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How to Survive on a Single Income in a Two-Income World
Learning to live on less is never easy. Sometimes it’s voluntary, like when a spouse decides to stay home to take care of children. Sometimes the decision is made for you. If one half of a couple is laid off, living on a single income might be the only option for awhile. In a slow economy, if you’ve lost your job or business, replacing that income might take longer than expected.
Whether long term or short term, temporary or permanent, by design or by accident, it is possible for your family to live on a single income. If you’re accustomed to having two earners, you will need to make some changes in your lifestyle. The following are some tips on how to prepare for living on one income, as well as some suggestions on how to make the most of being a single-income family.
Prepare in Advance
If you’re planning on downsizing to one income, now is the time to start preparing for the transition. Even if you don’t expect to be living on just one income, you should be prepared for the possibility. It might not happen, but if it does you can slash the stress by following a couple of simple steps.
- Set aside an emergency fund. Aim to save enough money to pay for at least three months of income as a contingency fund. If you intend to downsize to one income on purpose, talk to your financial advisor to learn how much money you should set aside to make the transition easier.
- Make sure you’re covered with the appropriate insurance, especially life and disability. If possible, ensure that you can continue to pay for family health insurance even if one spouse loses his or her job. If you’re laid off, COBRA can help to temporarily maintain coverage while you look for a new job; however, if you are choosing the single-income lifestyle, you’ll need to find a more permanent solution.
Examine your budget
Living on one income means living on less, so you will need to spend accordingly and adjust your lifestyle as needed. Figure a baseline budget (what it takes each month for the essentials), and then add in the extra budgetary items. Don’t guess. Use your bank, credit and debit card statements to realistically estimate your expenses and to help you avoid overlooking smaller items. A streamlined budget might seem like an obvious consideration, one that goes without saying, but it leads logically to the next point.
Resist the Urge to Charge
Since you’re living on less, it can be tempting to use credit to make up the difference. Fight the temptation. If you’re unable to pay off the balances each month, you will be faced with recurring monthly payments and interest charges. If you can’t keep up, it will cost you even more in late fees and your credit will be damaged.
If you have an emergency fund, use it wisely and find ways to cut spending. Buy secondhand clothing, eat at home instead of dining out, drive a used car, live without cable or satellite TV, clip coupons and ask your cell phone provider if they can set you up with a more economical plan. Look for ways to save money on the basics, and limit the extras to what you can truly afford. Take advantage of the savings you will enjoy because only one spouse is working: reduced automobile expenses, no outside childcare, downgraded clothing expenses and other savings that result from the situation.
Innovate and Diversify
Just because you’re living on one spouse’s income does not mean one or both partners can’t earn some extra household money if the opportunity arises. If a part-time job is feasible for the nonworking partner, you might be surprised at how many basic bills a few hours each week can pay for. The working spouse can volunteer for overtime or try to earn a sales bonus. If you have unwanted items, sell them online or have a garage sale. Living on a single income sometimes requires innovation and creativity. If you keep a positive attitude and enjoy a challenge, you can even make it fun.
Remember Retirement
Finally, even though your income might not be what it was with two earners, it is important to keep investing and planning for the future. Part of your income might have gone away, but the need for funding your eventual retirement has not.
Set Business Goals and Achieve Your Vision for 2012
The recession and economic uncertainty of recent years have presented challenges for many small businesses. As 2012 begins, economic recovery is tenuous and vulnerable to government debt and economic tension at home and abroad. In tough times like these, setting business goals and working diligently to achieve them is more important than ever, whether you own a large enterprise or run a home-based business.
As critical as it is to set and track your business goals, the beginning of any new year can be chaotic. Taking the time to analyze your business goals might seem overwhelming. But by following some simple guidelines, you can maximize the results as 2012 unfolds.
Visualize the FutureLook at the big picture and try to visualize where you want your business to go in 2012. Think big, dream big and strive for excellence, but be realistic. What sort of results would get you excited? What kind of lifestyle do you want to achieve? Which products or services were most successful in 2011? Do you need to introduce something different based on your market analysis?
Not all success is based on sales or income, although those things are obviously important. Consider other areas as well. What would you, personally, like to do more of or less of in 2012? How can your business help you do those things? Look back at the reasons you started your business in the first place. Are those reasons still valid? If not, what needs to change?
Think about how your business integrates with your family life and personal life. Do you want to spend more time with your kids? How does your business need to transform in order to achieve your ideal work/life balance?
Once you identify your vision and determine what needs to change, you can develop a strategy for taking your business to the next level. The strategy will consist of all the goals you need to accomplish and the actions required. Once the vision is in place, you can use it as a guide to keep you on track throughout the year.
Consult With Your Customers
Don’t forget that the customer is always right. Ask them what they would like to see from your business in the future. How did they rate your products, services, prices, customer service or quality last year? What can you do to give them what they want?
Write it Down
No matter what goals you set, if you don’t write them down and refer to them frequently, you are less likely to remember them or act upon them.
Start with a brainstorming session, listing every goal you can think of that will help get your business closer to the vision you identified in the first step. At this stage, be sure not to over think or judge your ideas. Jot down everything that pops into your mind. Use your imagination. You can analyze, prioritize and whittle the list down to a final, working list later.
Assess Your List
Once you have a loose list of goals that match your vision, it’s time to assess what you have brainstormed. In this step, use an analytical approach, eliminating entries that do not mesh with the overall vision of where you want your business to be by year’s end. Use your business sense. Is the goal realistic? Is it achievable? Make sure your goals are feasible.
Categorize your goals into buckets that make sense. Divide them into short-term and long-term goals. Long-term goals can then be broken into a series of short-term goals to help you stay on track and keep you motivated. As always, keep your overall vision in mind and set reasonable time limits for achieving each goal.
Identify Actions
No goal is attainable without taking action to make it happen. For each one, identify an action or series of actions that you must take to achieve that goal. They are the engines that drive you toward your goals. They help you manage your daily business activities and make your efforts sustainable. By clearly identifying the actions you must take to reach them, you are less likely to be overwhelmed by a long-term goal; furthermore, you will gain confidence that comes from continually working toward them.
Support, Advice and Accountability
If yours is a large organization, support can come from within. But if you are a small business, a home-based business or a sole proprietorship, you might need to look outside for advice and support. Even if it’s someone in your own family, find a trusted person to get their opinions, share your ideas with and help hold you accountable. Tell them your vision and ask them to help keep you on track to achieve it. Just knowing that someone else is expecting you to achieve your goals can provide some motivation and some positive pressure to help keep you accountable and moving forward. And don’t forget to consult with your tax, legal or financial advisor for their expert advice.
By establishing a vision, identifying short- and long-term goals and actions, and then working hard to achieve each of them, you can make 2012 a better year for your business.
Finding Deductions in the Oddest of Places
Happy New Year to one and all! Here’s hoping that everyone has the best year they have ever had.
OK, now that the niceties are out of the way, let’s ruin the year with talk of taxes. Just kidding – we are not going to ruin your year at all. In fact, we hope you might get some novel ideas that can help you file your tax return with novel deductions.
Most of you know that some deductions can be taken to arrive at Adjusted Gross Income while some have to be taken as Itemized Deductions. Itemized deductions are advantageous if they exceed the Standard Deduction the IRS already allows and typically include medical costs, taxes, contributions, home interest and a host of other deductions.
Where is as Important as When
Tax preparers understandably spend a lot of planning time around the question of when to execute a transaction or make a deductible payment. After all, if you don’t spend the money by the deadline, you won’t get the deduction.
Where you take a deduction can be as important as when. Let’s look at an example. We all know that contributions to a charitable organization are deductible as Itemized Deductions. So when the development director of your local United Way asks for a contribution to help sponsor the Annual Campaign Dinner, you have no problem providing a $1,000 donation as a Silver Sponsor.
Before you record that donation as a charitable gift, though, think about what you are really getting for your money. Do you get any meals out of it that you can use to entertain your top customers? Perhaps you get special listing as an event sponsor and nothing else. Maybe you get a combination of both or neither. The distinctions are important.
If all you receive as a result of your sponsorship is recognition for your business in the dinner program and signs around the room, then you should consider the payment to be a deductible business expense. If you are self-employed, this will allow you to reduce your income and self-employment taxes. As an itemized deduction, you will only get a reduction in your income taxes. This one simple reclassification will save you $125 in taxes – and it’s legal.
It’s Not Deductible – But Are You Sure?
Let’s take an example of a seemingly non-deductible expense that was held to be deductible. In most instances, cosmetic surgery aimed at enhancing one’s appearance is a personal expense that is not deductible. The exception would be reconstructive surgery.
In a case out of Texas, an exotic dancer underwent surgery to insert breast implants. Her reasoning was that the implants would enhance her income earning capacity. She reflected the cost of the surgery as a business expense on her tax return. The IRS denied the deduction, but the Tax Court found in her favor, citing her own testimony that she would gladly take them out after each performance if she could.
The Point
Many Americans are under the impression that there is no way to beat the IRS. In many ways, that is true. On the other hand, the current law is written broadly enough that there are sometimes openings to save taxes legally by looking deeper at the essence of a transaction. By looking at an expenditure for its primary purpose and for what was received as a result of the expenditure, taxes can be saved. Just because the IRS does not specifically state an expense is deductible, don’t assume you shouldn’t ask us about it. The worst we can tell you is that the expense is definitely nondeductible.
New Year- New Resolutions
It might be cliché, but beginning the year with renewed enthusiasm and new goals can be a major boost to business success and an excellent way to get back to business basics. Instead of making unrealistic resolutions, aim to make some simple changes to improve your chances of business success. Here are some suggested starting points.
If something isn’t working in your business, let it go now and try something different. Whether it’s a relationship, a product or business method, if it hasn’t worked in 2011, recognize reality and move on. Both professionally and personally, many of us waste time and money trying to force a square peg into a round hole. Resolve to act when something is not working and make a change immediately. Be willing to listen to others who might have the experience and insight to steer you in a more productive direction.
Make business planning a weekly activity. Don’t wait for the next month or quarter to review your company’s progress. Business moves at lightning speed, and in order to correct mistakes or identify new opportunities, it makes sense to evaluate your progress and goals each week. This way you can make corrections when the changes needed are still minor and relatively easy to implement. In a tough business environment, weekly strategy sessions will give you more control over your own destiny.
Promote your business consistently – in good times and bad. When you’re busy, it is easy to ease off on new business activities. Unfortunately, that is when you most need to keep your efforts going to keep your business healthy. In today’s economy, problems with your clients’ business affairs can come out of nowhere and hit your bottom line fast. Keeping existing customers happy is important, but it’s equally important that you identify new prospects and constantly market your business to new clients.
Give something back to your community. Don’t try to spread yourself too thin, but do find a local cause or charitable organization to support. Find something that is close to your heart or a logical fit with your area of expertise. Whether your contribution is in cash or in pro bono work, this type of giving cannot fail to energize you and help you appreciate your own good fortune. Although this work should never appear to be self-serving, good deeds generate recognition and enhance business reputations. Although the payback might come in unexpected ways, it rarely fails to materialize.
Differentiate between being busy and being productive. Running your own business presents you with many varied tasks – but they are not all of equal importance. Resolve to manage your own time better. Start by delegating minor tasks to others so that you can expend your energy on things that are critical to your business success. Prioritize your daily activities and begin with the most important first. Show others that you expect them to respect the value of your time as you value theirs. Insist that all company meetings have a short written agenda, that they start and end on time and that a participant documents all decisions, tasks, assignments and deadlines.
Extending this list wouldn’t be hard, but these five simple suggestions can provide a practical framework for success in 2012. Use them to improve your personal productivity and to also provide your staff with a great example of business leadership.
Tip: Don't Overlook Expiring Tax Breaks
As the year-end approaches, it’s time to ensure that you take advantage of all the tax breaks that apply to your business – especially those scheduled to expire by Dec. 31, 2011. Many of us also might face higher personal taxes in 2012. If ever there was a year-end where pre-emptive tax planning with a professional advisor is a must-do, this is it.
Here’s a review of some key points:
- You can claim 100 percent first-year bonus depreciation on new assets that are put to use in your business before Dec. 31. There are no dollar limits on this tax break and businesses small and large are eligible. If your depreciations lead to an overall tax loss for 2011, it may be carried back to 2010 and 2009 and could generate refunds for taxes you paid during this time period. Again the key phrases here are new and purchased and put to use before Dec. 31, 2011. Assets must be considered qualified property; most equipment, software and some lease hold improvements fit in this category.
- If you buy a new van or SUV for business purposes (with a gross vehicle-weight rating of more than 6,000 pounds), you can deduct the entire business-usage percentage of the vehicle’s cost on your 2011 tax return, up to a maximum deduction of $25,000. The business usage of the vehicle must be more than 50 percent, and this percentage is based on overall mileage. In 2012, the depreciation break is expected to be cut to 50 percent.
- New light trucks and passenger cars are eligible for a maximum deduction of $11,260 and $11,060, respectively. To qualify, the vehicle must be new and be used 100 percent for business purposes.
