Happy Thanksgiving everyone!
There will not be a Tax and Money Tip of the Week this week. We would just like to take the time to wish everyone a safe and happy Thanksgiving holiday!
Questions or Comments?
You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.
Mark Vitek, CPA/PFS, CFP® …until next week.
Exchange traded funds (ETFs) have become a very popular investment in the last few years. Here are a few things that you should know about them if you are considering investing in ETFs –
§ An ETF is a type of investment (like a mutual fund) that bases its investment mix on an index.
§ Unlike a mutual fund, ETFs are traded on an exchange, so they can be bought and sold throughout the day (like a stock). Mutual funds can only be bought or sold once a day, generally at the market close.
§ Many ETFs have lower expense ratios than mutual funds since ETFs are based on index investing.
§ The variety of ETFs available allows you to focus an investment into a particular industry, commodity or country.
§ ETFs are generally more tax-efficient (i.e., less taxable capital gains) than mutual funds.
§ Check the track records of any ETFs you are considering.
o If total assets are less than $20 million, the sponsor may decide to close it.
o If trading is less than $500,000 per day, the bid/ask spread is likely to be wider. Generally, the more narrow this spread, the better.
Is an ETF the proper investment for you? Give us a call to discuss.
Questions or Comments?
You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.
Mark Vitek, CPA/PFS, CFP®
…until next week.
Looking for a reliable and trustworthy employee? 
These days, who isn’t?
That person may be closer than you think. Why not hire your spouse? He or she probably already performs a number of company functions for no pay. Here are 4 tax benefits you may receive by employing your spouse.
Increase the amount of retirement savings
With your spouse as an employee, the company can deduct contributions to a qualified retirement plan on his/her behalf, which increases the amount of tax-deferred savings your family will have. Depending on the type of retirement plan the company maintains, this can result in a significant tax deduction for the company.
Shift taxable income to a lower tax rate
If your company is a C-corporation, any salary paid to your spouse is a deduction for the company. Assuming your personal tax rate is lower than the company’s tax rate, you will pay less tax on your spouse’s salary based on your lower tax rate.
Additional tax deductible travel expenses
Normally, travel expenses attributable to your spouse are not deductible if he/she accompanies you on a business trip. But, if your spouse accompanies you for a valid business reason as an employee of the company, the costs of his/her airfare, taxi, hotel, etc., would be deductible to the company.
Group-term life insurance
As an employee, your spouse would be entitled to life insurance coverage under the company’s Group Term Life Insurance plan.
Questions or Comments?
Mark Vitek, CPA/PFS, CFP®
…until next week.
In a recent court case (TC Summ OP.2001-17) the Tax Court allowed an interest deduction for a house that was never built. A married couple took out a loan and bought a beachfront home, tore it down and planned to build a new house on the site. However, they could not do so until a state environmental agency granted them a permit. That process dragged on for two years. By that time, the local real estate market had crashed and the couple couldn’t get a loan to cover the construction costs, so they sold the land at a loss.
Tax rules state that mortgage interest is deductible on a loan for 24 months after construction begins or for 24 months after the teardown date. The court ruled that deducting interest on a loan for a home under construction doesn’t condition deductibility on the house’s completion. And in this case, the home was never built because of unforeseen circumstances that were well beyond the couple’s control. Therefore, a mortgage interest deduction was allowed on the original acquistion loan.
The rule that disallows a mortgage interest deduction after the 24-month period ends remains as nondeductible personal interest.
Questions or Comments?
Mark Vitek, CPA/PFS, CFP®
…until next week.
After over 30 years in the tax business, we continue to find that solid accounting and good communication with your CPA is the key to lowering taxes.
Solid bookkeeping for your business enables you to take the most deductions possible while minimizing taxes.
Year-end tax planning also helps you know what to expect on April 15th, prevents unwanted surprises, and saves a lot of taxes for our clients each year through this valuable service we offer this time of year. We frequently save our fees through solid recommendations.
Business owners are always looking for ways to maximize your profits and minimize your expenses. Occasionally, you may be approached by folks other than us regarding estate or investment planning.
