December, 2005
Big Picture Planning
December, 2005
Big Picture Planning
Are there steps you might take next year to improve your financial situation? While the end of one year and the beginning of the next is always a hectic time, it's also one of the best times for planning.
When your year-end investment, bank, and retirement plan statements arrive, set them aside in preparation for a big picture review of your finances. Information you receive for your tax return - 1099s, W-2s, etc. - should also prove helpful. And, to get a head start on your planning, ask yourself these questions:
Do I need a spending plan? A spending plan is a tool for prioritizing your financial goals and managing your money to reach them. A good spending plan:
Am I investing wisely? With so many investment choices, it's easy to get bogged down in details and forget the big picture. The location of your investments (taxable and tax-deferred accounts) and how your assets are allocated among the major asset classes (stocks, bonds, cash, etc.) are two broad areas that deserve your consideration.
Am I adequately protected? Simply paying insurance renewal premiums every year without giving thought to whether you have enough - or too much - coverage isn't smart. For your own peace of mind, consider whether you have suitable life, disability, homeowners, and auto insurance protection in place. And consider any other special insurance needs you might have.
Is my plan for the future on track? You may be looking forward to the day your retire - or you may intend to continue working indefinitely. With adequate financial resources, you'll have the freedom to choose. If we can help you with your planning, let us know.
Great Job!
Looking for ways to reward your employees for outstanding performance? Cash bonuses are always appreciated. bug cash, gift certificates, and similar cash-like items are counted as taxable income for employees. Here are some low-cost, tax-free ways to show your appreciation.
If you want to reward everyone at the same time, throw a party or hand out hams or turkeys for the holidays. These so-called "de minimis fringe" benefits are not taxed to employees, and employers may deduct the associated costs.
Continuous oversight will help your company avoid problems - and the potential liability that could result from failure to fulfill fiduciary obligations with respect to the plan. Here are just a few of the areas you might want to check.
Fidelity Bond
As more assets accumulate in your plan or different individuals become responsible for managing the plan, bonding requirements many increase. In general, every plan fiduciary and person who handles plan money must be bonded for at least 10% of the amount handled (minimum bond of $1,000).
Fees and Expenses
Administration fees, investment fees, and amounts paid for optional plan features (such as participant loans) can have a significant effect on retirement savings over time. You probably evaluated the cost structure when you set up your plan. but cost creep isn't uncommon. Make sure fees and expenses are still reasonable in view of the services being provided.
Investments
Many retirement plans allow employees to direct the investment of their own plan accounts. Shifting this responsibility to employees doesn't mean that an employer's work is done. Employers should regularly evaluate their plan's investment lineup and keep tabs on performance figures. If a fund consistently underperforms its benchmark market index, consideration should be given to finding a suitable replacement.
New Developments
The tax and pension laws and regulations are always changing. To ensure compliance, you'll want to have your plan regularly reviewed and updated.
One 2005 change of note: Plans can no longer cash out small accounts ($1,001-$5,000) without consent upon termination of employment. Instead of automatically distributing such accounts, plans having an applicable cash-out provision must set up an IRA for the departing employee and roll over the account to the IRA. See us for details.
The destruction caused by hurricanes, eathquakes, and other natural disasters can be overwhelming. Recovery efforts can range from minor cleanup to the wholesale rebuilding necessary after a disaster like Hurricane Katrina. Affected taxpayers may be eligible for tax relief in the form of a casualty loss deduction.
Measuring the Loss For tax purposes, a casualty loss if measured by comparing the damaged property's pre-casualty value with its post-casualty value. The loss amount is the property's decline in value or its adjusted basis (usualy its cost minus any previously claimed depreciation deductions), whichever is less. If rental (or business) property is completely destroyed, loss is limited to adjusted basis.
Taking the Deduction A casualty loss tax deduction must be reduced by any insurance reimbursement received for the damage. A personal casualty loss deduction is general subject to income-based limitations.
Help for Katrina Victims The IRS acted quickly to extend filing and payment deadlines for taxpayers in the areas affected by Hurricane Katrina. An emergency tax relief bill was enacted, and, at press time, additonal tax incentives for the disaster victgims were being considered.
Have you considered switching your phone service from traditional landline to VoIP? Given the buzz about Voice over Internet Protocol, it wouldn't be surprising if you have.
VoIP is the transmission of phone calls over the internet rather than telephone wires or wireless cell phone networks. To utilize VoIP technology, you must have a broadband internet connection and either a VoIP phone. VoIP adapter for your regular phone, or VoIP software plus a headset for your computer.