- Also due to expire at the year-end are provisions that permit you to claim deductions of as much as $250,000 for qualified real estate improvements. In most instances, the improvements must have been put to use more than three years after the business opened for business. The deductions cover only nonresidential building interior costs for qualified leasehold property. Elevator construction and some other interior structural costs do not qualify. Restaurant property deductions include both building and improvement costs. To be eligible, more than 50 percent of the building’s square footage must be devoted to preparing meals and to customer seating. Qualifying retail building improvements cover nonresidential buildings that are open for customers to visit and whose products involve sales of tangible, personal property.
The above are concise summaries. We are happy to provide more information on these and other tax exemptions that are due to disappear by year’s end.
Health insurance premiums are rising: What can you do to protect yourself?
As healthcare costs in the United States continue to climb, premiums are on the rise. Adding to the pain, coverage is being reeled in, co-pays are going up and deductibles are creeping higher. Maximum out-of-pocket expenses are going up as well.
Employer-sponsored health insurance premiums are not immune from the trend, with the Kaiser Family Foundation reporting a 60 percent increase in premiums employees pay for their health insurance over the past 12 years. A Commonwealth Fund study found a 63 percent increase in employees’ premium costs since 2003, with families paying an average of nearly $14,000 a year in 2010 for employer-sponsored healthcare. From 2010 to 2011, according to the Kaiser Family Foundation study, families paying for coverage through an employer saw their premiums climb an average of about 9 percent.
Fast forward to higher costs
The march toward higher health insurance premiums is not expected to retreat any time soon, according to a PriceWaterhouseCoopers LLC (PwC) survey. Employers across a wide spectrum of industries report that their costs are projected to increase about 8.5 percent in 2012, and, along with those increases, employees can expect further cutbacks in coverage, higher deductibles and co-pays, and higher premiums next year and beyond.
The reasons for higher healthcare costs, and the higher costs of coverage, are debatable. Some critics blame the Affordable Care Act of 2010 for the latest spike, while others maintain that it is merely a result of unavoidable market conditions. Regardless of the underlying causes, the insured must find ways to deal with rising costs, while ensuring that their health and finances are protected.
Examine your options
The first step to reducing premium costs is to examine your options, especially during your employer’s open enrollment. If you are married and your spouse works, can he or she get a better deal? Some employers cover employees for free, but adding an entire family can be prohibitively costly. In these cases, look at whether your spouse’s company offers a more competitive cost for family coverage. If it does, keep your individual coverage, but go with your spouse’s plan for the remaining family members.
In addition to considering premium costs, look at out-of-pocket expenses, deductibles, co-pays and other factors. The proactive approach is to plan now for next year by evaluating all of your health insurance options and then choosing the right strategy for your needs and your budget.
A combined approach: high-deductible plans and health savings accounts
To reduce healthcare costs, many employers are offering a combination of high-deductible plans and health savings accounts (HSAs). In addition to cutting costs for employers, HSAs offer benefits for employees. Through a health savings account, insured workers can learn to better control their own healthcare costs while also taking advantage of tax breaks and, in many cases, matching employer contributions.
Contributions to an HSA are tax-free. These funds can then be used to pay for medical expenses with no taxes on the withdrawals. HSAs are also portable; the plans can continue to be used, including the employer’s matching contributions, even after an employee leaves the company.
Saving with an HSA is not limited to an employer-offered plan. Combining a high-deductible health insurance plan with an HSA can work for the individually insured person as well, offering lower premium costs and a reduction in income taxes. Contributions to your account can be deducted from your income for tax purposes, and, just as with an employer-sponsored plan, withdrawals to pay for medical expenses are tax free. Unused contributions can be rolled over into the next year.
Bridging the gap between now and Medicare
The above approach also works well for singles or couples 55 and over who are not yet eligible for Medicare. By stashing money in an HSA (up to $7,150 for a couple), you can save on income taxes and premiums and set money aside for future medical expenditures. Depending on the plan, co-pays are often waived after the deductible is met, saving more.
Even with the relatively high deductibles, a high-deductible plan combined with an HSA can often reduce overall costs when taxes and other savings are calculated.
Mitigate the costs
One thing is certain: health insurance premium costs, deductibles and out-of-pocket expenses are on the way up, but there are steps you can take to mitigate these costs. Talk to your financial advisor or your health insurance provider about how you can best deal with these costs and ensure that your health and financial well being are covered.
Tight Lending Presents Opportunities for Home-Based Business Startups
Although recent reports indicate that bank lending to businesses has picked up since the recession officially ended two years ago, Federal Reserve Chairman Ben Bernanke said as recently as November that small businesses are still having problems getting the capital they need. Continued tighter credit not only hinders daily operation for existing small businesses, but it also creates an obstacle for startups.
Is Now the Time to Start a Business?
With unemployment still high and the economic outlook bleak, one can hardly be blamed for thinking that now is not the ideal time to start a business. While failure rates for new businesses are high, the fact that so many people are unable to find success in the traditional job market might mean that now is actually the best time to look at an alternative. If you have a good idea and the perseverance to see it through, success can come in good times or bad.
While starting a small business sounds like the perfect answer to a tough job market, how can you finance a business startup when credit is tight?
The Home-Based Alternative
One alternative is to start a home-based business. Success stories abound of entrepreneurs riding their fledgling business concept all the way from their kitchen table or garage to an IPO.
One obvious advantage to starting a business in your home is that you can start small. What this means in a climate of tight lending is that your new business will probably require much less startup capital. The slashed overhead of a home-based business can be passed on to your consumers, increasing your competitive advantage through lower prices.
While starting a business at home usually requires only limited startup funds, you will still need to consider financing sources that could include banks, credit cards, family, friends and government programs and agencies. The important point about a home-based business startup is that you can be more flexible about financing and scale your initial business activities to match the money you have available. A home-based business allows you to be creative and nimble with your entrepreneurial energy and your business finances. As your business grows, you can use some of your profits to help finance further growth.
The Competitive Mobile Advantage
One major factor facilitating this home-based business nimbleness is the widespread availability and use of the Internet. With its availability on mobile devices, the Web gives business owners unprecedented flexibility to operate no matter where they are. This ideally suits the home-based business venture because their operations are not limited to any single location.
Potential customers have also been empowered by mobile Internet access, with the ability to browse products, ask questions, interact with other buyers and make purchases while on the go. This means that you can reach more customers with more products for fewer dollars, which translates into less reliance on hard-to-come-by bank financing.
It’s Still Not Easy
Don’t be misled into thinking that a home-based business startup is easy or without any obstacles. Like any business, there are risks to home businesses; without a viable idea, a solid business plan and hard work, chances for success are slim. Most successful home entrepreneurs start with a passion for their product or service and build their business around good customer service.
A Way Around the Credit Roadblock
While politicians debate the best way to help small businesses navigate a sluggish economy, entrepreneurs will continue to look for ways to successfully start and operate their businesses. A low-cost, flexible home-based business approach can help entrepreneurs bypass the roadblock of tight bank credit.
Before starting any type of business, give us a call. We will be happy to help ensure that you structure and plan your business with the best chance of success.
Stock Market: Anticpated IPOs Bring Optimism
Although economic prospects in Spain, Italy and Greece continued to look bleak and Europe’s economic crisis dominated the headlines, the U.S. economy began to show long-anticipated signs of growth. Various IPOs slated for the months ahead are bringing interest and enthusiasm into the moribund stock market. Market traders and individual investors were cheered by some good news as the advent of the holiday season drew near.
On the economic front, the Conference Board’s Leading Economic Index (LEI) increased 0.9 percent in October. Not only was the gain an improvement over September’s negligible 0.1 percent increase, but it also beat analysts’ expectations. This news was greeted with enthusiasm because it suggests that confidence is resurging – lack of which holds growth back even when key statistics are encouraging. An increase in housing permits, improving consumer sentiment and job growth were all cited as major factors in this upward swing. Retail sales also exceeded expectations, encouraging analysts to hope that the trend would be sustained through the holiday season.
September’s numbers showed that business inventories were flat in September, after some 20 consecutive months of increases. However, economists anticipate that businesses are loosening their purse strings in anticipation of the year-end expiration of some tax breaks. If equipment purchases rebound, it will help offset concerns about the impact here of the European fiscal crisis. Industrial production brought good cheer, bettering expectations by posting a 0.7 percent increase for the month; most significantly, a 3.1 percent gain in auto production was a major factor in the overall increase.
Although some market analysts remain leery, others remind investors that there are some excellent buying opportunities among blue-chip companies. Select stock prices are well below valuations, and investment gurus remind us that there are bargains to be found. Times like these ignite discussions about value vs. growth stocks. Many investment pros believe that long-term investing favors value stocks – or stocks that are inexpensive relative to earnings and the book value of their assets. Growth stocks, which include companies like Apple and eBay, are expected to log rapid growth and therefore bring relatively high stock prices. Growth stocks can perform for years, and investment statistics show that they do well during times of economic uncertainty. As soon as economic uncertainty retreats, value stocks once again command investor attention.
Opinions vary on whether the new crop of IPOs will boost the markets. Mid-November was one of the busiest times all year for IPOs, with Angie’s List attracting significant attention. Overall, analysts were cautious about the impact of IPOs launched by companies as diverse as Angie’s List, Delphi Automotive and Mattress Firm Holding Corp. Companies like Toys R Us and Zynga (online games) are waiting in the wings with paperwork filed to go public in the next few weeks. Some investment advisors note that IPOs generate excitement and confidence – excitement that may well exceed their ability to lift the markets. Nevertheless, the markets thrive on confidence and everyone would be happy to see pre-holiday optimism on Wall Street.
Null-Lairson, PC receives the Sloan Award for Exemplary Workplace Practices
November 14, 2011 (Houston, TX). Null-Lairson, PC is proud to announce that it was recently recognized as a leading practitioner of workplace flexibility in Houston, Texas and across the country. The Sloan Awards are unique for their rigorous, two-step selection process, which involves an evaluation of employers’ flexibility programs and practices, and a confidential employee survey. Null-Lairson, PC and the other recipients of the 2011 Alfred P. Sloan Awards for Business Excellence in Workplace Flexibility were acknowledged at an event in Sugar Land on October 27, 2011.
Pam Travis, Human Resources Director for Null-Lairson, PC said, “At Null-Lairson, we strive to use flexibility as an effective workplace strategy to increase business success and benefit employees. We are thrilled to receive the Sloan Award this year.”
The Alfred P. Sloan Awards for Business Excellence in Workplace Flexibility are part of When Work Works, a national project to educate the business community on the value of workplace effectiveness and flexibility. It is an ongoing initiative of Families and Work Institute (FWI) first funded by the Alfred P. Sloan Foundation. In 2011, the Society for Human Resource Management and FWI formed a ground-breaking, multi-year partnership to grow When Work Works and help businesses become more successful by transforming the way they view and adopt effective and flexible workplaces.
For more information about the When Work Works project and the Alfred P. Sloan Awards for Business Excellence in Workplace Flexibility, visit www.whenworkworks.org.
Social Security Benefits Increase Along With Medicare Costs
About 55 million seniors receiving Social Security benefits and 8 million recipients of Supplemental Security Income will enjoy a 3.6 percent cost-of-living adjustment increase beginning with their January 2012 monthly checks. This is the first COLA increase since January 2009.
With declining consumer prices in the aftermath of The Great Recession, there were no increases in 2010 or 2011. Before then, COLA had increased each year from 1975 through 2009. Legislation was enacted in 1973 tying increases to the Consumer Price Index for Urban Wage Earners and Clerical Workers, as calculated by the Bureau of Labor Statistics.
Keeping Up With Inflation?
The law is designed to make sure Social Security benefits don’t fall behind the inflation rate by comparing the average third-quarter CPI-W for the current year with the average CPI-W for the last year that the COLA was increased. If inflation increases, so does the COLA.
For the average retiree, next year’s increase will equal about $43 in additional Social Security benefits per month, or $516 per year. But if you’re a senior looking forward to a larger check in 2012, don’t make plans for that extra money just yet.
Give a Little, Take a Little
While welcome news for seniors, many of who need every dollar of the additional cash, the COLA increase comes with some less-good news. Basic Medicare Part B premiums (which cover doctors visits), withheld from Social Security checks before they are sent to recipients, are projected to rise by about $3.50 in 2012 for most recipients ($7 less than projected as recently as May) and equal to about 8.1 percent of the average COLA increase they’ll be due. Some could see a slightly smaller net increase in Social Security income than they are expecting. More recently enrolled retirees will actually pay less (a $99.90 cost for most, compared to the $115.40 they pay now).
The deductible on Part B will drop $22 to $140; the Part A (hospital) deductible will increase $24 to $1,156 for those who are admitted as inpatients.
In years when there is no COLA increase, Social Security’s hold harmless provision prohibits Medicare Part B premiums from reducing Social Security payments for 75 percent of recipients; however, there is nothing in the law that prevents the premiums from reducing checks by up to the amount of any COLA increase.
When the COLA goes up, that same 75 percent of recipients must pay the extra premium out of their checks. The other 25 percent would actually see a reduction in Part B premiums – this is the same group that pays higher premiums (a large percentage of it covered by state Medicaid funds) to make up the difference in the years without a COLA increase.
