ESTIMATED TAXES – DO YOU NEED TO PAY THEM?
Many taxpayers have income on which there is no withholding, such as interest, dividends, rental or royalty income, or business income. If this is your situation, you’ll want to see if you’re required to make estimated tax payments in 2012 to avoid the penalty for underpayment of your taxes.
The tax system is “pay as you go” by law. If you have income on which no taxes are withheld, it is up to you to prepay the proper amount of taxes. Generally, if you expect to owe at least $1,000 in federal taxes and your withholding and tax credits are less than 90 percent of your 2012 tax liability (or less than 100 percent of your 2011 tax liability), estimated tax payments are required. You are essentially required to “estimate” your income and taxes, and make the appropriate payments. Additionally, your estimated tax payments must be computed to also pay for any self-employment (i.e. FICA) taxes on your net business and/or partnership income that you might also owe.
How do you make your “estimates” in order to comply with the IRS requirements? You should use the worksheets found in Form 1040-ES for the 2012 tax year. Once you compute your estimated income and taxes, you pay them in four installments with due dates of April 15, June 15, Sept.15, and Jan. 15 of the following year.
The penalties for not properly paying your taxes on a timely basis can be severe. It’s certainly not something that you want to ignore or overlook. And the computations can be tricky. Also, there are special rules for farmers, fishermen and high-income taxpayers.
BREAKEVEN ANALYSIS IS IMPORTANT TO YOUR BUSINESS
Breakeven analysis is a quick and easy tool that provides valuable information to business managers. Are you thinking about adding a new product to your business? If you are, you will want to know the minimum number of units you need to sell to make this new product profitable. Breakeven analysis is the tool that can answer this and many other business questions for you.
The first step in performing breakeven analysis is to identify all costs related to the venture. The second step is to separate the fixed costs from the variable. For example, if you are considering launching a new product, your fixed costs might include additional liability insurance, advertising, and additional salaries. Your variable costs may include the cost to purchase inventory from a supplier, freight and sales commissions. Once you have tabulated the costs, you only need to plug them into the following equation to compute the breakeven point for the product: Total fixed costs per month / (Selling price per unit - Total variable cost per unit) = Breakeven point in units.
Assume the following costs and selling price as the first step in computing the number of units you’ll need to sell to break even.
- Liability insurance (additional) $1,000
- Advertising budget (for new product) 2,000
- Salaries/benefits for two new employees 6,000
- Total monthly fixed costs $9,000
Expected selling price per unit $100
- Cost to purchase each unit from supplier $40
- Cost to ship each unit $5
- Sales commission on each unit sold $15
- Total variable costs per unit sold $60
Plug the numbers into the breakeven equation as follows:
$9,000 / ($100 - $60) = 225 units
In this example, the company needs to sell 225 units per month in order to cover costs on this new product. At this sales volume, the company has broken even. It hasn’t made money on the new product, but it hasn’t lost money either. Every additional unit sold creates profit for the company.
TAX CREDITS CAN HELP PAY FOR COLLEGE AND JOB TRAINING
If you, your spouse, or your dependents are paying for college or job training, two federal tax credits may help offset the costs.
The American Opportunity Credit provides up to $2,500 a year to an eligible student for the first four years of higher education. To qualify, the student must be pursuing a degree or other recognized credential and must be enrolled at least half time for one academic period during the year. The credit can cover tuition, enrollment fees, textbooks, supplies, and equipment, whether or not the materials are bought from the educational institution. Forty percent of the American Opportunity Credit is refundable, which means a student owing no taxes could still receive up to $1,000.
The Lifetime Learning Credit can provide up to $2,000 for each year of post-secondary education or each year in which you take courses to acquire or improve job skills, regardless of whether you’re pursuing a degree or credential. The number of years is not limited, and the credit is available for as little as one course. Tuition and fees are covered, but books, supplies, and equipment are only eligible if provided by the educational institution. Since the Lifetime Learning Credit is not refundable, it is limited to offsetting taxes that you owe for the applicable year.
The following limitations apply to both credits:
- You can only claim one of the credits per student in a given tax year (although you can claim a different credit for a different dependent in the same year).
- If a student qualifies as a dependent, only the parent may claim the credit.
- Both credits phase out if your modified adjusted gross income exceeds a specified level.
Children and Wealth: Important Lessons Start Early in Life
Wealth can be a mixed blessing – one that creates great opportunity as well as weighty responsibility – especially for children. As a parent, grandparent, or concerned relative, you hope to pass on what you have learned about managing and preserving wealth to the younger generation. However, you want the family legacy to be about more than astute money management; you want it to reflect your personal values, which may include a social conscience and philanthropic ideals.
How do you combine financial knowledge and charitable intent in your wealth management lessons? Following are some thoughts for your consideration.
Multi-billionaires Bill Gates and Warren Buffett have vowed to leave the majority of their fortunes to charity, reasoning that a large inheritance would do their children more harm than good. Wealthy families across America face similar concerns.
