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INVESTMENT STRATEGIES FOR A RISING TAX ENVIRONMENT – PART II
By SEEMA RAMROOP
Give increased attention to buy-and-hold strategies
As the tax rate on capital gains increases, the tax deferral afforded by buy-and-hold strategies becomes more valuable. Thus, it could be worthwhile to hold investments longer to defer the higher taxes due upon sale. Similarly, it becomes more important to harvest tax losses in order to shelter gains that otherwise would be taxed at the higher rate.
Consider investing in life insurance which can provide estate tax liquidity
In a rising tax environment, life insurance can offer several general tax benefits to clients:
• Provides tax deferral on increases in cash value that have not been withdrawn during the client’s life (as the cash value accumulates within certain life insurance policies, it is not subject to current taxation)
• Provides an income tax-free death benefit (which may also be free from estate tax, if properly structured) if the policy is held until death
Although the future of federal estate taxes is still uncertain, with many states short on budgets, there is little promise for estate tax relief. Life insurance can also provide estate tax liquidity for clients with taxable estates. Typically, an estate will go to three places: taxes, charity and heirs. In many cases, the estate tax return and any taxes are due within nine months, except in special situations for business owners and farmers. Many people usually try to sell assets in the estate to cover the tax liability, which generally creates two liquidity issues:
• Depending on the assets in the estate, nine months may not be enough time to liquidate the assets at a fair price, or
• The assets that are needed to pay the estate taxes may be intended for family members or charities
Life insurance provides estate tax liquidity, which can help clients pass wealth to future generations in a tax-efficient manner, and potentially increase the amount passed on to heirs and charities.
Consider opening a 529 College Savings Plan to fund college expenses and leverage tax-deferred growth
529 college savings plan is the most tax-efficient way to fund college expenses. By investing in a 529 college savings plan, investors can set aside funds to help pay for the future college
costs, plus enjoy numerous benefits including the following tax advantages:
• Tax-deferred growth: Contributions grow on a tax deferred basis, and distributions taken to pay for qualified education expenses are exempt from federal income taxes.
• Gift tax benefits: For each child, investors can contribute up to $13,000 annually ($26,000 for married couples filing jointly) or make five years worth of contributions by giving $65,000 ($130,000 for a married couple filing jointly) in a single year without incurring gift taxes.
• Estate planning benefits: Your contributions to a 529 college savings plan are excluded from your taxable estate.
• State tax benefits: Some states allow you to reduce your taxable income for contributions made to certain plans up to specific amounts.
Seema Ramroop, financial advisor, Morgan Stanley Smith Barney, can be reached at firstname.lastname@example.org or call (727) 773-4629.
what to do if you receive a letter from the irs
bY kamlesh h. patel, cpa
There are many reasons why the Internal Revenue Service could be contacting you. Some contacts involve minor corrections; some are for serious changes that could involve a lot of money. Sometimes the IRS is correct in what they are seeking; sometimes they are wrong.
An IRS notice can be something as simple as a correction to a Social Security number or as significant as a billing for more taxes, interest and penalties due for an adjustment to your total tax liability.
So, what should you do if you get a letter from the IRS?
Here is a list of do’s and don’ts concerning contact from the IRS.
� Don’t ignore the notice; the problem will not go away.
� Act promptly. A quick response to the IRS may eliminate further, more complicated correspondence.
� Follow the instructions in the IRS notice. Any correspondence you have with the IRS must make reference to the specific notice you are addressing.
� If you agree with the IRS adjustment, you do not need to do anything unless a payment is due.
� If the IRS is requesting more money or a significant amount of new information, be sure to contact your tax preparer immediately.
� Always provide your tax preparer with a copy of any IRS notice, regardless of how minor it appears to be.
� Keep a copy of all the IRS correspondence with your tax return copy for the year in question.
look carefully before you leap into a franchise business
Buying a franchise may seem like an easy way to get into business, but there are many things to consider before you make a commitment.
A franchise agreement is basically a contract between you and an owner (franchisor) which allows you to use the owner’s trademark, trade name, or advertising symbol. In exchange for this right, you pay fees (often a portion of your business revenues) to the franchisor. As with any business relationship, specific obligations and benefits vary. Some franchisors offer a full range of services to help you get started, including training, site selection, marketing plans, and products. Others give you little more than the legal right to use their name or symbol, after which you are on your own.
Initial and ongoing expenses vary widely among franchises, so determine all your costs before you invest. For example, some franchisors require franchisees to pay for licensing fees, building renovation, equipment purchases, operations manuals, real estate leases and other start-up costs. Other franchisors may require you to pick up such costs as training, insurance and advertising.