Prepare for Changes
Meanwhile, Congress continues to look for ways to save money, such as raising the Social Security retirement age or implementing a change in the formula for figuring the COLA in order to reduce future increases. This could mean even lower adjustments in future years, leaving states and wealthier retirees to take up the slack by paying higher Medicare Part B premiums. Advocates for retirees argue that the current formula for measuring inflation does not account for the fact that older Americans spend more money on medical care than the general population and that COLA increases are already too small.
With more lower and middle income retirees relying on Social Security benefits to help bridge the gap between their savings and their needs, knowing what to expect from Social Security and Medicare will help you avoid surprises and plan for the future.
Stock Market: Sentiment and Reality
Shakespeare’s Hamlet observed that nothing is good or bad, but thinking makes it so. He certainly wasn’t talking about the stock market, but his commentary fits the market’s dizzying ups and downs some 450 years later. How else can we explain a market that ended the third week of October showing an 11 percent bounceback (since its Oct. 3 low), only to post losses that wiped out all the gains just three days later? Volatility like this suggests an investment community that wants to embrace good news but is fearful of other major factors – notably the European debt crisis. Here’s a synopsis of some of the current talking points.
Volatility
It’s not just your imagination. We are seeing big swings in investor sentiment repeated frequently. The Dow Jones Industrial Average has moved more than 1 percent daily for 43 days since June 30. We have to look back to the dark days of 2008 when the U.S. financial crisis was at its lowest point to match this degree of volatility. Market rallies have been short-lived in the face of global economic issues. In scenarios like this, perspective is a rare commodity and bad news makes yesterday’s good news history.
Europe and the World
The Italian government’s impasse is the most recent challenge to a decisive solution to European debt problems. Without Italy’s agreement to the economic measures EU officials require, negotiation leaders were unable to move forward with their grand plan (although an agreement on Greek debt was reached Oct. 27, sending world markets higher). Italy’s growing debt is second only to Greece’s, and the country’s fate is integral to the entire Eurozone because it represents the zone’s third largest economy. Some economists think that a recession in Europe is likely, and that the best-case scenario involves reduced government spending and weak economic growth. These issues also cast a shadow over China’s economy. However, analysts expect the global spotlight to return to the United States as Congress faces a deadline of Nov. 23 to unveil its spending cuts.
Domestic Factors
The impasse in European negotiations coincided with some recent disappointing corporate earnings in the United States and a decline in the Conference Board’s index used to measure consumer confidence. These factors were the major cause of the sell-off that hit the Dow on Oct. 25. In the midst of such bearish sentiment, some analysts have been quick to remind us that if successful investing followed a predictable pattern, we would all be wealthy.
Contrarian Wisdom
Can pessimism be a good thing for individual investors? History indicates that consensus can be wrong. Advisors urge investors to be cautious about following current consensus views and also to be leery of safe bets. Risk is part of the game. Data can be misleading – especially sentiment indicators that often belie how consumers will really behave. Contrarians sometimes regard a general mood of pessimism as a possible indicator that a market bottom is on the horizon. They point out that there is often a gap between sentiment and market performance. Positive economic news includes data showing increases in spending for consumer staples and an uptick in retail spending. Contrarians are realists though – they don’t believe that market volatility is likely to be over very soon.
As always, the observations made in this article are general comments and are not intended to replace advice from investment professionals.
Taking Your Business Global
According to a recent survey taken by the Hong Kong Shanghai Banking Corp., 40 percent of small businesses worldwide want to be trading internationally by 2013. Firms both large and small are daunted by the linguistic and logistical challenges involved in international trade, so the prospect of going global has remained a pipe dream for many. The United States lags behind other developed countries in exports – estimates suggest that less than 1 percent of all 30 million U.S. companies export goods overseas. Small businesses make up more than 70 percent of U.S. exporters, and their goods represent approximately 14 percent of the value of all goods exported. In the international arena, small businesses have some advantages that the big guys don’t have – including the flexibility and willingness to embrace new technology to reach and service customers.
Is global business right for you? The decision to launch a global marketing effort needs careful thought. It must be compatible with your overall business plan and your growth strategy. Here are some basic issues and questions to consider.
1. Define your major objectives for tackling overseas marketing, which might include:- Improving profitability
- Capitalizing upon the pending launch of a unique new product or service
- Leveraging a special window of opportunity, such as a major international event
- Maintaining or improving growth rates
2. Do you have the staff skills and other resources required to support international marketing efforts?
3. Are you able to research the new international market(s) thoroughly, identifying key markets and possible customers, determining budget needs and assessing overall risks?
4. What special skills (languages, previous experience, existing business/family contacts etc.) do you have?
5. Are senior executives (and travel budgets) available to make trips to the overseas markets? And how much face time will be needed at startup – and then later on to maintain relationships when the business is more established?
6. Are you prepared to customize your products and/or adapt marketing efforts?
7. Adopt the Harmonized Commodity Description and Coding system if you plan to use a foreign distributor. It will help you easily read trade data to see which countries are exporting or importing certain products.
8. Attend industry trade shows to identify and meet foreign importers.
9. Can your product(s) be modified to suit local customers (e.g. packaging size and style; meet metric standards)?
10. In many countries (especially Asia and the Middle East), relationships are critical to success – and there are no shortcuts. It takes time. Get to know local protocol and business etiquette – it is important to know how to greet potential business partners and learn the rules of business dining. Some cultures like Japan’s are much more formal than the United States, and it’s import ant to observe the correct protocols and chain-of-command.
Resources
Retail businesses might want to take a look at Export Now, a new e-commerce venture designed specifically to help U.S. businesses access consumer markets in China. Founded by a former U.S. ambassador and under secretary of Commerce for International Trade, this e-commerce solution for small businesses distributes subscribers’ goods via its online store and Taobao.com, China’s largest business-to-consumer platform.
Closer to home, the administration is supporting export efforts. Thanks to President Obama’s National Export Initiative, the International Trade Administration at the Commerce Department has more funding for export programs. The president also has called on the Export-Import Bank of the United States to increase available financing for small businesses by 50 percent. In addition to helping business owners find capital, the Small Business Administration provides training and expert counseling to small firms. Public sector agencies have also ramped up efforts to simplify the requirements business owners must meet and will help businesses identify overseas markets and customers.
Some Unexpected ‘Gifts’ Come With a High Price
“Never look a gift horse in the mouth” is one of those old adages that many of us grew up with. Sometimes, though, even the wisest among us might want to stop and think before accepting a gift with blind trust.
One such example is an unexpected check from a taxing authority. Before computers made it easier for the IRS and other tax agencies to keep track of your account, that scenario was unlikely; however, with the government on the lookout for needed revenue, what you don’t know might cost you.
A not-for-profit executive recently received numerous checks in the mail from a state tax department. The description on the checks indicated they were for overpaid taxes from past tax periods. The revenue clerk asked if he should deposit the checks and without hesitating, the executive said, “Yes.”
In this instance, the refunds were truly due to the organization, but the simple act of depositing the checks could have opened the nonprofit entity up to penalties and interest even though the tax agency itself had sent them the funds. It might seem unreasonable, but this is how the IRS and other taxing authorities view this kind of transaction.
For example, you filed your 2008 income tax return and paid the $10,000 balance due on April 15, 2009. The IRS sends you a refund check on Oct. 31, 2010, in the amount of $5,000 for the 2008 tax year. You have no idea why they sent the check, but you are happy to deposit it. Three months later, the IRS sends you a notice that claims you underpaid your 2008 tax bill by $5,000 and you now owe them $5,000 in taxes plus penalty and interest.
Do you owe the full amount of that bill? You do owe the $5,000, but will you owe the penalties and interest you’re being charged (starting from April 15, 2009) as well? The answer, according to the IRS, is yes. When you deposited the $5,000 check from them, it was as if you had never made the initial payment – even though you did. The IRS, or any other taxing agency, will assert you owe the full amount – and they can probably make that stick.
This scenario has played out with many clients over the years and, from a common sense standpoint, charging penalty and interest from the original due date of the payment doesn’t seem fair. But the IRS has been successful in collecting that amount. While a small sum for penalty and interest might be reasonable, charging for the entire period is not equitable – then again, nobody ever said taxes were fair.
The IRS has started notifying taxpayers that a refund is being sent and to contact them if the taxpayer believes the refund is in error. This notification, however, often gets less than your full attention.
What is the best course to follow if you receive an unexpected payment from the IRS? Well, first find out why you are receiving the refund. That could entail simply comparing the information the IRS sends against the data reported on your return. If you believe the IRS is correct, go ahead and deposit the check. If you believe the IRS is incorrect, do not deposit the check. Instead, call your tax preparer and explain your concerns. If you still believe you are not due the refund, send the check back to the IRS with a letter of explanation. Depending on the check amount, you might want to return it by certified mail. Make sure you keep copies of the check and all correspondence.
While keeping an unexpected gift sounds good, whoever came up with the “gift horse” saying probably never had a run-in with the IRS. If you receive an unexpected windfall from the government, make certain you understand and agree with the reason for the surprise payment. Otherwise, your only gift might be an unwanted headache. Let us know if we can help – we will be glad to assist you in minimizing any hassles with the IRS.
Null-Lairson, PC Named One of 2011's Best Accounting Firms to Work For
Null-Lairson was recently named as one of the 2011 Best Accounting Firms to Work for. The annual list of “Best Accounting Firms” was created by Accounting Today and Best Companies Group.
This survey and award program was designed to identify, recognize and honor the best places of employment in the accounting industry, benefiting the nation's economy, its workforce and businesses. The Best Accounting Firms to Work for list is made up of a total of 100 companies located across the United States.
To be considered for participation, companies had to fulfill the following eligibility requirements:
- Be a for-profit or not-for-profit business;
- Be a publicly or privately held business;
- Have a facility in the United States;
- Have at least 15 employees working in the United States;
- Must be in business a minimum of 1 year;
- Be an accounting firm.
Accounting firms from across the country entered the two-part survey process to determine the Best Accounting Firms to Work for. The first part consisted of evaluating each nominated firm's workplace policies, practices, philosophy, systems and demographics. The second part consisted of an employee survey to measure the employee experience. The combined scores determined the top firms and the final ranking. Best Companies Group managed the overall registration, survey and analysis process and determined the final rankings.
The ranking of the 4th annual Best Accounting Firms to Work for will be unveiled at an awards ceremony sponsored by ADP during Accounting Today’s 2nd Annual Growth & Profitability Summit on October 25th – October 27th at the Bellagio Hotel & Casino in Las Vegas. The list-making firms will also be published in the December issue of Accounting Today.
For more information on the Best Accounting Firms to Work for program, visit www.BestAccountingFirmstoWorkfor.com.
Thriving in Today’s Economy
Studying the headlines every day for clues to the economy can be a frustrating process, and trying to figure out what works best in today’s economy can be exhausting. Relax. Surviving and thriving in today’s economy often doesn’t require abandoning your old systems in favor of something new. In an atmosphere of uncertainty, it is easy to lose sight of business basics in a fruitless search for some fail-safe solution. Successful business owners must adapt to conditions – good or bad – in order to reap the rewards. Here are some of the tried-and-true philosophies that characterize successful entrepreneurs.
- Make your own luck. We all face the same basic issues – product demand, credit availability, customers’ spending habits, economic slow-down etc. The winners are those who stop focusing on the problems and switch to being part of the solution. A positive attitude and outlook are vital in a tough economy. Don’t indulge in the idea of being a victim of today’s tough economic times. We are all affected by the same problems; but every situation brings opportunities for those who are willing to look for them. Open your mind to searching for new possibilities.
- Change your mindset. Stop referring to how things were and focus on what’s happening now. How can your business or your firm be a solution for customers in today’s market conditions?
- Recognize your advantages. Small businesses have the ability to respond to changing conditions faster than large organizations. They are unburdened by the unwieldy systems, layers of management and inflexible policies and procedures that make it hard for bigger companies to adapt and respond in a timely manner.
- Be a positive leader for your employees. People who work for and with you take their cues from you. A despondent leader unwittingly encourages defeatism and pessimism among those who are crucial to the business’s success. Be realistic and honest about problem areas, but make it a point to focus on remedies and positive action. With customers, by all means lend a sympathetic ear if your client needs one, but don’t join in the pity party. Use the feedback to develop new products or services that might help them. Instead of sympathy, offer solutions.
- Avoid major change; instead, embrace improvement. It is tempting to think a big change in your business systems is the key to adapting to outside economic issues. Perhaps it isn’t. If your business systems are informal – like many small businesses – then perhaps it’s time to review them. Don’t engender chaos by tossing out what might only need fine-tuning for something that is more complicated.
- Review and improve your basic business systems. Make sure that all the processes in your business – receiving customer orders, making sales reports, accounts receivable, etc. – are documented as simply and straightforwardly as possible. There’s no need to create fancy training materials or online tools. A simple checklist of tasks that outlines responsibilities, approval procedures and timelines is all that is usually needed. These checklists should be provided to every employee and made readily available online and/or as hard copies.