You can take your adapter, VoIP phone, or laptop with you when you travel and have phone service wherever there's a broadband connection. With some VoIP services, calls are local regardless of where you are.
Drawbacks? Calls stop when power is out or broadband connections are lost. And some VoIP services don't connect directly to 9-1-1 emergency services.
Whether you're looking for ways to reduce spending or you're concerned about the environment or both, conducting an energy audit makes sense, especially with rising energy costs. Improving the energy efficiency of your home and workplace can potentially provide significant savings.
See the Light
The U.S. Department of Energy estimates that 20% of the electricity consumed in the U.S. is used to provide lighting. To improve lighting. To improve energy efficiency in this area, consider replacing incandescent bulbs with fluorescent lighting.
With the compact fluorescent "bulbs" that are on the market, you may not need to replace your light fixtures. But, if you do, fluorescent lights last up to 10 times longer, use about one quarter of the energy, and produce 90% less heat than incandescent lights, so you should be able to recoup your investment and begin saving money relatively quickly.
Stem the Flow
At work, make sure all nonessential computer and other electrical equipment is turned off at night and on weekends. Use motion detectors to turn lights on and off in areas that are used infrequently. And use programmable thermostats to provide efficient heating and cooling.
Compare energy ratings when purchasing electrical equipment for the work-place and your home. Many manufacturers provide estimates of monthly energy costs for new equipment. Replacing old, inefficient equipment and appliances with new, energy-efficient models can be cost effective over a short period of time.
At home, power down your PC, monitor, printer, and other peripherals when not in use. Note: Laptop computers use considerably less energy than standard desktops.
Batten down the Hatches
Although you don't want to completely seal off the inside of your home or workplace, you do want to prevent heated or cooled inside air from escaping and outside air form coming in. Make sure windows and door frames are properly insulated and freshly caulked.
Danny and Jill opened a health food store two years ago. Their business is growing faster than they ever dreamed possible, and they're already planning to open a second store.
It's difficult to imagine that a business could grow too fast. But it can. Danny and Jill will want to exercise some control as they move forward with their expansion.
Cash is king - in good times and in bad. As tempting as it may be to splurge on plans for the new store based on revenue projections at their flagship location, Jill and Danny should resist the urge and maintain a steady cash flow. If they expect to finance a portion of the project with a commercial loan, they should take time to shop around for the best rates and terms rather than hurrying into a less than favorable arrangement.
If Danny and Jill try to open the new store too quickly, they could find that their staff is stretched dangerously thin. This could have a number of unfortunate results: Customer service may suffer, employees may quit, or customers may sense that something has changed and go elsewhere. It's important for Jill and Danny to main a good relationship with their customers, their employees, and their vendors.
Whether you'd like to expand by adding a location, diversifying your product line, diversifying your product line, or extending your hours of operation, we can help you analyze the effects your plans may have on your financial situation. Feel free to contact us.
Q. An employee we just hired has claimed 15 withholding allowances. This number seems high. Should we just accept?
A. Until recently, employers were required to submit copies of W-4 forms claiming more than 10 withholding allowances to the IRS. this is no longer the case. The IRS may, however, ask you to increase the amount of withholding for certain employees. In those situations, you'll receive a "lock-in" letter specifying the maximum number of withholding allowances permitted for the employee.
Q. I'm pursuing a master's degree in business administration. Can I deduct the tuition for tax purposes? My employer isn't reimbursing me for any of the cost.
A. Maybe. Education expenses are deductible only if the education improves or maintains skills needed for your current job or if the education is required to keep your job, job status, or salary. If the education qualifies you for a new career, then the expenses are not deductible. So, the answer really depends on your specific situation.
Higher gasoline prices have prompted the IRS to reset the optional standard mileage rates for miles driven from September 1 through December 13, 2005. The new business standard mileage rate is 48.5 cent per mile, up from the 40.5 cents per mile rate applicable to the first eight months of 2005. The rate for computing deductible moving and medical expenses increased from 15 to 22 cents per mile.
College textbook prices nearly tripled from December 1986 to December 2004, finds a recent study by the U.S. Government Accountability Office. Over the same period, tuition and fees increased by 240% and overall inflation was 72%. The GAO report cites higher costs associated with developing CD-ROMs and other products to accompany textbooks as the best explanation for the price increases.
From the tax history book: The IRS traces its roots to the Civil War period, when the first Commissioner of Internal Revenue was named and an income tax was enacted to pay war expenses.