October, 2006
Put Time On Your Side
October, 2006
Put Time On Your Side
Two coworkers, Michael and Mitchell, are attending a retirement party in their honor today. With almost $803,000 in personal savings and investments, Michael is confident he can afford a comfortable retirement. Mitchell has about $271,000 - approximately one third that amount - and has already scaled back his plans because he worried that his nest egg won't be enough to last throughout his retirement years.
Penny pincher? Compared to Mitchell, it looks as though Michael really pinched pennies, doesn't it? But that's not the case. Over the years, Michael and Mitchell saved the same amount of their pay - $110,400 each.
Fabulous investor? Then, you say, Michael must have earned better investment returns than Mitchell. Again, not so. Their investments both earned average annual total returns of 8%, compounded monthly.
Why the difference? In a word - time. By starting to save earlier than Mitchell, Michael used compounding to his advantage. Here's what Michael and Mitchell did to get where they are today.
What they did. When Michael was 25, he began a program of saving $230 a month. He didn't withdraw money from his retirement fund for cars, home repairs, or his daughter's summer camp expenses. He just kept putting $230 a month into his fund every year for 40 years.
Mitchell waited until he was 45 to begin saving. He socked away $460 a month for 20 years, never missing a contribution or withdrawing money from his account. Despite his efforts, Mitchell never caught up to Michael.
A simple concept With compounding, first you earn income (interest, dividends, or capital appreciation) on your initial investment. The next period, you earn more income - on your original investment and on the income you earned during the last period. All tings being equal, the long you let your investment earnings compound, the more you'll have in the end.
Even if you can't get the early start that Michael did, you can put the power of compounding to work by not waiting any longer to start saving more for your future.
A mountain of paperwork is part and parcel of having employees. Thanks to a new federal government rule, more of that mountain can be managed electronically. Employers now have the option to sign and retain Form I-9 (Employment Eligibility Verification) electronically. Employers that wish to continue maintain paper records may do so.
A Form I-9 has to be completed for all employees and kept on file for three years after the date of hire or for one year after the date employment is terminated, whichever occurs later. The form is not filed with the government but is subject to inspection. Employers can be penalized for noncompliance.
Employers interested in the new electronic option can access a PDF version of the I-9 on the U.S. Citizenship and Immigration Services website at www.uscis.gov. Or another electronic records system that is compliant with IRS standards can be used.
Providing benefits that employees want, need, and appreciate while containing costs is a constant challenge for employers. Companies that offer health flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs) may find that payment cards are helpful in streamlining plan administration.
How FSAs and HRAs Work Health FSAs allow employees to pay health-care expenses with pretax dollars. Participating employees agree to have money withheld from their paychecks and deposited in an account for the payment of their out-of-pocket medical expenses. Balances remaining at the end of the year (or the end of a grace period, if available) are forfeited.
HRAs are employer-funded plans that reimburse employees on a tax-free basis for medical expenses not covered by other insurance, up to a specified limit. Employees may carry forward balances that remain at the end of a coverage period for future use.
"Here's My Card" Plan-provided payment cards can streamline the process by eliminating the need for employees to pay expenses themselves and then seek reimbursement from the plan. Instead, employees simply present a payment card to their health-care provider or pharmacy at the time of service or purchase. The card can be a debit or stored-value card or a bank credit care with a limit equaling the coverage available under the FSA or HRA.
The big question, of course, is how to monitor use of the cards to ensure that employees are using them only for authorized expenses. The IRS says that a charge can be considered adequately substantiated if:
The U.S. domestic production activities deduction is a tax-saving opportunity that manufacturers, construction contractors, and other eligible businesses should make the most of. Tax legislation enacted earlier this year makes an important change in the deduction rules.
In general. The deduction is available for a percentage of income earned from qualified production activities. For 2006, the percentage is 3%. It doubles to 6% for 2007-2009 and increases to 9% after 2009.
Key limitation. The 2004 tax law that established the deduction restricts it to 50% of W-2 wages. To figure this limitation, companies use the total amount of wages paid in the calendar year ending during the tax year, including any amounts deferred to a 401(k) plan. Wages paid to employees not engaged in domestic production activities are included in the total.
New twist. The new tax law is less generous. It says that only wages "properly allocable" to domestic production gross receipts are to be taken into account in figuring the 50% limitation. This change is effective for tax years beginning after May 17, 2006.
If your business intends to claim the production activities deduction, it's important to review your recordkeeping system as soon as possible. You'll need a method for capturing wages that relate to qualifying activities, and you may want to set up new general ledger accounts to segregate qualifying wages from nonqualifying wages. Please talk to us soon about implementing the new rule.
