When our founding fathers assembled in Philadelphia in 1775 to gather all the states’ citizens under one roof they would soon call a nation they understood that there must be a glue to hold this disparate house together in face of the enormous challenges and rocky times that surely lay ahead. They created a constitution that has served as a beacon of light to guide and shelter each and every citizen. In good times and bad, in war and peace, people of this house would look to this document to decide the best course of action for all concerned. It has kept our house together longer than any other as the oldest continuous existing democracy on Earth.
Like our constitution, a financial plan has the same effect: It is the charter that governs our behavior in good times and bad. It helps us live up to our highest values by transcending selfishness to accomplish a good greater than ourselves. It guides us from going off the deep end, shelters us from storms, and provides us with a roadmap for being and doing more than we now are. It is this constitution that has guided me to act morally, live by principles and strive for dreams I never dared to dream before. I know this because I am a financial planner who has personally walked the talk.
Looking back, the most important thing I have done in my lifetime, bar none, is to create a financial plan and live by it. It has made all the difference; not because money solves all problems, it doesn’t, but because it prevents the most serious ones. Sometimes these problems work like a chain reaction, for example, cascading from a debt blowup to divorce and into depression. Life without a plan is like home plumbing without a pressure relief valve. When the inevitable failure occurs, there can only be a singular explosive and disastrous result.
By sharing this experience with clients, sooner or later they come to understand the power and magic of a living, breathing, financial plan. When they see that their kids are past college, weddings paid for and that their mortgage burned, early retirement on the horizon in a beautiful new home whose shelves still have room for more photo albums of travel, friends and family, they often ask, “how ever did we do it?” It is usually then when they recall that it was all part of the script I helped them rewrite many years ago. This is the moment when they truly understand the difference of a life view from forty thousand feet verses a prior life in the trenches with no constitutional purpose, just living day-to-day, script-to-script to “see what tomorrow brings”.
Less than one percent of adults, by my estimate, have ever made the big leap of creating a professionally written, comprehensive, personal, financial road map. That means the vast majority in our society have nothing to compare to. They may argue that the best thing they have ever done is to raise a family. Of this group, half the people saying it are divorced. More than half suffer from preventable and or treatable chronic diseases such as depression, drug and alcohol abuse, eating disorders and obesity. I would also add an insidious, growing pandemic, money mania. It’s the inability to have a functional relationship with money so that it supports ones values and the freedom to do and simply be true to oneself. I have lived on both sides, I have made the leap and I can say the view from here is fine now.
I believe a financial plan is a road map to a great life. I have learned that the greatest limits in our lives are not financial, but our beliefs. These beliefs, I call scripts, change little from our childhood days where we act either like or opposite from our parents. Unless disaster strikes close to heart, like cancer or sudden death, most never look in the mirror to think to rewrite the remaining chapters of a new and meaningful life. Even following disaster most slip back into old scripts. Like old recipes, old friends and old clothes, we are most comfortable with the familiar. Our lives are SOS, same old stagnancy.
Best investment? Privately and often during speeches, people often ask me “what is the best investment to make today?” I tell them to look in the mirror. You’ll never top the investment you see there.ith or without a financial plan, we become pretty much what we believe we can. The difference is that planning provides vision followed by purpose. The planner provides the nudging needed. With a road map in hand, money may slow us down from time to time, but it cannot stop us. These principles put to the pen have made an enormous difference in my and my wife’s lives and those we love. For loved ones it has helped us rescue them from pending personal bankruptcy, pick up a wedding tab, vanquish despair, fund past and future college educations, and make a 40th anniversary Alaska dream vacation a prepaid reality. A financial plan can save more than money, it can save souls.
Our financial plan is like our personally crafted constitution. It defines who we really are, our purpose, our principles, values and actions by which we live. It has not prevented problems from occurring, but it has cut them down to manageable size and provided us with vision and clarity toward a brighter future. Based upon vision and revision, it is a living road map to doing and being our best. The driving force behind any financial plan is the financial planner. He or she sheds light on our paths, keeps us from making wrong turns, and helps us choose the high road. When thinking of whether or not to create a financial plan, ask yourself this: Where would our nation be today without a constitution?