- Make new business everyone’s business. Build referral partnerships. Bring not only your employees, but also family members, business partners and others together to discuss what additional services or products might be of interest to your clients. If you are able to assist the company that services your fleet of trucks, perhaps they might refer a contact that needs your professional services.
- Be smart with social media. Set aside specific times to handle social media. Find sites like LinkedIn that will allow you to participate as an expert in your industry by answering questions from fellow group members.
Bottom line: tough times don’t necessarily require a radically different approach to business. What is essential is a willingness to adapt to market conditions and to accept responsibility for generating your own success.
Stock Market: Looking for a Silver Lining
After a summer of ups and downs, the markets headed downward as September drew to a close. By Sept. 25, the decline had affected oil prices as well as the silver and gold markets – which were down 26 percent and 9.6 percent, respectively. The bond market yielded no joy either, with yields on 10-year U.S. Treasury Notes falling below 2 percent. Global markets are giving investors a worrisome time, and domestic economic and European debt problem concerns have combined to produce a murky forecast. Here are the major issues under discussion and some viewpoints from various investment experts.
- What is the Fed doing?
The Fed’s latest approach to spurring the economy (announced on Sept. 22) was met with initial negativity and a brisk sell-off of U.S. stocks. The Fed’s unconventional strategy – coined Operation Twist – involves selling $400 billion worth of short-term bonds and using the proceeds of this sale to buy longer-term Treasury Bonds. This move is designed to lower long-term interest rates and increase short-term rates, with the end goal of encouraging people to borrow and invest. A further aim is to lower mortgage rates to encourage people to buy or refinance homes. This type of maneuver was used back in the 1960s (when the twist was a popular dance) to twist the yield curve. Investment advisers are still on the fence regarding Operation Twist. There is no consensus as to whether the strategy worked the last time it was used, and some investment experts don’t believe that home purchases will be boosted significantly by lower interest rates.
- How do the problems of Greece affect the United States?
We live at a time when global events shape the respective economies of both developed and developing nations worldwide. It is feared that Greece might default on its debt, which is currently estimated at twice the value of its annual production. Although it is a relatively small country, it shares the euro with other European nations. What happens in Greece might reverberate through other euro nations, and nervous investors could steer clear of countries like Portugal, Italy, Spain and Ireland that also hold large debts. The large European banks hold most of this debt, which in turn could create pressure on these major financial institutions. If Europe experiences a banking or economic crisis, it could pressure other global financial entities and further weaken the U.S. economy. The good news is that European governments are intensifying their efforts to formulate a plan to address the concerns of the financial markets and forestall this negative scenario. Under pressure from world leaders – including the United States – a group that represents 20 nations has just announced it will present “a collective and bold action plan.”
- Is there a silver lining anywhere?
Yes. Some investment advisers are adding income-producing alternatives to stocks and bonds to client portfolios. Others are counseling investors to watch stock prices of companies they would like to hold and to buy quality stocks on the dip. U.S stocks are at affordable price levels. To clients who are willing to ride the current market out for a couple of years, some advisers recommend acquiring blue chips with a history of raising dividends. On the plus side, oil prices are lower, mortgage rates are going down and home buyers can find some great bargains.
Investment advice should be tailored for the specific investor. The comments above are intended as general commentary and should not replace professional counsel from your tax and investment advisers.
Boomerang Kids: How to Protect Your Retirement Plans When an Adult Child Moves Back Home
Adult children moving home after a job loss, divorce or other financial setback is an increasingly common trend. So-called boomerang kids are moving back in with parents at a record pace, up more than 5 percent between 2008 and 2010, according to a recent report by the U.S. Census Bureau. One obvious cause is the weak job market that makes it harder for college graduates and inexperienced young workers to find well-paying positions.
Although this phenomenon makes good material for comedians and Hollywood screenwriters, it can cause serious financial problems for aging parents whose retirement savings might already be strained.
Parents instinctively want to help their children during hard times, and it can be nice having the kids around again – for awhile at least. But some future retirees’ budgets can’t withstand the financial strain of an extra adult (or two) living in the same household without setting up and following some basic guidelines.
With a lot of honesty and a little strategic planning, you can turn a difficult situation into a positive family experience that won’t deplete your retirement savings.
Talk to Your New Tenant
Talk to your child honestly about your expectations during the time they are living with you – and talk to them like an adult. Let them know you expect them to contribute financially to the household’s overhead.
You might want to discuss a reasonable amount for them to pay for rent, food, cell phone costs, utilities and automobile expenses, including gas and insurance. Which expenses and how much will vary depending on your family’s situation.
Agreeing on a financial contribution from your child will not only help with the extra costs, it will also help your child feel better about moving back in with you. Whatever agreements you make with him or her, put them in writing and stick with the plan.
In addition to financial expectations, determine how long your child will need to stay with you and plan a strategy for helping them move out on their own within that time frame. Coming up with a long-term plan for independence is even more important than short-term assistance.
Stick to Your Budget
Even if they do help with some expenses, you might have to pay for other things they can’t afford – there is a reason they are living with you instead of on their own. This might include student loans, medical bills or car payments. Whatever you pay on their behalf, don’t use money targeted for your retirement savings or for standard budgetary items.
And, of course, never take money out of a tax deferred retirement plan.
Make Loans Instead of Gifts
Instead of giving your child money outright, consider loaning the money at a low interest rate. When they are able, they can pay you back at a comfortable pace. It might make them think twice before asking for money they don’t really need, and you can eventually recoup some of your contribution with added interest.
Be a Good Example
If you didn’t teach your kids about finances the first time around (or if they didn’t listen), having a boomerang kid will give you the opportunity to teach them again – and make it stick this time. Instead of paying their bills, you can help them understand the importance of good money management by showing them how you handle your budget. You can make it a positive experience by contributing to the future financial well-being of your child.
Evaluate Your Retirement Plan – And Commit To It
One of the most important steps you can take to ensure that you don’t endanger your retirement when an adult child moves home is to evaluate your current situation with the help of a financial adviser.
Your adviser can show you whether your current rate of savings will likely provide enough income to last through your retirement years. They can also help you figure out how much you can reasonably afford to spend on your adult child. And if you’re already supporting a boomerang kid, you will be able to see the impact that is having on your retirement plans and adjust as needed.
Make a commitment to continue fully funding your retirement plan and build any financial help you provide to your adult child around that commitment.
While having your adult child move back home can be stressful, honestly discussing your expectations will minimize the stress and ensure that your road to retirement remains smooth. Proper planning will not only help preserve your funds, but it might even turn your boomerang kid around and point him or her in the right financial direction.
Is Now the Time to Invest in a Home?
Despite all the economic uncertainty, the news for consumers might not be all bad. Short-term interest rates are low and will likely stay that way well into 2013, based on public statements from the Federal Reserve. Mortgage interest rates have been hovering at or near record lows all summer.
Long-term, fixed-rate mortgage averages, for example, dropped to 4.15 percent in mid-August, the lowest since Freddie Mac began taking surveys in 1971. Rates on 15-year mortgage loans and five-year hybrid loans are also historically low.
What does this mean for potential home buyers? Is now the time to refinance or buy a new home? Rates could go even lower, but there’s not much room left for them to drop, so some experts believe this is an ideal time to take action if you’re in the market for a home.
Low Rates and Low Home Prices
Besides very low mortgage interest rates, there is another reason why buying a home now makes sense – homes are relatively inexpensive. As if incredibly low borrowing rates were not enough enticement to buy, home prices dropped nearly 6 percent in the second quarter of this year, reflecting a suppressed housing market. Because of the foreclosure inventory, the market is flooded with properties that banks need to sell. Even if you don’t buy a foreclosed home, the large supply of houses on the market drags down home prices in general.
Despite these favorable factors, home sales remain depressed due to the lack of a robust recovery in the housing market, high unemployment and the much stricter credit requirements lenders are imposing. Home sales fell in July and are still well below what they were before the housing bubble popped. Applications for home purchases are at their lowest level in 15 years.
Low Rates Won’t Last Forever
If you don’t have a job and you’re not independently wealthy, low interest rates and low home prices won’t help. In fact, it’s because of high unemployment and the recent financial crisis that these attractive home buying factors exist. And low home prices are certainly not good for current owners watching their equity shrink, keeping them from drawing upon such equity for home improvements and other large purchases.
But if you have topnotch credit, a stable income and the cash on hand to make a significant down payment, buying a home now is a good move. It might be a better move now than in two years because of uncertainty about the highly publicized debt deal Congress reached in August.
Any future budget deal could involve eliminating tax breaks in order to raise revenues, and the popular mortgage tax deduction and other mortgage-related deductions could be open for negotiation. Acting sooner rather than later might mean the difference between getting the full deduction or not; however, no one should buy a home unless they can afford it, regardless of the tax incentives.
Research Your Investment
Remember that the lowest interest rates are offered to buyers with the best credit and the ability to make a substantial down payment. If you are fortunate enough to be well qualified, you might get an even lower rate if you are willing to pay discount points upfront.
Whether you’re planning to buy a new home, be it a second home or a vacation home near the mountains or at the beach, that purchase is an investment – and all investments carry some risk. Just like stocks, home values can go down, so careful research is required before you make your choice. As with all such major decisions, it’s wise to talk to a financial adviser to help you decide what’s best for your unique situation.
Stock Market: Stocks Gyrate as Investors Ponder
With stocks’ gyrations and economic uncertainty rattling investor confidence here and abroad, individual investors have not lacked for editorial advice on how to formulate an approach to counter market volatility. “You can’t time the market” might be a traditional Wall Street saying, but pundits try to do so, and they will continue to devise plans to minimize risks to their clients’ portfolios and leverage future opportunities. To that end, the commentary this month has been as varied as the peaks and valleys of the market’s performance. Here’s a synopsis:
Some commentators are describing the current situation as one of “slow economic growth,” which means the gross domestic product is expected to grow little more than 2.5 percent this year, not the 3.2 percent forecast earlier in the year. They note that it is not a surprise the economy has slowed following a stint of growth and a two-year market rally. Lower gas prices are a major plus and could spur consumer spending. Some look to the Federal Reserve to provide insight that could help calm jittery investors. On the down side, the stimulus program ended in June and some analysts believe the current market performance is a reaction to this. Other inhibiting factors are Congressional wrangling over the debt reduction deal, cuts in government spending that could result from the agreement and continued high unemployment.
Will we see more stock market volatility in the months ahead? No one can say for sure, but some investment pros think that the economy could slow further before we see a rebound. With this in mind, some advisers are sticking with a strategy that suits volatile times, including suggestions like these:
- Diversifying one’s portfolio among specific market categories – especially those that are less affected by cutbacks in consumer spending, such as companies that manufacture consumer staples, health care companies and telecommunications.
- Running the numbers on dividend-paying stocks to find companies whose price to earnings ratios look robust.
- Avoiding knee-jerk reactions to bad news, but considering revisions to your portfolio in order to have cash quickly available to leverage the upside of undervalued stocks. It is important to note that changes like this should only be undertaken as part of a carefully planned investment strategy and are not for individuals who are risk adverse.
- Few advisers are suggesting that their clients bail out of the markets. Those who have restructured their holdings and added alternative financial instruments have a range of options to consider, including money market accounts and bonds, or CDs and bank accounts, though these two pay much lower interest rates.
The comments outlined above are general observations and are not intended to be investment advice.
New Study Shows Increase in Senior Financial Fraud: How Can You Protect Your Parents' Assets?
Senior fraud is a serious problem. You have probably seen many examples in the news – and it can happen to you or your aging parents. A June 2011 study by MetLife (The MetLife Study of Elder Financial Abuse: Crimes of Occasion, Desperation, and Predation Against America’s Elders) found that financial fraud and abuse perpetrated against the elderly in the United States rose by 12 percent in 2009 to $2.9 billion, compared to $2.6 billion in 2008. Strangers perpetrate more than half of all fraud against older citizens; however, it is likely that the 34 percent of reported cases of fraud committed by family members, friends and acquaintances is too low. In fact, most cases are unreported due to embarrassment or fear. The problem is probably much bigger than statistics indicate.
Seniors, their family and caregivers can prevent financial fraud. First, it’s helpful to look at some of the reasons seniors can be easy victims and some of the ways the fraud is perpetrated.Vulnerable to Fraud
Why are seniors the most financially abused sector of the U.S. population? According to the MetLife study, fraud against the elderly usually falls into one of three categories: “occasion, desperation and predation.” Fraudsters may simply be opportunistic (in the right place at the right time), have a desperate need for money or premeditate their crime by gaining their victim’s trust.
Seniors are prime victims of financial fraud because they often:- Live alone
- Have accumulated strong financial assets
- Trust others
- Are physically or mentally declining
- Are too embarrassed to report fraud
Fraudsters can make their scams sound very attractive, and their victims might be persuaded to buy into these schemes to ease their fears of financial hardship. Keep in mind that the perpetrator convinces the victim there is no risk of losing any of their current assets, so this is not as paradoxical as it might seem. If the senior is experiencing even minor dementia, they are more vulnerable to this approach. If the perpetrator is a family member, the senior’s vulnerability actually grows because the trust factor is amplified.
