June, 2006
Make the Most of Your Money
June, 2006
Make the Most of Your Money
If presented with some extra cash, few people couldn't find a hundred ways to spend it right away. Where the amount is large and the money is received all at once, however, it's usually wise to step back and assess the situation.
Most large sums carry a "price tag" in terms of taxes to be paid. And there are likely to be a number of additional planning issues that should be addressed from the outset. Whether it's a retirement plan payout, an inheritance, an insurance settlement, sale proceeds - even lottery winnings - a little planning can go a long way toward helping you make the most of your money.
Look Before You Leap. If you know in advance that you'll be receiving the money, it's a good idea to review the tax consequences beforehand to see whether you can minimize the tax impact.
Example. Rachel is retiring next month and will be receiving a lump sum payout from her employer's tax-deferred retirement plan. If Rachel takes the cash, she'll have a current income-tax liability. To sidestep the taxes, she can have the plan administrator directly transfer the distribution to an individual-retirement account (IRA) so that her money can continue to grow tax deferred,
Set Priorities. Your next step will be to devise a sound, long-term strategy for investing and spending your money. Consider parking the cash in short-term investments (such as certificates of deposit or a money market fund) while you develop a plan. That way, you can evaluate your financial goals and priorities without worrying too much about what the investment markets are doing.
Review Your Estate Plan. A large increase in your personal wealth may be a reason to review your estate plan. You may have new opportunities to control estate taxes, and you'll want to be sure that you've made appropriate provisions for your family or other beneficiaries.
Need Help? As financial professionals, we are trained to look at the big picture. Please call on us should you or a family member need personal financial and tax planning assistance.
Only 26% of individuals responding to a recent survey* believe they can save $200,000 during their lives, and only 9% believe they can accumulate a net worth of $1 million. Aren't the naysayers forgetting something?
If you want to build financial security, you have a powerful ally on your side. It's called compounding, and it can really work to your advantage - especially if you can put your money to work for several years.
Assuming a hypothetical 7% annual return, here are the amounts that must be saved to build a $200,000 balance:
Over time, the amounts you set aside, plus earnings on those amounts, plus earnings on your earnings, can grow to a substantial sum. It just takes a commitment to save regularly
* The Consumer Federation of America and the Financial Planning Association', January 2006
When it comes to politics and charities, the rule is: Follow the rules. Failure to do so could result in the loss of tax-exempt status. IRS examinations of political activities during the 2003-2004 election cycle revealed that many tax-exempt organizations engaged in political activities that are prohibited.
With campaign contributions soaring, the IRS has announced that it will address potential prohibited activities much more quickly during the upcoming election cycle. At the same time, it has pledged to provide tax-exempt organizations with better information about activities that are and are not allowed.
In a Nutshell - Basically, organizations that are exempt from taxes under Section 501(c)(3) of the Internal Revenue Code (including educational institutions and churches/religious organizations) may not participate or intervene in a political campaign on behalf of, or in opposition to, any candidate for public office.
Some limited political activities are permitted, however. For example, nonprofit organizations may conduct voter education forums, sponsor candidate debates, and issue voter guides - as long as the activities are nonpartisan and all candidates are treated equally. It is essential that charities understand the difference between permitted and prohibited activities.
Common Missteps. Here is a short list of the most common prohibited activities examined by the IRS:
Help Is Available.
If your organization is thinking of carrying on any political activities in an upcoming local, state, or federal election, we can help you understand and analyze these complex rules in greater detail.
Even though summer is just beginning, you want to start purchasing merchandise for the busy retail season ahead. The trouble is, you just hired extra help, so cash flow is under pressure. One common solution: a short-term loan to provide the extra working capital you need to keep the wheels turning.
Term Loan.
When you apply for a loan, you'll need to provide financial statements, tax returns, and, possibly, some personal financial information. If you've been in business for a while, you probably have collateral you can put up to secure the loan, such as your accounts receivable or some property or equipment. If your business is young or has credit issues, you may need to provide a personal guarantee that you'll repay the loan.
Line of Credit. If you have recurring cash crunches (and you've been in business for a while), you may be able to establish a business line of credit. You apply to borrow a certain amount of money. Then, when the need for cash arises, you use the amount you need and repay it. The next time the need arises, there's no need to reapply - as long as you haven't exceeded your limit, you can tap into the same line of credit.
An Extra Plus.
If your business has never borrowed money, you may want to arrange a short-term loan just to establish credit. CAUTION: Before you borrow any money, be sure you can repay it in the allotted time.
Just how many jobs can you juggle at once? Small business owners, by definition, often take on myriad responsibilities when it comes to day-to-day business operations. They also tend to be overworked and under pressure. Could outsourcing provide a solution?
