duryea-edwards-cpas

Why Every Freelancer in Orlando Should Work with a CPA

Tue, 30 Sep 2025 15:00:12 GMT

Freelancing in Orlando offers a unique blend of opportunities and challenges. As the gig economy continues to grow, many freelancers find themselves navigating the complexities of self-employment. One crucial aspect that often gets overlooked is the importance of working with a Certified Public Accountant (CPA). In this post, we’ll explore why every freelancer in Orlando should consider partnering with a CPA to streamline their financial processes, maximize tax benefits, and ultimately enhance their business success.

Understanding the Role of a CPA

A CPA is more than just a number cruncher; they are financial advisors who can provide invaluable insights into your business. Here are some key roles a CPA plays:

Tax Preparation: CPAs are experts in tax laws and can help freelancers navigate the complexities of filing taxes. They ensure that all forms are filled out correctly and submitted on time, minimizing the risk of errors that could lead to audits or penalties.
Financial Planning: They assist in budgeting and forecasting, ensuring you have a clear financial roadmap. This includes setting financial goals, tracking expenses, and planning for future investments.
Business Structure Advice: CPAs can guide you on the best business structure for your freelance work, whether it’s a sole proprietorship, LLC, or corporation. This advice can have significant implications for your taxes and liability.

Tax Benefits of Working with a CPA

One of the most significant advantages of hiring a CPA is the potential tax savings. Freelancers often miss out on deductions simply because they are unaware of them. Here’s how a CPA can help:

Identifying Deductions: CPAs can identify all eligible deductions, such as home office expenses, equipment purchases, and travel costs. They can also help you understand which expenses are necessary for your business and how to document them properly.
Tax Credits: They can help you take advantage of tax credits that you may qualify for, reducing your overall tax liability. This can include credits for education, energy-efficient equipment, and more.
Quarterly Tax Payments: A CPA can assist in calculating and managing your quarterly estimated tax payments, helping you avoid penalties. They can also advise on how much to set aside for taxes throughout the year.

Time-Saving Benefits

As a freelancer, your time is valuable. Managing finances can be time-consuming and stressful. Here’s how a CPA can save you time:

Streamlined Processes: CPAs can set up efficient accounting systems that save you time on bookkeeping. This includes automating invoicing, expense tracking, and financial reporting.
Focus on Your Craft: By outsourcing your financial management, you can focus more on your projects and clients. This allows you to dedicate your energy to what you do best, rather than getting bogged down in paperwork.
Ongoing Support: A CPA provides ongoing support, ensuring you have someone to turn to for financial questions throughout the year. This can be especially helpful during tax season or when making significant business decisions.

Compliance and Regulations

Freelancers must comply with various tax regulations and business laws. A CPA ensures you stay compliant, which can save you from costly penalties. Here’s how they help:

Staying Updated: CPAs are knowledgeable about the latest tax laws and regulations, ensuring you are always compliant. They can inform you of any changes that may affect your business and help you adjust accordingly.
Audit Support: In the event of an audit, having a CPA can provide peace of mind and support during the process. They can represent you and help gather the necessary documentation to support your claims.
Record Keeping: They can help you maintain proper records, which is crucial for compliance and future reference. This includes organizing receipts, invoices, and other financial documents in a way that is easy to access and review.

Financial Insights and Business Growth

Working with a CPA can provide you with insights that drive your business forward. Here’s how they contribute to your growth:

Performance Analysis: CPAs can analyze your financial performance and provide recommendations for improvement. This can include identifying areas where you can cut costs or increase revenue.
Strategic Planning: They can assist in creating a strategic plan that aligns with your business goals. This includes setting long-term objectives and determining the steps needed to achieve them.
Investment Advice: A CPA can offer advice on reinvesting profits back into your business for growth. This might involve exploring new markets, expanding your services, or investing in technology.

Choosing the Right CPA in Orlando

Finding the right CPA is crucial for your freelance success. Here are some tips to consider:

Experience with Freelancers: Look for a CPA who has experience working with freelancers and understands the unique challenges you face. They should be familiar with the specific deductions and credits available to self-employed individuals.
Reputation: Check reviews and testimonials to gauge the CPA’s reputation in the Orlando area. Personal recommendations from other freelancers can also be invaluable.
Communication: Choose a CPA who communicates clearly and is responsive to your needs. You want someone who will take the time to explain complex financial concepts in a way that you can understand.

Conclusion

In the competitive landscape of freelancing in Orlando, partnering with a CPA can be a game-changer. From maximizing tax benefits to providing strategic financial insights, a CPA can help you navigate the complexities of self-employment with ease. By investing in a CPA, you’re not just hiring a financial expert; you’re gaining a partner in your business journey. Don’t overlook the value they can bring to your freelance career—consider working with a CPA today! Their expertise can help you not only survive but thrive in the ever-evolving gig economy.

CPA vs. Tax Preparer: Which is Right for Orlando Residents?

Mon, 29 Sep 2025 15:00:13 GMT

When it comes to managing your finances, especially during tax season, choosing the right professional to assist you can make all the difference. For Orlando residents, the decision often boils down to two main options: Certified Public Accountants (CPAs) and tax preparers. Each has its unique advantages and specialties, and understanding these differences is crucial for making an informed choice that aligns with your financial needs.

Understanding the Roles

Before diving into the specifics, it’s essential to understand what each professional does:

Certified Public Accountants (CPAs): CPAs are licensed professionals who have passed rigorous exams and met specific educational requirements. They can provide a wide range of services, including tax planning, auditing, and financial consulting. Their expertise allows them to handle complex financial situations and offer strategic advice that can benefit individuals and businesses alike.
Tax Preparers: Tax preparers, on the other hand, specialize primarily in preparing and filing tax returns. They may not have the same level of certification or training as CPAs, but many are knowledgeable and experienced in tax laws. They can assist with straightforward tax filings and help clients maximize their deductions and credits.

Qualifications and Credentials

One of the most significant differences between CPAs and tax preparers lies in their qualifications:

CPAs: To become a CPA, individuals must complete a bachelor’s degree in accounting or a related field, pass the CPA exam, and fulfill state-specific licensing requirements. This extensive training equips them with a deep understanding of tax laws, accounting principles, and financial regulations. Additionally, CPAs are required to complete continuing education courses to maintain their licenses, ensuring they stay updated on the latest tax laws and financial practices.
Tax Preparers: Tax preparers may not require formal education or certification, although many have completed training programs or possess relevant experience. Some may hold a Registered Tax Return Preparer (RTRP) designation, but this is not mandatory. While they can be quite knowledgeable, their training may not be as comprehensive as that of a CPA.

Services Offered

When considering whether to hire a CPA or a tax preparer, it’s essential to evaluate the services you need:

CPAs: They offer comprehensive services, including:

Tax planning and strategy, which involves analyzing your financial situation to minimize tax liabilities.
Financial statement preparation, ensuring that your financial records are accurate and compliant with regulations.
Business consulting, providing insights on financial management and growth strategies for businesses.
Audit representation, where CPAs can represent you in case of an audit by tax authorities.
Estate and trust planning, helping you manage your assets and plan for the future.

Tax Preparers: Their services typically focus on:

Preparing and filing tax returns, ensuring that all necessary forms are completed accurately.
Providing basic tax advice, which can help clients understand their tax obligations.
Assisting with tax credits and deductions, helping clients take advantage of available tax benefits.

Cost Considerations

Cost is often a significant factor when deciding between a CPA and a tax preparer:

CPAs: Generally, CPAs charge higher fees due to their extensive training and the range of services they provide. Hourly rates can vary widely, often ranging from $150 to $400 or more, depending on the complexity of the services required. For more complex financial situations, the investment in a CPA can yield significant long-term benefits.
Tax Preparers: Tax preparers typically charge lower fees, often based on the complexity of the tax return. Basic returns may cost between $100 and $300, making them a more budget-friendly option for straightforward tax situations. However, clients should be cautious about the potential for missed deductions or credits with less experienced preparers.

Complexity of Your Financial Situation

Your financial situation plays a crucial role in determining which professional is right for you:

Simple Tax Situations: If you have a straightforward tax situation, such as a single income source and no significant deductions, a tax preparer may suffice. They can efficiently handle the preparation and filing of your tax return without the need for extensive financial planning.
Complex Financial Situations: If you own a business, have multiple income streams, or require extensive tax planning, a CPA’s expertise will be invaluable. They can provide strategic advice and help you navigate the complexities of tax laws that apply to your unique situation.

Personalized Financial Advice

Another critical aspect to consider is the level of personalized financial advice you may need:

CPAs: They can provide tailored financial strategies that align with your long-term goals, helping you navigate complex financial decisions. Their ability to analyze your entire financial picture allows them to offer insights that can lead to better financial outcomes.
Tax Preparers: While they can offer basic advice, they may not have the depth of knowledge to provide comprehensive financial planning. Their focus is primarily on tax preparation rather than holistic financial management.

Availability and Accessibility

Consider the availability and accessibility of the professionals you are considering:

CPAs: They may have a more structured schedule, especially during tax season, and may require appointments well in advance. This can be a disadvantage if you need immediate assistance or have last-minute questions.
Tax Preparers: Often more accessible, tax preparers may offer walk-in services or flexible hours, making it easier to get assistance when needed. This can be particularly beneficial for individuals with busy schedules or those who prefer a more casual approach to tax preparation.

Choosing the Right Option for You

Ultimately, the choice between a CPA and a tax preparer depends on your specific needs:

If you require comprehensive financial services, long-term planning, or have a complex tax situation, a CPA is likely the better choice. Their expertise can help you navigate intricate financial landscapes and ensure compliance with tax regulations.
If your needs are more straightforward and you’re looking for a cost-effective solution, a tax preparer may be sufficient. They can efficiently handle basic tax filings and provide essential guidance without the higher costs associated with CPA services.

Final Thoughts

For Orlando residents, understanding the differences between CPAs and tax preparers is essential for making an informed decision. Both professionals offer valuable services, but their expertise and the scope of their work vary significantly. By assessing your financial situation, the complexity of your tax needs, and your budget, you can choose the right professional to help you navigate the tax landscape effectively.
Whether you opt for a CPA or a tax preparer, ensure that you conduct thorough research and consider seeking recommendations from friends or family. The right choice can lead to significant savings and peace of mind during tax season. Remember, the goal is to find a professional who not only meets your immediate tax needs but also supports your long-term financial health.

Why Orlando Real Estate Investors Need a CPA on Their Team

Fri, 26 Sep 2025 15:00:02 GMT

Investing in real estate can be a lucrative venture, especially in a vibrant market like Orlando. However, navigating the complexities of real estate investments requires more than just a keen eye for properties. One of the most critical components of a successful investment strategy is having a Certified Public Accountant (CPA) on your team. A CPA brings invaluable expertise that can help Orlando real estate investors maximize their profits, minimize their tax liabilities, and ensure compliance with ever-changing regulations. In this post, we will explore the reasons why having a CPA is essential for real estate investors in Orlando.

Understanding the Financial Landscape

Real estate investing involves a myriad of financial considerations. From property acquisition costs to ongoing expenses, understanding the financial landscape is crucial. A CPA can provide insights into:

Cash Flow Analysis: A CPA can help you analyze your cash flow, ensuring that your investments generate positive returns. This analysis is vital for understanding how much money is coming in versus going out, allowing you to make informed decisions about your investments.
Budgeting: They can assist in creating a realistic budget that accounts for all potential expenses, including maintenance, property management, and taxes. A well-structured budget helps in planning for unexpected costs and ensures that you are financially prepared for any situation.
Financial Forecasting: A CPA can project future earnings and expenses, helping you make informed decisions about your investments. This forecasting can be crucial for long-term planning and can help you identify the best times to buy or sell properties.

Tax Planning and Compliance

One of the most significant advantages of working with a CPA is their expertise in tax planning and compliance. Real estate investors face unique tax challenges, and a CPA can help navigate these complexities:

Maximizing Deductions: A CPA knows which expenses are deductible, from mortgage interest to property depreciation, ensuring you take full advantage of available tax breaks. This knowledge can significantly reduce your taxable income and increase your overall profitability.
1031 Exchanges: If you're considering a 1031 exchange to defer capital gains taxes, a CPA can guide you through the process, ensuring compliance with IRS regulations. This strategy can be a powerful tool for reinvesting in real estate without incurring immediate tax liabilities.
Tax Strategy Development: A CPA can develop a tailored tax strategy that aligns with your investment goals, helping you minimize your tax burden. This personalized approach ensures that you are not only compliant but also strategically positioned for financial success.

Regulatory Compliance

The real estate industry is heavily regulated, and staying compliant with local, state, and federal laws is essential. A CPA can help you navigate these regulations:

Understanding Local Laws: Orlando has specific regulations regarding property management, tenant rights, and zoning. A CPA can help ensure you comply with these laws, reducing the risk of legal issues that could arise from non-compliance.
Financial Reporting: Many investors are required to provide financial reports to lenders or partners. A CPA can prepare accurate and compliant financial statements, ensuring that you present a professional image to stakeholders.
Audit Preparedness: In the event of an audit, having a CPA on your team can provide peace of mind and ensure you are prepared. They can help you gather necessary documentation and represent you during the audit process.

Investment Strategy and Portfolio Management

A CPA can play a pivotal role in shaping your investment strategy and managing your portfolio:

Property Valuation: They can assist in determining the fair market value of properties, helping you make informed purchasing decisions. Accurate valuations are essential for negotiating deals and ensuring you do not overpay for a property.
Risk Assessment: A CPA can evaluate the risks associated with different investment opportunities, helping you make strategic choices. Understanding the potential downsides of an investment is crucial for long-term success.
Portfolio Diversification: They can advise on diversifying your portfolio to mitigate risks and enhance returns. A well-diversified portfolio can protect you from market fluctuations and provide more stable income streams.

Financial Education and Guidance

Investing in real estate can be overwhelming, especially for newcomers. A CPA can provide valuable education and guidance:

Workshops and Seminars: Many CPAs offer workshops on real estate investing, tax strategies, and financial management. These educational opportunities can empower you with the knowledge needed to make informed decisions.
One-on-One Consultations: Personalized consultations can help you understand your financial situation and develop a plan tailored to your needs. This individualized attention can be invaluable in navigating the complexities of real estate investing.
Resource Recommendations: A CPA can recommend books, courses, and other resources to enhance your financial literacy. Continuous learning is key to staying ahead in the competitive real estate market.

Building a Strong Financial Team

Having a CPA is just one piece of the puzzle. Building a strong financial team is essential for success in real estate investing:

Collaboration with Other Professionals: A CPA can work alongside real estate agents, attorneys, and financial advisors to create a cohesive strategy. This collaboration ensures that all aspects of your investment are aligned and working towards your goals.
Networking Opportunities: CPAs often have extensive networks, providing you with connections to other professionals in the industry. These connections can lead to new opportunities and partnerships that can enhance your investment portfolio.
Continuous Support: Your CPA can offer ongoing support as your investment portfolio grows and evolves. This long-term relationship can be crucial for adapting to changes in the market and your personal financial situation.

Conclusion

In the competitive world of real estate investing, having a CPA on your team is not just beneficial; it is essential. From tax planning and compliance to financial analysis and strategic guidance, a CPA can provide the expertise needed to navigate the complexities of the Orlando real estate market. By investing in a CPA, you are investing in your success as a real estate investor. Don’t overlook this critical resource—partner with a CPA and take your real estate investments to the next level.

The Benefits of Outsourcing Payroll to a CPA in Orlando

Thu, 25 Sep 2025 15:00:00 GMT

Outsourcing payroll can be a game-changer for businesses, especially in a bustling city like Orlando. Many companies are discovering the numerous benefits of entrusting their payroll processes to Certified Public Accountants (CPAs). This approach not only streamlines operations but also enhances accuracy and compliance. In this post, we will explore the key advantages of outsourcing payroll to a CPA in Orlando, helping you understand why this decision could be one of the best for your business.

1. Cost Efficiency

One of the primary benefits of outsourcing payroll to a CPA is cost efficiency. Managing payroll in-house can be expensive due to various factors. First, there are employee salaries and benefits for payroll staff, which can add up quickly. Additionally, businesses incur costs associated with payroll software and regular updates to keep up with changing regulations. Furthermore, there are potential penalties for errors or late filings that can significantly impact the bottom line. By outsourcing, businesses can significantly reduce these costs. A CPA typically charges a flat fee or a per-employee rate, which can be more economical than maintaining an in-house payroll department. This shift allows companies to allocate their financial resources more effectively, investing in areas that drive growth and innovation.

2. Expertise and Accuracy

CPAs are trained professionals with extensive knowledge of tax laws and payroll regulations. This expertise ensures accurate calculations of wages, taxes, and deductions, which is crucial for maintaining compliance. Timely filing of payroll taxes is another critical aspect that CPAs excel at, ensuring that businesses avoid unnecessary penalties. Moreover, their understanding of federal, state, and local regulations helps businesses navigate the complex landscape of payroll compliance. Outsourcing payroll to a CPA minimizes the risk of errors that can lead to costly penalties and fines. Their attention to detail and up-to-date knowledge of tax laws provide peace of mind for business owners, allowing them to focus on their core operations without the constant worry of payroll-related issues.

3. Time Savings

Managing payroll can be a time-consuming task, especially for small business owners who wear multiple hats. The administrative burden of payroll processing can detract from time spent on strategic initiatives. By outsourcing payroll, you can free up valuable time to focus on core business activities, such as strategizing for growth, improving customer service, and enhancing product development. With a CPA handling payroll, you can redirect your efforts toward activities that drive revenue and improve your business's overall performance. This shift not only enhances productivity but also fosters a more innovative and agile business environment.

4. Enhanced Security

Payroll data is sensitive information that requires robust security measures. CPAs invest in secure systems to protect your data from breaches and unauthorized access. By outsourcing payroll, you benefit from advanced security protocols, regular data backups, and access to secure cloud-based solutions. This level of security is often more sophisticated than what a small business can implement on its own, significantly reducing the risk of data theft and fraud. Moreover, CPAs are well-versed in best practices for data protection, ensuring that your payroll information remains confidential and secure. This commitment to security not only protects your business but also builds trust with your employees, who can feel confident that their personal information is handled with care.

5. Scalability

As your business grows, so do your payroll needs. Outsourcing to a CPA allows for easy scalability. Whether you hire new employees or expand into new locations, a CPA can quickly adjust to your changing payroll requirements without the need for additional in-house resources. This flexibility ensures that your payroll processes can keep pace with your business growth, allowing you to focus on expansion without worrying about administrative burdens. Additionally, a CPA can provide insights into how to manage payroll effectively during periods of growth, helping you to implement strategies that support your business objectives while maintaining compliance and efficiency.