A quick (even 15 minute or less) phone call with your trusted advisor CPA about topics such as these can help you be sure you have considered all the financial and tax impacts on you, your company and your family.
When you are considering any significant financial decisions, we are available.
Give us a call. Sometimes it can mean saving thousands of dollars.
Questions or Comments?
You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.
Mark Vitek, CPA/PFS, CFP®
…until next week.
I’d like to share a relatively new addition to some insurance companies auto policies: The Accident Forgiveness and/or Violation/Ticket Forgiveness Rider. If you have this on your auto policy, it could save you hundreds or thousands of dollars! (it costs me very little)
Here’s how it works:
If you have this rider on your policy and you or someone in your family has an accident or ticket, your insurance company will “forgive” you one time and not increase your rates. Some insurance companies have an accident forgiveness rider only and not ticket forgiveness, so be sure to ask questions and understand the details of what you are buying.
Call and ask your auto insurance agent or insurance company if they offer this relatively new insurance rider that could save you thousands.
Questions or Comments?
You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.
Mark Vitek, CPA/PFS, CFP®
…until next week.
Most of us have some sort of life insurance, so that when we die, our loved ones will be able to use the proceeds to pay off our debts and provide for some of their future living expenses. One thing that is often overlooked is that life insurance proceeds can be subject to Federal estate taxes when we die. For 2012, the Federal estate tax rate is as high as 35%. For 2013, if there are no changes, that rate can be 55%.
You only pay estate tax on property that you own at your death. One way to avoid paying estate tax on life insurance proceeds is to have the policy owned by an Irrevocable Life Insurance Trust, or ILIT (say, “eye-lit”).
What is an ILIT & how does it work?
An ILIT is a type of trust that can be set up to hold life insurance policies. Instead of you owning a policy on your life, the ILIT owns it. Then, you name the ILIT as the beneficiary of your policy. Your family would be the beneficiaries of the ILIT and would receive the proceeds of your policy via the ILIT. During your lifetime, the policy premiums would be paid by the ILIT, after you had transferred the cash to a bank account owned by the ILIT.
An ILIT is irrevocable, which means that once it is set up, you cannot change it. But that also means that any life insurance policies owned by the ILIT are not owned by you; therefore, you will not owe any estate tax on the proceeds.
A properly drafted ILIT will allow your life insurance proceeds to flow to the beneficiaries you want, without being decreased by estate tax. Make sure that you have it set up by an experienced attorney.
Maintaining an ILIT can be involved, as there are gift tax consequences as well as accounting and tax returns that will need to be addressed. You would name a Trustee (consider a professional), who would administer the trust and deal with these issues.
While there will be costs involved with setting up and maintaining an ILIT, the potential estate tax savings should more that outweigh these administrative costs.
If you think that an ILIT could be an option for you in your estate plan, give me a call to discuss in more detail.
Questions or Comments?
You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.
Mark Vitek, CPA/PFS, CFP®
…until next week.
If you need to file a Form 1040 (individual return), the deadline to file is October 15, 2012. This assumes you had filed for an extension prior to April 16, 2012. You also have until October 15, 2012 to fund a SEP-IRA for tax year 2011.
As a reminder, putting your tax returns on extension can be a good thing – but penalties to miss the extension deadline can be steep, up to 25% penalty of taxes owed, so make sure that you make the October 15th deadline.
Give us a call if you need help meeting your deadline.
Questions or Comments?
You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.
Mark Vitek, CPA/PFS, CFP®
…until next week.
Potential increase in federal income tax may make 2012 Roth conversions attractive
When you convert a traditional IRA to a Roth IRA, the conversion is generally taxed as ordinary income (except for any after-tax, nondeductible contributions you’ve made). With the “Bush tax cuts” set to expire at the end of 2012, federal income tax rates will jump up in 2013. Unless Congress acts, we’ll go from six federal tax brackets (10%, 15%, 25%, 28%, 33%, and 35%) to five (15%, 28%, 31%, 36%, and 39.6%). While there continues to be discussion about extending the expiring tax cuts, many believe there’s little chance of resolution until after the November election.
While no one can predict what Congress will ultimately do (or not do), 2012 may present an opportunity to convert a traditional IRA to a Roth IRA at a potentially lower tax cost than if you wait until 2013.