Before signing a contract, make sure you understand any restrictions on competing with other franchisees or selling your business. Talk to other franchisees of the franchisor that you are considering. Do they get adequate training and ongoing support? If you hear extensive complaints, you should probably keep looking. Also, take a hard look at yourself. Are you willing to work long hours? Do you like working with people? Can you effectively sell your product or service?
As always, it’s a good idea to seek professional advice before investing in a new business. A lawyer familiar with franchising should review your contract, and we can help determine whether your income, expense, and cash flow projections make sense.
take a refresher course on education tax breaks
Are your children going back to school this fall? You may be able to offset some of the rising costs of higher education with tax breaks, although the benefits are phased out for certain taxpayers. Here’s a “tax primer” for parents to follow.
� Education tax credits. You can elect to claim one of two education tax breaks.
For 2010, the maximum “American Opportunity Tax Credit” (an enhanced version of the Hope Scholarship credit) is $2,500 per student. Currently, the credit can be claimed for all four years of study, not just the first two years. Also, up to 40 percent of the credit is refundable. The phase-out begins at an AGI of $160,000 for joint filers ($80,000 for single filers).
The maximum “Lifetime Learning Credit” is $2,000 regardless of the number of college students. This credit begins to phase out at an AGI of $100,000 for joint filers ($50,000 for single filers).
� Student loan interest. The tax law provides an above-the-line deduction of up to $2,500 a year for interest paid on student loans. For 2010, the deduction begins to phase out at an AGI of $120,000 for joint filers ($60,000 for single filers). Parents may arrange for a child to take out the loan.
� Education savings accounts let you set aside up to $2,000 per year per child in a tax-deferred account for elementary, secondary, or higher education expenses at either private or public schools. Phase-outs apply.
� Section 529 plans include tax-favored college savings plans and prepaid tuition accounts. Tax-free withdrawals can be used to pay for tuition, fees, supplies, equipment, and certain room and board expenses.
Don’t pay more in taxes than necessary because you’ve failed to take advantage of the education tax breaks that exist in the law.
Kamlesh H. Patel, CPA, can be reached at (813) 949-8889 or e-mail email@example.com or firstname.lastname@example.org.
HOW YOUR PERSONALITY AFFECTS YOUR FINANCIAL DECISION-MAKING
By DEV GOSWAMI, CFP®
All investors are not created equal. That’s why financial planners start their first client meetings with a discussion of money attitudes, goals and risk tolerance – the driver at the root of all investment decisions. Some planners do this by general conversation, others by detailed surveys they ask their clients to fill out.
The survey route can be a more valuable tool because it forces clients to face their money issues, perhaps for the first time. Despite the difficulty in facing up to such key issues, individuals get a better idea of where their money strengths and weaknesses really lie. Often, the real difficulties lie in how money is spent.
The real value of answering a lot of questions about your risk tolerance is to tell you what you don’t know – how the sources of your money, the way you made it, your money viewpoints and current methods of handling it will inform every decision you make about it in the future.
The most important thing a questionnaire can reveal is your true money priorities and behaviors. Trained financial advisers, such as CERTIFIED FINANCIAL PLANNER™ professionals – use both conversation and surveys to reach some firm answers that might surprise you.
Are there particular money types? In reality, you’ll find quite a number of surveys out there that define money types in particular ways, but you’ll find personalities that are common on the scale from conservative to liberal. Deborah L. Price, a Financial Planning Association member and founder and CEO of the Money Coaching Institute, offers these scenarios in an article titled, “What’s Your Money Personality?”:
The Innocent: Price notes that innocents often live in denial, are easily overwhelmed by financial information and rely heavily on the advice and opinions of others. They tend to be the most trusting because they generally don’t see people or situations clearly – which leaves them open to bad decisions at best and fraud at worst.
The Victim: She notes that victims are people who tend to live in the past and blame their woes on outside factors and situations they claim they can’t control. These people may have been abused, betrayed, or have suffered some great financial loss, but they generally see life as a self-fulfilling prophecy that they can’t change.
The Warrior: Generally seen as a successful person in the business and financial worlds, they will listen to advisors, but they make their own decisions. They tend to be great caretakers.
The Martyr: These people generally put other people before their own financial health. They use their money to rescue others based on their high expectations for themselves and the people they’re rescuing, but these decisions may be costly in the long run.
The Fool: The Fool, explains Price, is a combination of the Innocent and the Warrior because they have no clue about what they’re doing but they’ll act fearlessly. They are financially adventurous and they act on impulse.