Look for the SignsSenior financial fraud comes in many forms, and it’s easy to miss the signs that it might be occurring. Question symptoms of possible elder financial abuse by looking at the following:
- Is your parent experiencing a sudden increase in the number of visitors, repeat visits or unusual interest by a certain family member?
- Is another family member, worker or care provider keeping you away from your parent?
- Has your parent become suddenly and voluntarily isolated?
- Have you noticed signs of physical abuse?
Financial fraud against seniors is wide-ranging and comprehensive. These might be carried out via door-to-door sales calls, telephone solicitation, email phishing, mail, unscrupulous home healthcare providers, dishonest romantic interests and other avenues. Unfortunately, many cases are not prosecuted because they are perceived as difficult to prove.
Protect your Parent’s Financial AssetsBeing alert for any signs that might indicate fraudulent activity against your parent is important, but the first step in preventing any fraud against them is to have an honest, respectful and tactful discussion about the issue, informing them of the risks and their vulnerabilities. This is especially urgent if your parent is showing any early signs of mental decline. Remember to be sensitive to your parent’s feelings – try not to be overbearing or pushy.
Additionally, you can take concrete steps to protect your parent’s financial assets; depending on your parent’s unique situation, you can:
- Help manage your parent’s finances with durable power of attorney.
- Move large amounts of cash into a separate account that you manage, leaving your parent with adequate money for living expenses.
- Be actively involved in managing your parent’s finances and investments by consulting with a financial or investment professional.
- Report any financial fraud or attempted fraud to the proper authorities.
Charitable Giving
Charitable giving can play an important role in many estate plans. Pilanthropy cannot only give you great personal satisfaction, it can also give you great income tax deduction, let you avoid capital gains tax, and reduce the amount of taxes your estate may owe when you die.
There are many ways to give to charity. You can make gifts during your lifetime or at your death. You can make gifts outright or use a trust. You can make a charity as a beneficiary in your will, or designate a charity as a beneficiary of your retirement plan or life insurance policy. Or, if your gift is substantial, you can establish a private foundation, community foundation, or donor-advised fund.
Making Outright Gifts
An outright gift is one that benefits the charity immediately and exclusively. With an outright gift you get an immediate income and gift tax deduction.
Tip: Make sure the charity is a qualified charity according to the IRS. Get a written receipt or keep a bank record for any cash donations, and get a written receipt for any property other than money.
Will or Trust Bequests and Beneficiary Designations
These gifts are made by including a provision in your will or trust document, or by using a beneficiary designation form. The charity receives the gift at your death, at which time your estate can take the income and estate tax deductions.
Charitable Trusts
Another way for you to make charitable gifts is to create a charitable trust. You can name the charity as the sole beneficiary, or you can name a non-charitable beneficiary as well, splitting the beneficial interest (this is referred to as making a partial charitable gift). The most common types of trusts used to make partial gifts to charity are the charitable lead trust and the charitable remainder trust.
Charitable Lead Trust
A charitable lead trust pays income to a charity for a certain period of years, and then the trust principal passes back to you, your family members, or other heirs. The trust is known as a charitable lead trust because the charity gets the first, or lead, interest.
A charitable lead trust can be an excellent estate planning vehicle if you own assets that you expect will substantially appreciate in value. If created properly, a charitable lead trust allows you to keep an asset in the family and still enjoy some tax benefits.
Charitable Remainder Trust
A charitable remainder trust is the mirror image of the charitable lead trust. Trust income is payable to you, your family members, or other heirs for a period of years, then the principal goes to your favorite charity.
A charitable remainder trust can be beneficial because it provides you with a stream of current income- a desirable feature if there won’t be enough income from other sources.
Private Family Foundation
A private family foundation is a separate legal entity that can endure for many generations after your death. You create the foundation, then transfer assets to the foundation, which in turn makes grants to public charities. You and your descendants have complete control over which charities receive grants. But, unless you can contribute enough capital to generate funds for grants, the costs and complexities of a private foundation may not be worth it.
Forefield Inc. does not provide legal, tax, or investment advice. All content provided by Forefield is protected by copyright. Forefield is not responsible for any modifications made to its materials, or for the accuracy of information provided by other sources. Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2011.
Update on IRS Guidelines for Overseas Accounts
The IRS has extended its deadline for U.S. taxpayers to enter a voluntary disclosure program regarding their offshore foreign bank accounts. The IRS decided to extend its initial Aug. 31 deadline by as many as 90 days to help taxpayers who are struggling to meet the deadline and who are making a good faith effort to report overseas income as part of the voluntary program. The 2011 disclosure program is a type of amnesty program for U.S. citizens living overseas who have foreign bank accounts, as well as taxpayers residing in the United States who hold foreign accounts. The IRS previously had taken a hard line on the program’s timeline, giving taxpayers no leeway on the Aug. 31 deadline. The revision might be a response to criticism from tax professionals who claim that their clients’ cases have been delayed because information has been passed from one agent to another without resolution.
The IRS cracks down hard on U.S. taxpayers who don’t provide full disclosure of overseas accounts – the top penalty has been increased from 20 percent in the 2009 program to 25 percent in 2011, and it applies to accounts in existence from 2003 through 2010. To further deter scofflaws, the IRS guidelines outline the civil penalties and the range of criminal charges that face account owners whose holdings are discovered by the IRS rather than through voluntary disclosure.
As well as the decision to extend deadlines, the IRS also announced that taxpayers already in the program can now choose to opt out of the disclosure program’s civil-settlement process and have their cases reviewed under standard audit procedures. The IRS’ decision to do this came about after significant criticism of the current program.
In addition to the deadline issue, many tax professionals also believe that the IRS has failed to distinguish between real tax evaders with complicated financial accounts and others who have been swept up in the crackdown. The small fry caught up in this includes people who are heirs to family holdings outside the United States. In response, the IRS announced a new lower penalty rate of 12.5 percent for people whose offshore accounts are less than $75,000 for the applicable time frame. Criticism of the program’s unwieldy structure and slow procedures might be the impetus behind a further IRS announcement that allows taxpayers who have already entered the voluntary disclosure program to opt out. According to the IRS, those who chose to do so will not be penalized further.
Opting out of the voluntary disclosure program could be more costly for some taxpayers, but not for others. Taxpayers who choose this option will have their cases reviewed by a central committee, which will take the taxpayers’ statements into account before deciding on appropriate penalties. The IRS also reserves the right to remove taxpayers from the voluntary disclosure program if they are deemed uncooperative or if the IRS examiners believe their case won’t be resolved within a reasonable time frame.
The revisions to the 2011 disclosure program have met with approval from some tax advisors who’ve been involved in assisting clients with compliance. The issue is complicated, and the IRS’s revisions to their guidelines have not made matters any easier. For more information on the disclosure program and on current tax laws regarding overseas bank accounts, feel free to give us a call.
Stock Market: First Quarter Shows Gains; Greek Debt Crisis Rattles Investors
Investors were pleased to note that first quarter economic results showed a modest expansion despite lingering weakness in the housing sector. The nation’s gross domestic product grew at an inflation-adjusted annual rate of 1.9 percent – a little better than original estimates of 1.8 percent, but a drop-off from 2010 when GDP increased 3.1 percent. It was nice to have some good news – even if gains were modest – in a month that saw a default looming in Greece and stocks decline here, in Europe, Hong Kong and Singapore.
At home, economists reported a rebound of 1.9 percent in factory goods – a good sign after April’s decline of 2.7 percent. The transportation sector was a major factor in the upswing. Automobile production continued to fall because Japanese global supply chains are still affected by the devastation from the recent tsunami. Existing home sales declined in May, as they had in April. Although month-to-month sales continue to be weak, new home sales were up 13.5 percent from May 2010. Every region except the Northeast saw new home sales increase over May of last year.
On the downside, core inflation (an inflation rate that is calculated without energy and food costs) posted its biggest increase in almost three years in May, showing a 0.3 percent gain. Consumer prices increased 0.2 percent following a 0.4 percent upswing in April. Inflation concerns continue to worry some investors.
On the heels of mixed domestic economic news, Wall Street worried that Greece’s debt problems might have caused a major ripple effect. Like it or not, when it comes to financial markets and economic news, we are one world and bad news in one locale can infect markets elsewhere. U.S. share prices dropped when the Greek crisis became public. Share prices continued to decline as protests against austerity measures in Greece turned violent, with the Dow Jones Industrial Average declining 2 percent in just one day. With eurozone authorities making little headway on possible aid to Greece and riots in the streets, investors on both sides of the Atlantic headed for the sidelines in mid-June. Not surprisingly, the Euro took a dive – bad news for U.S. exporters because a weaker Euro makes American goods comparatively more expensive.
Global Portfolio
Does this mean that U.S. investors need to overhaul their investment strategy and avoid international stocks? Knee-jerk reactions are never a good idea, but it might make sense to review the balance of various financial instruments in your portfolio with help from your investment and tax advisors. It is important to remember that although exposure in foreign markets might seem scary when a crash is under way, history shows that international diversification holds its own over the long term.
The Federal Reserve responded to the European crisis by downgrading U.S. GDP forecasts for 2011 from 3.2 percent to 2.8 percent. Separately, the Federal Open Market Committee announced that target federal fund rates will remain unchanged, but also confirmed that its second round of quantitative easing will wind down. The committee noted that the slightly slower pace of recovery was expected to be temporary, and that higher food and energy costs plus the tragic events in Japan were all contributing factors.
The above are general observations and are not intended as a substitute for advice from your professional tax and investment advisors.
Tips for Improving Your Cash Flow
No business can survive for long without a positive cash flow – that is, more cash flowing in than flowing out. This is probably the top reason a business fails. In times of an economic downturn, you must be aware of your company's current cash situation and take the necessary steps to repair and improve it. Correcting it now will help you weather stormy economic times in the future.
Take Control of Your Receivables Some of your customers might be making payments late or not at all. The time to go after receivables is before they become late. Prompt invoicing is extremely important in receiving payments in a timely manner. The sooner you invoice a purchase, the sooner you can collect payment. This money will go into your bank and start earning interest to improve your cash flow situation. Consider invoicing your customers more often, such as monthly instead of quarterly. Review your accounts receivable often to make sure customers are not skipping payments or making a habit of paying late. Ask for partial payment up front on large purchases. If customers are late with payments, send out reminder notices quickly. Often, customers just need a reminder that they have forgotten to make this month’s payment. Offering a discount for early payment is also a great incentive to encourage timely payments. Communicate your credit terms up front to avoid future problems.
Create a Budget and Stick To It Every business owner should create a budget no matter the size of the company. A budget can help you determine if financial goals are being met. By creating one for the whole year, you can spread the cost out over several months. Break down revenue and expenses by each month and determine the amount of cash you will need coming in to keep your bills paid. Review your budget each month to make sure you are meeting your goals. Begin next year's budget before the end of the current year to stay ahead of the game.
Pay Your Bills on Time But Not Early It takes more than improving sales and receivables to maintain a proper cash flow for your business. You must also make sure you pay your on bills on time. This will put money in your pocket by saving on late fees and interest charges. Consider scheduling payments to creditors electronically to avoid late fees. However, sometimes it is in your best interest not to make payments before they are due. This allows your money to stay in your bank drawing interest until it’s needed. Try negotiating credit terms for purchases. Paying 30 days after receipt would be more advantageous than paying 30 days after shipment of goods. Negotiate with your vendors to get the best deal possible.
Control Your Inventory Controlling your inventory is key to improving your cash flow situation. Inventory includes both raw goods and finished products. You want to have enough inventory on hand to fulfill orders but not so much that it will sit on your shelf. You should know when you place an order how long it will take to receive the shipment to help you establish reliable lead times for placing orders.
Prepare a Forecast Forecast what you think you will look like financially in the coming year. Don’t worry about accuracy (it will be wrong.) But do be realistic. Then monitor your actual number against this model. It will tell you things you do not know about your finances, your people, your customers, your costs and much more. You can then tweak to achieve better results
Repeal of Tax Reporting Mandate Is Good News for Small Business
Business groups that opposed the additional reporting of transactions to the Internal Revenue Service – a provision called “1099” for the form it would have required – were happy to see President Obama sign a bill repealing this measure in mid-April. The provision, which was intended to increase business tax revenue, would have taken effect in 2012. Its opponents argued that it created a significant paperwork burden to generate minimal returns, and ultimately both Republican and Democratic lawmakers agreed. Announcing the repeal, the President acknowledged the vital role small businesses play in the U.S. economy and noted that bilateral collaboration had brought about the repeal of the component. The bill the President signed also repealed another tax reporting requirement passed last year, which took effect January 1, 2011, requiring landlords to disclose more about their business expenses.
When Congress passed the 1099 business tax reporting requirement in 2010, it drew immediate criticism. It would have required business owners to report all transactions totaling $600 or more paid to other businesses for products and services. With its repeal, business tax reporting reverts to previous guidelines, which require only disclosure of payments made to unincorporated businesses.
