040 for assistance in clarifying any issues you may have. 

For those of you doubting just how serious the ramifications of tax evasion can be take a look at the list below and I am sure all them felt at some point that they would never get caught.  Or maybe they did a simple arithmetic and said "what are the chances?"

1.  Wesley Snipes - Actor
2.  Ty Warner - Creator of Beanie Babies
3.  Lauryn Hill - five-time Grammy winning singer

Year-end Planning Tips 7/10 - Open Enrollment - 401(k) Deferrals

While all the talk right now is about Open Enrollment for Health insurance, healthcare flexible spending and Medicare we cannot forget about our 401(K) deferrals.   Most of us feel overwhelmed by the prospect of retiring.   Most have not done a proper “needs analysis” and therefore the amount needed for retirement is just an unqualified guess.  For those at the beginning of their careers it might seem impossible to think about what your needs might be at the end of your career but it is this generation that is blessed with the gift of time and can take full advantage of the growth opportunities.

If you are 50 years of age and above there are provisions for you to make up for lost time by making an additional catch-up contribution of $5,500 over and above the $17,500 deferral amount.  Traditional IRAs and Roth IRA also have a catch-up of $1,000 and this above the $5,500 annual contribution amount.  One should not be intimidated into contributing the full amount.  You should only contribute what you can afford but neither should you stinge your future needs either. Before you have children there is greater flexibility to put away more but one will need to review one’s situation once the family starts growing. 

Whether you are investing in your 401(k) or IRA, diversification as in every part of your income earnings or preservation of wealth is important to your portfolio.  The Department of Labor -Employee Benefits Security Administration has a guide that is useful for those not in a position to afford the services of Financial Planner.  Either way this is all too important to leave to chance and the links below should provide some guidance. 

Most employer sponsored plans to provide the services of an investment professional that can give you general guidance on your investment choices but this is usually geared to only retirement assets in that particular plan and will not include the other aspects of your life.

Savings Fitness: A GUIDE TO YOUR MONEY AND FINANCIAL FUTURE

Taking the Mystery Out of Retirement Planning

Year-end Planning 6/10 - Keeping Track of Tax Deductible Expenditures - Cyber Monday Purchases

Most of us worked off the turkey dinner by venturing out to the malls Thanksgiving night. Shopping continues today with Cyber Monday.  All in all a substantial amount of shopping will continue over the next day or two as we take advantage of all deals on offer.  Some of the deals available now a more attractive than those on offer during the "Back-to-School" campaigns.

Do not miss out on the opportunity to make the most of the deals by buying items that will have an added benefit of being tax deductible.  While you are searching the web for attractive offers try and keep in minds the needs of your college going children as well as your ends to your business.  Be sure to keep track of your purchases using many of the apps that are available.

While keeping track of what you are buying is important for budgeting purposes some of the items being purchase will qualify for tax deductions too.

Even though the deduction is a good incentive proceed with caution reviewing all return policies carefully as most will come with a shorter period within which you can return items.


Expense Tracker - Android

Income and Expense Tracking - iphone