6. Access to Advanced Technology

CPAs often utilize the latest payroll technology, which can be costly for small businesses to implement independently. By outsourcing, you gain access to automated payroll systems, employee self-service portals, and real-time reporting and analytics. This technology not only streamlines payroll processes but also provides valuable insights into labor costs and employee performance, helping you make informed business decisions. Furthermore, leveraging advanced technology can enhance the overall employee experience, as self-service portals allow employees to access their payroll information easily, reducing the administrative burden on HR staff. This technological edge can be a significant advantage in attracting and retaining top talent.

7. Focus on Compliance

Staying compliant with payroll regulations can be challenging, especially with frequent changes in tax laws. A CPA specializes in compliance, ensuring that your business adheres to federal and state tax regulations, labor laws, and employee benefits regulations. This focus on compliance reduces the risk of audits and penalties, allowing you to operate with confidence. Moreover, CPAs can provide guidance on best practices for maintaining compliance, helping you to implement policies and procedures that align with regulatory requirements. This proactive approach not only safeguards your business but also enhances your reputation as a responsible employer.

8. Improved Employee Satisfaction

Timely and accurate payroll processing is crucial for employee satisfaction. When payroll is outsourced to a CPA, employees can expect consistent paychecks, accurate tax withholdings, and access to payroll information through self-service portals. Happy employees are more productive and engaged, contributing to a positive workplace culture. Additionally, when employees feel secure in their compensation and benefits, they are more likely to remain loyal to the company, reducing turnover and the associated costs of hiring and training new staff. This investment in employee satisfaction can lead to a more motivated workforce and improved overall performance.

9. Strategic Financial Planning

CPAs can provide valuable insights into your business's financial health through payroll data analysis. By outsourcing payroll, you can leverage this expertise for budgeting and forecasting, identifying cost-saving opportunities, and improving cash flow management. This strategic financial planning can help you make informed decisions that drive your business forward. Furthermore, having a CPA analyze payroll data can uncover trends and patterns that may not be immediately apparent, allowing you to make proactive adjustments to your business strategy. This level of insight can be a game-changer for your company's growth trajectory.

10. Peace of Mind

Finally, outsourcing payroll to a CPA provides peace of mind. Knowing that a professional is handling your payroll allows you to focus on what you do best—running your business. You can rest assured that your payroll is accurate and compliant, your employees are paid on time, and your sensitive data is secure. This peace of mind is invaluable, allowing you to concentrate on growth and innovation. With a CPA managing your payroll, you can approach your business challenges with confidence, knowing that you have a reliable partner in your corner.
In conclusion, outsourcing payroll to a CPA in Orlando offers numerous benefits, including cost efficiency, expertise, time savings, enhanced security, scalability, access to advanced technology, compliance focus, improved employee satisfaction, strategic financial planning, and peace of mind. If you’re considering this option, it may be time to partner with a CPA to streamline your payroll processes and elevate your business to new heights.

How a CPA Helps Orlando Contractors Stay Compliant with Tax Laws

Wed, 24 Sep 2025 15:00:00 GMT

In the bustling construction industry of Orlando, contractors face a myriad of challenges, from managing projects to ensuring compliance with tax laws. Navigating the complex landscape of tax regulations can be daunting, but this is where a Certified Public Accountant (CPA) becomes an invaluable asset. A CPA not only helps contractors understand their financial obligations but also ensures they remain compliant with ever-changing tax laws. This blog post will explore how a CPA assists Orlando contractors in staying compliant, ultimately leading to smoother operations and peace of mind.

The Importance of Compliance for Contractors

For contractors in Orlando, compliance with tax laws is not just a legal obligation; it is essential for the sustainability of their business. Non-compliance can lead to severe penalties, including fines and interest on unpaid taxes. Here are some key reasons why compliance is crucial:

Avoiding Penalties: The IRS and state tax authorities impose hefty fines for non-compliance. A CPA helps contractors avoid these pitfalls by ensuring that all tax obligations are met in a timely manner.
Maintaining Reputation: A contractor's reputation can suffer if they are known for tax issues. Compliance fosters trust with clients and partners, which is vital for securing future projects and maintaining a positive business image.
Financial Health: Understanding tax obligations allows contractors to manage their finances better, ensuring they allocate funds appropriately for taxes, payroll, and other essential expenses.

How a CPA Supports Contractors in Compliance

A CPA provides a range of services tailored to the unique needs of contractors. Here are some of the key ways they assist:

1. Tax Planning and Strategy

Effective tax planning is essential for contractors to minimize their tax liabilities. A CPA helps develop strategies that align with the contractor's business goals. This includes:

Identifying deductible expenses, such as materials and labor costs, which can significantly reduce taxable income.
Advising on the best business structure (LLC, S-Corp, etc.) for tax efficiency, which can have long-term financial implications.
Implementing retirement plans that offer tax benefits, allowing contractors to save for the future while reducing their current tax burden.

2. Accurate Record Keeping

Maintaining accurate financial records is vital for compliance. A CPA assists contractors in setting up efficient bookkeeping systems that track income and expenses. This includes:

Utilizing accounting software tailored for the construction industry, which can streamline processes and improve accuracy.
Regularly reviewing financial statements to ensure accuracy and compliance with accounting standards.
Providing guidance on what records to keep for tax purposes, ensuring that contractors are prepared in case of an audit.

3. Navigating Tax Regulations

Tax laws are constantly evolving, and staying updated is crucial for compliance. A CPA keeps contractors informed about changes in tax regulations that may affect their business. This includes:

Understanding local, state, and federal tax laws, which can vary significantly and impact how contractors operate.
Advising on sales tax obligations for construction services, which can be complex and often misunderstood.
Helping contractors navigate tax credits and incentives available for the construction industry, which can provide significant financial benefits.

4. Preparing and Filing Tax Returns

Filing tax returns can be a complex process, especially for contractors with multiple projects and revenue streams. A CPA ensures that tax returns are prepared accurately and filed on time. This involves:

Gathering necessary documentation and financial data, which can be time-consuming without proper organization.
Calculating tax liabilities and ensuring all deductions are claimed, maximizing potential refunds or minimizing payments.
Filing returns electronically to expedite processing, reducing the risk of errors and delays.

Benefits of Working with a CPA

Engaging a CPA offers numerous benefits for Orlando contractors. Here are some of the most significant advantages:

Expertise: CPAs possess specialized knowledge in tax law and accounting practices, ensuring contractors receive the best advice tailored to their specific needs.
Time Savings: By outsourcing tax-related tasks, contractors can focus on their core business activities, such as project management and client relations, rather than getting bogged down in paperwork.
Peace of Mind: Knowing that a professional is handling tax compliance reduces stress and allows contractors to concentrate on project delivery, ultimately leading to better business outcomes.

Choosing the Right CPA for Your Contracting Business

Not all CPAs are created equal, and finding the right one for your contracting business is essential. Here are some tips for selecting a CPA:

Industry Experience: Look for a CPA with experience in the construction industry, as they will understand the unique challenges you face and provide relevant advice.
Reputation: Seek recommendations from other contractors or check online reviews to gauge the CPA's reputation and reliability.
Communication: Choose a CPA who communicates clearly and is responsive to your needs, ensuring that you are always informed about your financial status and compliance requirements.

Conclusion

In the competitive landscape of Orlando's construction industry, staying compliant with tax laws is crucial for success. A CPA plays a vital role in helping contractors navigate the complexities of tax regulations, ensuring they remain compliant while maximizing their financial health. By leveraging the expertise of a CPA, contractors can focus on what they do best—building and delivering quality projects—while leaving the intricacies of tax compliance to the professionals. This partnership not only enhances operational efficiency but also contributes to the long-term sustainability and growth of the contracting business.

Retirement Planning with a CPA: Orlando Strategies for a Secure Future

Tue, 23 Sep 2025 15:00:12 GMT

Retirement planning is a crucial aspect of financial security, and enlisting the help of a Certified Public Accountant (CPA) can make a significant difference in your strategy. In Orlando, where the cost of living and lifestyle choices can vary greatly, having a tailored retirement plan is essential. This blog post will explore effective retirement planning strategies with a CPA in Orlando, ensuring you have a secure future.

Understanding the Role of a CPA in Retirement Planning

A CPA brings a wealth of knowledge and expertise to the table when it comes to retirement planning. Here are some key roles they play:

Tax Planning: CPAs help you understand the tax implications of your retirement savings and withdrawals, ensuring you minimize your tax burden. They can analyze your current tax situation and project how different retirement income sources will affect your tax bracket, allowing you to make informed decisions about when and how to withdraw funds.
Investment Advice: They can provide insights into investment options that align with your retirement goals and risk tolerance. A CPA can help you understand the benefits and risks associated with various investment vehicles, ensuring that your portfolio is well-positioned to grow over time.
Financial Projections: CPAs can create detailed financial projections to help you visualize your retirement income and expenses. This includes estimating future living costs, healthcare expenses, and potential income from Social Security or pensions, giving you a clearer picture of your financial landscape.
Estate Planning: They assist in planning for the distribution of your assets after your passing, ensuring your wishes are honored. A CPA can help you navigate the complexities of estate taxes and trusts, ensuring that your heirs receive the maximum benefit from your estate.

Key Strategies for Retirement Planning in Orlando

When planning for retirement in Orlando, consider the following strategies:

1. Assess Your Current Financial Situation

Before diving into retirement planning, it’s essential to evaluate your current financial status. This includes:

Calculating your net worth, which provides a snapshot of your financial health by subtracting liabilities from assets.
Reviewing your income sources, including salaries, investments, and any passive income streams.
Identifying your expenses, both fixed and variable, to understand your spending habits and areas where you can cut back.

Understanding where you stand financially will help you set realistic retirement goals and create a roadmap to achieve them.

2. Set Clear Retirement Goals

Establishing clear and achievable retirement goals is vital. Consider the following:

What age do you want to retire? This will influence how much you need to save and invest.
What lifestyle do you envision during retirement? Think about travel, hobbies, and living arrangements.
How much money will you need annually to maintain that lifestyle? This includes estimating costs for housing, healthcare, and leisure activities.

Having specific goals will guide your planning process and help your CPA create a tailored strategy that aligns with your vision for retirement.

3. Maximize Retirement Accounts

Utilizing retirement accounts effectively can significantly impact your savings. Here are some options:

401(k) Plans: If your employer offers a 401(k), contribute enough to get any matching contributions, as this is essentially free money that can boost your retirement savings.
IRAs: Consider both Traditional and Roth IRAs for tax advantages. A Traditional IRA allows for tax-deductible contributions, while a Roth IRA offers tax-free withdrawals in retirement.
Health Savings Accounts (HSAs): These can be beneficial for covering medical expenses in retirement, as contributions are tax-deductible, and withdrawals for qualified medical expenses are tax-free.

Your CPA can help you determine the best accounts to maximize your savings and ensure you are taking full advantage of available tax benefits.

4. Diversify Your Investments

Diversification is key to managing risk in your investment portfolio. Consider the following:

Invest in a mix of stocks, bonds, and real estate to spread risk and enhance potential returns.
Rebalance your portfolio regularly to maintain your desired asset allocation, adjusting for market fluctuations and changes in your risk tolerance.
Consider low-cost index funds or ETFs for broad market exposure, which can provide a cost-effective way to diversify your investments.

Your CPA can provide guidance on how to diversify effectively based on your risk tolerance and retirement timeline, ensuring that your investment strategy aligns with your long-term goals.

5. Plan for Healthcare Costs

Healthcare can be one of the most significant expenses in retirement. Here are some strategies to consider:

Research Medicare options and supplemental insurance plans to understand what coverage you will need and how much it will cost.
Estimate your healthcare costs based on your current health and family history, as well as potential long-term care needs.
Consider long-term care insurance to protect your assets and ensure you have the necessary funds to cover extended care if needed.

Discussing these options with your CPA can help you prepare for potential healthcare expenses and incorporate them into your overall retirement plan.

Utilizing Local Resources in Orlando

Orlando offers various resources to assist with retirement planning:

Financial Workshops: Attend local workshops to learn more about retirement planning, investment strategies, and financial management.
Networking Events: Connect with other retirees and financial professionals in the area to share experiences and gain insights.
Community Services: Explore services offered by local organizations that focus on retirement planning, including seminars and one-on-one consultations.

Engaging with these resources can enhance your understanding and provide additional support as you navigate your retirement planning journey.

Working with a CPA: What to Expect

When you decide to work with a CPA for your retirement planning, here’s what you can expect:

Initial Consultation: Discuss your financial situation, goals, and concerns in detail. This is an opportunity to establish a rapport and ensure that your CPA understands your unique needs.
Customized Plan: Your CPA will create a personalized retirement plan based on your needs, incorporating tax strategies, investment options, and projected expenses.
Ongoing Support: Expect regular check-ins to adjust your plan as needed and ensure you stay on track. Your CPA will help you navigate any changes in your financial situation or the economy that may impact your retirement.

This collaborative approach can provide peace of mind as you navigate your retirement journey, knowing that you have a knowledgeable partner by your side.

Conclusion

Retirement planning with a CPA in Orlando can set you on the path to a secure and fulfilling future. By understanding the role of a CPA, implementing key strategies, and utilizing local resources, you can create a comprehensive retirement plan tailored to your needs. Start planning today to ensure a comfortable retirement tomorrow. The earlier you begin, the more options you will have, and the better prepared you will be to enjoy the retirement lifestyle you desire.

The Value of Strategic Tax Planning for Orlando Entrepreneurs

Mon, 22 Sep 2025 15:00:12 GMT

In the vibrant city of Orlando, where entrepreneurship thrives, understanding the intricacies of tax planning can be a game-changer for business owners. Strategic tax planning is not just about filing returns; it’s about leveraging the tax code to maximize profits and minimize liabilities. For Orlando entrepreneurs, this means being proactive rather than reactive, ensuring that every financial decision aligns with their long-term business goals. Let’s explore the value of strategic tax planning and how it can significantly impact your entrepreneurial journey.

Understanding Strategic Tax Planning

Strategic tax planning involves analyzing your financial situation to develop a comprehensive plan that minimizes tax liabilities while maximizing financial opportunities. This process requires a deep understanding of tax laws, regulations, and potential deductions available to businesses. Here are some key components:

Tax Compliance: Ensuring that your business adheres to all tax regulations to avoid penalties. This includes timely filing of returns and accurate reporting of income and expenses.
Tax Deductions: Identifying all possible deductions that can reduce taxable income. This can include operational costs, employee salaries, and other business-related expenses.
Tax Credits: Taking advantage of available tax credits that can directly reduce tax owed. These credits can significantly lower your tax bill and improve cash flow.
Entity Structure: Choosing the right business structure (LLC, S-Corp, etc.) to optimize tax benefits. The structure you choose can affect your tax rates and liability.

The Benefits of Strategic Tax Planning

Implementing a strategic tax plan offers numerous benefits for Orlando entrepreneurs:

Increased Cash Flow: By minimizing tax liabilities, businesses can retain more earnings, allowing for reinvestment and growth. This can be crucial for startups and small businesses looking to expand.
Enhanced Financial Forecasting: A well-structured tax plan provides clarity on future tax obligations, aiding in better financial planning. This foresight can help in budgeting and resource allocation.
Risk Management: Proactive tax planning helps identify potential tax risks and mitigates them before they become issues. This can prevent costly surprises during tax season.
Improved Business Valuation: A business with a solid tax strategy is often more attractive to investors and buyers. This can enhance your ability to secure funding or sell your business at a favorable price.

Key Strategies for Effective Tax Planning

To maximize the benefits of tax planning, Orlando entrepreneurs should consider the following strategies:

1. Keep Accurate Records

Maintaining detailed and accurate financial records is crucial. This includes:

Tracking all income and expenses meticulously to ensure nothing is overlooked.
Organizing receipts and invoices systematically to facilitate easy access during tax preparation.
Utilizing accounting software for real-time financial tracking, which can streamline the process and reduce errors.

2. Understand Deductions and Credits

Familiarize yourself with the various deductions and credits available to your business. Some common deductions include:

Business expenses such as supplies, utilities, and travel costs.
Home office deductions for remote entrepreneurs, which can significantly reduce taxable income.
Depreciation on business assets, allowing you to recover costs over time.

3. Choose the Right Business Structure

The structure of your business can significantly impact your tax obligations. Consider the following:

LLCs offer flexibility and protection, allowing for pass-through taxation.
S-Corps can help reduce self-employment taxes, providing potential savings for business owners.
Partnerships may provide unique tax benefits, especially in terms of profit sharing and loss allocation.

4. Plan for Retirement

Investing in retirement plans not only secures your future but also provides tax advantages. Options include:

SEP IRAs for self-employed individuals, allowing for higher contribution limits.
401(k) plans for larger businesses, which can include employee contributions and matching.
Roth IRAs for tax-free withdrawals in retirement, providing flexibility in retirement income planning.

Common Mistakes to Avoid

Even with a strategic plan, entrepreneurs can make mistakes that lead to unnecessary tax liabilities. Here are some common pitfalls to avoid:

Neglecting Tax Deadlines: Missing deadlines can result in penalties and interest, which can add up quickly and impact cash flow.
Overlooking Deductions: Failing to claim all eligible deductions can lead to higher tax bills, reducing the funds available for business growth.
Not Consulting Professionals: Attempting to navigate complex tax laws without expert advice can be risky and may result in costly errors.

When to Seek Professional Help

While many entrepreneurs can manage basic tax planning, there are times when professional assistance is invaluable:

When starting a new business and choosing an entity structure, as this decision can have long-term tax implications.
During significant financial changes, such as mergers or acquisitions, where tax consequences can be complex.
When facing complex tax situations or audits, where expert guidance can help navigate the process and ensure compliance.

Conclusion

For Orlando entrepreneurs, strategic tax planning is not just a financial obligation; it’s a vital component of business success. By understanding the value of tax planning and implementing effective strategies, business owners can enhance their financial health, reduce liabilities, and position themselves for long-term growth. Remember, the key to successful tax planning lies in being proactive, informed, and prepared. Embrace the opportunities that strategic tax planning offers, and watch your business thrive in the competitive Orlando market. By taking the time to develop a robust tax strategy, you can ensure that your business not only survives but flourishes in the dynamic landscape of entrepreneurship.