Giving this holiday season has taken on a whole new meaning for IRA owners over age 70 ½ since congress, in an exceptional move, created a Code addition last year unlocking the $4 trillion national IRA vault 1 for direct, tax-free, charitable transfers that benefit the donor as significantly as the charity. Four trillion dollars, put in perspective, would make Bill Gates’ wealth appear but a blip on the radar screen. Even if the top 20% of the wealthiest IRA owners, mostly over age 65, who own 80% of the IRA dollars are counted, there’s still a huge sea of cash unallocated by owners and unclaimed by charities. But who’s talking?
This could be the best kept secret since Vice President Cheney’s role in outing former CIA agent Valerie Plame Wilson. For national benevolence purposes, I’ll reveal this code, or at least its high points: When congress passed the Pension Protection Act (PPA) in 2006 one of many monumental changes was the allowance of Qualified Charitable Distributions (QCD) of up to $100,000 per year directly from an IRA to a public charity as defined in Internal Revenue Code (IRC) section 170(b)(1)(A). In short, transfers to donor advised funds or to charities where the donor received any benefit, like tickets to a game or performance, are not allowed. Under pre-2006 law, IRA owners had to first take taxable distributions from their IRAs and then write a check that was only partially deductible to charities of choice. Who benefits most and how?
People who benefit the most are those who:
Are at least age 70 ½
Are currently supporting or wish to support charities and their communities
Have over $100,000 per person aggregate in traditional IRAs
Have excess income from Required Minimum Distributions (RMD) that they do not need now
Have 2007 countable Social Security earnings totaling over $34,440
Want to reduce their income taxes
Have a total net worth over 1 million dollars per person and are concerned about estate taxes
Are willing and able to act before December 31 2007
Anticipate a one-time higher income for 2007, for example, a lump sum distribution or bonus.
Wish to redirect dollars destined to the IRS to their charities of choice
An American axiom is that if someone earns a lot they’ll be taxed a lot. The biggest benefit of charitable IRA giving is that it reduces taxes in many, many, ways. Here’s a few:
1.No double whammy tax on IRA distributions that first tax the IRA RMD and then tax one out of every three dollars over the Social Security threshold of $34,440. Charitable IRA gifting can keep taxable income low and permit more Social Security dollars to reach IRA owners and have less of their benefits subject to Social Security double taxation.
2.May allow assisted living residents above, or close to, income thresholds to go to or remain within low income guidelines and retain benefits allowing continued or newly qualified independent living status.
3.Each dollar given via a charitable IRA gift counts as 100% toward a RMD.
4.Gifts have no Adjusted Gross Income (AGI) 20%, 30%, and 50% limits as in traditional giving. For example, someone with an AGI of $20,000 may take a tax deduction on only $6,000 (0.3 x 20,000) to a 30% public charity from a taxable account, but can benefit from a full $20,000 donated directly from a traditional IRA to that same charity. Although no charitable tax deduction is allowed in the latter, the donor benefits by channeling their RMD dollars to charity – lowering AGI.
5.Smartest strategy: IRA dollars are subject to both estate and income taxes. Donor’s Estate tax liability shrinks a dollar for each dollar given to charity. Most of us do not like to think that estate tax may consume up to half of our total wealth, the wealth we thought we were transferring to family at death. This tax is in addition to income tax paid on the year of death. For some, federal income and estate taxes could consume most of their wealth – over 70%. Since traditional IRAs are the most highly taxed of all assets, it certainly makes sense to designate these dollars first for charity.
6.More medical expenses are deductible as the 7.5% of AGI barrier shrinks in step with a lower AGI
7.More miscellaneous deductions qualify above the 2% AGI floor for a larger tax break
8.Allows donors to stay in or move to a lower tax bracket. Tax brackets range from 0-35% for 2007. Lower tax brackets provide the biggest deductions and benefits.
9.Itemized deductions and personal exemptions that would otherwise be phased out (disallowed) because they were driven by RMD forced income, may shrink or disappear.
10.Lowering RMD driven AGI could lower Social Security part D premiums
11.Charitable IRA giving may avert triggering Alternative Minimum Taxes (AMT)
12.More dollars may qualify for contributions to Coverdell Education Savings Accounts in support college education of grandchildren.
