Throwing Out The Old Rules of Money #2

Posted on May 11, 2011 by taxblogger

Tax & Money Tip of the Week: 
Throwing Out The Old Rules of Money
May 11, 2011 | No. 42

Old School Rule #2
Retirement Planning Old School Wisdom: Convert your traditional IRA to a Roth IRA.  New unconventional advice: Forget about doing this; Roth IRAs are designed to get you to pay taxes EARLIER ….

Why It’s Smarter
Converting to a Roth IRA does nothing to increase your wealth.

For example, lets say a client in the 25% federal income tax bracket has a Regular IRA of $100,000. If he decides to convert to a Roth he would have to pay tax of $25,000 immediately and would be left with only $75,000. Lets say the client doubles in 10 years this Roth IRA shrewdly via investing to $150,000. Instead, assume the client  keeps his regular IRA of $100,000 and doubles it in 10 years to $200,000. After paying taxes, he would wind up with $150,000, the same amount but without the hassles of paying taxes, etc.

Key point:  Congress may decide to tax Roth IRA withdrawals, subject them to 28% AMT tax or reduce the marginal tax rates (via eliminating certain deductions).  For most situations, paying taxes sooner is NOT better than keeping wealth tax sheltered and using the power of tax compounding to your advantage.

If you should have any questions, please don’t hesitate to give us a call.

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®
mark@markvitekcpa.com

…until next week.

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Throwing Out The Old Rules of Money #1

Posted on May 4, 2011 by taxblogger

Tax & Money Tip of the Week: 
Throwing Out The Old Rules of Money
May 4, 2011 | No. 41

This week we will start a series regarding throwing out the old rules of money.

Old School Rule #1
Conventional mortgage wisdom is to pay your home mortgage as soon as possible using extra payments.  Here’s what you should do instead:  Keep a long-term mortgage typically 30 years, regardless of your age or income, even if you can pay it off sooner.

Why It’s Smarter
Owning your home outright saddles you with some pretty significant disadvantages now days, such as lack of liquidity.  Every dollar you give to the bank is one you will never get back until you sell your home.  You may need that money if you lose your job unexpectedly or have a large medical expense.  Instead, put that money to work in a diversified investment portfolio possibly one composed of a mix of passively managed index funds to keep expenses low.

If you should have any questions, please don’t hesitate to give us a call.

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®
mark@markvitekcpa.com

…until next week.

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Financial Aid 101

Posted on April 27, 2011 by taxblogger

Tax & Money Tip of the Week: 
Financial Aid 101
April 27, 2011 | No. 40

Many parents pay for college with a combination of savings and financial aid.  Here are some of the basics.

What is financial aid?
Financial aid is money distributed primarily by the federal government and colleges in the form of student loans, grants, scholarships, and work-study jobs.  Loans and work-study must be repaid (through monetary or work obligations), while grants and scholarships do not.  A student can receive both federal and college aid.

Financial aid can be broken down into two categories, need-based and merit-based.  Need-based awards are given based upon financial need.   Merit-based awards are granted according to your child’s academic, athletic, musical, or artistic merit.

How is financial need determined?
The federal government’s aid application, the FAFSA, uses a formula known as the federal methodology.  Generally speaking, the parent and child income and assets are tallied and assessed at certain rates.  There are certain deductions and allowances against income and certain assets are excluded from consideration, specifically, home equity, retirement plans, annuities, and cash value life insurance.  The result is a figure known as your expected family contribution, or EFC.  This is the amount of money you must contribute to college costs to be eligible for aid.  Your EFC remains constant, no matter which college your child applies to.

Your EFC is not the same as your child’s financial need.  To calculate financial need, subtract your EFC from the cost at a given college. Because tuition, fees, and room-and-board expenses are different at each college, your child’s financial need will vary depending on the cost of a particular college.

Colleges have their own way of determining financial aid, but basically the process works the same as with the federal government with some exceptions.

How do I apply and when?
The FAFSA can be filed manually, but the better option is to complete and file it online at www.fafsa.ed.gov.  The online version flags suspected mistakes immediately and takes only one week to process compared to four to six weeks for paper FAFSAs.

The FAFSA can be filed beginning January 1st in the year that your child will be attending college through June 30th.  Timely submission of the FAFSA is important because some financial aid programs operate on a first come, first-served basis.