How CPAs in Orlando Assist Startups with Incorporation and Compliance

Fri, 19 Sep 2025 15:00:09 GMT

Starting a new business is an exciting venture, but it comes with its own set of challenges, especially when it comes to legal and financial compliance. For startups in Orlando, navigating the complexities of incorporation and compliance can be daunting. This is where Certified Public Accountants (CPAs) play a crucial role. They not only help in the incorporation process but also ensure that startups remain compliant with local, state, and federal regulations. In this blog post, we will explore how CPAs in Orlando assist startups with incorporation and compliance, providing valuable insights for entrepreneurs looking to establish their businesses successfully.

The Role of CPAs in Startup Incorporation

Incorporation is a significant step for any startup, as it establishes the business as a separate legal entity. This process can be complex, and having a CPA by your side can make it much smoother. Here are some key ways CPAs assist with incorporation:

Choosing the Right Business Structure: CPAs help entrepreneurs decide on the most suitable business structure, whether it be a sole proprietorship, partnership, LLC, or corporation. Each structure has its own legal and tax implications, and a CPA can provide insights tailored to the startup's goals. Understanding the nuances of each structure can save entrepreneurs from costly mistakes down the line.
Filing Necessary Documents: The incorporation process requires various documents to be filed with the state. CPAs ensure that all necessary paperwork is completed accurately and submitted on time, reducing the risk of delays or rejections. This attention to detail is crucial, as any errors can lead to significant setbacks.
Obtaining an EIN: A Federal Employer Identification Number (EIN) is essential for tax purposes. CPAs assist startups in applying for an EIN, ensuring compliance with IRS regulations. This number is vital for opening business bank accounts and hiring employees.
Setting Up Financial Systems: Once incorporated, startups need robust financial systems in place. CPAs can help set up accounting software, establish bookkeeping practices, and create financial reports that are essential for tracking the business's performance. A solid financial foundation is key to making informed business decisions.

Understanding Compliance Requirements

Compliance is an ongoing responsibility for any business. Startups must adhere to various regulations to avoid penalties and legal issues. Here’s how CPAs in Orlando help startups stay compliant:

State and Local Regulations: CPAs are well-versed in the specific regulations that apply to businesses in Orlando. They help startups understand and comply with local business licenses, permits, and zoning laws. This local expertise can be invaluable in avoiding fines and ensuring smooth operations.
Tax Compliance: Navigating tax obligations can be overwhelming for new business owners. CPAs ensure that startups are aware of their tax responsibilities, including sales tax, income tax, and payroll tax, and help them file returns accurately and on time. This proactive approach can prevent costly penalties and interest charges.
Employment Laws: As startups grow, they may hire employees. CPAs provide guidance on employment laws, including wage and hour laws, employee classification, and benefits compliance. Understanding these laws is crucial for maintaining a positive workplace and avoiding legal disputes.
Ongoing Reporting Requirements: Many businesses are required to submit periodic reports to state and federal agencies. CPAs help startups stay on top of these requirements, ensuring that all necessary filings are completed promptly. This ongoing support is essential for maintaining good standing with regulatory bodies.

Financial Planning and Forecasting

Incorporation and compliance are just the beginning. Startups also need to focus on financial planning and forecasting to ensure long-term success. CPAs play a vital role in this area as well:

Budgeting: CPAs assist startups in creating realistic budgets that align with their business goals. This helps entrepreneurs manage their finances effectively and allocate resources wisely. A well-structured budget can serve as a roadmap for growth and profitability.
Cash Flow Management: Understanding cash flow is critical for any startup. CPAs provide insights into cash flow management, helping businesses maintain sufficient liquidity to meet their obligations. Effective cash flow management can prevent financial crises and ensure operational stability.
Financial Projections: CPAs can help startups develop financial projections based on market research and industry trends. These projections are essential for attracting investors and securing funding. A solid financial forecast can instill confidence in potential stakeholders.
Performance Analysis: Regular financial analysis is crucial for identifying areas of improvement. CPAs provide detailed reports that help startups assess their financial health and make informed decisions. This analytical approach can lead to better strategic planning and resource allocation.

Tax Strategies for Startups

Tax planning is a critical aspect of running a successful startup. CPAs in Orlando help entrepreneurs develop effective tax strategies that minimize liabilities and maximize deductions:

Identifying Deductions: Startups often overlook potential tax deductions. CPAs help identify eligible deductions, such as startup costs, business expenses, and home office deductions, ensuring that entrepreneurs take full advantage of available tax benefits. This can significantly reduce the overall tax burden.
Tax Credits: There are various tax credits available for startups, including those for research and development. CPAs can help businesses navigate these opportunities and apply for credits that can significantly reduce tax liabilities. Understanding and utilizing these credits can provide a financial boost to new ventures.
Entity Structure and Tax Implications: The choice of business structure can have significant tax implications. CPAs guide startups in selecting the right structure to optimize tax outcomes. This strategic decision can lead to substantial savings over time.
Year-End Tax Planning: As the year comes to a close, CPAs assist startups in year-end tax planning, ensuring that they are prepared for tax season and can take advantage of any last-minute deductions. This proactive approach can lead to better financial outcomes and reduced stress during tax season.

Building a Strong Financial Foundation

Establishing a strong financial foundation is essential for the growth and sustainability of any startup. CPAs provide valuable support in this area:

Establishing Credit: CPAs can help startups build business credit, which is crucial for securing loans and favorable financing terms in the future. A strong credit profile can open doors to new opportunities and partnerships.
Investment Strategies: As startups grow, they may seek investment opportunities. CPAs can provide insights into potential investors and help prepare financial statements that attract funding. This guidance can be instrumental in securing the necessary capital for expansion.
Exit Strategies: Planning for the future is essential. CPAs assist startups in developing exit strategies, whether through selling the business, merging, or going public. Having a clear exit strategy can enhance the overall value of the business.
Continuous Support: The relationship between a startup and its CPA should be ongoing. Regular check-ins and updates ensure that the business remains compliant and financially healthy. This continuous support fosters a collaborative environment for growth and success.

Conclusion

Incorporation and compliance are critical components of launching a successful startup in Orlando. CPAs provide invaluable assistance throughout this process, from choosing the right business structure to ensuring ongoing compliance with regulations. By leveraging the expertise of CPAs, entrepreneurs can focus on what they do best—growing their businesses. For startups in Orlando, partnering with a CPA is not just a smart move; it’s a necessary step toward achieving long-term success. With the right CPA by their side, entrepreneurs can navigate the complexities of the business landscape with confidence, paving the way for a prosperous future.

The Benefits of Having a CPA Handle IRS Correspondence for You

Thu, 18 Sep 2025 15:00:06 GMT

Dealing with the IRS can be a daunting task for many individuals and businesses. The complexities of tax laws and regulations can lead to confusion and stress, especially when it comes to correspondence with the IRS. This is where a Certified Public Accountant (CPA) can make a significant difference. Having a CPA handle IRS correspondence for you not only alleviates stress but also ensures that your tax matters are managed professionally and efficiently. In this post, we will explore the numerous benefits of entrusting your IRS communications to a CPA.

Expertise in Tax Regulations

One of the primary advantages of hiring a CPA is their extensive knowledge of tax regulations. CPAs undergo rigorous training and must pass a comprehensive exam to earn their certification. This expertise allows them to:

Understand the nuances of tax laws and how they apply to your specific situation.
Stay updated on any changes in tax legislation that may affect your correspondence.
Interpret IRS notices and letters accurately, ensuring you respond appropriately.

Moreover, CPAs are often required to complete continuing education courses to maintain their certification, which means they are always informed about the latest developments in tax law. This ongoing education equips them with the tools necessary to navigate the complexities of the tax system effectively. Their ability to interpret intricate tax codes can save you from potential pitfalls and ensure compliance with IRS regulations.

Effective Communication with the IRS

Communicating with the IRS can be intimidating, especially if you are unsure of the correct procedures. A CPA can act as your representative, handling all communications on your behalf. This includes:

Drafting responses to IRS inquiries.
Negotiating payment plans or settlements if necessary.
Ensuring that all correspondence is timely and compliant with IRS requirements.

By having a CPA manage these communications, you can rest assured that your responses will be professional and well-crafted. They understand the language of the IRS and can articulate your position clearly, which can significantly improve the chances of a favorable outcome. Additionally, a CPA can help you prepare for any potential follow-up questions or requests for additional information from the IRS, ensuring that you are fully prepared for any situation that may arise.

Reducing Stress and Anxiety

Tax season can be a stressful time for many. The thought of receiving a notice from the IRS can cause anxiety. By having a CPA manage your IRS correspondence, you can:

Focus on your personal or business responsibilities without the added stress of tax issues.
Feel confident that a professional is handling your case.
Reduce the fear of making mistakes that could lead to penalties or further complications.

Knowing that a CPA is in your corner can provide peace of mind. They can help demystify the tax process, making it less overwhelming. This reduction in stress can lead to better decision-making and a more positive outlook on your financial situation. Furthermore, a CPA can help you develop a proactive approach to tax planning, which can alleviate future anxiety related to tax obligations.

Strategic Tax Planning

CPAs are not just tax preparers; they are also strategic advisors. When handling IRS correspondence, a CPA can provide insights that help you:

Plan for future tax obligations and avoid surprises.
Identify potential deductions or credits that may apply to your situation.
Implement strategies to minimize your tax liability moving forward.

Through careful analysis of your financial situation, a CPA can help you create a comprehensive tax strategy that aligns with your long-term goals. This strategic planning can lead to significant savings over time, as they can identify opportunities that you may not be aware of. Additionally, a CPA can help you adjust your financial strategies as your circumstances change, ensuring that you remain on track to meet your objectives.

Representation in Case of Audits

In the unfortunate event of an audit, having a CPA by your side can be invaluable. They can:

Represent you during the audit process, ensuring your rights are protected.
Prepare the necessary documentation and evidence to support your case.
Help negotiate with the IRS to reach a favorable outcome.

Audits can be intimidating, but a CPA can help demystify the process. They understand what auditors are looking for and can help you gather the necessary documentation to support your claims. Furthermore, having a CPA represent you can alleviate the pressure of dealing with the IRS directly, allowing you to focus on your daily responsibilities while they handle the complexities of the audit process.

Time and Cost Efficiency

While hiring a CPA involves a cost, it can save you time and money in the long run. Consider the following:

CPAs can often resolve issues more quickly than individuals who are unfamiliar with IRS processes.
They can help you avoid costly mistakes that could lead to penalties or additional taxes owed.
By managing your correspondence, they free up your time to focus on other important areas of your life or business.

Investing in a CPA can be a wise financial decision. The time saved by not having to navigate the complexities of tax law on your own can be redirected toward growing your business or enjoying personal pursuits. Additionally, the potential savings from avoiding penalties and maximizing deductions can far outweigh the cost of hiring a CPA.

Building a Long-Term Relationship

Establishing a relationship with a CPA can provide ongoing benefits beyond just handling IRS correspondence. A CPA can:

Get to know your financial situation and goals, allowing for personalized advice.
Provide year-round support, not just during tax season.
Help you navigate complex financial decisions as they arise.

Having a trusted CPA as a long-term partner can lead to better financial outcomes. They can help you stay organized throughout the year, ensuring that you are prepared for tax season when it arrives. This ongoing relationship allows for continuous monitoring of your financial health, enabling you to make informed decisions that align with your goals.

Conclusion

In summary, having a CPA handle IRS correspondence for you offers numerous benefits, from expert knowledge of tax regulations to effective communication and stress reduction. By entrusting your tax matters to a professional, you can ensure that your correspondence is managed efficiently and accurately, allowing you to focus on what truly matters in your life or business. If you find yourself facing IRS communications, consider reaching out to a CPA to help you navigate the complexities of tax law with confidence. Their expertise can provide you with peace of mind and a clearer path toward achieving your financial goals.

Common Tax Mistakes Orlando Residents Make (and How a CPA Prevents Them)

Wed, 17 Sep 2025 15:00:08 GMT

Tax season can be a stressful time for many Orlando residents, often leading to common mistakes that can cost them money or create unnecessary headaches. Understanding these pitfalls is crucial for ensuring a smooth filing process. Fortunately, a Certified Public Accountant (CPA) can help navigate these challenges, providing expertise and guidance to avoid costly errors. In this post, we’ll explore the most common tax mistakes made by Orlando residents and how a CPA can help prevent them.

1. Failing to Keep Accurate Records

One of the most significant mistakes taxpayers make is not maintaining accurate records throughout the year. This can lead to missed deductions and credits, ultimately increasing tax liability. Keeping organized records is essential for a successful tax filing experience. Here are some tips to keep your records organized:

Use accounting software to track income and expenses, which can simplify the process and provide a clear overview of your financial situation.
Keep receipts for all deductible expenses, as these documents serve as proof of your expenditures and can be crucial during an audit.
Organize documents by category (e.g., medical, charitable donations) to make it easier to locate specific information when needed.

A CPA can assist in setting up an effective record-keeping system, ensuring that you have all necessary documentation ready for tax season. They can also provide advice on what records to keep and for how long, helping you stay compliant with IRS regulations.

2. Ignoring Tax Deductions and Credits

Many Orlando residents overlook valuable tax deductions and credits that could significantly reduce their tax burden. Commonly missed deductions include:

State and local taxes paid, which can be deducted from your federal taxable income.
Mortgage interest, which is often one of the largest deductions for homeowners.
Charitable contributions, which can provide both a sense of fulfillment and a tax break.
Medical expenses exceeding a certain percentage of income, which can be a significant deduction for those with high medical costs.

A CPA is well-versed in current tax laws and can help identify all eligible deductions and credits, maximizing your refund or minimizing your tax bill. They can also keep you informed about any changes in tax legislation that may affect your eligibility for certain deductions.

3. Misclassifying Income

Another frequent mistake is misclassifying income, especially for freelancers and self-employed individuals. It’s essential to accurately report all income sources, including:

W-2 income from employers, which is typically straightforward.
1099 income from freelance work, which can vary significantly from year to year.
Investment income, which may include dividends, interest, and capital gains.

Misclassification can lead to penalties and interest charges. A CPA can ensure that all income is reported correctly, helping you avoid potential issues with the IRS. They can also provide guidance on how to properly categorize different types of income and expenses, ensuring compliance with tax regulations.

4. Not Understanding Tax Brackets

Many taxpayers fail to understand how tax brackets work, which can lead to overpaying or underpaying taxes. Here’s a quick overview:

Tax brackets determine the rate at which income is taxed, and understanding these brackets is crucial for effective tax planning.
Income is taxed at different rates depending on the bracket it falls into, meaning that not all income is taxed at the same rate.
Understanding your bracket can help with tax planning strategies, such as timing income or deductions to your advantage.

A CPA can provide insights into your tax bracket and suggest strategies to minimize your tax liability. They can help you understand how to manage your income and deductions to stay within a lower tax bracket, ultimately saving you money.

5. Missing Deadlines

Missing tax deadlines can result in penalties and interest charges, which can add up quickly. Common deadlines include:

April 15 for individual tax returns, which is the most well-known deadline.
Estimated tax payments throughout the year, which are required for self-employed individuals and those with significant income not subject to withholding.
Filing extensions, which can provide additional time but must be filed before the original deadline.

A CPA can help you stay on track with deadlines, ensuring that you file on time and avoid unnecessary penalties. They can also assist in setting reminders for important dates and help you prepare your documents well in advance of the deadlines.

6. Not Planning for Tax Implications of Life Changes

Life changes such as marriage, divorce, or having children can significantly impact your tax situation. Failing to plan for these changes can lead to mistakes. Consider the following:

Married couples may choose to file jointly or separately, affecting their tax rates and potential deductions.
Having children can qualify you for additional credits, such as the Child Tax Credit, which can provide substantial savings.
Divorce may change your filing status and deductions, and it’s essential to understand how these changes affect your tax obligations.

A CPA can help you navigate these changes, ensuring that you take advantage of any tax benefits available to you. They can also provide guidance on how to adjust your withholding and estimated payments based on your new circumstances.

7. Overlooking State-Specific Tax Laws

Florida has unique tax laws that differ from other states, including no state income tax. However, residents must still be aware of:

Sales tax on goods and services, which can vary by county and municipality.
Property tax implications, which can affect homeowners significantly.
Local taxes that may apply, such as tourist development taxes or local business taxes.

A CPA familiar with Florida tax laws can help you understand your obligations and ensure compliance, preventing costly mistakes. They can also provide insights into how local tax laws may impact your overall tax strategy.

8. Failing to Plan for Retirement Contributions

Retirement contributions can provide significant tax benefits, yet many residents fail to take full advantage of them. Consider these options:

Contributing to a 401(k) or IRA can reduce taxable income, allowing you to save for retirement while lowering your current tax bill.
Catch-up contributions for those over 50 can maximize savings, providing an opportunity to boost retirement funds as you approach retirement age.
Understanding the tax implications of withdrawals is crucial, as early withdrawals can result in penalties and tax liabilities.

A CPA can help you develop a retirement strategy that aligns with your financial goals while maximizing tax benefits. They can also provide guidance on the best retirement accounts to utilize based on your income and tax situation.

9. Not Seeking Professional Help

Many individuals attempt to navigate their taxes without professional assistance, leading to mistakes that could have been avoided. Here’s why hiring a CPA is beneficial:

Expertise in tax laws and regulations, which can be complex and ever-changing.
Ability to identify deductions and credits you may miss, ensuring you take full advantage of available tax benefits.
Support in case of an audit or tax dispute, providing peace of mind and professional representation.

Investing in a CPA can save you time, stress, and money in the long run. They can also help you develop a long-term tax strategy that aligns with your financial goals, ensuring you are prepared for future tax seasons.

10. Failing to Review Tax Returns

Finally, many taxpayers neglect to review their tax returns before submission. This can lead to simple errors that could have been easily corrected. Here are some tips for reviewing:

Double-check all personal information for accuracy, including names, Social Security numbers, and addresses.
Ensure all income is reported correctly, as discrepancies can trigger audits.
Review deductions and credits claimed to confirm that you are eligible for them and that they are calculated correctly.

A CPA can provide a thorough review of your tax return, ensuring accuracy and compliance with tax laws. They can also help you understand any changes in your return from previous years and how they may affect your overall tax situation.
In conclusion, avoiding common tax mistakes is essential for Orlando residents looking to maximize their tax benefits and minimize liabilities. By partnering with a CPA, you can navigate the complexities of tax season with confidence, ensuring that you stay compliant and make the most of your financial situation. Don’t let these common pitfalls derail your tax filing—seek professional help and enjoy peace of mind this tax season. With the right guidance and preparation, you can turn tax season from a source of stress into an opportunity for financial growth and stability.