Last Minute Tax Considerations
April 18 is fast approaching and with it, the deadline for filing your 2010 income tax return. While the majority of your 2010 tax figures are already in place, there are still a few things to consider before the due date.
Last Minute Tax Savings
Individuals qualifying for Individual Retirement Accounts have until April 18 to contribute to the account and take the deduction on their 2010 income tax return. To qualify, you must have earned income. Additionally, if covered by a retirement plan at work, you must meet certain phase-out requirements, depending on your filing status.
If you qualify, the maximum deduction for your IRA is $5,000 ($6,000 if you are 50 years old or over). If your spouse qualifies, the maximum deduction is $10,000 ($12,000 if both you and your spouse are 50 or older).
The IRA can be established any time up until April 18, 2011.
Simplified Employee Pensions are similar to IRAs, but they are established and funded by employers. They can be set up and funded anytime up to the due date of the return (including extensions). They are excellent retirement vehicles for sole proprietors in that you can contribute up to 25 percent of your self-employment income or a maximum of $49,000. Their biggest drawback is that you must contribute the same percentage to qualifying employees’ SEPs that you contribute to yours.
Assume you want to contribute 25 percent of your self-employment income to a SEP. Also assume that you have three other employees who qualify under the plan and their total combined income is $100,000. In addition to your contribution, you would have to contribute a total of $25,000 to your employees’ accounts. For this reason, you need to think long and hard before establishing a SEP if you have employees.
Health Savings Accounts and Medical Savings Accounts are tax-advantaged methods you can save within to cover the cost of medical expenses. Most medical plans require you to pay a deductible, so if you are covered by a high-deductible plan, you can establish an HSA. The idea behind the health account is to reduce your overall cost by allowing you to increase your deductible, which typically reduces the premium. Instead of spending the premium savings, you deposit the savings into an HSA (the deposit is deductible just like in an IRA). If you need money to pay qualified medical expenses, you can use the funds in the HSA.
The amount you can contribute to the HSA each year is limited to the lesser of your deductible or $3,050 for individuals (and $6,150 for families). Assuming you qualify, you have until April 18 to establish and fund an HSA. In addition to the maximum amounts above, persons age 55 and older can make catch-up contributions of $1,000.
A Few Other Thoughts
In addition to last minute tax savings tips, be aware of the rules surrounding extensions. While you can obtain an extension of time to file your return, there are no extensions on due dates for tax payments. If you believe you will owe tax, make every effort to accurately estimate the amount due. Failure to pay it by the April 18 deadline will subject you to interest and penalties when the return is finally filed.
As we near the filing deadline, you might still have one or two tactics available to minimize your tax liability. Give us a call and let us help search through your options.
New Tax Rules Make 529 College Savings Plans More Attractive
Prior to December 17, 2010, Americans faced uncertainty about whether the Bush tax cuts would expire at the end of the year as scheduled. But the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 halted the speculation and brought some stability to taxpayers, financial planners and investors – at least, for now.
After the financial crisis of 2008 that resulted in substantial losses for 529 college savings accounts (many of which are traditionally stock heavy), contributions dropped sharply. Other potential 529 limitations, such as comparative performance weakness, high fees and yearly investment changes, have also discouraged use of the vehicle despite its tax advantages. (Please note that 529 plan rules vary by state.)
Given some key features of the 2010 tax act, it could be time to reconsider the 529 college savings accounts as an education savings vehicle – especially for wealthier families. The next two years are an open window through which new money could start pouring into 529 plan accounts, which allow tax-fee growth and federally exempt distributions for approved college expenses.
Lifetime Gift Tax Exemption Increased The tax advantages were made permanent in 2002, so the importance of the new legislation for 529 plans lies largely in the lifetime gift tax exemption, which now mirrors that of the federal estate tax exemption. The annual gift tax exclusion remains at $13,000 ($26,000 per couple).
- The annual gift tax exclusion means you can give away up to $13,000 per year ($26,000 for couples) to any number of beneficiaries without having to pay gift taxes on that amount.
- The lifetime estate tax exemption is the amount you can give to all beneficiaries during your lifetime without decreasing the amount from your estate that can be given away tax-free after your death.
For 2011 and 2012, the estate tax is back (after a 2010 hiatus) for estates exceeding $5 million, but the 2010 bill also increases the lifetime gift tax exemption from $1 million to $5 million per individual taxpayer, or $10 million per couple.
- Let’s say a wealthy uncle decides to contribute $65,000 to his niece’s 529 plan in 2011. By spreading the annual gift tax exclusion over a five-year period, the uncle can avoid cutting into his $5 million lifetime gift tax exemption.
- If the wealthy uncle’s contributions do exceed the gift tax exclusion amount in any given year, he can either choose to pay the gift tax due on the excess or he can opt to use part of his $5 million lifetime exemption, which means that his federal estate tax exemption will be reduced by the same amount when the estate tax is due to be paid.
A Window of Opportunity The new law is temporary, so the new benefits may be short-lived. The increased lifetime gift tax exemption numbers are only good for 2011 and 2012, with no certainty of an extension. If you are considering contributing to a 529 plan and you can afford to do it, the next two years might be a good time to make a large contribution. Given the massive federal budget deficit and the increasing pressure lawmakers are feeling to cut spending, raise taxes or both, Congress could tighten the rules to boost revenue, making 529 plans less attractive in the future.
Talk to an Expert Gift and estate taxes are complicated and often misunderstood, and 529 plan fees and other features vary widely from state to state. There are several other options to consider as well, so be sure to contact our office to discuss what works best for your unique situation.
Medical Expenses – What Can You Deduct?
This is the time of year when many of us begin the frantic search for tax deductions. While most of the deductions allowed were set in stone on Dec. 31, 2010, there might still be some gems to uncover in your 2010 costs. One of them could be found in your medical expenses.
Limitations
As an overview, medical expenses are deductible to the extent they exceed 7.5 percent of your adjusted gross income. If your AGI (Line 38 of Form 1040) is $100,000 and you have medical expenses totaling $10,000, your deduction on Schedule A would be $2,500, or $10,000 - (7.5 percent of $100,000).
One item that can be included in medical expenses is health insurance costs. If you are self-employed and are not covered under your spouse’s employer-sponsored group plan, the premiums you pay are deductible on Form 1040 rather than Schedule A. Additionally, contributions to Medical Savings Accounts and Health Savings Accounts are deductible on Form 1040 and not Schedule A. The remainder of this article assumes that you are not eligible for the self-employed health insurance deduction.
Insurance Premiums
Assuming you do not qualify for a self-employed health insurance deduction, insurance premiums you pay for health coverage are deductible as medical expenses.
Payments for long-term care insurance can also be included as medical expenses. There is, however, a limitation on the deductible amount based on your age at the close of the taxable year. For 2010, the deduction ranges from $330 for those under age 40 to $4,110 for those older than 71.
Out-Of-Pocket Medical Costs
Out-of-pocket medical costs include:
- Unreimbursed doctors’ fees, including co-pays and other amounts paid to a physician’s office
- Unreimbursed dental fees
- Unreimbursed expenses paid to hospitals for hospital stays, including emergency room visits
- Unreimbursed medical transportation costs, including ambulance, and 16.5 cents per mile for using your car for medical visits
- Prescription drugs and medicines
- Medical equipment
- Other medical costs
Let’s look at a little more detail on a few of the above items:
With respect to medically necessary procedures by physicians and dentists, those expenditures are deductible. However, cosmetic procedures that are not designed to ameliorate deformities (from congenital birth defects or other injuries or diseases) are not deductible. For example, let’s say you have surgery on your nose. If the surgery was done because you were in an accident and it is reconstructive in nature, the cost is deductible; however, surgery to change your nose size or shape to improve your appearance is likely not. Similarly, the cost of whitening teeth is not deductible as a medical expense.
What is included in medical transportation costs? Payments for an ambulance or similar transportation services are deductible. Likewise, costs for driving you or a loved one to the emergency room or a doctor’s visit are deductible. But what about out-of-town transportation? The general answer is that any transportation costs incurred for medical purposes are deductible. Thus, the cost of traveling to another town, whether by air or car, to see a specialist is deductible. Not only the travel cost, but lodging in connection with treatment at a hospital or other qualified medical facility is deductible, though lodging costs are limited to $50 a day per person.
Here is an example of medical travel. Your son requires a bone marrow transplant and the local medical facilities do not have qualified personnel to perform the procedure. Both parents and the child travel to the city where the transplant will be performed. The cost for plane tickets is $550 each and the hotel cost while undergoing necessary work-up procedures is $110 per day. The full cost of the plane tickets will be deductible and the deduction for lodging will be $110 per day. If the nightly cost for the hotel room was $160, the deduction would be limited to $50 per day per person or $150. Meals are not deductible.
Medical travel can also include travel to foreign countries and other tourist areas as long as the travel is essential to and primarily for medical care and not for a significant element of personal enjoyment.
Other medical costs have the potential to add up to big savings. For example, air conditioners designed to assist in allergy relief or cystic fibrosis relief might be deductible. If you or someone you know is blind, the cost of a seeing-eye dog or a portion of the costs of Braille books could be deductible. The cost of a clarinet and lessons to alleviate severe malocclusion of teeth can qualify as a medical deduction, as can health club dues in certain circumstances. Even the cost of a medicine man might be a deductible medical expense.
This discussion is not intended to be a complete list of medical deductions because those items that qualify as such could go on for pages. The above information is meant to help prod your thinking about the possibilities. Give us a call if you have some questions and let’s discuss what deductions you may be entitled to.
What's New on Form 1040
After months of uncertainty regarding possible tax cut extensions, we now know which breaks have been extended and which ones have hit the deck. Here’s how the major changes stack up.
Health Insurance Premium Deductions for Self-Employed Taxpayers
In the past, eligible self-employed taxpayers could deduct their health insurance premiums from their federal tax bill. For 2010 only, health insurance premiums also may be deducted from self-employment taxes using Schedule SE. This tax break is not slated to continue beyond 2010 unless Congress chooses to extend it.
No Phase-Outs for Itemized Deductions and Exemptions
For 2010 filings, Bush-era tax cuts repealed phase-outs for itemized deductions and exemptions, and recent legislation extended the repeal through 2012. This extension ruling means that higher-income taxpayers will not have itemized deductions – such as mortgage interest, state and local income and property taxes, and charitable contributions – subject to a phase-out ruling. Likewise, a similar phase-out ruling covering personal and dependent exemption deductions was repealed for 2011 and 2012 as well.
Adoption Credit Maximum Increased
The maximum adoption credit was increased to $13,170 for 2010, from $12,150 in 2009. The credit – previously regarded as nonrefundable – was made 100 percent refundable for the 2010 tax year. The refund will be applied to your federal income tax bill, and you will receive a check for the difference (if any remains) after your taxes are paid. In order to claim this credit, you must fill out Form 8839 (Qualified Adoption Expenses) and enter the credit amount on line 71 of Form 1040.
Home Purchase Credit Repayment Requirements
Homebuyers might have to repay some or all of the credit claimed for a home purchase made during 2008 or 2009 through their Form 1040 for 2010. For the most part, only those who purchased homes during 2008 will be subject to this ruling. These individuals will be required to repay 1/15th of the credit on the 2010 Form 1040.
Real Estate Deduction for Non-Itemizers Has Expired
Unmarried individuals who did not itemize were allowed to write off up to $500 of state and local real estate taxes by claiming an increased standard deduction for 2008 and 2009. Married joint-filers were allowed to write off $1,000. This provision expired at the end of 2009 and was not extended into 2010.
Tax Break for Unemployment Benefits is Not Extended
Previously, the first $2,400 of unemployment benefits was not subject to federal income taxes. Now, all unemployment benefits received during 2010 must be reported as income on Form 1040.
No More Tax Breaks for New Vehicle Purchases
Stimulus Act tax breaks aimed at spurring purchases of new vehicles lapsed at the end of 2009, and they were not reinstated for the 2010 tax year. Previously, non-itemizers who paid state and local sales taxes on new vehicles purchased between February 17, 2009, and December 31, 2009, were granted a temporary write-off. Eligible purchasers were granted an additional standard deduction write-off, and itemizers were also allowed to claim an extra itemized deduction for these taxes.
April 18 is Tax Deadline Day for 2011
Because April 15 falls on a Friday and that Friday happens to be Emancipation Day (a District of Columbia State holiday), the deadline for tax returns is Monday, April 18. If you wish to extend the deadline to October 17, 2011, your Form 4868 must be filed by April 18.
The summary above provides general comments only. Contact us and we can provide more detailed information and advice tailored to your specific needs.
Stock Market: Encouraging Performance Cheers Investors
The Dow Jones Industrial Average topped 12,000 – a threshold that had not been crossed since 2008 – as January drew to a close. The excitement proved tough to sustain, however, as the market retreated and then rebounded the following day. The 12,000- point milestone doesn’t increase GDP or boost exports, but it does provide the psychological lift that investors need from time to time. Are we seeing the beginnings of a bull run? Answers range from a qualified “yes” to predictions of future minor market corrections. Whatever their stance on future prospects, most analysts agree that index performance and rallies like the recent one help draw investors from the sidelines back into the equity market. Here’s what some of the influential commentators are saying.
