October, 2005
Happy Birthday - Here's Your Tax Break!
October, 2005
Happy Birthday - Here's Your Tax Break!
Who says Uncle Sam doesn't give presents? Some birthdays come with an extra surprise - a tax break.
Baby Bonanza
Add to the family? Add an exemption. A dependency exemption is available the year your child is born if you provide your little bundle's Social Security number. Your children may continue to qualify as dependents until they reach age 19 (age 24 for full-time students). In 2005, the exemption amount is $3,200. (The exemption is phased out above certain income levels).
You may also qualify for a child tax credit for each child under age 17. The child tax credit is $1,000 per qualified child in 2005. Again, the credit is phased out above certain income amounts.
Kiddie Care
Working parents of children under age 13 may be able to get a break on day-care expenses. The child care tax credit is 20% to 35% of the amount spent on day care, depending on income. The maximum amount of expenses eligible for the credit is $3,000 for one child, $6,000 for two or more.
Teen Time
When teens reach age 14, they get their own tax break. Before that age, unearned income over a certain amount ($1,600 in 2005) is taxed at their parents' highest marginal rate. At age 14, this "kiddie tax" ends and teens are taxed at their own rate (10% on taxable income up to $7,300 in 2005) on earned and unearned income.
If you're a sole proprietor in a trade or business and your under-18-year-old works for you, you both get breaks. The teen's wages aren't subject to FICA (Medicare and Social Security) tax.
Over Thirty
Some birthdays are tax warnings. At age 30, the beneficiary of a Coverdell Education Savings Account (ESA) generally will receive a distribution of any remaining funds within 30 days. Income tax will be due on the earnings and a 10% penalty tax as well. But you won't have to worry about the 10% penalty tax on early withdrawals from tax-deferred retirement accounts and IRAs once you reach age 59-1/2.
The "Golden" Years
You can celebrate your 65th birthday with an additional standard deduction. But, after you reach age 70-1/2, Uncle Sam wants you to start making up for all those years of tax deferral in your traditional IRAs and, in most cases, your retirement plan. That's when required minimum distributions start - and they're taxable income.
The IRS recently clarified some issues regarding the deduction for a self-employed individual's health insurance expenses.
Whose name?
A sole proprietor can still claim the deduction when the medical care insurance policy is issued in his/her name of the trade of business.
Which business?
The deduction can't exceed earned income from the trade or business with respect to which the medical plan is established. Net profits from more than one trade or business cannot be added when calculating the deduction limit.
Multiple plans.
However, if a person has more than one trade or business, each with a medical plan, the deduction is available for the cost of coverage under each plan, up to the net earnings of that specific trade or business. So, for example, if one business had a dental plan and another business had a health plan, the earnings limit would be calculated separately for each.
The current housing boom is fueling a boom in the mortgage industry - and interest in adjustable rate mortgages or ARMS.
A Low Start
An adjustable rate mortgage is just that: a fixed-term mortgage loan with a variable interest rate. The initial interest rate is usually lower than the rate on a fixed-rate mortgage. This difference is what makes ARMs attractive.
However, after an initial period (which can vary greatly and is spelled out in the mortgage loan documents), the interest rate is adjusted periodically based on an index such as a short-term Treasury bill index. The lender adds its margin to come up with the new interest rate the borrower must pay.
Welcome Limits
Does that mean ARM payments will go up if the index rises? Yes, but there usually is a cap (written into the mortgage loan documents) on how much the interest rate can increase from one adjustment period to another, as well as a cap on how high the interest rate can go over the life of the mortgage. If the index goes down, ARM payments also drop, although the lender's margin is a constant.
Plenty of Options
Lenders offer many different types of adjustable rate mortgages. Here are some common examples.
Interested Buyers
ARMS may be especially attractive to buyers who are reasonably certain their income will be increasing in the near future, plan to move again in a few years, or are low on cash. However, ARMs are more complex than fixed-rate mortgages.
Before you close on an ARM, make sure you completely understand the interest rate caps and how and when adjustments will occur. Run the numbers under the worst possible conditions to make sure you can afford the payments. And be certain there isn't a prepayment penalty clause.
What's not to like about direct deposit? Millions of employers and employees have come to appreciate the many advantages of transferring payroll funds electronically to employee bank accounts
Until recently, workers without bank accounts couldn't enjoy the benefits of direct deposit. but that has changed with the introduction of the payroll card or "paycard."
What's a Paycard
a paycard is something like a debit card, and each employee participating in the payroll card program receives one. Each pay period, employee wages are transferred to the financial institution that provides the paycard service and the appropriate amount is "loaded" onto each card. Employees have immediate access to their money via ATMs and can use their cards to make purchases at many retail establishments.