13.Those who forget to take IRA distributions based on the aggregate sum of all their IRAs face a 50% penalty for failure to take a timely distribution, generally before December 31st. In contrast, those who donate their IRA to charity this year can qualify for up to a full required minimum distribution amount and avert this penalty.
14.Last, but not least, a charitable IRA gift provides peace-of-mind of supporting charitable communities with big tax-saving dollars. It’s giving smart through the heart.
Can’t give this year? The new law says that from now on you may make a public charity an IRA beneficiary. You can leave any percentage from 1-100%, to charities of your choice. You may name them as primary or contingent beneficiaries. A primary beneficiary also has the option of disclaiming his or her share, or any percentage thereof, to the contingent beneficiary. If the latter is a charity, a primary beneficiary can reduce his or her taxable income by disclaiming a portion of the assets in favor of the charity.
So if you’ve ever dreamed of being Santa Claus, now’s your great chance. Perhaps the IRS is hoping nobody’s paying attention because they already have a siphon attached to every traditional IRA. Pay now or pay later, but pay you will, except of course if you want to be Santa. Now you have a singular chance make a huge and lasting impact well beyond 2007 by switching from writing charitable checks to channeling IRA dollars now destined for taxation to your favorite public charities. But don’t wait, like holiday festivities, the lights go out on this opportunity on December 31 2007 and the secret code vanishes like a phantom into the long winter night.
Advising Veteran-Owned Small Businesses to be First in Line for Federal Government Contracts. A Market Opportunity for Financial Advisors.
By Steven Wightman, CFP®
In any given year, even without stimulus money, the United States government will write at least $433 billion in checks to businesses. It has a goal of spending 23 percent of those dollars on small businesses, and it has set aside 3 percent, or about $12.8 billion, for Service Disabled Veteran Owned Small Businesses (“SDVOB”). This is an enormous opportunity.
Advisors can take a quantum leap in their value added by performing business matchmaking services to clients for business-to-government and business-to-business markets. In particular, specializing in serving SDVOBs can be a great business for financial advisors.
Small Business Realities
Small businesses view the U.S. government as an ideal customer; it manufactures nothing, purchases everything, and by law, must pay all bills within 30 days.
For many years, however, SDVOBs struggled to get their fair share of small-business government spending. But in 2004, President Bush signed Executive Order 13360 to create the Office of Small and Disadvantaged Utilization Interagency Council (“OSBDU”). The order established clear goals and set the reporting and management infrastructure and accountability for all federal agencies. For the first time, not meeting these goals reflected on manager’s performance evaluations. Each agency must appoint a representative to report progress to agency directors who meet monthly with OSBDU to report on the 3% procurement goal progress. Now agencies, led by the Small Business Administration and the Department of Veteran’s Affairs, are paying real attention to directing government business to SDVOBs.
Combined with the strengths that veterans demonstrate, the business opportunities look stronger today than ever. Veterans know how to serve. They are disciplined and steeled to meet the mission, regardless of the odds. They tend to be highly trained, physically fit, and mentally acute. Generally, they care deeply about the health and welfare of our country. They are driven to succeed.
Business classification
Contracts awarded in billions ending 9/30/2008
Share of total contracts
Goal
Small businesses
$93.2
21.5%
23%
Minority owned
$29.3
6.8%
5%
Women owned
$14.7
3.4%
5%
Hub zone
$10.1
2.3%
3%
SDVOB
$6.4
1.5%
3%
Source: Small Business Administration
The biggest problem SDVOBs face is, well, not being big. They often lack the resources to meet the often large service and supply demands of government agencies. Furthermore, contracting officers look for a performance record with government agencies, something a new (or even an existing) SDVOB may lack. The result is that SDVOBs often only qualify to be subcontractors for larger firms often called primes—and then they sometimes get the short end of the contract stick.How an Advisor Can Help
Financial advisors can help small-business owners become successful government contractors in many ways. I learned about these opportunities while attending the July 20-23, 2009 Fifth Annual National Veteran Small Business Conference in Las Vegas aimed specifically at the SDVOB market, and many of the lessons can be expanded to reflect the needs, resources and opportunities of small businesses in general. Interestingly, I learned that any small U.S. business can enlist a team of federal experts dedicated to assisting small businesses to start or expand business with the U.S.A. without adding a dollar to the payroll. At the federal level alone there are many employees working hard for this cause. How can you help?