More Amenable to Risks of Equity Markets The current low yields from the bond and treasury markets are making the stock market more attractive to investors. The Dow gained 11 percent in 2010 at a time when yields on Treasury notes ranged from 2.5 percent to 4.0 percent. Investors took notice, as evidenced by an influx of equity purchases in November 2010 – a trend that reversed six months of negative flows. The investors who have decided to return to the stock market are doing so slowly, according to market research, and they tend to favor blue-chip stocks.
The 12,000 Barrier To those investors disappointed that the Dow Industrials stopped at 12,000 and failed to push through, the pros urge patience. Many analysts recognize that the pullback might have been created more by psychological factors than any others. It has been noted over the years that investors place disproportionate importance to round numbers and that these psychological perceptions become self-fulfilling prophecies.
Big Names Rebound; Small-Caps Dither Companies listed on the Dow are benefiting from investors’ preference for big names, but small-caps have not benefited to the same extent. Trend lines of the Russell 2000 index of small capitalization stocks suggest that over the past two months, the relative performance of the index has been worse than both the Dow and the Standard and Poor’s 500 indices. It must be noted, however, that more Russell 2000 individual stocks have advanced than declined in the past 60 days. Trading patterns also suggest that the most aggressive activity on the Russell 2000 happens when stock prices decline – a bearish trend.
Mixed Earnings Reports Some experts think we might be due a market correction – albeit not a big downturn. These analysts have noted the U.S. market’s sour take on the recent disappointing GDP figures from the U.K. They predict similarly unimpressive data from U.S. sources. Analysts also note that earnings reports are proving to be a mixed bag, with both Proctor & Gamble and Colgate-Palmolive taking hits after releasing financial reports showing a profit slide of 28 percent for P&G (compared with 2010, which was bumped up by a large gain from discontinued operations); and Colgate-Palmolive’s failure to hit projected earnings targets.
Whether bullish or bearish, experts don’t deny that challenges remain. They note the U.S. is still in a recovery mode, and if unemployment rates don’t decline and/or inflation rears its head, the market’s recent progress could be stymied.
IRS Delay to Affect Income Tax Returns
Because of last-minute maneuvers on Capitol Hill in late 2010, the IRS says the agency is not prepared to process more than 50 million income tax returns until at least mid-February.
Click here to see Steve Metzenthin, with Null-Lairson, explain on "FOX 26 Morning News Extra" how the IRS predicament will affect people submitting tax returns.
What the New Tax Bill Means For You
By now, all taxpayers know that the current tax-rate brackets will remain in place through 2012. However, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 contains many other provisions – and a couple of surprises. Here’s a general overview of key provisions.
• Existing tax rates and tax brackets have been extended through 2012. The current 0 percent and 15 percent rates on most long-term capital gains and dividends have also been extended until 2012.
• The $1,000 Child Tax Credit – slated to be cut to $500 – has been extended and is in place through 2012.
• A new Social Security tax reduction will be in place for 2011 only. The 6.2 percent Social Security tax withholding on employee wages will be cut to 4.2 percent. This reduction affects the first $106,800 of 2011 wages, which equates to a maximum savings of $2,136 for individuals filing as single taxpayers and $4,272 for married couples. The Social Security tax component of the self-employment tax is also reduced from 12.4 percent to 10.4 percent for 2011.
• Congress has allowed bigger Alternative Minimum Tax exemptions and certain personal tax credits to keep more households from falling into this add-on bracket. The new law covers 2010 and 2011.
• The tax break for seniors (age 701/2 or older) that allowed charitable donations of up to $100,000 to be made directly from IRAs has been extended through 2012. This provision benefits wealthier retirees who are allowed to use these donations as IRA-required minimum distributions to take the place of taxable RMDs.
• Taxpayers residing in states with minimal or no state income taxes had the option from 2004 to 2009 to claim an alternative itemized deduction for state and local sales taxes. This option is retroactively restored in the new tax laws and extended to 2011.
• The American Opportunity Credit of 2010 provides a generous college tuition tax credit, worth as much as $2,500 for up to four years of undergraduate studies. This has been extended through 2012. The new law also retroactively restored the college tuition deduction for 2010 and extended it through 2011.
• For employees in continuing education programs, the new act extends the Employer Educational Assistance provisions that allow an employer to provide up to $5,250 a year in federal income tax-free educational assistance payments to eligible employees. The tax-free payments can be used for undergraduate and post-graduate school costs for classes that do not have to be job related.
Some Lost Out
Many tax provisions were extended, but with smaller tax credits – and others were not extended at all. Notably, the tax credit for energy-efficient home improvements – up to a credit of $1,500 – was scaled back to 10 percent of the project costs with a maximum payout of $500. This new $500 limit will be reduced if any previous credits have been claimed. This means that most homeowners who took advantage of this tax break previously are unlikely to be eligible for any further tax benefits.
In addition, a homeowner tax deduction was not restored either. This real estate tax provision had allowed some taxpayers who did not itemize to write off state and local real estate property taxes by claiming an increased standard deduction. Unmarried non-itemizers had a potential write-off of up to $500, and married couples who filed jointly were eligible for a write-off of up to $1,000.
The Act also provides for extensions to several provisions helpful to families with children. For more information on these, and for more details on those mentioned above, please contact our office.
Charitable Giving Guidelines
Even though it’s now 2011, completing and filing taxes for 2010 is just beginning. While we all know that charitable donations are an ideal way to reduce your tax liability, it’s a good idea to review some of the finer points of the IRS rules. While it’s a good feeling to give back to others, the act is more rewarding when we also receive a bottom-line credit.
Charitable Donations
Generally, donations to the following charities and organizations are 100 percent deductible: religious organizations (churches, synagogues); the United Way, hospitals, research facilities, educational organizations, some membership organizations, units of government and some private foundations.
Subtract Cost of Goods and Services
You cannot deduct 100 percent of your donation if you received any goods and/or services in exchange. For example, if you paid a $35 registration fee to participate in a benefit race and received a T-shirt, the value of that shirt must be subtracted from the total donation. Estimate the value as best as you can – you’re on an honor system.
Not Everything is Deductible
Let’s say you volunteer your time at the same benefit race. The time you spent volunteering is not deductible. However, any out-of-pocket expense associated with the run may be, including mileage, lodging and meals.
Prove Your Donation
If you are giving cash, be sure to get a receipt that includes any pertinent information or details. If you paid by check, keep the cancelled check or rely on your bank’s electronic check register. Credit card payments can be justified through a receipt or your credit card statement.
Fair Market Value of Goods
Most everyone at some point donates clothes, furniture, electronics, books and other items to various kinds of charities. Get and keep an itemized list of all items donated. However, remember that if a new iPod cost you $200 and you donate the iPod after two years, you cannot claim $200 on your tax return.
The IRS bases the amount on fair market value, so in most cases you must estimate the value. Think of this in terms of when you trade in a car; the $30,000 car after five years may only be worth $10,000 as a trade-in. When figuring the fair market value of a donation, make sure you don't overestimate the value of the gift. A good rule of thumb is to calculate what your item would sell for at a thrift store or in a garage sale. If you donated an item with a value more than $500, you must have the item appraised by a third-party for verification. This usually involves cars, artwork or estate jewelry.
Qualifying Year
A gift is deductible only in the year it was paid. If you give a client or customer a gift, despite the fact that the gift will be used in the following year, you can only deduct the cost of that gift in the year you originally gave it.
Donating Stock
You can also donate stock to charity. If the stock has appreciated in value, you get to donate without having to pay taxes on the capital gains and you can deduct the entire current value of the stock.
Itemizing is Important
You will only get IRS credit for charitable donations if you itemize your deductions on your return. There is no provision to add these gifts to the standard deduction.
Giving is good for the soul – and also good for us in other ways. As always, be sure to contact our office with any questions.
Renewable Energy Systems Fuel Tax Incentives
The climate of our economy has brought a great deal of attention to investing in renewable energy systems and going green. With an opportunity to stimulate the economy and increase jobs, this concept is receiving a stronger drive than ever. The tax incentives and cost efficiency are intriguing.
For example, the Investment Tax Credit is an asset accessible to companies that allows them to participate in accomplished energy projects. IRC Section 48 provided stipulations that enabled the passage of energy projects dealing with solar, geothermal and fuel cells – and heat, power, wind and micro-turbine technologies play an important factor as well. IRC Section 48 will provide the tax credits, deductions and exclusions in these areas.
The tax discounts generated from commercial buildings with adequate energy can compensate for the price of the parts that make up the buildings. In this case, the parts are deemed as devalued property if they are established in a U.S. building that meets the requirements for lighting, heating, cooling and ventilation.
According to guidelines created by the American Society of Heating, Refrigeration and Air-Conditioning Engineers, the systems must lower the overall yearly energy usage by 50 percent or more. The building also must be certified by a person the IRS regards as “admissible to conclude that it meets the regulations by using an accepted computer software program.”
On the domestic front, if your newly built home meets the requirements to be energy-efficient, you can receive a tax credit of up to $2,000. In order to get this discount, you must use the home for personal living during a taxable year. Also, the residence must be within the boundaries of the United States and comply with the various energy-saving demands.
These demands prescribe that the home has yearly heating and cooling energy utilization that is 50 percent lower than a unit consistent with the 2003 International Energy Conservation Code, while 20 percent of the home must represent an upgrade to the part of the home that divides the interior and exterior environment.
In addition, the property must comply with rules implemented by the National Appliance Energy Conservation Act of 1987, as well as correspond to the federal Manufactured Home Construction and Safety Standards. If all these requirements are met, you may receive the full credit.
As green technologies become more renowned, the growth will result in lower costs for the systems. Even with organizations doing what they can to establish energy-saving tactics, it still costs less for small businesses and individuals to invest in refurbished energy and energy-efficient technologies. As the government steadily lengthens tax incentives and the rules of energy procedures become more rigid, the benefits of tax incentives and cost-efficiency for green technologies should continue to increase in the future.
More information is located at the U.S. Department of Energy Tax Incentives website or you can contact our office for additional details.
Null-Lairson's Holiday Card Art Contest Winners Announced
Null-Lairson holds an annual holiday card art contest as a part of our dedication and commitment to supporting education and community involvement. This year, Null-Lairson partnered with the Third Grade classes of Jane Long Elementary in Richmond, TX. John Null, Managing Shareholder of Null-Lairson, PC said, “We look forward every year to seeing what the kids produce. We love the creativity that this contest inspires and we feel that our clients always enjoy our unique holiday card.”
This year a winner was chosen from each of the four Third Grade classes. The winners received a new backpack, filled with art supplies. Marlene Springer, Jane Long Elementary’s art teacher said, “This is such a treat for these kids. They will really enjoy the art supplies.” The winners were announced at the school’s assembly with Louis Sepulveda, Madison Sanchez, Nayeli Alvarez, and Crystal Landaverde each receiving recognition. Crystal’s artwork was chosen for the top honor of being featured on the cover of Null-Lairson’s holiday cards this year. Null-Lairson also made a contribution to the school’s art department.
Jennifer Esch, CPA and Associates to Join Null-Lairson, PC
December 2, 2010 (Houston, TX). Null-Lairson, PC is excited to announce that Jennifer Esch, CPA will be joining the firm as a tax partner. Jennifer Esch is a Baylor graduate and has 20 years of experience providing tax and accounting services to her clients in Fort Bend County. “We’re excited about the opportunity to join this team of accountants who provide the same personalized and friendly practice philosophy that we provide for our clients,” Esch said. “Null-Lairson also gives us the opportunity to offer our clients additional services such as financial planning, business valuations, cost segregation, auditing services and many more.”
John Null, managing shareholder of Null-Lairson, PC said, “Jennifer brings a lot of value and experience with her. We’re thrilled to have her and her team join our firm.” Esch will be joining Null-Lairson’s Ft. Bend office.
Take Full Advantage of Tax Breaks in the Small Business Jobs Act
The Small Business Jobs Act of 2010 is intended to provide some welcome tax relief to businesses, with the hope of spurring growth and job creation. Many of these provisions are set to expire after 2011. It is important for business owners not to overlook any of these newly minted tax breaks because most will not be around for the taking for very long. A broad overview of seven new tax cuts President Obama signed into law in September 2010 follows. We would be happy to provide more details on how these measures might affect your business and your tax bills for 2011.
• The amount of investment that a business can immediately write off for 2010 and 2011 has increased from $250,000 to $500,000. The level at which the write-off begins to be phased out has been raised to $2 million.
• The 50 percent bonus first-year depreciation has been extended for qualified real property through 2010.
• The bill also gives self-employed business owners a new deduction for health insurance costs for themselves and their family members when calculating their self-employment tax. This new provision is expected to provide more than $1.9 billion in tax cuts to entrepreneurs.
• The bill also provides tax relief and simplifies the process of claiming deductions for cell phones and similar hand-held communications devices.
• A temporary increase in the amount of start-up expenses that entrepreneurs can deduct from their taxes for 2010 has been increased from $5,000 to $10,000 (with a phased-out threshold of $60,000 in expenditures).