Potential Benefits. Outsourcing gives you more time and energy to focus on your core business. It also gives you access to skills and knowledge you don't currently have on staff - think marketing, for example - and eliminates the need to train and supervise additional employees.
Potential Drawbacks. On the other hand, outsourcing reduces the amount of control you have. You're also vulnerable to fee increases and the success or failure of the companies providing you with services.
The key is to find a balance that positions your company for success.
"Of course they are," you might be thinking. Actually, though, the tax treatment of website development costs - software, web page design, and consulting services - is complex. While certain costs may be deductible in the year incurred, others may have to be "capitalized" and deducted in increments over a multi-year period. To help in the analysis, businesses should be prepared to answer questions like these:
Who Is Doing the Work? If a web designer creates a relatively simple informational site using a template- driven program, the related design costs typically are capitalized and deducted ratably over their economically useful life. On the other hand, if a programmer has to manually create code using a sophisticated programming language, as might be the case for a sophisticated e-commerce site, the project consists of software development. A business typically can deduct the costs as incurred or capitalize the costs and deduct them over a three-year period.
What Does the Contract Say? A current-year deduction is not available for software "purchased" from a contractor who assumes the risk of development. So, for example, if a contract calls for payment to be rendered when each deliverable is functioning properly, the contractor is at risk and the business generally must capitalize the costs and deduct them over three years.
When Was the Work Performed? Website costs incurred by a startup company before it begins active operations may fall in the "start-up expenses" category. A business generally may elect to deduct up to $5,000 of start-up expenses in the first year of operations. The remaining costs must be capitalized and deducted ratably over a 15-year period.
Additional Questions. These are just a few of the questions that may be relevant to your company's website project. Note also that certain issues - such as which website costs constitute currently deductible advertising - have yet to be definitively resolved. Let us know if we can help you review your situation and untangle the applicable tax rules.
Capital gains tax receipts were larger than expected for 2004, when taxpayers realized gains of about $479 billion. The Congressional Budget Office expects the 2005 numbers to be even higher.
Real wage and benefit costs in the private sector increased 12% between 1991 and 2005, reports the U.S. Government Accountability Office. While wages and benefits increased at similar rates for most of the period until 2002, after that year benefit costs continued to rise while wages stagnated.
Employers with SIMPLE IRA plans have until December 31, 2006, to update their plans for tax law changes made by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). The update can be accomplished by adopting the latest version of the IRS SIMPLE IRA plan document or by adopting another SIMPLE IRA document that reflects the EGTRRA provisions.
Of the 5.4 million corporations that filed corporate returns in tax year 2003, IRS statistics indicate that 3.3 million of them were Subchapter S corporations.
Lenny and Joan have been retired for five years. After a recent review of their finances, Lenny has decided to do some part-time consulting work to help cover expenses and replenish their savings.
Joan and Lenny thought they were set financially to retire. Unfortunately, things haven't turned out as they'd planned. The maintenance fee on their condominium doubled six months after they retired, and their prescription drug costs have more than tripled in five years.
When Joan and Lenny were planning their retirement, they were unrealistic about how much income they would need to cover the basics. They just assumed that once they were no longer working, their expenses would be minimal. Lenny and Joan are spending less on some things. But other expenses have filled the void. If the couple had created a budget based on actual expenses, they might have realized they were cutting it too close.
Joan is one of a dwindling number of retirees who receives a pension from her employer. Lenny has a 401(k) plan And they both receive Social Security benefits. However, neither one receives any health benefits besides Medicare, and their supplemental insurance premiums have been much more expensive than they expected.
Adjusting to life without a regular paycheck can be a challenge. You can prepare by estimating your retirement income needs as early as possible and setting realistic savings and investing goals. If you'd like help planning for your retirement, please call.
Client Profile is based on a hypothetical situation. The solutions we discuss may or may not be appropriate for you. Talk to us before taking any action.
Question. I have a variable annuity that I'd like to exchange for another variable annuity with a different insurer. Because the surrender period on my current annuity has expired, I'm not worried about having to pay a surrender charge, but will I have to pay federal income taxes on the exchange?
Answer. Annuity contracts can be exchanged on a tax-free basis. To be eligible, both contracts must provide for payment to the same annuitant over the annuitant's life. A word of caution, however: Your new annuity probably has its own surrender period so, if you plan to withdraw any money, consider doing so before the exchange.
Question. My company has a profit- sharing plan with a five-year graded vesting schedule. Due to recordkeeping errors, two
employees who left the company after three years received less than they should have. What can we do to correct these mistakes?
Answer. The IRS's Employee Plans Compliance Resolution System has methods for employers to correct vesting problems under either the Voluntary Correction Program (VCP) or the Self- Correction Program (SCP). You can find details online at www.irs.gov.