First and foremost, the advisor should get veterans to sit down with the local area’s SBA Veteran Business Development Officer and the Small Business Development Center. Staff members in these offices know how to work with small businesses to develop or refine a business plan, and then to qualify them for contracts and list them in contracting data bases. They even offer small business free online training programs. Also, inquire about http://www.acquisition.gov/, Acquisition Central, the integrated acquisition portal that streamlines the federal acquisition process and is used by every member of the federal acquisition community.
Second, direct the veteran to register at http://www.vetbiz.gov/. It is the easiest way for potential government buyers to find any Veteran Owned Business, VOB. It’s a free linkage service for veterans from the Veterans Administration. Here at a section called VIP (Vendor Information Page) veterans can post their own web page and even cast a three minute video about their products or services free of charge. VIP is the first place federal contracting officers visit to improve their performance scores for VOB and SDVOB contracting. Also, VIP Registered businesses automatically receive contract solicitation notices from fedbizops, a linked website, http://www.fbo.gov/ matching their industry or product codes AND they also receive advance purchase planning information from VA’s forecast of business opportunities.Third, get hands-on assistance in the Federal Market place. Procurement Technical Assistance Centers (http://www.dla.mil/db/procurem.htm) are located in most States. Procurement Technical Assistance Centers (PTAC) while funded by the Department of Defense provide counseling and training on financial, technical, contracting and marketing issues at minimal or no cost.
Fourth, consider a mentor-protégé program with a non-SDVOB business, preferably one that has the resources and experience to fill the kind of contract work that the SDVOB is seeking to obtain (but is too small to service a large set-side contract alone). These types of partnerships are welcomed by government agencies. In fact, some agencies prefer mentor-partnerships to stand-alone SDVOBs. See www.sba.gov.GC/indexcontracts-sbsd.html for a list of prime contractors and their Small Business Liaison Officer contact in your region.
Mentoring is a triple-win: SDVOBs get access to great talent and resources; the government reduces contract default risk; and the prime contractor gets access to a formerly inaccessible pie. As a subcontractor, the SDVOB works closely with the prime contractor to meet the requirements of the contract (this is vital), but also to develop its own skills in marketing, negotiating contract terms, and providing services to the government.
Fifth, advisors should encourage SDVOBs to look for opportunities to become prime contractors, after they have developed experience. Remember that complex legal issues arise for prime contractors, so it’s best to bring in an attorney who understands federal contracting law.
If you’re not moving fast, you’re food.Sixth, Financing: Advisors can help SDVOBs establish a merchant account to accept government credit cards. Many government agencies use credit cards for small purchases. Check out http://sss.gsa-smartpay.com/. Also advisors can help SDVOBs obtain the financing needed to fulfill a contract. Financing might be needed to hire workers, set up a benefits program, rent office or warehouse space, buy equipment or a variety of other business growth needs. Fortunately, veterans have excellent options for getting funding through the Patriot Loan program; this offers business loans for as little as 2.25 percent above prime and an 85-percent federal backing guarantee. Seventh and finally, this often overlooked axiom; businesses have got to market to make it and advisors can add value by connecting businesses to those that have that know how. Registering on government databases is a lot like having your own website; it’s great for showcasing your services but it’s not very good at attracting new business. Imagine for a moment that you are a VOB. Yes, you’ve identified your customers, researched their requirements, registered on all the right websites, and learned government procurement laws and procedures, but now you must sell your capabilities directly to government contracting officers that purchase your product or services. Remember, their time is valuable too and you must show them that you have exactly what they are looking for on their, not your terms. Advisors can help businesses define their products and services in language more appealing to federal purchasers. SBA can help here too. Visit www.sba.gov/businessop/marketing/register.html where you’ll find valuable resources on contracting with the federal government. Supporting small businesses, especially those owned by veterans, can be a great business opportunity for an advisor. Helping a client prosper can generate extraordinary loyalty, as well as build assets that the advisor can manage. But more importantly than the immediate business opportunities, the advisor can have an impact that goes beyond his firm—an impact that includes strengthening our economic security, sparking morale in his or her practice, and supporting the local community.