What's a Paycard
When employees opt for direct deposit and paycards, employers don't have to worry about check fraud and lost or stolen checks. and eliminating paper checks typically results in cost savings.
Advantages for employees include quicker access to their wages (especially during vacations), less time and money spent traveling to the bank and waiting in line, and no misplaced or lost checks. And employees without bank accounts are spared expensive check cashing fees each payday.
Tim thought he had a good idea. to reduce the value of his estate, he'd give his condo to his children. They would own the place, but he would continue to live there rent free and pay all the expenses of maintaining the property.
Tim went ahead with his plan but, after he died, the IRS insisted the condo had to be included in his estate at its fair market value at his death. Why? Because Tim had retained a life interest in the property.
Simply transferring title to the residence wasn't enough to remove it from the estate. Tim continued to use and occupy the condo during his lifetime without paying his children fair market rent and, for that reason, it was part of his estate when he died.
Tim might have achieved the estate-tax result he desired if he had used a qualified personal residence trust strategy. If you're interested, we can tell you more.
Like many successful professionals, Elena was confident that her investments and other assets would provide her children with a secure financial future.
But recent events have made Elena much less certain. Last month, Elena's colleague was the target of a lawsuit and had to pay a considerable cash settlement, leaving his personal finances very shaky.
Although Elena carries insurance and has never had even a hint of legal trouble in her 20 years of practice, she now realizes that no one is immune from an unexpected future liability.
Busy as she is, Elena needs to find some time in her schedule to address this important issue. She may be able to take certain steps as part of her overall financial and estate planning that will better protect her assets from the potential risk of loss.
Possible planning strategies vary in complexity. So, Elena will want to weigh the expected costs against the possible benefits before she does anything. Taxes are likely to be one of the important considerations.
After consulting with her attorney and financial advisors. Elena may come to the conclusion that she is already adequately protected. She also could decide that more planning is needed.
As experienced financial advisors, we are prepared to work with you and your attorney in helping you meet your financial and estate planning objectives. Please feel free to consult with us.
You have a killer business plan. Financing has been approved. And your marketing plan is in the works. Now you need the right space for your business. Here are something to remember when you're leasing commercial space.
What's in Your Wallet?
Before you even start looking, have a realistic idea of what you want and how much you can afford to pay for it. Especially if you're just starting out, you won't want to drastically under or overestimate your needs.
Baltic Avenue or Park Place?
Once you've found suitable space, do some research. How long has it been empty? What are comparable rents and vacancy rates in the area? find out as much as you can about the space and market conditions in the surrounding area. A little knowledge could save you a bundle.
Negotiate, Negotiate, Negotiate!
When you reach the contract phase, get your lawyer involved. Even on a standard contract, everything is negotiable. You have to play fair, but you have the right to ask for anything. Here a few negotiating points:
Remember, this could be the beginning of a relationship. The ideal lease is one that is satisfactory to you and your landlord.
Question - I intend to use some of the money in my individual retirement account for my son's college tuition. Since I am under age 59-1/2, will I have to pay a penalty on the withdrawal?
Answer - The 10% early withdrawal penalty does not apply to IRA distributions to the extent the amount distributed does not exceed qualified higher education expenses for the year. Watch your timing, though. The Tax Court recently held that the penalty exception is not available for IRA funds withdrawn to pay off a loan or credit card balance from an earlier tax year, even though the debt was incurred to finance higher education expenses.
Question - My business partner and I are thinking about expanding the business. Before we make any decisions, though, we'd like to get information about the work force and business climate in other areas of the country. Is this type of data available online?
Answer - A good starting point for your research might be the U.S. Census Bureau's site: http://www.census.gov. You'll find a number of government reports that may prove helpful.
Charitable giving in the U.S. reached a record high in 2004, finds a recent report from the Giving USA Foundation. Donations totaled an estimated $248.52 billion, with 75% of that amount contributed by living individuals.
the Junk Fax Protection Act provides that businesses may send unsolicited advertisements to customers with whom they have an established business relationship without obtaining prior written approval. Recipients must have voluntarily communicated their fax numbers to the sender or voluntarily made their fax numbers available to the public (not applicable for numbers in the sender's possession before July 9, 2005). Faxes must include a notice telling customers how to request that such advertisements not be sent in the future.
After his new residence sustained water damage caused by faulty construction, a taxpayer sued the contractor and architect and was awarded damages. In a private letter ruling, the IRS said the damages were not income to the taxpayer but did reduce his cost basis in the residence.