How Orlando CPAs Help Navigate IRS Audits Stress-Free

Tue, 16 Sep 2025 15:00:14 GMT

Facing an IRS audit can be a daunting experience for any taxpayer. The thought of having to provide extensive documentation and answer probing questions can lead to significant stress and anxiety. However, Orlando CPAs are equipped with the expertise and knowledge to help you navigate this complex process with ease. In this blog post, we will explore how these professionals can assist you in managing IRS audits, ensuring a stress-free experience.

Understanding IRS Audits

Before diving into how Orlando CPAs can help, it’s essential to understand what an IRS audit entails. An audit is a review of your financial information to ensure that your tax returns are accurate and compliant with tax laws. Here are some key points to consider:

Audits can be triggered by various factors, including discrepancies in reported income, random selection, or specific deductions that raise red flags.
There are different types of audits, including correspondence audits, office audits, and field audits, each varying in complexity and requirements.
Receiving an audit notice does not necessarily mean you did something wrong; it’s simply a request for more information.

How Orlando CPAs Can Assist You

Orlando CPAs play a crucial role in helping taxpayers navigate the audit process. Here are several ways they can provide support:

1. Expert Guidance

One of the primary benefits of hiring an Orlando CPA is their expertise in tax laws and regulations. They can:

Explain the audit process in detail, helping you understand what to expect and how to prepare.
Provide insights into common audit triggers and how to avoid them in the future, ensuring you are better prepared for any potential issues.
Assist in gathering the necessary documentation to support your case, ensuring that you have everything you need to present a strong defense.

2. Representation

Having a CPA represent you during the audit can significantly reduce your stress levels. They can:

Communicate directly with the IRS on your behalf, ensuring that all correspondence is handled professionally and efficiently.
Negotiate with the IRS if discrepancies arise, advocating for your best interests and working to resolve any issues that may come up.
Help you understand your rights as a taxpayer throughout the audit process, ensuring that you are aware of what you are entitled to and how to protect yourself.

3. Documentation Preparation

One of the most time-consuming aspects of an audit is preparing the necessary documentation. Orlando CPAs can streamline this process by:

Organizing your financial records, making it easier to present your case and ensuring that everything is in order.
Ensuring that all required documents are complete and accurate, reducing the likelihood of further inquiries from the IRS.
Providing templates and checklists to help you stay organized, making the entire process more manageable and less overwhelming.

4. Stress Reduction

The emotional toll of an IRS audit can be overwhelming. Orlando CPAs can help alleviate this stress by:

Offering reassurance and support throughout the process, helping you feel more at ease as you navigate the complexities of the audit.
Providing a clear plan of action, so you know what to expect at each stage and can prepare accordingly.
Helping you maintain a positive mindset, focusing on resolution rather than anxiety, which can significantly improve your overall experience.

Choosing the Right Orlando CPA

Not all CPAs are created equal, and selecting the right one for your needs is crucial. Here are some tips for finding the best Orlando CPA to assist with your IRS audit:

Look for CPAs with experience in handling IRS audits specifically, as their expertise will be invaluable during this process.
Check their credentials and ensure they are licensed and in good standing, which is essential for your peace of mind.
Read reviews and testimonials from previous clients to gauge their effectiveness and reliability in handling audits.
Schedule a consultation to discuss your situation and assess their approach, ensuring that you feel comfortable and confident in their abilities.

Common Myths About IRS Audits

There are many misconceptions surrounding IRS audits that can add to the stress. Here are a few common myths debunked:

Myth: Only dishonest taxpayers get audited.
Fact: Audits can happen to anyone, regardless of their honesty or integrity.
Myth: You must attend the audit in person.
Fact: Many audits can be conducted via mail, especially correspondence audits, which can save you time and stress.
Myth: An audit means you will owe money.
Fact: Many audits result in no changes to your tax liability, and some may even lead to refunds.

Conclusion

In summary, Orlando CPAs are invaluable allies when navigating the complexities of IRS audits. Their expertise, representation, and support can transform a potentially stressful experience into a manageable one. By understanding the audit process and enlisting the help of a qualified CPA, you can approach your audit with confidence and peace of mind.
For more information on how Orlando CPAs can assist you, feel free to visit our website or contact us for a consultation. We are here to help you every step of the way, ensuring that you have the support you need to successfully navigate your IRS audit.

Choosing the Right CPA Firm in Orlando: What to Look For

Mon, 15 Sep 2025 15:00:10 GMT

Choosing the right CPA firm in Orlando can be a daunting task, especially with so many options available. Whether you are a business owner seeking financial guidance or an individual needing tax assistance, finding a firm that aligns with your needs is crucial. This guide will help you navigate the selection process, ensuring you make an informed decision that will benefit you in the long run.

Understanding Your Needs

Before you start searching for a CPA firm, it’s essential to understand your specific needs. Consider the following questions:

What services do you require? (e.g., tax preparation, auditing, consulting)
What is your budget for accounting services?
Do you prefer a local firm or are you open to remote services?

By clarifying your needs, you can narrow down your options and focus on firms that specialize in the services you require. This step is crucial as it sets the foundation for your search and helps you articulate your expectations clearly to potential firms.

Researching CPA Firms in Orlando

Once you have a clear understanding of your needs, it’s time to start researching potential CPA firms. Here are some effective strategies:

Online Reviews: Check platforms like Google, Yelp, and LinkedIn for client reviews and ratings. These reviews can provide insights into the experiences of other clients and highlight the strengths and weaknesses of various firms.
Referrals: Ask friends, family, or business associates for recommendations. Personal referrals can often lead you to trustworthy firms that have a proven track record.
Professional Associations: Look for firms that are members of professional organizations like the American Institute of CPAs (AICPA). Membership in such organizations often indicates a commitment to ethical standards and ongoing professional development.

Gathering information from multiple sources will give you a well-rounded view of each firm’s reputation and expertise. This research phase is vital as it allows you to compile a list of potential candidates that meet your criteria.

Evaluating Qualifications and Experience

When considering a CPA firm, it’s vital to evaluate their qualifications and experience. Here are some key factors to consider:

Certifications: Ensure the firm’s CPAs are licensed and have the necessary certifications. This includes checking for CPA licenses and any additional credentials that may be relevant to your needs.
Experience: Look for firms with a proven track record in your industry or with similar financial needs. Experience can significantly impact the quality of service you receive.
Specializations: Some firms may specialize in specific areas, such as small business accounting, estate planning, or international tax. Identifying a firm with relevant expertise can enhance the quality of the services provided.

Understanding the qualifications of the CPA firm will help you gauge their ability to meet your needs effectively. This evaluation process is essential to ensure that you are entrusting your financial matters to capable hands.

Assessing Communication and Availability

Effective communication is crucial when working with a CPA firm. Consider the following:

Responsiveness: How quickly do they respond to inquiries? A firm that is prompt in communication is likely to be attentive to your needs.
Accessibility: Are they available for meetings and consultations when you need them? Flexibility in scheduling can be a significant advantage.
Communication Style: Do they explain complex financial concepts in a way that you can understand? A good CPA should be able to break down complicated information into digestible parts.

Establishing a good communication channel from the start can lead to a more productive working relationship. Clear communication can prevent misunderstandings and ensure that both parties are aligned in their goals.

Understanding Fees and Pricing Structures

Before making a final decision, it’s essential to understand the fee structure of the CPA firm. Here are some common pricing models:

Hourly Rates: Many firms charge by the hour for their services. This model can be beneficial for clients who need occasional assistance.
Flat Fees: Some services may be offered at a flat rate, which can provide more predictability in budgeting. This is often the case for standard tax preparation services.
Retainer Fees: For ongoing services, a retainer fee may be required. This arrangement can be advantageous for businesses that need regular financial oversight.

Make sure to discuss fees upfront to avoid any surprises later on. Understanding the cost structure will help you budget effectively and ensure that you are getting value for your investment.

Scheduling Consultations

Once you have narrowed down your options, schedule consultations with your top choices. This is an excellent opportunity to:

Ask questions about their services and experience. Prepare a list of questions to ensure you cover all your concerns.
Discuss your specific needs and see how they propose to meet them. This dialogue can reveal how well the firm understands your situation.
Get a feel for their office environment and staff. A welcoming atmosphere can indicate a positive company culture.

Consultations can provide valuable insights and help you determine which firm feels like the best fit for you. This step is crucial as it allows you to assess not only the firm’s capabilities but also their approach to client relationships.

Trust Your Instincts

After conducting thorough research and consultations, trust your instincts when making a decision. Consider the following:

Do you feel comfortable with the firm and its staff? Comfort is key to a successful partnership.
Do they seem genuinely interested in helping you achieve your financial goals? A firm that prioritizes your needs is likely to be more effective.
Are they transparent about their services and fees? Transparency is a hallmark of a reputable firm.

Your comfort level and trust in the firm are essential for a successful partnership. Trusting your instincts can often lead you to the right choice, as personal rapport can significantly enhance the working relationship.

Final Thoughts

Choosing the right CPA firm in Orlando is a significant decision that can impact your financial future. By understanding your needs, researching potential firms, evaluating qualifications, and trusting your instincts, you can find a CPA firm that will support you effectively. Take your time in this process, and don’t hesitate to ask questions along the way. The right CPA firm can be a valuable partner in your financial journey, providing guidance and support that can help you achieve your financial goals and navigate the complexities of tax regulations and financial planning.

When Should You Switch from a Bookkeeper to a CPA in Orlando?

Fri, 12 Sep 2025 15:00:01 GMT

Deciding when to switch from a bookkeeper to a Certified Public Accountant (CPA) is a significant decision for any business owner in Orlando. As your business grows, so do your financial needs. Understanding the right time to make this transition can help ensure your financial health and compliance with regulations. In this post, we’ll explore the key indicators that suggest it might be time to make the switch, the benefits of working with a CPA, and how to find the right CPA for your business.

Understanding the Roles: Bookkeeper vs. CPA

Before diving into when to switch, it’s essential to understand the differences between a bookkeeper and a CPA. While both play crucial roles in managing your business finances, their functions and expertise vary significantly. A bookkeeper primarily handles day-to-day financial transactions, including recording sales, purchases, receipts, and payments. They ensure that your financial records are accurate and up-to-date, allowing you to have a clear picture of your business's financial health on a daily basis. On the other hand, a CPA is a licensed professional who has passed the CPA exam and met additional state requirements. They offer a broader range of services, including tax planning, financial analysis, and strategic advice. CPAs can also represent you in front of the IRS, providing you with a level of expertise that goes beyond basic bookkeeping. This distinction is crucial as your business evolves and your financial needs become more complex.

Signs It’s Time to Switch to a CPA

Recognizing the right moment to transition from a bookkeeper to a CPA can be challenging. Here are some signs that indicate it might be time to make the switch:

Complex Financial Needs: If your business has grown and your financial situation has become more complex, a CPA can provide the expertise needed to navigate these complexities. This includes managing multiple revenue streams, handling various expenses, and understanding intricate financial regulations.
Tax Planning and Strategy: As your business grows, so do your tax obligations. A CPA can help you develop tax strategies that minimize your liabilities and ensure compliance with tax laws. They can also assist in identifying tax credits and deductions that you may not be aware of.
Financial Analysis and Forecasting: If you need detailed financial analysis or forecasting to make informed business decisions, a CPA can provide valuable insights and guidance. This can help you understand cash flow trends, profitability, and areas for improvement.
Audit Preparedness: If you anticipate an audit or have been selected for one, having a CPA on your side can be invaluable. They can help you prepare and represent you during the audit process, ensuring that you are compliant and minimizing potential penalties.
Business Growth and Expansion: If you’re planning to expand your business, a CPA can assist with financial planning, budgeting, and securing financing. They can help you create a solid financial foundation for your growth initiatives.

Benefits of Working with a CPA

Switching to a CPA offers numerous benefits that can significantly impact your business’s financial health:

Expertise and Knowledge: CPAs have extensive training and knowledge in accounting principles, tax laws, and financial regulations, ensuring your business remains compliant. Their expertise can help you avoid costly mistakes and navigate complex financial situations.
Strategic Financial Planning: A CPA can help you develop long-term financial strategies that align with your business goals, providing a roadmap for growth. This includes budgeting, forecasting, and investment planning.
Time Savings: By outsourcing your accounting needs to a CPA, you can focus on running your business while they handle the financial details. This allows you to dedicate more time to strategic initiatives and customer engagement.
Increased Accuracy: CPAs are trained to ensure accuracy in financial reporting, reducing the risk of errors that could lead to costly penalties. Their attention to detail can help maintain the integrity of your financial data.
Peace of Mind: Knowing that a qualified professional is managing your finances can provide peace of mind, allowing you to concentrate on other aspects of your business. This can lead to better decision-making and overall business performance.

How to Choose the Right CPA in Orlando

Finding the right CPA for your business is crucial. Here are some tips to help you make the best choice:

Check Qualifications: Ensure the CPA is licensed in Florida and has the necessary qualifications and experience in your industry. This can include certifications, specializations, and a solid track record of working with businesses similar to yours.
Ask for Referrals: Seek recommendations from other business owners or professionals in your network who have experience with CPAs. Personal referrals can provide valuable insights into a CPA's reliability and effectiveness.
Interview Potential CPAs: Schedule consultations with potential CPAs to discuss your needs and assess their expertise and communication style. This is an opportunity to gauge their understanding of your industry and their approach to client service.
Consider Specializations: Some CPAs specialize in specific industries or services. Choose one whose expertise aligns with your business needs, whether it’s tax planning, audit services, or financial consulting.
Evaluate Fees: Understand the fee structure and ensure it fits within your budget. Don’t hesitate to ask about any additional costs that may arise, such as fees for specific services or hourly rates for consultations.

Transitioning from a Bookkeeper to a CPA

Once you’ve decided to make the switch, here are some steps to ensure a smooth transition:

Communicate with Your Bookkeeper: Inform your bookkeeper about your decision and discuss how to transition your financial records. This ensures that there is no disruption in your financial management during the transition.
Gather Financial Records: Compile all necessary financial documents and records to provide to your new CPA. This includes bank statements, tax returns, and any other relevant financial information.
Set Clear Expectations: Discuss your financial goals and expectations with your CPA to ensure they understand your needs. This can help them tailor their services to better support your business objectives.
Establish a Communication Plan: Determine how often you will meet with your CPA and the best methods for communication. Regular check-ins can help keep you informed and engaged in your financial management.
Review Progress Regularly: Schedule regular check-ins to review your financial status and adjust strategies as needed. This ongoing collaboration can help you stay on track and make informed decisions.

Conclusion

Deciding when to switch from a bookkeeper to a CPA is a critical decision that can significantly impact your business’s financial health. By recognizing the signs that indicate it’s time to make the switch and understanding the benefits of working with a CPA, you can ensure your business is well-prepared for growth and success. Take the time to find the right CPA in Orlando who can meet your needs and help you navigate the complexities of your business finances. Making this transition thoughtfully can lead to improved financial management and a stronger foundation for your business's future.

Personal vs. Business Taxes: How Orlando CPAs Handle Both Efficiently

Thu, 11 Sep 2025 15:00:00 GMT

Understanding the intricacies of personal and business taxes can be daunting, especially for residents and business owners in Orlando. With the ever-changing tax laws and regulations, having a knowledgeable CPA by your side can make all the difference. In this post, we will explore how Orlando CPAs efficiently manage both personal and business taxes, ensuring compliance while maximizing savings.

Why Personal and Business Taxes Matter

Taxes are a crucial aspect of financial planning for both individuals and businesses. Here’s why understanding the difference is essential:

Compliance: Ensuring that you meet all tax obligations is vital to avoid penalties. Non-compliance can lead to hefty fines and legal issues that can disrupt your financial stability.
Financial Health: Proper tax management can significantly impact your overall financial situation. By understanding your tax liabilities, you can make informed decisions that enhance your financial well-being.
Strategic Planning: Understanding tax implications can help in making informed financial decisions. This knowledge allows individuals and businesses to plan for the future, invest wisely, and allocate resources effectively.

Key Differences Between Personal and Business Taxes

While both personal and business taxes are essential, they differ in several ways:

Tax Structure: Personal taxes are typically based on income, while business taxes can include various forms of taxation, such as corporate tax, sales tax, and payroll tax. Each type of tax has its own rules and regulations that must be adhered to.
Deductions: Business owners can take advantage of numerous deductions that are not available to individuals, such as operational expenses and depreciation. Understanding these deductions can lead to significant tax savings for businesses.
Filing Requirements: The filing process for businesses is often more complex, requiring additional forms and documentation. This complexity necessitates the expertise of a CPA to ensure accurate and timely submissions.

How Orlando CPAs Manage Personal Taxes

Orlando CPAs specialize in navigating the complexities of personal taxes. Here’s how they do it:

Tax Preparation: CPAs ensure that all personal tax returns are accurately prepared and filed on time. They stay updated on the latest tax laws to maximize your return.
Maximizing Deductions: They help identify eligible deductions and credits to minimize tax liability. This includes analyzing your financial situation to uncover potential savings.
Tax Planning: CPAs provide strategic advice on retirement accounts, investments, and other financial decisions to optimize tax outcomes. This proactive approach can lead to long-term financial benefits.

Efficient Management of Business Taxes

For business owners, Orlando CPAs offer tailored services to handle business taxes effectively:

Entity Selection: CPAs assist in choosing the right business structure (LLC, S-Corp, etc.) to optimize tax benefits. The right choice can significantly affect your tax obligations and personal liability.
Bookkeeping Services: Accurate bookkeeping is essential for tracking income and expenses, which directly impacts tax filings. CPAs can implement systems that streamline this process.
Compliance and Reporting: CPAs ensure that businesses comply with all local, state, and federal tax regulations. They help businesses avoid costly mistakes that can arise from non-compliance.

Common Tax Deductions for Individuals and Businesses

Understanding available deductions can lead to significant savings. Here are some common deductions:

For Individuals:

Mortgage interest
Medical expenses
Charitable contributions

For Businesses:

Business travel expenses
Office supplies and equipment
Employee wages and benefits

The Role of Technology in Tax Management

Modern CPAs in Orlando leverage technology to enhance tax management:

Tax Software: Advanced software helps streamline the filing process and reduce errors. This technology allows for more accurate calculations and quicker turnaround times.
Cloud Accounting: This allows for real-time financial tracking and easier collaboration between clients and CPAs. Cloud solutions provide accessibility and security for sensitive financial data.
Data Analytics: CPAs use analytics to identify trends and opportunities for tax savings. By analyzing financial data, they can provide insights that lead to better financial decisions.