Advisors who lead the way for veterans to develop relationships with the Small Business Administration, VA and the SBDC will become heroes. It’s a great feeling to give something back to someone who has given so much. Let’s help our disabled veterans and help America too. Attention!
About Small and Disadvantaged Business (SADBU) Public Law 95-07 amended the Small Business Act and the Small Business Investment Act of 1958, making federal procurement contracting more readily accessible to all small businesses.
OSBDU http://www.va.gov/osdbu/veteran/index.asp
Ben R. Manzano Email of 10/8/09
Procurement Center Representative
US Small Business Administration
Office of Government Contracting, Area I. SBA.GOV/veteran loans. Patriot loans
Ben R. Manzano Email of 10/8/09
Procurement Center Representative
US Small Business Administration
Office of Government Contracting, Area I.
Consumers shop for a financial planner often based on the fee structure of the firm, but is that the most important quality?
Fee only means more than one way to pay.Should you select a financial planner based upon the fee structure alone? Fee-only can mean a retainer, a per-hour fee, and assets under management ("AUM") or any combination of the above. Fee-only is distinct from fee-based which means an advisor can take fees from all of the above plus commissions and trailers (commissions from products sold in years past). I advocate fee-only because it greatly reduces the potential for conflict of interest by steering clients away from commission-based products to products that do the same job, but at far lower consumer costs. I personally use an hourly fee for the short term when developing a financial plan, for example, and a flat retainer fee for ongoing annual services. This way all of the planning work is paid for equally and is not biased by a payment scheme. This is opposite investment services paid for by an alternate AUM arrangement which may get the lion's share of the attention at the expense of neglecting other valuable services such as refinancing a home, or retirement planning.
An argument of having a fiduciary on your side: What's more important than fee structure? I think it's to focus on a professional fiduciary relationship. That means, in the simplest terms, that the financial planner employs all of his or her skills, knowledge, experiences and training to walk in the client's shoes and make the best possible decisions by always putting the client interests before his or her own in every decision affecting the client's financial well being. It also means disclosing every single instance where any shortcoming exists between fiduciary standards and actual circumstances or actions. You won't find this standard offered in the vast majority of services offered by so called "financial advisors". Then, what would you look for?
Consumers can look for the CERTIFIED FINANCIAL PLANNER, or CFP (R) mark of a professional financial planner as a minimum standard of whom to consider for financial planning services. The consumer can at least rest assured that such a planner has already met and continues to follow, the fiduciary standard. Focus on fiduciary means putting all clients first and foremost - always. Had that been the industry-wide standard in 2008, which among other things, forces financial planners to fully disclose risks, can you honestly convince yourself that we'd be in the global financial nightmare today? Not likely: A fiduciary has the responsibility to steer all clients clear of inappropriate investing. With rare exceptions, the polymorphic, smoky derivative markets that sparked the financial tailspin in 2008 would have been fallen in that category and they would have been considered far too risky for most client portfolios. In sum, the consistent practice of the fiduciary standard would mean no Madoffs, no morasses, and no more messes. Fiduciary means the client is always first, not the pockets of the financial servicer.
It sounds like another world, and yes, it truly could be if consumers just focused on fiduciary - and of course, fees.
Full Disclosure: Steven Wightman is a NAPFA Registered fee-only financial planner who occasionally writes for the NAPFA ADVISOR, the member's magazine.
Fee only means more than one way to pay.Should you select a financial planner based upon the fee structure alone? Fee-only can mean a retainer, a per-hour fee, and assets under management ("AUM") or any combination of the above. Fee-only is distinct from fee-based which means an advisor can take fees from all of the above plus commissions and trailers (commissions from products sold in years past). I advocate fee-only because it greatly reduces the potential for conflict of interest by steering clients away from commission-based products to products that do the same job, but at far lower consumer costs. I personally use an hourly fee for the short term when developing a financial plan, for example, and a flat retainer fee for ongoing annual services. This way all of the planning work is paid for equally and is not biased by a payment scheme. This is opposite investment services paid for by an alternate AUM arrangement which may get the lion's share of the attention at the expense of neglecting other valuable services such as refinancing a home, or retirement planning.