If you should have any questions, please don’t hesitate to give us a call.

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®
mark@markvitekcpa.com

…until next week.

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Senate Approves the 1099 Repeal

Posted on April 20, 2011 by taxblogger

Tax & Money Tip of the Week: 
Senate Approves the 1099 Repeal
April 20, 2011 | No. 39

On April 5th, the Senate passed legislation to repeal both the expanded Form 1099 information and reporting requirements mandated by last year’s health care legislation. The Act (HR4) repeals the expansion of information reporting requirements for payments of $600 or more to corporations.

The Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 (HR4) was approved by the Senate by a vote of 87-12. 

The House of Representatives previously passed the bill on March 3rd.  Both the House and the Senate approved the same version of the bill. 

The bill has now been sent to President Obama to be signed into law.  We will keep you posted.

If you should have any questions, please don’t hesitate to give us a call.

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.

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Are You Getting the Credits You Deserve?

Posted on April 13, 2011 by taxblogger

Tax Tip of the Week: 
Are You Getting the Credits You Deserve?
April 13, 2011 | No. 38 

Tax Deductions are good….Nonrefundable Tax Credits are better….and Refundable Credits are great!

If, for example, you take a tax deduction for mortgage interest on your tax return you are simply reducing your taxable income.  This means that if your marginal tax rate is at the 25% level, you are saving $250 in taxes for every $1,000 spent on mortgage interest.

A nonrefundable credit, on the other hand, is a dollar for dollar reduction in your tax liability.
Examples of nonrefundable credits include:

Foreign Tax Credit
Education Credits
Dependent Care Expenses (Daycare)
Retirement Savings Credit
Child Tax Credit 
Residential Energy Credit
Credit for Prior Year AMT
General Business Credit

Nonrefundable credits, however, are limited to your tax liability.  For example, if you have an energy credit of $1,500 and your tax liability is only $1,000, then your credit is limited to $1,000.

Refundable Credits are those that result in Uncle Sam giving you money!  Examples of Refundable Credits include:

Making Work Pay Credit
Earned Income Credit
Additional Child Tax Credit
American Opportunity Credit (Education)
First Time Homebuyer (expired)
Fuel Tax Credit
Adoption Credit
Health Coverage Credit

I had a couple come see me this year that have five children, two of which are in college.  They also installed a new energy-efficient HVAC system.  Their gross income was around $75,000.  After taking advantage of one part of the American Opportunity Credit for college expenses, the Child Tax Credit for those children under age 17, and the Residential Energy Credit their tax liability was eliminated.  In addition, they received an $800 Making Work Pay Credit, $2,000 Additional Child Tax Credit and $1,000 refundable credit for the second part of the American Opportunity Credit.  So their refund consisted of all the federal tax they had withheld plus $3,800 in refundable credits.

If you should have any questions, please don’t hesitate to give us a call.

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.

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Coverdell Education Savings Accounts

Posted on April 12, 2011 by taxblogger

Tax and Money Tip of the Week: 
Coverdell Education Savings Accounts
April 6, 2011 | No. 37 

If you meet designated income limits, you can contribute $2,000 annually to a Coverdell Education Savings Account.  Although contributions are not deductible, all earnings and withdrawals are tax-free, providing that you use the money for qualified education expenses, including those for kindergarten through high school.  In addition, you can fund your Coverdell Account with a wide variety of investments.

Along side a 529 College Savings plan, a Coverdell Account can play a big part in your college funding strategy.  Safety of principal and consistency of return are key considerations.  It’s also important to have an easy to manage program that keeps your money working all the time.

How much you invest depends on your resources and resolve.  By starting early and diversifying properly, you can achieve your goals.

If you should have any questions, please don’t hesitate to give us a call.

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.

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How To Speed Up A Tax Refund

Posted on March 30, 2011 by taxblogger

Tax and Money Tip of the Week: 
How To Speed Up A Tax Refund
March 30, 2011 | No. 36 

If you file a 2010 return and you’re expecting a tax refund, there’s no reason to dawdle.

Strategy:  E-file your return.  If you file electronically and request a direct deposit into your bank account, you’ll receive your refund in less than two weeks.  In contrast, filing by paper can take almost two months.