You can convert now, or you can take a wait-and-see approach–you have until December 31 to make a 2012 Roth conversion. Either way, if converting turns out to be the wrong decision, you’ll have until October 15, 2013, to “undo” your conversion, and it will be treated for federal tax purposes as if it never occurred.
Keep in mind that the potential 2013 tax rate increase is just one factor to consider when deciding if and when you should convert a traditional IRA to a Roth IRA. If you’ll need to pay the conversion tax with IRA funds, or if you think you’ll be in a lower tax bracket when you begin taking distributions, a Roth conversion may not be right for you.
You have until October 15, 2012, to undo a 2011 Roth conversion
If you converted a traditional IRA to a Roth IRA in 2011, and your Roth IRA has sustained losses, you may want to consider whether it makes sense to undo (recharacterize) your conversion. You have until October 15, 2012, to undo your 2011 conversion. (If you’ve already filed your federal income tax return for 2011, you’ll need to file an amended return if you recharacterize.) A recharacterization can help you avoid paying income tax on the value of IRA assets that have been lost. When you recharacterize, your conversion is treated for tax purposes as if it never happened.
For example, assume you converted a fully taxable traditional IRA worth $100,000 to a Roth IRA in 2011. However, due to market volatility, that Roth IRA is now worth only $60,000. If you don’t undo the conversion you’ll pay federal (and possibly state) income tax on $100,000, even though the current value of those assets is only $60,000. If you undo the conversion, you’ll be treated for tax purposes as if the conversion never happened, and you’ll wind up with a traditional IRA worth $60,000–and no resulting tax bill.
If you recharacterize your 2011 conversion, you’re allowed to convert those dollars (and any earnings) to a Roth IRA again (“reconvert”) but you’ll have to wait 30 days, starting with the day you transferred the Roth dollars back to a traditional IRA. Keep in mind that even though the amount you recharacterized, and any earnings, is subject to a 30-day waiting period, any other amounts in your traditional IRAs are not subject to the waiting period, and you can convert all or part of those dollars to a Roth IRA at any time.
Whether it makes sense to recharacterize your Roth conversion depends on several factors, including the extent of the losses in your Roth IRA, and your expectations of where the markets may be headed.
Call me to help decide if a recharacterization is right for you.
Questions or Comments?
You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.
Mark Vitek, CPA/PFS, CFP®
…until next week.
It’s time for college students to head back to school. But how are you going to pay for this next year of college? Some people will be able to write the check. But the majority of the population relies on loans, grants, scholarships, funds from family members and student earnings to cobble together enough money to pay the bills. What if it isn’t enough? Can you use your retirement savings to help pay the bill?
First of all, consider whether you should use your retirement assets. Are you putting your retirement at jeopardy to give your student a chance to have a good life? Many advisors will tell you that you can borrow to pay for college, but you cannot borrow to pay your expenses in retirement. The message is to look for all possible sources of cash before you consider using your retirement funds.
If you are over the age of 59 1/2, you have access to your retirement funds without penalty. You will have to pay income tax on any distributions you take, but the retirement funds are now available for you to use as you wish.
A problem exists if you are under age 59 1/2 and are subject to the 10% early distribution penalty. Fortunately, payment of higher education expenses is an exception to this penalty and the tax code is generous about applying this exception. The IRA owner can pay for expenses for himself, his spouse, or the children or grandchildren of either the account owner or the spouse. You can apply the exception to the unreimbursed payment of tuition, books, fees, supplies and required equipment – in other words, the expenses minus any financial aid. Room and board are qualified expenses if the student is enrolled on at least a half-time basis. The expenses must be paid in the same year that a distribution is taken from the IRA.
So good luck to all those students returning to college this fall. And good luck to those that are footing the bill. Use your retirement assets only as a last resort and don’t pay the early distribution penalty if you qualify for this exception!
Questions or Comments?
You can add comments on the blog, call 919-847-2981, or visit our web site. We look forward to hearing from you.
Mark Vitek, CPA/PFS, CFP®
…until next week.
taxandmoneyblog.com 