To counter these and other potentially negative effects of wealth, many parents are committed to educating children about finances from an early age. Studies show that marketers start targeting children as early as age 2. So, the sooner you start talking about money, the better. Explain the meaning and purpose of employment, the importance of managing credit and paying bills, and the best way to handle cash through banks and ATMs. Let children practice what they have learned about earning, saving, spending, and giving money through their own experiences with allowances and after-school jobs.
As a child matures, his or her financial education should become more rigorous. Learning how to balance a checkbook, create a budget, respect the role of credit and debt, and develop strategies for funding important goals such as a college education helps teens make the important transition from child to adult.
While parents generally are competent educators about financial matters and can serve as a child's most important role models, they could use some support. In that regard, schools need to be proactive in teaching, motivating, and creating a greater awareness of both the benefits of money management and the short- and long-term impact of poor financial decisions. Many high school graduates are unable to balance a checkbook and lack the basic financial survival skills involved with earning, saving, and investing money. Parents should urge schools to incorporate personal finance topics into their core curriculum or to offer personal finance as a stand-alone "required" life skills course.
Set a Charitable Example
If we want to ensure future generations of volunteers and donors, we must teach our children how to give of their time, skills, and money. Adult family members can set an example by pursuing their own philanthropic and volunteer activities, or by encouraging the whole family to get involved in charitable activities based around a shared interest, such as the outdoors, sports or religion.
Ensure Your Legacy through Incentive Planning
Wealth holders often worry that the important values they pass on to heirs during their lifetime will be lost once they are gone. For these individuals, creating testamentary trusts that allow you to reward your children's desired behaviors or discourage undesirable activities can be a meaningful addition to an estate plan. For instance, a trust may offer educational support for heirs who pursue a specific field of study or attend a particular institution.
A trust may promote "family values" by providing income support to heirs who choose to stay at home to raise children or who foster or adopt children in need. Alternatively, a trust can withhold benefits from heirs convicted of a crime or who fail conditional drug or alcohol testing.
Financial advisors play an important role in the creation and success of a legacy by helping you articulate the values, beliefs and priorities you want to perpetuate and the methods to achieve your goals. Working together, you can offer meaningful relationships that go beyond a financial inheritance.
Seema Ramroop, financial advisor, Morgan Stanley Smith Barney, can be reached at Seema.Ramroop@morganstanleysmithbarney.com or call (727) 773-4629.
CHOOSING THE RIGHT AMOUNT OF CAR INSURANCE COVERAGE
It's a common question: How much car insurance do I need? Unfortunately, there's no black and white answer: It depends a lot on what coverage you need and what kind of deductible you feel comfortable with. So let's try to break it down:
How high should my liability coverage limits be?
No one can predict exactly how much you'd have to pay if you were to cause an accident. But the key question to ask yourself is: Can you or do you want to pay for any damages exceeding your coverage limits? The higher your liability coverage limits are, the more damages your policy may be able to cover.
What should my collision and comprehensive deductibles be?
This is a balancing act. Higher deductibles typically lower your premium, but will increase your out-of-pocket costs if a loss occurs. Ask yourself how much you're willing and able to pay directly, often on short notice, to potentially save on your premium. If you want to lower the amount you have to pay when an accident occurs, you might want to opt for a lower deductible.
Do I need collision and comprehensive coverage?
There may not be a choice if your car is leased or financed. But if you do have the option, consider whether the savings from dropping collision and/or comprehensive coverage is enough to offset the risk of having to pay the entire cost of repairing or replacing your car.
Are You Financially Prepared For The Death Of Your Spouse?
Death isn’t an easy topic, but it is important to discuss it. When developing financial plans, couples need to consider what will happen when one of them passes away.
The Census Department reports that in 2009, 2.4 percent of all men were widowed and 9.3 percent of all women were. After age 65, 41.3 percent of women were widows. The death of a spouse isn’t a theoretical number: It’s something that could very well affect your family.
As part of your financial plan, you should consider what will happen to your family’s income and expenses when one spouse passes away. If the spouse was working, that income will be lost; if the spouse was retired, the pension could be. Social Security benefits may make up some of the lost income, especially if there are minor children in the household.
Expenses may go down, but don’t depend on it. If there are minor children, then childcare expenses are likely to increase with only one parent in the household. If the family received its health insurance from the deceased spouse’s job, then those costs may rise. On the other hand, some of the deceased’s expenses will be eliminated. With retired couples, research by the Department of Health and Human Services on widows shows that household costs decreased about 20 percent when the husband passed away; in some cases, her income decreased by 50 percent or more when her spouse's income was gone.
Careful planning for savings, pension elections, and life insurance may help your family avoid a financial crisis on top of personal sorrow. The proper option will be different for each couple, but the first step should be a discussion about what would happen should tragedy hit tomorrow.
Adi Khorsandian, a State Farm agent providing insurance and financial services, can be reached at (813) 991-4111 or visit www.adikinsurance.com