When you're negotiating a business loan, the bank will probably want to include a number of restrictions in the loan agreement. For example, the bank may seek restrictions on payments to owners, or it may want to restrict capital expenditures and the total amount of debt your business can have. Your company may also have to maintain certain financial ratios while the loan is outstanding.
Before agreeing to the loan terms, make sure you can live with the restrictions. The bank will keep a loser eye than ever on your results if you violate a restriction - or it could call the loan.
After you've complied with the restrictions for a year or two, you may be able to renegotiate the loan. Consider asking for better terms if the business has been profitable and can show evidence of good market position for the future.
Prescription drug coverage was the topic that captured headlines when the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 first became law. But buried in that law is another provision that will impact the budgets of some seniors. Starting in 2007, premiums for Medicare Part B will be calculated on a sliding scale. Higher income enrollees can expect to pay more for their coverage as a result of this change. Here's what to expect.
Basic Premium + Medicare Part B covers physician services, outpatient hospital care, and a variety of other services. The basic Medicare Part B premium this year is $88.50 a month ($1,062 a year), and it will increase a projected 11.2% to at least $98.40 for all enrollees in 2007. (The official inflation-adjusted figure was not available at press time.)
Adjusted Gross Income + The basis for the 2007 surtax computation is 2005 adjusted gross income (AGI) plus any tax-exempt interest received in 2005, any excluded interest on Series EE U.S. savings bonds used for education, and any excluded foreign earned income.
Example Rob is single and reported $60,000 of AGI on his 2005 Form 1040. He also received $25,000 of tax-exempt municipal bond interest in 2005. because Rob's modified AGI of $85,000 is more than $80,000, he'll have to pay a premium surcharge for 2007.
Further increases in the Medicare Part B premium will be phased in for higher income enrollees through 2011. Taxpayers who itemized their deductions should be sure to include Medicare Part B premium payment sin their medical expenses.
The oldest family business in the world is a Japanese construction company that has been in business for over 1,400 years, says a Family Business Review study.
In a recent analysis of credit card use among college students, the American Council on Education found that about one quarter of student card holders had used their card to pay tuition. By their fourth or fifth year in college, almost half of the card holders carried a balance.
Benefits and job security are important, but compensation ranks as the number one factor in job satisfaction, finds a Society for Human Resource Management survey of employees.
Noncash donations reported by individual taxpayers totaled $36.9 billion for tax year 2003, says the IRS in a recent release. Corporate stock donations averaged $79,279 per return showing such donations and represented more than one third of the noncash donations that year.
Housing represents a big item in the budgets of U.S. homeowners. In 2004, some 7.4 million homeowners spent over half of their income on housing, according to a Harvard University study.
Andrea's graphic design business is booming. Her customers love her and she works hard to meet their expectations. Why is she always broke?
With relatively low overhead and projects booked weeks in advance, Andrea's business should be thriving. Instead, she rarely draws a paycheck and struggles to pay her bills. If this situation continues, she may be forced out of business.
Andrea enjoys her work, but not managing the cash flow of her business. Her financial records are almost nonexistent and she is rarely aggressive about collecting money owed to her because of her generous spirit. In fact, it's difficult for Andrea to gauge the amount her customers owe her because she often neglects to prepare appropriate customer bills.
Andrea can take several steps to improve her financial situation. Her first step should be to put a basic accounting system in place. This might include computerizing her records and developing routine billing and collection processes. Once she is on more solid financial ground, Andrea should guard against falling back into her old patterns.
Good cash management is a key to business success. As experienced small business consultants, we are prepared to work with you to help your business reach its full potential. Please contact us soon for an appointment.
Question: I'm a teacher and my son is attending a preschool program this fall. In the past, I've claimed a child-care credit for a portion of his daycare expenses. Will the credit still be available now that he has started "school"?
Answer: It should be, since the expenses are for the care of your child while you are at work. Once a child starts kindergarten, the IRS considers expenses (private school tuition, for example) to be primarily education and therefore not credit-eligible. However, expenses for before-or-after-school care can qualify.
Question: We're planning to hire a housekeeper soon. The person we've been talking to about the job doesn't work for an agency or anyone else. Will we have to pay employment taxes?
Answer: Your prospective housekeeper will likely be considered an employee rather than an independent contractor, and that means you will be liable for Social Security and Medicare (FICA) axes if you pay annual wages of $1,500 or more. (This 2006 amount may be inflation-adjusted for 2007.) You may have additional employment-tax obligations as well. See us for more details.