The Creator/Artist: These people often have a love/hate relationship with money. They’re constantly struggling to make their finances work, but they often feel that caring about money means something bad.
The Tyrant: price reports that this type hoards money and uses it to manipulate others. They may have everything they need, but they’re never comfortable with their lives because they fear losing control.
The Magician: Price defines the The Magician as the ideal money type. They’re aware of their circumstances and responsibilities and can see situations very clearly.
A financial planner tries to see through the static to find out what you need to create a solid financial life. But it might make sense to ask yourself a few questions before you and your planner sit down:
One of the toughest aspects of getting a financial plan going is recognizing how your personal style, mindset and life situation might affect your investment decisions. A financial professional will understand this challenge and can help you think through your choices. Your resulting portfolio should feel like a perfect fit for you!
This article was produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Dev Goswami, CFP®, a member of FPA in Jacksonville, who offers securities through: The O.N. Equity Sales Company, Member FINRA/SIPC, One Financial Way, Cincinnati, Ohio 4524, and Investment Advisory Services through: O.N. Investment Management Company. He can be reached at (904) 565-2969, email email@example.com or visit www.DevGoswami.com
HEALTH REFORM & HIRE ACT — TWO NEW LAWS — WHAT’S IN IT FOR YOU?
By AMOL NIRGUDKAR, CPA
2010 will mark the end of this decade. The decade will be remembered by many as Washington’s glory period for new tax legislation. There have been 24 new tax acts over the last 10 years that have overhauled our tax code and made it into one of the most complex treatises ever written. The pace of change and complexity of the regulations have befuddled Americans and many of them have gotten progressively intimidated by the enormity of modern tax compliance. Even tax attorneys and CPAs have spent countless hours in continuing education trying to understand each new law and apply it to the benefit of their clients.
The purpose of this article is to analyze two recent pieces of legislation that became law recently and discuss the impact on 2010 taxes.
On March 18, 2010, the president signed into law the “Hiring Incentives to Restore Employment Act of 2010” (aka the HIRE Act). Its was stated in the title — to stimulate employment and make a dent in the 9.7 percent unemployment rate that is looming like a dark cloud on the United States economy. In hopes of encouraging employers to hire and retain unemployed workers, the HIRE act provides two basic tax breaks:
1) Payroll tax holiday — Exempts employers from paying employers share of the Social Security employment taxes on wages paid in 2010 on newly hired unemployed workers. The tax holiday applies to workers hired after Feb. 3, 2010 and before Jan. 1, 2011 provided the workers were unemployed for at least 60 days before hire date. The payroll tax paid by the employer on wages after March 19, 2010 will be exempt from the 6.2 percent Social Security tax for the remainder of the wages for 2010.
2) Retention incentive — As an additional incentive to retain the qualified unemployed workers, the act provides an additional $1,000 tax credit if the workers maintain employment for 52 consecutive weeks.
In addition to the employment incentives, the HIRE act also extends Section 179 deduction until Dec. 31, 2010. Section 179 allows qualifying businesses to deduct up to $250,000 in qualified asset purchases in 2010.
On March 23, 2010, the president also signed two controversial healthcare bills – Patient Protection and Affordable Care Act (aka Health Care Act) and the Health Care and Education Reconciliation Act (aka Reconciliation Act). Both acts aim to reform the current unsustainable health care system in the United States and offer affordable health coverage to all Americans.
The centerpiece of the legislation is the mandate that requires most United States residents to obtain health insurance. There are a host of other provisions ranging from new penalties for not carrying health insurance, large employer mandates to offer coverage, voucher system for lower income employees, “simple” cafeteria options for small businesses, etc.
Most of the mandate and other provisions go into effect in years 2014 and beyond. However, starting in 2010, small businesses that offer and pay for at least 50 percent of the health coverage for their employees get a tax credit equal to 35 percent of the premiums paid in 2010, 2011, 2012 and 2013. The credit increases to 50 percent for years beginning after 2013 for employer’s non-elective contributions towards employees’ health insurance premiums. Another provision of the health bill that affects 2010 is the new 10 percent tax on indoor tanning services.
The fate of this health legislation in future years and its impact on Americans is hard to predict and many of the provisions could possibly change in the next few years. The November elections and the presidential election in 2012 could be contributing factors to future amendments. All of us can hope and wish that these new laws actually do make health care affordable to all Americans while maintaining quality of care.
Amol Nirgudkar, CPA is the managing partner of Reliance Consulting LLC and a partner at Reliance Wealth & Trust Partners LLC and can be reached at (813) 931-7258 or via email at firstname.lastname@example.org
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