• Certain small businesses will be allowed to “carry back” general business credits to offset five years of taxes (instead of one year), and these credits will be allowed to offset the Alternative Minimum Tax.
• Penalties imposed on small business owners for errors in tax reporting will be eased. Beginning this year, the bill will change the rate penalties are calculated for failing to report certain tax transactions. Instead of a fixed dollar amount, a method that was criticized for putting disproportionately high penalties on small businesses in certain circumstances, penalties will now reflect the percentage of the tax benefit from a specific transaction. However, penalties for failing to file information returns will increase.
While you are thinking about the tax breaks listed above, don’t forget to consider the possibility of major hikes on estate gift, and capital gains tax rates if the expiration of the 2001 tax breaks proceed as planned.
When Someone Dies, Who Pays the Debt?
Although no one likes to think about end-of-life issues, it’s always best to educate yourself on the fine points of estate planning to ensure a smooth transition for your beneficiaries. Given the current economy, how are credit cards and other loans paid off if a person dies and leaves outstanding debt? Are they paid from the estate before beneficiaries receive their inheritances?
Remember that nothing is ever as it seems; a person might seem wealthy and secure, but under the surface there could be credit card balances, student loans, multiple mortgages and other debt. What’s the worst case scenario?
Consider these facts. According to the National Foundation for Credit Counseling, 26 percent of Americans – or more than 58 million adults – admit to not paying all of their bills on time. A CreditCards.com survey reports that when finances are tight, 59 percent of people would pay their credit card bills last. A majority (52 percent) would pay the mortgage first, while 38 percent say they would pay utilities before paying other obligations.
When a person dies, all debts are typically settled from the person’s estate. An estate consists of cash, cars, real estate and anything else owned by the deceased that has value. A prized swordfish mounted on the wall could have sentimental value – but not much monetary value. An older car, even though it might not be included on any used car listing because of its age, still has some kind of value, as nominal as that might seem.
A deceased person’s heirs receive any amount left over after all debts are settled, as dictated by the terms of a valid will. Most everyone has heard it said that a person needs to have a will, no matter how much the person owns. Yet, if a will does not exist, state intestacy laws kick in. Intestacy is defined as the condition of the estate of a person who dies owning property greater than the sum of his or her enforceable debts and funeral expenses without having made a valid will or other binding declaration. If a will or declaration has been made but only applies to part of the estate, the remaining estate forms the intestate estate.
Here’s the bottom line. While the debts of a deceased person don’t just go away, the surviving family members do not necessarily bear the burden. Unless a family member is somehow directly connected to the debt by cosigning a loan or holding a joint account, he or she isn't personally liable for the debt.
There is one exception. In community property states – Alaska, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin – assets that couples acquire during marriage are considered to be owned by both spouses. As a result, when one dies, creditors might be able to target this property to satisfy debts incurred by either or both spouses during their marriage.
Most beneficiaries won’t have to worry about figuring these matters out for themselves. One of the duties of an estate’s executor or administrator is to identify and pay off all debts before distributing anything to the heirs. However, if there are not enough assets to pay off outstanding debts and a joint account holder does not exist, any credit card or other debt goes unpaid.
During the time an estate is being settled, it should be noted that credit card issuers are required by law to stop tacking on any fees and penalties to the outstanding balances. In addition, if first- or third-party debt collectors try contacting family members, any calls should be referred to the executor or administrator of the estate.
Stock Market: Tax Issues and a Cautious Recovery Create Uncertainty
News that the recession officially ended some 15 months ago failed to generate much excitement among Wall Street pundits. Economic growth and unemployment have yet to perform significantly better than during the official recessionary period. Truth be told – and semantics aside – analysts and individual investors alike are most concerned with implications of the slow pace of recovery and resolution of the current tax cut debate. Caution is understandable in an environment of volatility and uncertainty – everyone is dealing with economic and geopolitical realities that have no precedent. However, amid the uncertainty there is good news. Here’s a quick overview of current issues and trends.
Good News
Durable goods news for August suggests that U.S. manufacturing is coming back to life. Although total orders declined 1.3 percent in August, core capital goods rose 4.1 percent and new orders (excluding transportation) climbed 2 percent.
Similarly, the Conference Board’s index of leading indicators showed a slight increase in August, suggesting that the economy would continue to grow slowly into 2011. Some of the indicators were positive, including interest rate spread, money supply, average weekly manufacturing hours, building permits, stock prices and new orders for capital goods. Unemployment claims, vendor performance and new orders for consumer goods were in the negative.
New residential construction rose for the second month against expectations and the news from the housing sector was positive – though results remained low by historical standards.
Tax Cuts Conundrum
The upcoming November elections and the possibility of a Republican-led House and Senate represent a big question mark for investors. Hand-in-hand with the election issue is the matter of whether the Bush tax cuts will be extended.
Until Congress makes some hard decisions, investors will continue to face a lot of uncertainty. Though opinions vary, the majority of investment experts believe that tax cuts for the middle class will be extended; however, households above this threshold will take some tax hits. Investment planners anticipate higher tax rates for bond and dividend income for taxpayers in higher brackets, and many suggest that investors hold their higher-paying dividend stocks and bonds in IRA or 401(k) accounts, where future investment income won’t generate higher tax bills.
Trying to develop a tax-savvy investment strategy is fraught with many variables. We will be providing much more information plus year-end planning opportunities after the election and before year-end. Be sure to contact us with any issues pertaining to your circumstances.
Tax Benefits Change for College Funding Programs
Everyone knows the cost of college tuition has skyrocketed to almost incomprehensible levels. According to CollegeBoard.com, the average tuition and fees for in-state students at a public four-year college is $7,020, while the average full-time, out-of-state price tag is $11,528.
Compare that to private four-year colleges that charge an average of $26,273 per year in tuition and fees, and the numbers can make any student – and most parents – extremely nervous.
One way to lower part of this cost is to apply the education tax credits available. However, students and parents alike must pay attention to some very important changes in several of the key plans.
What Stays the Same?
The American Opportunity Credit does not change for 2010 or the foreseeable future. This plan offers a tax credit of up to $2,500 per student in 2010, available up to 100 percent of the first $2,000 in qualified college costs and 25 percent of the next $2,000. To get the full credit, parents or students must spend at least $4,000 on qualified expenses.
The American Opportunity Credit applies to all families – even if they do not owe any federal taxes. Forty percent of the credit is refundable, so the family could receive a check from the government for an amount up to $1,000.
What’s Set to Expire?
The Hope and Lifetime Learning Credit is set to expire on Dec. 31. While there is speculation that Congress might extend the credit, it is not known when that will actually happen.
Originated during the Clinton administration, the Hope and Lifetime Learning Credit is available for married couples with modified adjusted gross income of up to $160,000. This credit carries with it the same threshold as the American Opportunity Credit of $4,000 on qualified expenses.
Based on the cost of an in-state college, it’s not hard to see how the $4,000 can be easily reached. However, many students attend two-year colleges where the tuition price tag is much less –an average of $2,544 per year in tuition and fees.
If you have cash on hand, prepaying tuition and expenses is a way to reach the $4,000 in qualified expenses before Dec. 31. For example, there are no rules prohibiting anyone from prepaying tuition. Most colleges post 2011 invoices before Dec. 31. If the bill is paid in 2010, taxpayers can claim the credit on their 2010 tax return.
Textbooks and course materials are qualified expenses in the American Opportunity Credit, so consider buying spring 2011 textbooks in 2010 and claim the credit on the 2010 return.
A special note on 529 college savings plans. Popular since they were created in 1996, the 529 plan helps families set aside money for future college costs. Withdrawals are tax-free if they are used for educational purposes, but if you take advantage of the American Opportunity Credit or the Hope and Lifetime Learning Credit, paying for college out of a 529 is considered double-dipping.
Instead, advisers suggest using a 529 plan to pay for costs that aren't covered by the tax credit, such as room and living expenses.
What Becomes Less Advantageous
As of Dec. 31, Coverdell Education Savings accounts will become much less attractive. Annual contributions will shrink to $500, tuition for primary and secondary schools will no longer be a qualified expense and a portion of withdrawals taken after Dec. 31 will be taxed.
Established in 2002, the Coverdell Account enables families to contribute up to $2,000 a year in a portfolio of mutual funds or other investments. These are classified as after-tax contributions, but withdrawals are tax free as long as the money is used for qualified expenses, including college-related costs or tuition at a primary or secondary school.
If you have a Coverdell account, you can roll it into a 529 college savings plan with no tax liability. Withdrawals from 529 plans are tax-free as long as the money is used for qualified expenses.
Contact our office should you need more information or have questions on any of these programs.
New 1099 Requirement Presents Potential Challenges for Small Business
While the new health care bill affects the way small businesses maintain and administer medical plans, one small provision in the bill has nearly been overlooked in the hubbub of activity. Beginning in 2012, companies must report to the IRS payments of more than $600 a year to any vendor, including individuals and corporations.
Where’s the surprise? Well, we’re talking about any vendor, from overnight delivery services to hotels and even equipment providers.
Here’s the situation: To ensure that workers pay the taxes that a business would normally withhold if the workers were W-2 employees, a business must file 1099-MISC forms for freelancers and other service providers who aren't incorporated. Under current law, businesses must submit 1099 forms for payments made above $600 for rent, interest, dividends and non-employee services (when these payments are made to entities other than corporations). In addition, payments for merchandise are not required to be reported.
Beginning in 2012, the three-paragraph section in the bill known as the Patient Protection and Affordable Care Act requires businesses to issue 1099s to include payments for goods and services.
In a time when Congress is looking for ways to offset rising costs, the provision was created to finance the actual cost of the bill. It is predicted that this requirement will generate more than $2 billion each year in taxes on income that currently goes unreported by contractors and small businesses.
Small businesses might suffer the most based on lack of staff to handle the additional paperwork. Essentially, companies must get tax ID numbers and file forms for nearly all suppliers and also track expenses to determine which vendors need 1099s. Although all companies, regardless of size, location or any other attribute, should track this information on a regular basis, it nonetheless creates a noticeable additional level of detail. Small businesses, in particular, could be forced to focus more on operations and processes than bottom-line growth.
Experts also believe the new requirement will force small businesses to rely on larger vendors that because of their infrastructure will complete the paperwork for their customers. What this means is that some companies will bypass smaller providers in order to work with vendors that will assist their customers and help them save time and money.
Of course, the provision brings with it a huge number of naysayers who want the 1099 requirement to remain as it is today.
During 2011, National Taxpayer Advocate Nina Olson says her office will study the impact of the requirement. Depending on the results, the office might propose modifications to make the requirement less of a burden.
Rep. Dan Lungren (R-Calif), introduced the Small Business Paperwork Mandate Elimination Act, a bill pending before the Ways and Means Committee. He claims the requirement imposes extra costs on business owners who pay their taxes to help the government catch those who don't. “This paperwork burden is only justifiable if you assume that nearly all businesses are cheaters," he says.
However, if the provision is not repealed, companies of all sizes will need to deal with this issue. Automation of this process will be critical. We will keep you apprised of any changes and look forward to assisting you as necessary.
White House Announces Plan to Make R&D Credit Permanent and More Expansive
The research and development credit, originally enacted in 1981, provides businesses with a tax credit of 20% of their research costs, measured in terms of wages, supplies, and contractor costs, which exceed a base amount. Under the Alternative Simplified Credit (ASC), taxpayers may currently opt instead to claim a credit of 14% of the excess of current expenses over one half the average of the prior year’s expenses.
The White House has announced a plan to make the research and development credit permanent by ending the frequent need to renew the R&D credit, which is currently expired, every one to two years. The White House also revealed that it plans to expand the credit for taxpayers taking the ASC, by increasing the credit from 14% to 17%.
Finally making the R&D tax credit permanent is a great benefit to taxpayers and small business owners. It will potentially stimulate investments and job creation.
Look at the annual process from a strategic viewpoint
Houston Business Journal, July 30, 2010
by Steve Metzenthin
Click Here to read the article
Null-Lairson, PC Announces the Launch of New Web Site
Press Release 7-19-2010
July 19, 2010 (Houston, TX). John Null, Managing Shareholder of Null-Lairson, PC, announced today the launch of Null-Lairson's redesigned web site: www.null-lairson.com. "We are very excited about Null-Lairson's updated web presence. We are always looking for innovative ways to interact with and inform our clients," said Mr. Null.
The new web site offers informative content including tax resources, articles and industry links as well as details about the firm and the services they provide. The new web site design also reflects the firm's focus on client relations. With easily accessible Client Portal and Online Bill Payment links, the new design positions these resources within the click of a mouse.
Visitors to the new site will also be able to sign up for Null-Lairson's monthly e-newsletter, The Null-Lairson CalcuLetter, apply for available job opportunities, and request more information from the firm. "We hope that our clients and potential employees will find value in the new web site features," said Mr. Null.
Null-Lairson, PC's new web site, www.null-lairson.com launches in July 2010.
Fort Bend Focus Man of the Year 2009, John Null