Choosing the Right CPA in Orlando

Selecting a CPA is a critical decision. Here are some tips to find the right fit:

Experience: Look for CPAs with experience in both personal and business tax matters. Their expertise can provide valuable insights and strategies tailored to your needs.
Reputation: Check reviews and testimonials from other clients. A CPA with a strong reputation is likely to provide quality service and support.
Communication: Choose a CPA who communicates clearly and is responsive to your needs. Effective communication is key to a successful working relationship.

Conclusion

In summary, navigating personal and business taxes can be complex, but with the help of a skilled Orlando CPA, you can ensure compliance and maximize your tax savings. By understanding the differences between personal and business taxes, leveraging technology, and choosing the right CPA, you can take control of your financial future. Investing in professional tax services not only simplifies the tax process but also empowers you to make informed financial decisions that can lead to long-term success.

How a CPA in Orlando Helps Small Businesses Maximize Deductions

Wed, 10 Sep 2025 15:00:01 GMT

In the bustling business landscape of Orlando, small businesses often face the challenge of navigating complex tax regulations. A Certified Public Accountant (CPA) can be a game-changer, helping these businesses maximize their deductions and ultimately save money. Understanding the intricacies of tax laws and identifying eligible deductions can significantly impact a small business's bottom line. This post explores how a CPA in Orlando can assist small businesses in optimizing their tax strategies.

Understanding Tax Deductions

Tax deductions are expenses that can be subtracted from a business's total income to reduce the amount of taxable income. For small businesses, maximizing these deductions is crucial for financial health. Here are some common types of deductions that small business owners should be aware of:

Operating Expenses: These are the costs incurred in the day-to-day running of the business, such as rent, utilities, and office supplies. Keeping track of these expenses can lead to significant savings.
Employee Salaries: Wages paid to employees can be deducted, which helps in reducing taxable income. This deduction is particularly important for businesses with multiple employees.
Business Travel: Expenses related to travel for business purposes, including transportation, lodging, and meals, can be deducted. Proper documentation is essential to ensure these deductions are valid.
Marketing and Advertising: Costs associated with promoting the business, including online ads and print materials, can also be deducted. Investing in marketing can yield high returns, and the associated costs can help reduce tax liability.

The Role of a CPA in Identifying Deductions

A CPA brings expertise and knowledge that can help small businesses uncover deductions they might not be aware of. Here’s how they do it:

Comprehensive Tax Planning: A CPA conducts a thorough review of the business's financials to identify potential deductions. This proactive approach ensures that no deduction is overlooked.
Staying Updated on Tax Laws: Tax laws change frequently. A CPA keeps abreast of these changes to ensure businesses take advantage of new deductions. This knowledge can be crucial in maximizing tax savings.
Customized Strategies: Each business is unique. A CPA tailors strategies to fit the specific needs and circumstances of the business, ensuring that the tax plan aligns with overall business goals.

Common Deductions Small Businesses Overlook

Many small businesses miss out on valuable deductions simply because they are unaware of them. Here are some commonly overlooked deductions that can provide significant tax relief:

Home Office Deduction: If a business operates from home, a portion of home expenses can be deducted. This includes utilities, internet, and even a portion of mortgage interest.
Professional Development: Costs for training, workshops, and courses related to business improvement can be deducted. Investing in employee development can enhance productivity and morale.
Interest on Business Loans: Interest paid on loans taken for business purposes is deductible. This can help reduce the overall cost of financing.
Startup Costs: New businesses can deduct certain startup expenses, which can ease the financial burden. Understanding what qualifies as a startup cost is essential for new entrepreneurs.

How a CPA Streamlines the Deduction Process

Working with a CPA not only helps in identifying deductions but also streamlines the entire process. Here’s how:

Organized Record-Keeping: A CPA helps establish a system for maintaining accurate records, making it easier to track deductible expenses. Good record-keeping is vital for substantiating deductions during tax time.
Tax Preparation: They prepare and file tax returns, ensuring all eligible deductions are claimed. This reduces the risk of errors that could lead to audits or penalties.
Audit Support: In the event of an audit, a CPA can provide the necessary documentation and support to defend the deductions claimed. This peace of mind is invaluable for business owners.

Choosing the Right CPA in Orlando

Finding the right CPA is essential for small businesses looking to maximize deductions. Here are some tips for choosing a CPA that fits your business needs:

Experience with Small Businesses: Look for a CPA who specializes in working with small businesses in your industry. Their familiarity with specific challenges can be beneficial.
Reputation: Check reviews and testimonials to gauge the CPA's reliability and effectiveness. A good reputation often reflects a CPA's commitment to their clients.
Communication: Choose a CPA who communicates clearly and is willing to explain complex tax concepts. A good CPA should be approachable and ready to answer questions.
Fees: Understand the fee structure upfront to avoid any surprises later. Some CPAs charge hourly rates, while others may offer flat fees for specific services.

Conclusion: The Value of a CPA for Small Businesses

In conclusion, a CPA in Orlando can be an invaluable asset for small businesses aiming to maximize their tax deductions. By leveraging their expertise, small business owners can navigate the complexities of tax laws, uncover hidden deductions, and ultimately save money. Investing in a CPA not only simplifies the tax process but also contributes to the overall financial health of the business. For small business owners in Orlando, partnering with a knowledgeable CPA is a step towards financial success. By taking proactive measures and utilizing the resources available, small businesses can thrive in a competitive environment, ensuring they are well-prepared for tax season and beyond.

How a CPA Supports Nonprofit Organizations in Orlando with Compliance

Tue, 09 Sep 2025 15:15:15 GMT

In the vibrant city of Orlando, nonprofit organizations play a crucial role in addressing community needs and driving social change. These organizations are often at the forefront of tackling pressing social issues, from poverty alleviation to education and healthcare access. However, navigating the complex landscape of compliance can be a daunting task for these organizations. This is where Certified Public Accountants (CPAs) come into play, offering invaluable support to ensure that nonprofits adhere to regulations while focusing on their mission. In this blog post, we will explore how a CPA supports nonprofit organizations in Orlando with compliance, highlighting key areas where their expertise is essential.

The Importance of Compliance for Nonprofits

Compliance is not just a legal obligation for nonprofit organizations; it is fundamental to their credibility and sustainability. Nonprofits must adhere to various federal, state, and local regulations, including:

Tax-exempt status requirements
Financial reporting standards
Fundraising regulations
Employment laws

Failure to comply with these regulations can lead to severe consequences, including loss of tax-exempt status, fines, and damage to reputation. For instance, a nonprofit that fails to file its annual IRS Form 990 may face penalties and scrutiny from both the IRS and the public. Therefore, having a CPA who understands the intricacies of nonprofit compliance is essential for organizations in Orlando. A CPA not only helps in meeting these requirements but also provides guidance on best practices that can enhance the organization’s operational efficiency.

Key Areas Where CPAs Provide Support

CPAs offer a range of services that help nonprofit organizations maintain compliance. Here are some key areas where their expertise is particularly beneficial:

1. Financial Reporting and Auditing

Nonprofits are required to produce accurate financial statements that reflect their financial health. CPAs assist in:

Preparing financial statements in accordance with Generally Accepted Accounting Principles (GAAP)
Conducting audits to ensure transparency and accountability
Providing insights into financial performance and areas for improvement

These services not only help organizations comply with regulations but also build trust with donors and stakeholders. A well-prepared financial statement can serve as a powerful tool for fundraising, as it demonstrates the organization’s financial integrity and responsible management of resources. Furthermore, regular audits can uncover inefficiencies and areas for cost savings, ultimately enhancing the organization’s impact.

2. Tax Compliance

Maintaining tax-exempt status is critical for nonprofits. CPAs help organizations navigate the complexities of tax compliance by:

Filing the necessary IRS forms, such as Form 990
Advising on unrelated business income tax (UBIT)
Ensuring compliance with state and local tax regulations

By managing tax compliance, CPAs allow nonprofits to focus on their mission rather than getting bogged down in paperwork. They can also provide strategic advice on how to structure activities to minimize tax liabilities, ensuring that more resources are available for programmatic work. Additionally, CPAs can help organizations understand the implications of any changes in tax law that may affect their operations.

3. Grant Management

Many nonprofits rely on grants to fund their programs. CPAs support organizations in managing grants by:

Ensuring compliance with grant requirements
Tracking expenditures and reporting to funders
Preparing for audits related to grant funding

Effective grant management is essential for securing future funding and maintaining positive relationships with grantors. CPAs can assist in developing a robust system for tracking grant-related expenses, ensuring that funds are used in accordance with the grantor’s stipulations. This not only helps in maintaining compliance but also enhances the organization’s reputation as a reliable steward of funds.

4. Risk Management

Nonprofits face various risks, from financial mismanagement to compliance violations. CPAs help organizations mitigate these risks by:

Identifying potential compliance issues before they become problems
Implementing internal controls to safeguard assets
Providing training for staff on compliance-related topics

By proactively managing risks, CPAs help nonprofits protect their resources and reputation. For example, implementing strong internal controls can prevent fraud and misappropriation of funds, which are critical concerns for any organization. Additionally, training staff on compliance issues fosters a culture of accountability and awareness, ensuring that everyone in the organization understands their role in maintaining compliance.

Building a Strong Partnership

For nonprofits in Orlando, establishing a strong partnership with a CPA can significantly enhance their compliance efforts. Here are some tips for building this relationship:

Choose a CPA with Nonprofit Experience: Look for a CPA who specializes in nonprofit organizations and understands the unique challenges they face. A CPA with a background in nonprofit work will be more attuned to the specific regulations and best practices that apply to your organization.
Communicate Regularly: Maintain open lines of communication to discuss compliance issues, financial performance, and strategic goals. Regular check-ins can help identify potential issues early and ensure that everyone is on the same page.
Involve the CPA in Strategic Planning: Include your CPA in discussions about future growth and funding opportunities to ensure compliance is integrated into your plans. Their insights can help shape strategies that align with regulatory requirements while also advancing your mission.

By fostering a collaborative relationship, nonprofits can leverage their CPA's expertise to navigate compliance challenges effectively. This partnership can lead to improved financial health, enhanced credibility, and ultimately, a greater ability to serve the community.

Conclusion

In conclusion, CPAs play a vital role in supporting nonprofit organizations in Orlando with compliance. Their expertise in financial reporting, tax compliance, grant management, and risk management helps nonprofits focus on their mission while ensuring they meet regulatory requirements. By building strong partnerships with CPAs, nonprofits can enhance their compliance efforts and ultimately drive greater impact in the community. As the landscape of nonprofit work continues to evolve, having a knowledgeable CPA by your side can make all the difference in achieving long-term success and sustainability.

Quarterly Tax Tips: How Orlando CPAs Keep Clients Ahead of Deadlines

Mon, 08 Sep 2025 15:00:03 GMT

As tax season approaches, many individuals and businesses in Orlando find themselves scrambling to meet deadlines and ensure compliance. However, with the right guidance from certified public accountants (CPAs), staying ahead of tax obligations becomes a manageable task. In this blog post, we will explore quarterly tax tips that Orlando CPAs use to help their clients navigate the complexities of tax regulations and deadlines, ensuring they remain compliant and avoid unnecessary penalties.

Understanding Quarterly Tax Obligations

Quarterly taxes are payments made to the IRS and state tax authorities throughout the year, rather than in one lump sum at tax time. This system is particularly important for self-employed individuals and businesses. Here are some key points to understand:

Quarterly tax payments are typically due in April, June, September, and January.
These payments are based on estimated income and tax liability for the year.
Failure to pay quarterly taxes can result in penalties and interest charges.

Why Work with an Orlando CPA?

Engaging a CPA can provide numerous benefits when it comes to managing quarterly taxes. Here are some reasons why working with a local CPA is advantageous:

Expertise: CPAs have extensive knowledge of tax laws and regulations, ensuring compliance.
Personalized Advice: They can tailor tax strategies to fit individual or business needs.
Time-Saving: CPAs handle the complexities of tax preparation, allowing clients to focus on their core activities.

Quarterly Tax Tips from Orlando CPAs

To help clients stay ahead of deadlines, Orlando CPAs recommend the following quarterly tax tips:

1. Keep Accurate Records

Maintaining organized financial records is crucial for accurate tax reporting. Here are some tips:

Use accounting software to track income and expenses effectively.
Keep receipts and invoices for all business-related transactions to substantiate your claims.
Regularly reconcile bank statements to ensure accuracy and identify discrepancies early.

2. Estimate Your Tax Liability

Estimating your tax liability can help you avoid underpayment penalties. Consider the following:

Review your previous year’s tax return to gauge your income and deductions accurately.
Use IRS Form 1040-ES to calculate estimated taxes based on your current financial situation.
Adjust your estimates based on any significant changes in income or expenses throughout the year.

3. Set Aside Funds for Taxes

To avoid financial strain when tax payments are due, it’s wise to set aside funds throughout the year:

Open a separate savings account specifically for tax payments to keep these funds distinct.
Allocate a percentage of your income to this account regularly to build a cushion for tax obligations.
Consider using a budgeting app to track your savings goals and ensure you are on target.

4. Stay Informed About Tax Law Changes

Tax laws can change frequently, impacting your obligations. Here’s how to stay updated:

Subscribe to newsletters from reputable tax organizations to receive timely updates.
Follow local tax authorities on social media for real-time information and announcements.
Attend workshops or webinars hosted by CPAs or tax professionals to enhance your understanding.

5. Plan for Deductions and Credits

Maximizing deductions and credits can significantly reduce your tax liability. Consider these strategies:

Keep track of all deductible expenses, such as business supplies, travel costs, and home office expenses.
Research available tax credits that may apply to your situation, such as education or energy efficiency credits.
Consult with your CPA to identify potential deductions you may have overlooked, ensuring you take full advantage of available benefits.

Utilizing Technology for Tax Management

In today’s digital age, technology plays a vital role in tax management. Here are some tools that can help streamline the process:

Accounting Software: Programs like QuickBooks or Xero can streamline financial tracking and reporting.
Tax Preparation Software: Tools like TurboTax can assist in preparing and filing taxes efficiently.
Cloud Storage: Use services like Google Drive or Dropbox to store important documents securely and access them from anywhere.

Common Mistakes to Avoid

Even with the best intentions, mistakes can happen. Here are some common pitfalls to avoid:

Failing to make timely payments can lead to penalties and interest charges that add up quickly.
Neglecting to update estimated tax payments based on income changes can result in underpayment penalties.
Overlooking deductions or credits that could benefit you can lead to paying more taxes than necessary.

Conclusion

Staying ahead of quarterly tax deadlines is essential for individuals and businesses in Orlando. By following these tips and working with a knowledgeable CPA, you can navigate the complexities of tax obligations with confidence. Remember, proactive tax planning not only helps you avoid penalties but can also lead to significant savings. Don’t hesitate to reach out to a local CPA for personalized guidance tailored to your unique financial situation. With the right support and strategies in place, you can approach tax season with peace of mind, knowing that you are well-prepared and compliant with all regulations.

The Peace of Mind of Working with a Trusted Orlando CPA

Fri, 05 Sep 2025 15:00:01 GMT

In today's fast-paced world, managing finances can often feel overwhelming. Whether you're an individual or a business owner, the complexities of tax laws, financial planning, and accounting can lead to stress and uncertainty. This is where the peace of mind that comes from working with a trusted Orlando CPA becomes invaluable. A Certified Public Accountant (CPA) not only helps you navigate the intricate financial landscape but also provides a sense of security and confidence in your financial decisions. Let's explore the numerous benefits of partnering with a reliable CPA in Orlando.

Understanding the Role of a CPA

A CPA is more than just a number cruncher; they are financial advisors who can help you make informed decisions. Here are some key roles they play:

Tax Preparation and Planning: CPAs are experts in tax laws and can help you minimize your tax liability while ensuring compliance. They stay updated on the latest tax regulations and can identify deductions and credits that you may not be aware of, ultimately saving you money.
Financial Reporting: They prepare accurate financial statements that reflect your financial position, which is crucial for decision-making. This includes balance sheets, income statements, and cash flow statements that provide insights into your financial health.
Business Consulting: CPAs provide strategic advice to help businesses grow and improve profitability. They can analyze your business model, identify areas for improvement, and help you implement effective strategies to enhance your operations.
Audit Services: They can conduct audits to ensure financial accuracy and transparency. This is particularly important for businesses that need to maintain trust with stakeholders and comply with regulatory requirements.

The Benefits of Working with a Trusted Orlando CPA

Choosing a CPA in Orlando can significantly impact your financial well-being. Here are some benefits:

Expertise and Knowledge: CPAs undergo rigorous training and continuous education, ensuring they are up-to-date with the latest tax laws and financial regulations. This expertise allows them to provide you with the best possible advice tailored to your specific situation.
Personalized Service: A trusted CPA takes the time to understand your unique financial situation and tailors their services to meet your needs. They will work closely with you to develop a financial plan that aligns with your goals and aspirations.
Time-Saving: By outsourcing your financial tasks to a CPA, you can focus on what you do best—running your business or enjoying your personal life. This delegation allows you to free up valuable time and resources.
Peace of Mind: Knowing that a professional is handling your finances allows you to relax and make informed decisions without the stress of financial uncertainty. This peace of mind can lead to better overall well-being and improved focus on your personal and professional life.

How to Choose the Right CPA in Orlando

Selecting the right CPA is crucial for your financial success. Here are some tips to help you make the right choice:

Check Qualifications: Ensure the CPA is licensed and has the necessary credentials. Look for certifications such as CPA, which indicates a high level of expertise and professionalism.
Experience Matters: Look for a CPA with experience in your specific industry or financial situation. An experienced CPA will have a better understanding of the unique challenges and opportunities you may face.
Read Reviews: Check online reviews and testimonials to gauge the CPA's reputation and client satisfaction. This can provide valuable insights into their level of service and expertise.
Schedule a Consultation: Meet with potential CPAs to discuss your needs and assess their communication style and approach. This initial meeting can help you determine if they are a good fit for you.