An argument of having a fiduciary on your side:What's more important than fee structure? I think it's to focus on a professional fiduciary relationship. That means, in the simplest terms, that the financial planner employs all of his or her skills, knowledge, experiences and training to walk in the client's shoes and make the best possible decisions by always putting the client interests before his or her own in every decision affecting the client's financial well being. It also means disclosing every single instance where any shortcoming exists between fiduciary standards and actual circumstances or actions. You won't find this standard offered in the vast majority of services offered by so called "financial advisors". Then, what would you look for?
Consumers can look for the CERTIFIED FINANCIAL PLANNER, or CFP (R) mark of a professional financial planner as a minimum standard of whom to consider for financial planning services. The consumer can at least rest assured that such a planner has already met and continues to follow, the fiduciary standard. Focus on fiduciary means putting all clients first and foremost - always. Had that been the industry-wide standard in 2008, which among other things, forces financial planners to fully disclose risks, can you honestly convince yourself that we'd be in the global financial nightmare today? Not likely: A fiduciary has the responsibility to steer all clients clear of inappropriate investing. With rare exceptions, the polymorphic, smoky derivative markets that sparked the financial tailspin in 2008 would have been fallen in that category and they would have been considered far too risky for most client portfolios. In sum, the consistent practice of the fiduciary standard would mean no Madoffs, no morasses, and no more messes. Fiduciary means the client is always first, not the pockets of the financial servicer. It sounds like another world, and yes, it truly could be if consumers just focused on fiduciary - and of course, fees.
Full Disclosure: Steven Wightman is a NAPFA Registered fee-only financial planner who occasionally writes for the NAPFA ADVISOR, the member's magazine.
Audie Murphey, the most highly decorated soldier of WW II had a simple philosophy about leadership; "follow me!" he commanded. Soldiers did just that. Why? He was the first into battle and the last out. He lead by example. In life and as a financial planner, I have remembered this lesson well. I have always put myself at risk first before asking a friend, family member or client to follow. This has been a true education to me of the difficulties people have where the rubber meets the proverbial road. Today is a good example.
I received a call from Citimortgage Loan Modification Division requesting that I talk to their refinance department at yet another number and voicemail chain. I was greeted with five selections, several sounding very similar and all of them ambiguous. I threw a dart and found a real voice with an accent right out of India. Courteously he referred me to another number where I repeated the process. Here I found Jennifer, who made an exception. She provided me with a "warm transfer", where I bypassed providing all my personal information all over again. The opposite is a form of telephone waterboarding where the caller runs out of time, patience or quarters and is defeated.
Brian in refinancing told me I did not qualify for a Refi with Citimortgage. Citi already financed a loan in 2008, but not now? I wasn't a risk then, am I now? I have the same credit score (excellent), a lower debt load, and a secure income, though lower than 2008. Citi said my income to loan ratio was too high. You are rejected. It mattered not that I had applied for the Making Homes Affordable program on April 1 of 2009 and I was assured that it would only take 60 days to reach a decision. That 60 days has passed 2.5 times over and there's still no decision. Every other month Citi requests new and or fresh documents saying that once they have them, a decision is just around the corner. What I later learn is around the corner is more curves and smoky rules.
Making Homes Affordable is a great program in theory, but a failure in practice because of one simple missing ingredient: Accountability. Citibank took 60 billion in taxpayer money to keep itself afloat. One might think they'd show some gratitude to American taxpayers for that right? Not a chance. In fact the Refi Dept offered me an interest rate about a half point higher than the current market rate for my credit rating. They are profiting from a homeowner mortgage rescue program.
The skinny on how this program is treated by banks is this: If you are in imminent risk of foreclosure, you will likely get the best deal. If you are cash poor but have make all your payments and you have maintained a high credit rating, banks do not consider you a risk and therefor they are unlikely to grant a modification even when income has shrunk over 50% due to unemployment or underemployment. In other words, they drag out the process until you are unable to make all your mortgage payments on time. Once you have defaulted twice, they are likely to pay more attention because they do not want to take possession of a home; they want a cash payment stream.