The IRS estimates the following “turn-around times” for tax refunds:

  • Six weeks for a paper return and paper check
  • Five weeks for a paper return and direct deposit
  • Three weeks for e-filing and direct deposit
  • 10 days for e-filing and direct deposit

Clearly, if speed is your top priority, e-filing is the best approach.  But it’s not for everyone.  For instance, you might miss some tax-saving opportunities or you just may not be comfortable doing it.   If you want your return e-filed, you can have us e-file for you for a minor charge.

If you should have any questions, please don’t hesitate to give us a call.

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.

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2010 IRA Contributions

Posted on March 23, 2011 by taxblogger

Tax and Money Tip of the Week: 
Deadline for Making 2010 IRA Contributions
March 23, 2011 | No. 35 

There’s still time to make a regular IRA contribution for 2010! You have until your tax return due date (not including extensions) to contribute up to $5,000 for 2010 ($6,000 if you were age 50 by December 31, 2010). For most taxpayers, the contribution deadline for 2010 is April 18, 2011. Normally, your tax return must be filed by April 15. However, the IRS has extended the deadline to April 18 this year because the 15th is a holiday in Washington D.C. (Emancipation Day).

If you should have any questions, please don’t hesitate to give us a call.

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.

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Home Office Deduction

Posted on March 16, 2011 by taxblogger

Tax and Money Tip of the Week: 
Home Office Deduction
March 16, 2011 | No. 34
 

We often hear people say they do not want to take the home office deduction because it is an audit “red flag.”  However, this feeling may lead to missing out on a potentially significant and legitimate deduction.

Let’s look at the rules.  First, the area of the home used for an office must be used regularly and exclusively:

  1. As the principal place of business (including administrative use);
  2. As a place to meet with clients in the normal course of business, or
  3. In connection with the business, if it is a separate structure not attached to the principal residence.
  4. If you are an employee, the business use of the home must be for the convenience of the employer.  (Meaning no other office facility exists and is a condition of employment).  Also, note that the home office deduction will not be as significant as those who are self-employed because the deduction is taken on Schedule A subject to 2% AGI limitations.

If you meet these tests, you can then deduct the business percentage use of:

  • Mortgage Interest
  • Real Estate Taxes
  • Casualty Losses 
  • Home Repairs/Maintenance
  • Rent    
  • Utilities
  • Homeowners Insurance
  • Security Systems
  • Other expenses including garbage removal, snow plowing, etc.
  • Depreciation

Note:  Choosing not to take the depreciation deduction is not an option.  It falls under the “allowed or allowable” rules.  It also means that when you sell your home you must recapture the depreciation.  This means you will have a taxable consequence on what would otherwise probably be a tax-free sale of the home. 

If you should have any questions, please don’t hesitate to give us a call.

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.

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House Votes to Repeal 1099 Provision

Posted on March 9, 2011 by taxblogger

Tax and Money Tip of the Week:
House Votes to Repeal 1099 Provision
March 9, 2011 | No. 33
 

The U.S. House of Representatives voted to repeal an unpopular tax-reporting requirement affecting small business owners, in what would be the first substantial change to the sweeping health-care package signed into law last year.

In a 414-112 vote, the House approved the measure, but the Senate is unlikely to take up the bill as it is currently drafted, adding further delay to the attempt at repealing the measure.

Seventy-six Democrats joined every present Republican lawmaker in voting in favor to repeal the legislation, while 112 Democrats opposed it.

The so-called 1099 provision was included in last year’s health-care law.  Official estimates stated it would raise around $18 billion a year, money that would be used toward the cost of implementing the health-care law.

It required smaller business owners to provide an account to the IRS of far more of their business transactions.  The goal was that more money owed in taxes would be tracked this way.

But business groups and firm owners quickly attacked the measure, saying the onerous requirements it placed on smaller firms far outweighed any benefit to the Treasury.

Republicans said it would require small-business owners to spend more on tax preparation, rather than invest in their companies and hire new workers.

Congressional Democrats and President Barack Obama agreed, and pointed to efforts to repeal the measure as evidence they were willing to work with Republicans to change their controversial health-care law.

A similar bill passed through the Senate last month, but it was attached to a wider overhaul of the regulation of the aviation industry.  Due to that, and because House Republican leaders wanted to change how the revenue lost from repealing the provision would be accounted for, they brought forward their own version of repeal legislation.

If you should have any questions, please don’t hesitate to give us a call.

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.

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