Common Services Offered by Orlando CPAs

Orlando CPAs offer a wide range of services that can cater to both individuals and businesses. Here are some common services:

Individual Tax Preparation: CPAs help individuals file their taxes accurately and on time, ensuring compliance with all tax regulations and maximizing potential refunds.
Business Tax Services: They assist businesses with tax planning, compliance, and filing. This includes strategies to minimize tax liabilities and ensure that businesses take advantage of available deductions.
Bookkeeping: CPAs can manage your day-to-day financial transactions, ensuring accurate records. This service is essential for maintaining financial health and preparing for tax season.
Financial Planning: They provide guidance on investments, retirement planning, and wealth management. A CPA can help you create a comprehensive financial plan that aligns with your long-term goals.

The Importance of Communication

Effective communication is key to a successful relationship with your CPA. Here are some tips for maintaining open lines of communication:

Be Transparent: Share all relevant financial information with your CPA to ensure they can provide the best advice. Transparency fosters trust and allows for more accurate financial planning.
Ask Questions: Don’t hesitate to ask for clarification on any financial matters you don’t understand. A good CPA will be happy to explain complex concepts in a way that makes sense to you.
Regular Check-Ins: Schedule regular meetings to discuss your financial progress and any changes in your situation. This proactive approach helps keep your financial plan on track and allows for timely adjustments.

Conclusion: Embrace Financial Peace of Mind

In conclusion, working with a trusted Orlando CPA can provide you with the peace of mind you need to navigate your financial journey. With their expertise, personalized service, and commitment to your financial success, you can focus on what truly matters in your life. Whether you are an individual seeking tax assistance or a business owner looking for strategic financial advice, a CPA can be your trusted partner in achieving your financial goals. By investing in a CPA, you are not just hiring a service; you are gaining a valuable ally in your financial journey, ensuring that you are well-prepared for the future.

Estate Planning in Orlando: How a CPA Can Protect Your Family’s Future

Thu, 04 Sep 2025 15:00:07 GMT

Estate planning is a crucial step in securing your family's future, especially in a vibrant city like Orlando. With its unique blend of opportunities and challenges, having a solid estate plan can ensure that your loved ones are protected and your wishes are honored. One of the best allies in this process is a Certified Public Accountant (CPA). They bring a wealth of knowledge about tax implications, financial strategies, and legal requirements that can significantly impact your estate planning decisions. In this post, we will explore how a CPA can help you navigate the complexities of estate planning in Orlando.

Understanding Estate Planning

Estate planning involves preparing for the transfer of your assets after your death. It encompasses various legal documents and strategies to ensure that your wishes are fulfilled. Here are some key components of estate planning:

Wills: A legal document that outlines how your assets will be distributed. A will is essential for ensuring that your property goes to the people you choose, rather than being distributed according to state laws.
Trusts: Arrangements that allow you to manage your assets during your lifetime and specify how they should be distributed after your death. Trusts can help avoid probate, provide privacy, and potentially reduce estate taxes.
Powers of Attorney: Legal documents that grant someone the authority to make decisions on your behalf if you become incapacitated. This can include financial decisions and healthcare choices, ensuring that your preferences are respected even when you cannot communicate them.
Healthcare Directives: Documents that outline your medical care preferences in case you cannot communicate them yourself. These directives can guide your loved ones and healthcare providers in making decisions that align with your values and wishes.

The Role of a CPA in Estate Planning

A CPA plays a vital role in estate planning by providing financial insights and ensuring that your plan is tax-efficient. Here are several ways a CPA can assist you:

Tax Planning: A CPA can help you understand the tax implications of your estate plan, including estate taxes, gift taxes, and income taxes on inherited assets. This knowledge is crucial for minimizing tax liabilities and maximizing the value of your estate for your heirs.
Asset Valuation: They can assist in accurately valuing your assets, which is essential for effective estate planning. Proper valuation ensures that your estate is distributed fairly and according to your wishes.
Trust Management: If you establish a trust, a CPA can help manage it, ensuring compliance with tax laws and regulations. This includes filing necessary tax returns and maintaining accurate records.
Financial Projections: A CPA can create projections to help you understand how your estate plan will affect your financial future. This foresight can guide your decisions and help you make informed choices about your assets.

Benefits of Working with a CPA in Orlando

Choosing to work with a CPA in Orlando offers several advantages:

Local Expertise: A CPA familiar with Florida's estate laws can provide tailored advice that considers local regulations. This local knowledge can be invaluable in navigating the specific legal landscape of estate planning in Orlando.
Comprehensive Services: Many CPAs offer a range of services, from tax preparation to financial planning, making them a one-stop shop for your estate planning needs. This can save you time and ensure that all aspects of your financial life are coordinated.
Long-Term Relationship: Building a relationship with a CPA can provide ongoing support as your financial situation and family dynamics change. A CPA can help you adapt your estate plan to reflect significant life events, such as marriage, divorce, or the birth of a child.

Common Estate Planning Mistakes to Avoid

When planning your estate, it's essential to avoid common pitfalls that can jeopardize your family's future. Here are some mistakes to watch out for:

Not Having a Will: Failing to create a will can lead to your assets being distributed according to state laws, which may not align with your wishes. This can create unnecessary stress and conflict among your loved ones during an already difficult time.
Overlooking Tax Implications: Not considering the tax consequences of your estate plan can result in unexpected liabilities for your heirs. Understanding these implications can help you structure your estate in a way that minimizes taxes.
Neglecting to Update Your Plan: Life changes, such as marriage, divorce, or the birth of a child, should prompt a review and update of your estate plan. Failing to do so can lead to outdated provisions that no longer reflect your wishes.
Assuming Trusts Are Only for the Wealthy: Trusts can benefit individuals of all income levels by providing control over asset distribution and potential tax advantages. They can also help protect your assets from creditors and ensure that your beneficiaries receive their inheritance in a structured manner.

Steps to Create an Effective Estate Plan with a CPA

Creating an effective estate plan involves several steps. Here’s a guide to help you get started:

Assess Your Assets: Make a comprehensive list of your assets, including real estate, investments, and personal property. Understanding what you own is the first step in determining how to distribute it.
Define Your Goals: Determine what you want to achieve with your estate plan, such as providing for your family or supporting charitable causes. Clear goals will guide your planning process and help you make informed decisions.
Consult a CPA: Schedule a meeting with a CPA to discuss your financial situation and estate planning goals. Their expertise will help you identify potential issues and opportunities.
Create Legal Documents: Work with an attorney to draft the necessary legal documents, including wills and trusts. Ensure that these documents are legally sound and reflect your wishes accurately.
Review and Update Regularly: Regularly review your estate plan to ensure it remains aligned with your goals and circumstances. Life changes can impact your estate plan, so it's important to keep it current.

Conclusion

Estate planning is an essential process that can protect your family's future and ensure your wishes are honored. By working with a CPA in Orlando, you can navigate the complexities of estate planning with confidence. Their expertise in tax implications and financial strategies will help you create a comprehensive plan that meets your needs. Don't wait until it's too late—start your estate planning journey today to secure peace of mind for you and your loved ones. Taking proactive steps now can make a significant difference in the financial well-being of your family in the future.

Year-Round Tax Preparation: How Orlando CPAs Keep You Audit-Ready

Wed, 03 Sep 2025 15:00:09 GMT

Tax season can often feel like a daunting task, but what if you could stay ahead of the game all year round? In Orlando, CPAs are dedicated to ensuring that individuals and businesses are not only prepared for tax season but also audit-ready at any time. This proactive approach to tax preparation can save you time, money, and stress. Let’s explore how Orlando CPAs help you maintain your financial health throughout the year.

Understanding Year-Round Tax Preparation

Year-round tax preparation involves continuous monitoring and management of your financial records, ensuring that everything is in order before tax season arrives. This approach allows for:

Timely identification of potential tax deductions that can significantly reduce your taxable income.
Regular updates on tax law changes, ensuring you are always compliant and aware of new opportunities.
Consistent financial record-keeping, which simplifies the tax filing process and reduces the risk of errors.

By engaging with a CPA throughout the year, you can avoid the last-minute rush and the anxiety that often accompanies tax filing. This ongoing relationship means that your CPA can provide tailored advice based on your unique financial situation, helping you make informed decisions that benefit your overall financial health.

The Role of Orlando CPAs

Orlando CPAs play a crucial role in helping clients stay audit-ready. Here are some of the key services they provide:

Tax Planning: CPAs work with you to develop a tax strategy that aligns with your financial goals, ensuring you take advantage of all available deductions and credits.
Record Keeping: They assist in maintaining accurate and organized financial records, which is essential for both tax preparation and audits. This includes tracking income, expenses, and any relevant documentation.
Compliance Monitoring: CPAs keep you informed about changes in tax laws that may affect your filings, helping you stay compliant and avoid penalties.
Audit Support: In the event of an audit, having a CPA who is familiar with your financial situation can be invaluable. They can represent you and provide the necessary documentation to support your claims.

Benefits of Year-Round Tax Preparation

Engaging in year-round tax preparation offers numerous benefits:

Reduced Stress: Knowing that your finances are in order can alleviate the anxiety that often accompanies tax season. You can approach tax time with confidence, knowing you have a plan in place.
Maximized Deductions: Continuous monitoring allows for the identification of deductions you may otherwise miss, potentially saving you a significant amount of money.
Better Financial Decisions: Regular consultations with a CPA can lead to more informed financial choices throughout the year, helping you to achieve your financial goals more effectively.
Audit Readiness: With organized records and ongoing support, you’ll be better prepared in case of an audit, reducing the likelihood of stress and complications.

How to Choose the Right CPA in Orlando

Selecting the right CPA is crucial for effective year-round tax preparation. Here are some tips to help you make the right choice:

Check Qualifications: Ensure the CPA is licensed and has relevant experience in tax preparation. Look for credentials such as CPA certification and any additional qualifications that may be relevant to your needs.
Look for Specialization: Some CPAs specialize in specific industries or types of tax situations, such as small businesses, real estate, or international tax, which can be beneficial depending on your circumstances.
Read Reviews: Look for testimonials or reviews from previous clients to gauge their satisfaction. This can provide insight into the CPA's reliability and effectiveness.
Schedule a Consultation: Meeting with a CPA can help you assess their approach and compatibility with your needs. Use this opportunity to ask questions about their services and how they can help you.

Common Misconceptions About Year-Round Tax Preparation

There are several misconceptions surrounding year-round tax preparation that can deter individuals from seeking help:

It’s Too Expensive: Many people believe that hiring a CPA year-round is costly, but the long-term savings can outweigh the initial investment. The cost of potential missed deductions and penalties can far exceed the fees for professional services.
It’s Only for Businesses: Individuals can also benefit significantly from year-round tax preparation. Whether you are a freelancer, a homeowner, or have investment income, a CPA can help you navigate your tax obligations.
It’s Not Necessary: The complexity of tax laws makes it essential to have professional guidance throughout the year. Attempting to manage your taxes alone can lead to costly mistakes.

Tips for Staying Audit-Ready

In addition to working with a CPA, there are steps you can take to ensure you remain audit-ready:

Keep Detailed Records: Maintain organized records of all financial transactions, including receipts, invoices, and bank statements. This will make it easier to provide documentation if needed.
Stay Informed: Regularly review tax law changes that may impact your situation. This knowledge can help you adjust your financial strategies accordingly.
Communicate with Your CPA: Keep an open line of communication with your CPA to address any concerns or questions. Regular check-ins can help you stay on track and informed.
Review Your Tax Returns: Regularly review past tax returns to ensure accuracy and completeness. This practice can help you identify any discrepancies and correct them before they become an issue.

Conclusion

Year-round tax preparation is a proactive approach that can significantly ease the burden of tax season. By partnering with a knowledgeable CPA in Orlando, you can ensure that your financial records are always in order, maximizing your deductions and keeping you audit-ready. Don’t wait until tax season to start thinking about your taxes; take control of your financial future today! By investing in year-round tax preparation, you are not only preparing for the upcoming tax season but also setting yourself up for long-term financial success.

The Role of a CPA in Managing Business Cash Flow in Central Florida

Tue, 02 Sep 2025 15:00:03 GMT

Managing cash flow is crucial for any business, especially in a dynamic market like Central Florida. A Certified Public Accountant (CPA) plays a vital role in ensuring that businesses maintain healthy cash flow, which is essential for growth and sustainability. In this blog post, we will explore the various ways a CPA can assist businesses in Central Florida with cash flow management, highlighting their expertise and the value they bring to the table.

Understanding Cash Flow Management

Cash flow management involves tracking, analyzing, and optimizing the flow of cash in and out of a business. It is essential for maintaining liquidity, meeting obligations, and planning for future growth. Here are some key components of cash flow management:

Cash Flow Forecasting: Predicting future cash inflows and outflows to ensure that the business can meet its financial obligations. This involves analyzing historical data and market trends to create accurate projections.
Monitoring Receivables: Keeping track of customer payments and ensuring timely collections to maintain cash flow. This includes establishing clear payment terms and following up on overdue accounts.
Expense Management: Analyzing and controlling expenses to prevent cash shortages. This requires a thorough understanding of fixed and variable costs and identifying areas where savings can be made.

The CPA's Role in Cash Flow Management

CPAs are more than just number crunchers; they are strategic partners who provide valuable insights into financial health. Here’s how they contribute to effective cash flow management:

1. Financial Analysis and Reporting

CPAs prepare detailed financial reports that provide insights into cash flow trends. These reports help business owners understand:

Current cash position, which is crucial for making informed decisions.
Historical cash flow patterns that can indicate potential future issues.
Projected cash flow based on various scenarios, allowing businesses to plan for different outcomes.

2. Budgeting and Forecasting

Creating a budget is essential for managing cash flow. CPAs assist businesses in Central Florida by:

Developing realistic budgets based on historical data and market trends, ensuring that financial goals are achievable.
Implementing cash flow forecasting models to predict future cash needs, which helps in planning for seasonal fluctuations.
Adjusting budgets as necessary to respond to changing business conditions, ensuring that the business remains agile and responsive.

3. Tax Planning and Compliance

Tax obligations can significantly impact cash flow. CPAs help businesses navigate tax laws and regulations by:

Identifying tax deductions and credits that can improve cash flow, allowing businesses to retain more of their earnings.
Ensuring timely tax payments to avoid penalties, which can strain cash resources.
Advising on tax-efficient strategies for cash management, helping businesses optimize their tax positions.

Strategies for Improving Cash Flow

In addition to their advisory role, CPAs can implement specific strategies to enhance cash flow. Here are some effective methods:

1. Streamlining Invoicing Processes

CPAs can help businesses establish efficient invoicing systems that ensure:

Invoices are sent promptly and accurately, reducing delays in payment.
Clear payment terms are communicated to clients, minimizing confusion and disputes.
Follow-ups on overdue invoices are conducted regularly, improving collection rates.

2. Managing Inventory Wisely

Excess inventory can tie up cash. CPAs advise on:

Implementing inventory management systems to optimize stock levels, ensuring that cash is not unnecessarily tied up in unsold goods.
Analyzing sales trends to adjust purchasing decisions, aligning inventory with actual demand.
Identifying slow-moving items to reduce excess stock, freeing up cash for other uses.

3. Establishing a Cash Reserve

Having a cash reserve can provide a safety net during lean periods. CPAs recommend:

Setting aside a portion of profits for emergencies, ensuring that the business can weather unexpected challenges.
Regularly reviewing cash reserves to ensure they meet business needs, adjusting as necessary based on current conditions.
Creating a plan for utilizing reserves effectively, ensuring that funds are available when needed most.

Leveraging Technology for Cash Flow Management

In today’s digital age, technology plays a significant role in cash flow management. CPAs can guide businesses in Central Florida to:

Utilize accounting software for real-time cash flow tracking, providing immediate insights into financial health.
Implement automated invoicing and payment systems, reducing administrative burdens and speeding up collections.
Use data analytics tools to gain insights into cash flow patterns, helping businesses make informed decisions based on data.

Conclusion

In conclusion, the role of a CPA in managing business cash flow in Central Florida is indispensable. Their expertise in financial analysis, budgeting, tax planning, and strategic cash flow management can help businesses thrive in a competitive environment. By leveraging the skills of a CPA, business owners can ensure they maintain healthy cash flow, allowing them to focus on growth and success. The partnership with a CPA not only enhances financial stability but also empowers businesses to make strategic decisions that drive long-term success.

Top Reasons to Hire a CPA in Orlando Instead of Doing Your Taxes Yourself

Mon, 01 Sep 2025 15:00:00 GMT

When tax season rolls around, many individuals and businesses face the daunting task of preparing their taxes. While some may consider tackling this challenge on their own, hiring a Certified Public Accountant (CPA) in Orlando can provide significant advantages. In this post, we’ll explore the top reasons why hiring a CPA is a smart choice, ensuring you maximize your tax benefits and minimize stress.

Expert Knowledge and Experience

One of the primary reasons to hire a CPA is their extensive knowledge and experience in tax laws and regulations. CPAs undergo rigorous training and must pass a comprehensive exam to earn their certification. This expertise allows them to:

Stay updated on the latest tax laws and changes, ensuring compliance and optimization of your tax situation.
Understand complex tax situations that may apply to your case, such as investments, business ownership, or unique deductions.
Provide insights on tax-saving strategies tailored to your financial situation, helping you make informed decisions that can lead to significant savings.

Time-Saving Benefits

Preparing taxes can be a time-consuming process, especially if you’re unfamiliar with the necessary forms and regulations. By hiring a CPA, you can save valuable time that can be better spent on your personal or business activities. Consider the following:

CPAs can quickly gather and organize your financial information, streamlining the preparation process.
They can efficiently complete your tax returns, reducing the time spent on paperwork and allowing you to focus on your core responsibilities.
With a CPA handling your taxes, you can concentrate on what you do best, whether that’s running your business or enjoying your personal life.

Minimizing Errors

Tax preparation is fraught with potential errors, which can lead to costly penalties or audits. A CPA’s expertise significantly reduces the likelihood of mistakes. Here’s how they help:

CPAs are trained to identify common pitfalls in tax preparation, ensuring that your returns are accurate and complete.
They perform thorough reviews to ensure accuracy before submission, providing an additional layer of security against errors.
In the event of an audit, a CPA can represent you and help navigate the process, alleviating the stress of dealing with tax authorities.

Maximizing Deductions and Credits

Many taxpayers miss out on valuable deductions and credits simply because they are unaware of them. A CPA can help you identify and claim all eligible deductions, including:

Business expenses for self-employed individuals, ensuring you take full advantage of what you can deduct.
Education credits for students and parents, which can significantly reduce your tax burden.
Home office deductions for remote workers, allowing you to benefit from your work-from-home situation.