Conclusion? Being responsible to creditors may place homeowners in a gauntlet that never seems to end and the jokes and the profits go to those who are delivering the punches. As Audy Murphey well understood; no one comes out of battle unscarred.
Fall is upon us. When I saw leaves dropping I used to grumble about toiling to rake and bundle them. No more! Now I ask myself, how can I make this years taxes drop like falling leaves? While enjoying the cooler weather, why not put a chill on the household income taxes burden too? I plan to take full advantage of the following, you can too.
RETIREMENT ACCOUNTS: Review them. Are you saving 100% of the amount allowed tax deferred? Is your spouse? Participants of a 401k or 403b plan can defer up to $15,500 in taxable income. Saving for college too? If you are funding your child’s education in a taxable account, why not avoid future taxes by shifting these funds into your IRAs, qualified plans, and Section 529 or Coverdell accounts? Done right, all of these accounts allow tax-free distributions for qualified education expenses.
Did you know that if you attained age 50 any time during 2007, you can defer an extra $1,000 to your Roth 401k and 403b program? Unlike individual IRAs, these qualified plan contributions are not subject to income caps. See your HR department to learn more about these plans.
EDUCATION EXPENSES: HOPE AND LIFETIME LEARNING CREDITS: Each could cut tax bills for each college student by over $1100 per year! Tip, when using tax credits, always use the Lifetime Learning Credit (LLC) for the first semester of college and then the Hope credit for semesters 2 and 3. Why? Unlike the LLC, you’re not likely to maximize the Hope credit based on education expenses for the last 4 months of the tax year. Once you have 12 months expenses, you may maximize the credit.
Student loan interest deduction: You can deduct amounts paid on your or a family members behalf. Income limits begin at 55/110K, single, MFJ.
RMD (Required Minimum Distributions). If you attained the age of 70 ½ this year, you must begin your RMD from qualified plans and traditional IRAs by April 1 2008. Failure to do so may trigger a 50% penalty on the amount that should have been distributed to you. Now the good news: Tables are easier to use and it only takes a few hours to calculate and actualize with your custodian. Many custodians assist their clients in calculating the RMD. Common calculation mistakes to avoid include:
Failure to base your calculation on the aggregate total of all your plans.
Counting an inherited IRA or Roth IRA as part of the RMD
Having an investment portfolio that is unfriendly to your distribution needs, for example, one not designed for income.
REAL ESTATE AND MEDICAL Bunch real estate taxes into one year for multiple homes for your primary residence and your vacation home with taxes due Dec 30th. You could pay two bills in January and two more the following Dec. Do the same with dental and medical bills. It’s smart to use them in years in which you need the greatest tax breaks. Why? To rise above the floor of itemized deduction limits.
INVESTING: For folks in high tax brackets: Be careful of purchasing mutual funds such as growth funds outside of retirement plans that have high capital gains and dividend distributions in the last quarter of the year. You may find yourself paying taxes at ordinary rates as high as 35% for income reinvested in your account - and never seen by you.
Don’t wash a loss: You may take a long-term or short-term capital loss for securities that performed poorly this year. Buy them or a like investment back after 31 days has transpired to avoid the "Wash rules". Then take tax losses. This is a highly effective strategy for lowering adjusted gross income.
Wash your gains: Under the wash rules, like investments mean that if you sold an index fund XY on the S&P 500 and then purchased AB S&P index fund for the same dollar value in less than 31 days, wash rules apply. For example, if XY index fund had tripled in value since you bought it and you decided to sell it because annual fees were too high. You’d have to pay capital gains tax on the appreciated amount. However, if you subsequently purchased AB index fund for the same dollar amount, it’s a wash sale, and there are no taxes due.
Best idea of all for saving taxes this fall is to call us at 781-862-6642 for a free tax planning review. How much could you save? Can you think of a more valuable way to spend an hour this fall? I can’t.
For tax filing help, call the IRS at 800-829-1040 or go to the links section of www.IRS.gov. Order publication 17, your personal tax guide. You’ll find lots of great tips here and on the Web.