By maximizing your deductions, a CPA can potentially lower your tax liability significantly, putting more money back in your pocket.

Personalized Financial Advice

Beyond just tax preparation, CPAs offer personalized financial advice that can benefit you year-round. They can assist with:

Budgeting and financial planning, helping you create a roadmap for your financial future.
Investment strategies to grow your wealth, ensuring your money is working for you.
Retirement planning to ensure a secure future, guiding you on how much to save and the best accounts to use.

This holistic approach to your finances can lead to better long-term outcomes, allowing you to achieve your financial goals with confidence.

Understanding Local Tax Regulations

Tax laws can vary significantly by state and locality. A CPA in Orlando is well-versed in Florida’s specific tax regulations, which can impact your tax situation. They can help you navigate:

State income tax laws and exemptions, ensuring you take advantage of any benefits available to you.
Local tax incentives for businesses, which can provide significant savings and opportunities for growth.
Sales tax regulations that may affect your purchases, helping you understand your obligations and rights.

Peace of Mind

Perhaps one of the most significant benefits of hiring a CPA is the peace of mind it provides. Knowing that a professional is handling your taxes can alleviate stress and anxiety. You can rest assured that:

Your taxes are being prepared accurately and efficiently, reducing the risk of errors and penalties.
You have a knowledgeable advocate in case of an audit, providing you with support and guidance throughout the process.
You are making informed financial decisions with expert guidance, allowing you to focus on your life and business without the burden of tax worries.

Conclusion

In summary, hiring a CPA in Orlando offers numerous advantages over attempting to do your taxes yourself. From expert knowledge and time-saving benefits to minimizing errors and maximizing deductions, a CPA can significantly enhance your tax experience. If you want to ensure your taxes are handled professionally and efficiently, consider reaching out to a local CPA today. Their expertise can not only simplify your tax season but also provide you with valuable financial insights that can benefit you throughout the year.

Mutual Funds: Frequently Asked Questions

Wed, 11 Oct 2023 18:08:55 GMT

How are mutual fund distributions taxed?

You must generally report as income any mutual fund distribution, whether or not it is reinvested. The tax law generally treats mutual fund shareholders as if they directly owned a proportionate share of the fund's portfolio of securities. The fund itself is not taxed on its income if certain tests are met and substantially all of its income is distributed to its shareholders. Thus, all dividends and interest from securities in the portfolio, as well as any capital gains from the sales of securities, are taxed to the shareholders. There are two types of taxable distributions: ordinary dividends and capital gain distributions.

Ordinary dividends are the most common type of distribution from a corporation and are paid out of the earnings and profits of the corporation. For mutual funds, this is the interest and dividends earned by securities held in the fund's portfolio that represent the net earnings of the fund. Ordinary dividends are periodically paid out to shareholders and are taxable as ordinary income unless they are qualified dividends. Qualified dividends are ordinary dividends that meet the requirements to be taxed as net capital gains and are included with your capital gain distributions as long-term capital gain, regardless of how long you have owned your fund shares.

Like the return on any other investment, mutual fund dividend payments decline or rise from year to year, depending on the income earned by the fund in accordance with its investment policy. You should receive a Form 1099-DIV, Dividends and Distributions, from each payer for distributions of $10.00 or more; however, even if you do not receive a Form 1099-DIV or Schedule K-1 (dividends received through a partnership, an estate, a trust, or a subchapter S corporation), you must still report all taxable dividends.

Ordinary dividends are taxed at ordinary tax rates for whatever tax bracket you fall under. Qualified dividends are taxed at a 15 percent rate.

Capital gain distributions are the net gains, if any, from the sale of securities in the fund's portfolio. When gains from the fund's sales of securities exceed losses, they are distributed to shareholders. As with ordinary dividends, capital gain distributions vary in amount from year to year and are reported on Form 1099-DIV, Dividends and Distributions. Capital gain distributions are always reported as long-term capital gains for tax purposes.

Are reinvested dividends from a mutual fund taxable?

Most mutual funds offer you the option of having dividend and capital gain distributions automatically reinvested in the fund a--good way to buy new shares and expand your holdings. Most shareholders take advantage of this service, but you should be aware that you do not avoid paying tax by doing this. Reinvested ordinary dividends are taxed as ordinary income, just as if you had received them in cash and reinvested capital gain distributions are taxed as long-term capital gain.

If you reinvest, add the amount reinvested to the "cost basis" of your account. "Cost basis" is the amount you paid for your shares. The cost basis of your new shares purchased through automatic reinvesting is easily seen from your fund account statements. This information is important later on when you sell shares.

Make sure that you don't pay any unnecessary capital gain taxes on the sale of mutual fund shares because you forgot about reinvested amounts. When you reinvest dividends and capital gain distributions to buy more shares, you should add the cost of those shares (that is, the amount invested) to the cost basis of the shares in that account because you have already paid tax on those shares.

You bought 500 shares in Fund PQR in 1990 for $10,000. Over the years you reinvested dividends and capital gain distributions in the amount of $10,000, for which you received 100 additional shares. This year, you sold all 600 of those shares for $40,000.

If you forget to include the price paid for your 100 shares purchased through reinvestment (even though the fund sent you a statement recording the shares you received in each transaction), you will unwittingly report on this year's tax return a capital gain of $30,000 ($40,000 - $ 10,000) on your redemption of 600 shares, rather than the correct capital gain of $20,000 ($40,000 [$10,000 + $10,000]).

Failure to include reinvested dividends and capital gain distributions in your cost basis is a costly mistake.

Am I subject to tax if I switch from one fund to another in the same mutual fund family?

The "exchange privilege," or the ability to exchange shares of one fund for shares of another, is a popular feature of many mutual fund "families." Families are fund organizations offering a variety of funds.

For tax purposes, exchanges are treated as if you had sold your shares in one fund and used the cash to purchase shares in another fund. This means you must report any capital gain from the exchange on your return. The same tax rules used for calculating gains and losses when you redeem shares apply when you exchange them.

Gains on these redemptions and exchanges are taxable whether the fund invests in taxable or tax-exempt securities.

Am I subject to tax on return-of-capital distributions?

Sometimes mutual funds make distributions to shareholders that are not attributable to the fund's earnings. These are called nontaxable distributions, also known as returns of capital. Note that nontaxable distributions are not the same as the tax-exempt dividends. Because a return of capital is a return of part of your investment, it is not taxable. Your mutual fund will show any return of capital on Form 1099-DIV in the box for nontaxable distributions.

If you receive a return of capital distribution, your basis in the shares is reduced by the amount of the return.

Two years ago you purchased 100 shares of Fund ABC at $10 a share. Last year, you received a $1-per-share return of capital distribution, which reduced your basis in those shares by $1, to give you an adjusted basis of $9 per share. This year, you sell your 100 shares for $15 a share. Assuming no other transactions during this period, you would have a capital gain this year of $6 a share ($15 - $9) for a total reported capital gain of $600.

Non-taxable distributions cannot reduce your basis below zero. If you receive returns of capital that, taken together, exceed your original basis, you must report the excess as a long-term capital gain.

Should I invest in tax-exempt funds to cut my income taxes?

If you're in the higher tax brackets and are seeing your investment profits taxed away, you might want to consider tax-exempt mutual funds as an alternative.

The distributions of municipal bond funds that are attributable to interest from state and municipal bonds are exempt from federal income tax, although they may be subject to state tax.

The same is true of distributions from tax-exempt money market funds. These funds also invest in municipal bonds, but only in those that are short-term or close to maturity, the aim being to reduce the fluctuation in NAV that occurs in long-term funds.

Many taxpayers can ease their tax bite by investing in municipal bond funds. The catch with municipal bond funds is that they offer lower yields than comparable taxable bonds. For example, if a U.S. Treasury bond yields 4.8 percent, then a quality municipal bonds of the same maturity might yield 4 percent. The tax advantage makes it worthwhile to invest in the lower-yielding tax-exempt fund, and the tax advantage to a particular investor hinges on that investor's tax bracket.

To figure out how much you'd have to earn on a taxable investment to equal the yield on a tax-exempt investment, use this formula:

The tax-exempt yield divided by (1 minus your tax bracket) = equivalent yield of a taxable investment.

You are in the 24 percent bracket, and the yield of a tax-exempt investment is 4 percent. Applying the formula, we get 0.04 divided by (1.00 minus 0.24) = 0.0526. Therefore, 5.26 percent is the yield you would have to receive from a taxable investment to match the tax-exempt yield of 4 percent.

For some taxpayers, portions of income earned by tax-exempt funds may be subject to the federal alternative minimum tax.

Although income from tax-exempt funds is federally tax-exempt, you must still report on your tax return the amount of tax-exempt income you received during the year. This is an information-reporting requirement only and does not convert tax-exempt earnings into taxable income.

Your tax-exempt mutual fund will send you a statement summarizing its distributions for the past year and explaining how to handle tax-exempt dividends on a state-by-state basis.

Capital gain distributions paid by municipal bond funds (unlike distributions of interest) are not free from federal tax. Most states also tax these capital gain distributions.

How do states generally tax mutual fund distributions?

Generally, states treat mutual fund distributions as taxable income, just as the federal government does. However, states may not provide favored tax rates for dividends or long-term capital gains. Further, if your mutual fund invests in U.S. government obligations, states generally exempt dividends attributable to federal obligation interest from state taxation.

Mutual funds that invest in state obligations are another special situation. Most states do not tax income from their own obligations, whether held directly or through mutual funds. On the other hand, the majority of states do tax income from the obligations of other states. Thus, in most states, you will not pay state tax to the extent you receive, through the fund, income from obligations issued by your state or its municipalities.

What are the tax benefits and drawbacks of investing in a foreign mutual fund?

Dividends from funds investing in foreign stocks may qualify for the 15/5/0 percent rate on dividends. If your fund invests in foreign stocks or bonds, part of the income it distributes may have been subject to foreign tax withholding. If so, you may be entitled to a tax deduction or credit for your pro-rata share of taxes paid. Your fund will provide you with the necessary information.

A tax credit provides a dollar-for-dollar offset against your tax bill while a deduction reduces the amount of income on which you must pay tax, so it is generally advantageous to claim the foreign tax credit. If you decide to take the credit, you may need to attach a special form to your Form 1040, depending on the amount of credit involved.

Tax Saving Strategies: Frequently Asked Questions

Wed, 11 Oct 2023 18:03:49 GMT

What's the best way to borrow to make consumer purchases?

For tax years 2018 through 2025, interest on home equity loans is only deductible when the loan is used to buy, build or substantially improve the taxpayer's home that secures the loan. Prior to 2018, many homeowners took out home equity loans. Unlike other consumer-related interest expenses (e.g., car loans and credit cards), interest on a home equity loan was deductible on your tax return.

What special deductions can I get if I'm self-employed?

You may be able to take an immediate Section 179 expense deduction of up to $1,160,000 for 2023 ($1,080,000 in 2022), for equipment purchased for use in your business, instead of writing it off over many years. There is a phaseout limit of $2,890,000 in 2023 ($2,700,000 in 2022). Additionally, self-employed individuals can deduct 100 percent of their health insurance premiums. You may also be able to establish a Keogh, SEP, or SIMPLE IRA plan and deduct your contributions (investments).

Can I ever save tax by filing a separate return instead of jointly with my spouse?

You sometimes may benefit from filing separately instead of jointly. Consider filing separately if you meet the following criteria:

One spouse has large medical expenses, miscellaneous itemized deductions, or casualty losses.
The spouses' incomes are about equal.

Separate filing may benefit such couples because the adjusted gross income "floors" for taking the listed deductions will be computed separately.

Why should I participate in my employer's cafeteria plan or FSA?

Medical and dental expenses are deductible to the extent they exceed 7.5 percent of your adjusted gross income or AGI. If your employer offers a Flexible Spending Account (FSA), Health Savings Account, or cafeteria plan, these plans permit you to redirect a portion of your salary to pay these expenses with pretax dollars.

What's the best way to give to charity?

If you're planning to make a charitable gift, giving appreciated long-term capital assets generally makes more sense instead of selling the assets and giving the charity the after-tax proceeds. Donating the assets instead of the cash avoids capital gains tax on the sale, and you can obtain a tax deduction for the full fair-market value of the property.

I have a large capital gain this year. What should I do?

If you also have an investment on which you have an accumulated loss, it may be advantageous to sell it before year-end. Capital gains losses are deductible up to the amount of your capital gains plus $3,000 ($1,500 for married filing separately). If you are planning on selling an investment on which you have an accumulated gain, it may be best to wait until after the end of the year to defer payment of the taxes for another year (subject to estimated tax requirements).

What other tax-favored investments should I consider?

For growth stocks you hold for the long term, you pay no tax on the appreciation until you sell them. No capital gains tax is imposed on appreciation at your death.

Interest on state or local bonds ("municipals") is generally exempt from federal income tax and tax by the issuing state or locality. Therefore, interest paid on such bonds is somewhat less than that paid on commercial bonds of comparable quality. However, for individuals in higher brackets, the interest from municipals will often be greater than from higher-paying commercial bonds after a reduction in taxes.

For high-income taxpayers who live in high-income-tax states, investing in Treasury bills, bonds, and notes can pay off in tax savings. The interest on Treasuries is exempt from state and local income tax.

What tax-deferred investments are possible if I'm self-employed?

Consider setting up and contributing as much as possible to a retirement plan. These are allowed even for a sideline or moonlighting business. Several plans are available: an individual or self-employment 401(k) plan, a SEP (Simplified Employee Pension), and the SIMPLE IRA plan.

How can I make tax-deferred investments?

Through tax-deferred retirement accounts, you can invest some of the money you would have otherwise paid in taxes to increase the amount of your retirement fund. Many employers offer plans where you can elect to defer a portion of your salary and contribute it to a tax-deferred retirement account.

For most companies, these are known as 401(k) plans. For many other employers, such as universities, a similar plan called a 403(b) is available.

Some employers match a portion of employee contributions to such plans. If this is available, you should structure your contributions to receive the maximum employer-matching contribution.

What can I do to defer income?

If you are due a bonus at year-end, you may be able to defer receipt of these funds until January. This can defer the payment of taxes (other than the portion withheld) for another year. If you're self-employed, defer sending invoices or bills to clients or customers until after the new year begins. You can also defer some of the tax, subject to estimated tax requirements.

You can achieve the same effect of short-term income deferral by accelerating deductions, for example, paying a state-estimated tax installment in December instead of the following January due date.

Why should I defer income to a later year?

Most individuals are in a higher tax bracket in their working years than during retirement. Deferring income until retirement may result in paying taxes on that income at a lower rate.

Deferral can also work in the short term if you expect to be in a lower bracket in the following year or if you can take advantage of lower long-term capital gains rates by holding an asset a little longer.

Mutual Fund Taxation: How To Cut The Tax Bite

Wed, 11 Oct 2023 17:58:28 GMT

A basic knowledge of mutual fund taxation and careful record-keeping can help you cut the tax bite on your mutual fund investments.

You must generally report as income any mutual fund distributions, whether or not they are reinvested. The tax law generally treats mutual fund shareholders as if they directly owned a proportionate share of the fund's portfolio of securities. Thus, all dividends and interest from securities in the portfolio, as well as any capital gains from the sales of securities, are taxed to the shareholders.

The fund itself is not taxed on its income if certain tests are met and substantially all of its income is distributed to its shareholders.

Taxable Distributions

There are two types of taxable distributions: (1) ordinary dividends and (2) capital gain distributions:

1. Ordinary Dividends. Distributions of ordinary dividends, which come from the interest and dividends earned by securities in the fund's portfolio, represent the net earnings of the fund. They are paid out periodically to shareholders. Like the return on any other investment, mutual fund dividend payments decline or rise from year to year, depending on the income earned by the fund in accordance with its investment policy. These dividend payments are considered ordinary income and must be reported on your tax return.

2. Qualified dividends . Qualified dividends are ordinary dividends that are subject to the same tax rates that apply to net long-term capital gains. Dividends from mutual funds qualify where a mutual fund is receiving qualified dividends and distributing the required proportions thereof. Dividends from foreign corporations are qualified where their stock or ADRs are traded on U.S. exchanges or with IRS approval where the dividends are covered by U.S. tax treaties.

3. Capital gain distributions . When gains from the fund's sales of securities exceed losses, they are distributed to shareholders. As with ordinary dividends, these capital gain distributions vary in amount from year to year. They are treated as long-term capital gain, regardless of how long you have owned your fund shares. A mutual fund owner may also have capital gains from selling mutual fund shares.

Capital gains rates

The beneficial long-term capital gains rates on sales of mutual fund shares apply only to profits on shares held more than a year before sale. Profit on shares held a year or less before the sale is ordinary income, but capital gain distributions are long-term regardless of the length of time held before the distribution.

In 2023, tax rates on capital gains and dividends remain the same as 2022 rates (0%, 15%, and a top rate of 20%); however, threshold amounts are different in that they don't correspond to new tax bracket structure as they did in the past. The maximum zero percent rate amounts are $44,625 for individuals and $89,250 for married filing jointly. For an individual taxpayer whose income is at or above $492,300 ($553,850 married filing jointly), the rate for both capital gains and dividends is capped at 20 percent. All other taxpayers fall into the 15 percent rate amount (i.e., above $44,625 and below $492,300 for single filers).

In 2023, say your taxable income, apart from long-term capital gains and qualified dividends, is $87,000. Even though you're in a middle-income tax bracket (22 percent on a joint return in 2023) you'll get the benefit of a lower capital gains tax rate, in this case, 15 percent for long-term gains and qualified dividends.

For tax years 2013-2017 dividend income that fell in the highest tax bracket (39.6%) was taxed at 20 percent. For the middle tax brackets (25-35%) the dividend tax rate was 15 percent, and for the two lower ordinary income tax brackets of 10% and 15%, the dividend tax rate was zero.

At tax time, your mutual fund will send you a Form 1099-DIV, which tells you what earnings to report on your income tax return, and how much of it is qualified dividends. Because tax rates on qualified dividends are the same as for capital gains distributions and long-term gains on sales, Congress wants these items combined in your tax reporting, that is, qualified dividends added to long-term capital gains. Also, capital losses are netted against capital gains before applying favorable capital gains rates. Losses will not be netted against dividends.

Undistributed capital gains. Mutual funds sometimes retain a part of their capital gain and pay tax on them. You must report your share of such gains and can claim a credit for the tax paid. The mutual fund will report these amounts to you on Form 2439. You increase your shares' "cost basis" (more about this in Tip No. 5, below) by 65 percent of the gain, representing the gain reduced by the credit.

Medicare Tax

Starting with tax year 2013, an additional Medicare tax of 3.8 percent is applied to net investment income for individuals with modified adjusted gross income above $200,000 (single filers) and $250,000 (joint filers). These amounts are not indexed for inflation.

Now that you have a better understanding of how mutual funds are taxed, here are 13 tips for minimizing the tax on your mutual fund activities:

Keep Track of Reinvested Dividends

Most funds offer you the option of having dividend and capital gain distributions automatically reinvested in the fund - a good way to buy new shares and expand your holdings. While most shareholders take advantage of this service, it is not a way to avoid being taxed. Reinvested ordinary dividends are still taxed (at long-term capital gains rates if qualified), just as if you had received them in cash. Similarly, reinvested capital gain distributions are taxed as long-term capital gain.

If you reinvest, add the amount reinvested to the "cost basis" of your account, i.e., the amount you paid for your shares. The cost basis of your new shares purchased through automatic reinvesting is easily seen from your fund account statements. This information is important later on when you sell shares (more about that in Tip No. 5 ).

Be Aware That Exchanges of Shares Are Taxable Events

The "exchange privilege," or the ability to exchange shares of one fund for shares of another, is a popular feature of many mutual fund "families," i.e., fund organizations that offer a variety of funds. For tax purposes, exchanges are treated as if you had sold your shares in one fund and used the cash to purchase shares in another fund. In other words, you must report any capital gain from the exchange on your return. The same tax rules used for calculating gains and losses when you redeem shares apply when you exchange them.

Gains on these redemptions and exchanges are taxable whether the fund invests in taxable or tax-exempt securities.

Be Wary of Buying Shares Just Before Ex-Dividend Date

Tax law requires that mutual funds distribute at least 98 percent of their ordinary and capital gain income annually. Thus, many funds make disproportionately large distributions in December. The date on which a fund's shareholders become entitled to future payment of a distribution is referred to as the ex-dividend date. On that date, the fund's net asset value (NAV) is reduced on a per-share basis by the exact amount of the distribution. Buying mutual fund shares just before this date can trigger an unexpected tax.

You buy 1,000 shares of Fund XYZ at $10 a share. A few days later, the fund goes ex-dividend, entitling you to a $1 per share distribution. Because $1 of your $10 NAV is being distributed to you, the value of your 1,000 shares is reduced to $9,000. As with any fund distribution, you may receive the $1,000 in cash or reinvest it and receive additional shares. In either case, you must pay tax on the distribution.

If you reinvest the $1,000, the distribution has the appearance of a wash in your account since the value of your fund investment remains $10,000. The $1,000 reinvestment results in the acquisition of 111.1 new shares with a $9 NAV and increases the cost basis of your total investment to $11,000. If you were to redeem your shares for $10,000 (their current value), you would realize a $1,000 capital loss.

In spite of these tax consequences, in some instances it may be a good idea to buy shares right before the fund goes ex-dividend. For instance, the distribution could be relatively small, with only minor tax consequences. Or the market could be moving up, with share prices expected to be higher after the ex-dividend date.

To find out a fund's ex-dividend date call the fund directly.

If you regularly check the mutual fund quotes in your daily newspaper and notice a decline in NAV from the previous day, the explanation may be that the fund has just gone ex-dividend. Newspapers generally use a footnote to indicate when a fund goes ex-dividend.

Do Not Overlook the Advantages of Tax-Exempt Funds

If you are in the higher tax brackets and are seeing your investment profits taxed away, then there is a good alternative to consider: tax-exempt mutual funds. Distributions from such funds that are attributable to interest from state and municipal bonds are exempt from federal income tax (although they may be subject to state tax).

Many taxpayers can ease their tax bite by investing in municipal bond funds. The catch with municipal bond funds is that they offer lower yields than comparable taxable bonds. For example, if a U.S. Treasury bond yields 2.8 percent, then a quality municipal bond of the same maturity might yield 2.45 percent. If an investor is in a higher tax bracket, the tax advantage makes it worthwhile to invest in the lower-yielding tax-exempt fund. Whether the tax advantage actually benefits a particular investor depends on that investor's tax bracket.

To figure out how much you would have to earn on a taxable investment to equal the yield on a tax-exempt investment, use this formula: Tax-exempt yield divided by (1 minus your tax bracket) = equivalent yield of a taxable investment.

You are planning for the 32% bracket. The yield of a tax-exempt investment is 2.8 percent. Applying the formula, we get .028 divided by .68 (1 minus .32) = .041. Therefore, 4.1 percent is the yield you would need from a taxable investment to match the tax-exempt yield of 2.8 percent.

In limited cases based on the types of bonds involved, part of the income earned by tax-exempt funds may be subject to the federal alternative minimum tax.

Your tax-exempt mutual fund will send you a statement summarizing its distributions for the past year and explaining how to handle tax-exempt dividends on a state-by-state basis.

Capital gain distributions paid by municipal bond funds (unlike distributions of interest) are not free from federal tax. Most states also tax these capital gain distributions.

Keep Records of Your Mutual Fund Transactions

It is very important to keep the statements from each mutual fund you own, especially the year-end statement.

By law, mutual funds must send you a record of every transaction in your account, including reinvestments and exchanges of shares. The statement shows the date, amount, and number of full and fractional shares bought or sold. These transactions are also contained in the year-end statement.

In addition, you will receive a year-end Form 1099-B, which reports the sale of fund shares, for any non-IRA mutual fund account in which you sold shares during the year.

Why is record keeping so important? When you sell mutual fund shares, you will realize a capital gain or loss in the year the shares are sold. You must pay tax on any capital gain arising from the sale, just as you would from the sale of individual securities. (Losses may be used to offset other gains in the current year and deducted up to an additional $3,000 of ordinary income. Remaining loss may be carried for comparable treatment in later years.)

The amount of the gain or loss is determined by the difference between the cost basis of the shares (generally the original purchase price) and the sale price. Thus, in order to figure the gain or loss on a sale of shares, it is essential to know the cost basis. If you have kept your statements, you will be able to figure this out.

In 2012, you purchased 100 shares of Fund JKL at $10 a share for a total purchase price of $1,000. Your cost basis for each share is $10 (what you paid for the shares). Any fees or commissions paid at the time of purchase are included in the basis, so since you paid an up-front commission of two percent, or $20, on the purchase, your cost basis for each share is $10.20 ($1,020 divided by 100). Let's say you sell your Fund JKL shares this year for $1,500. Assume there are no adjustments to your $ 1,020 basis, such as basis attributable to shares purchased through reinvestment (for an example of the effect of reinvestment on the cost basis, see Tip #6.). On this year's income tax return, you report a capital gain of $480 ($1,500 minus $1,020).

Since they are taken into account in your cost basis, commissions or brokerage fees are not deductible separately as investment expenses on your tax return.

One of the advantages of mutual fund investing is that the fund provides you with all of the records that you need to compute gains and losses--a real plus at tax time. Some funds even provide cost basis information or compute gains and losses for shares sold. That is why it is important to save the statements. However, you are not required to use the fund's gain or loss computations in your tax reporting.

Re-investing Dividends & Capital Gain Distributions when Calculating

Make sure that you do not pay any unnecessary capital gain taxes on the sale of mutual fund shares because you forgot about reinvested amounts. When you reinvest dividends and capital gain distributions to buy more shares, you should add the cost of those shares (that is, the amount invested) to the cost basis of the shares in that account because you have already paid tax on those shares. Failure to include reinvested dividends and capital gain distributions in your cost basis is a costly mistake.

You bought 500 shares in Fund PQR 15 years ago for $10,000. Over the years, you reinvested dividends and capital gain distributions in the amount of $8,000, for which you received 100 additional shares. This year, you sell all 600 of those shares for $40,000. If you forget to include the price paid for the 100 shares purchased through reinvestment (even though the fund sent you a statement recording the shares you received in each transaction), you will unwittingly report on your tax return a capital gain of $30,000 ($40,000 - $ 10,000) on your redemption of 600 shares, rather than the correct capital gain of 22,000 ($40,000 - [$10,000 + $8,000]).

Adjust Cost Basis for Non-Taxable Distributions

Sometimes mutual funds make distributions to shareholders that are not attributable to the fund's earnings. These are nontaxable distributions, also known as returns of capital. Because a return of capital is a return of part of your investment, it is not taxable. Your mutual fund will show any return of capital on Form 1099-DIV in the box for nontaxable distributions.

Nontaxable distributions are not the same as the tax-exempt dividends described in Tip No. 4 . If you receive a return-of-capital distribution, your basis in the shares is reduced by the amount of the return.

Fifteen years ago, you purchased 1,000 shares of Fund ABC at $10 a share. The following year you received a $1-per-share return-of-capital distribution, which reduced your basis in those shares by $1, to give you an adjusted basis of $9 per share. This year you sell your 1,000 shares for $15 a share. Assuming no other transactions during this period, you would have a capital gain this year of $6 a share ($15 - $9) for a total reported capital gain of $6,000.

Nontaxable distributions cannot reduce your basis below zero. If you receive returns of capital that, taken together, exceed your original basis, you must report the excess as a long-term capital gain.

Your overall basis will not change if non-taxable distributions are reinvested. However, your per-share basis will be reduced.

Use the Best Method of Identifying Sold Shares

Calculating the capital gain or loss on shares you sell is somewhat more complicated if, as is usually the case, you are selling only some of your shares. You then must use some accounting method to identify which shares were sold to determine your capital gain or loss. The IRS recognizes several methods of identifying the shares sold:

First-in, first-out (FIFO),
Average cost (single category and double category), and
Specific identification.

Reports from your funds may include a computation of gain or loss on your sale of mutual fund shares. Typically, these will use the average cost method, single category rule. This is done as a convenience. You are allowed to adopt one of the other methods.

First-In, First-Out (FIFO)

Under this method, the first shares bought are considered the first shares sold. Unless you specify that you are using one of the other methods, the IRS will assume you are using FIFO.

Average Cost

This approach allows you to calculate an average cost for each share by adding up the total cost of all the shares you own in a particular mutual fund and dividing by the number of shares. If you elect to take an average cost approach, you must then choose whether to use a single-category method or a double-category method.

With the single category method, you simply group all shares together, add up the cost, and divide by the number of shares. Under this method, you are deemed to have sold first the shares you have held the longest.
The double category method enables you to separate short-term and long-term shares. Shares held for one year or less are considered short-term; shares held for more than one year are considered long-term. You average the cost of shares in each category separately. In this way, you may specify whether you are redeeming long-term or short-term shares.

Keep in mind that once you elect to use either average cost method, you must continue to use it for all transactions in that fund unless you receive IRS approval to change your method.

Specific Identification

Under this method, you specify the individual shares that are sold. If you have kept track of the purchase prices and dates of all your fund shares, including shares purchased with reinvested distributions, you will be able to identify, for example, those shares with the highest purchase prices and indicate that they are the shares you are selling. This strategy gives you the smallest capital gain and could save you a significant amount on your taxes.

To take advantage of this method, you must, at the time of the sale or exchange, indicate to your broker or to the mutual fund itself the particular shares you are selling. The IRS also insists that you receive written confirmation of your instructions.

To see the advantages and disadvantages of these methods of identifying sold shares, see How The Various Identification Methods Compare (below).

Money market funds present a very simple case when you redeem shares. Because most money market funds maintain a stable net asset value of $1 per share, you have no capital gain or loss when you sell shares. Thus, you only pay tax on any earnings distributed.

Avoid Backup Withholding

One way the IRS makes sure it receives taxes owed by taxpayers is through backup withholding. In the mutual fund context, this means that a mutual fund company is required to deduct and withhold a specified percentage (see below) of your dividend and redemption proceeds if one of the following situations has occurred:

You have not supplied your taxpayer identification number (Social Security number) to the fund company;
You supplied a TIN that the IRS finds to be wrong;
The IRS finds you have underreported your interest and dividend payments; or
You failed to tell the fund company you are not subject to backup withholding.

The backup withholding percentage is 24 percent for tax years 2018-2025 (28 percent in prior years).

Don't Forget State Taxation

Many states treat mutual fund distributions the same way the federal government does. There are, however, some differences. For example,:

If your mutual fund invests in U.S. government obligations, states generally exempt from state taxation dividends attributable to federal obligation interest.
Most states do not tax income from their own obligations, whether held directly or through mutual funds. On the other hand, the majority of states do tax income from the obligations of other states. Thus, in most states, you will not pay state tax to the extent you receive, through the fund, income from obligations issued by your state or its municipalities.
Most states don't grant reduced rates for capital gains or dividends.

Don't Overlook Possible Tax Credits for Foreign Income

If your fund invests in foreign stocks or bonds, part of the income it distributes may have been subject to foreign tax withholding. If so, you may be entitled to a tax deduction or credit for your pro-rata share of taxes paid. Your fund will provide you with the necessary information.

Because a tax credit provides a dollar-for-dollar offset against your tax bill, while a deduction reduces the amount of income on which you must pay tax, it is generally advantageous to claim the foreign tax credit. If the foreign tax doesn't exceed $300 ($600 on a joint return), then you may not need to file IRS form 1116 to claim the credit.

Be Careful About Trying the "Wash Sale" Rule

If you sell fund shares at a loss (so you can take a capital loss on your return) and then repurchase shares in the same fund shortly thereafter, beware of the wash sale rule. This rule bars a loss deduction when a taxpayer buys "substantially identical" shares within 30 days before or after the date of sale.

Be sure to wait more than thirty (30) days before reinvesting.

Choose Tax-Efficient Funds

Many investors who hold mutual funds directly may hold others through tax-sheltered accounts such as 401(k)s, IRAs, and Keoghs. Your aggressive high-turnover funds and high-income funds should be in tax-sheltered accounts. These generate more current income and gains, currently taxable if held directly but tax-deferred in tax-sheltered accounts. Buy-to-hold funds and low activity funds such as index funds should be owned directly (as opposed to a tax-sheltered account). With relatively small currently distributable income, such investments can continue to grow with only a modest reduction for current taxes.

For some investors, the simpler approach may be to hold mutual funds personally and more highly taxed income (such as bond interest) in the tax-sheltered account.

As you can see, there are many tax pitfalls that await the unwary mutual fund investor. Professional guidance should be considered to minimize the tax impact.

How The Various Identification Methods Compare.

To illustrate the advantages and disadvantages of the various methods of identifying the shares that you sell, assume that you bought 100 shares of Fund PQR in January 2005 at $20 a share, 100 shares in January 2006 at $30 a share, and 100 shares in November 2010 at $46 a share. You sell 50 shares in June of this year for $50 a share. Here are your alternative ways to determine cost basis.

First-In, First-Out (FIFO) . The FIFO method identifies the 50 shares sold as among the first 100 shares purchased. Your cost basis per share is $20. This rate gives you a capital gain of $1,500 ($2,500 - (50 x $20)).
Advantages/Disadvantages. In this example, this method produces the highest amount of capital gain on which you are taxed. FIFO provides the lowest capital gain amount when the fund's net asset value has declined, and the first shares purchased were the most expensive. It can also sometimes save tax when shares bought later weren't held long enough to qualify for long-term capital gains treatment.
Average Cost/Single Category. Average cost/single category allows you to calculate the average price paid for all shares in the fund. Here, your cost basis per share is $32 (your 300 shares cost $9,600: $9,600 divided by 300 = $32), giving you a capital gain of $900 ($2,500 - (50 x $32)).
Advantages/Disadvantages. : Compared to FIFO, this method can reduce the amount of your capital gain if the fund's net asset value has increased over time. You could generate a lower long-term capital gain by using specific identification, but average cost/single category is useful if you did not designate shares at the time of sale or you simply do not want to do the record-keeping required to use the specific identification method.
Average Cost/Double Category. Under this method, you average the cost of the short-term shares (those held for one year or less) and the cost of the long-term shares (those held for more than one year) separately. Thus, in the long-term category, you have 200 shares at $5,000 for an average cost of $25 per share ($5,000 x 200), and in the short-term category, you have 100 shares at $4,600 for an average cost of $46 per share ($4,600 divided by 100). Comparing the two categories, your taxable gain using the long-term shares would be $1,250 ($2,500 - (50 x $25)), to be taxed at up to 20 percent, while your taxable gain using the short-term shares would be $200 ($2,500 - (50 x $46)), to be taxed at up to 37 percent (top rate for 2023).
Advantages/Disadvantages. In this example, using the average cost of short-term shares produces a better result. However, because of the current spread between the top marginal income tax rates and the maximum rate on long-term capital gains, it could make sense in some instances to choose the long-term shares. Furthermore, as with specific identification, you must plan ahead to use this method by specifying to the broker or mutual fund company at the time of sale that you are selling short-term or long-term shares, and you must receive confirmation of your specification in writing. If you have elected to use average cost-double category but do not specify for a particular redemption whether you are redeeming short-term or long-term shares, the IRS will deem you to have redeemed the long-term shares first.
Specific identification. With this method, you designate which shares you are selling. To reduce your capital gains tax bill the most, you would select the shares with the highest purchase price. In this case, you would identify the 50 shares sold as among those purchased in 1999. Your cost basis, therefore, is $46 per share, giving you a capital gain of $200 ($2,500 - (50 x $46)).
Advantages/Disadvantages: This method can produce favorable results in lowering the capital gain, but IRS regulations require you to think ahead by providing instructions before the sale and then receiving confirmation of your specification in writing. The IRS will not let you designate shares after the fact.

Government and Non-Profit Agencies

US Securities and Exchange Commission (SEC)

Securities and Exchange Commission
100 F Street, NE
Washington, D.C. 20549
(202) 942-8088

The SEC has public reference rooms at its headquarters in Washington, D.C., and at its Northeast and Midwest Regional offices. Copies of the text of documents filed in these reference rooms may be obtained by visiting or writing the Public Reference Room (at a standard per page reproduction rate) or through private contractors (who charge for research and/or reproduction).

Other sources of information filed with the SEC include public or law libraries, securities firms, financial service bureaus, computerized on-line services, and the companies themselves.

Most companies whose stock is traded over the counter or on a stock exchange must file "full disclosure" reports on a regular basis with the SEC. The annual report (Form 10-K) is the most comprehensive of these. It contains a narrative description and statistical information on the company's business, operations, properties, parents, and subsidiaries; its management, including their compensation and ownership of company securities: and significant legal proceedings that involve the company. Form 10-K also contains the audited financial statements of the company (including a balance sheet, an income statement, and a statement of cash flow) and provides management's discussion of business operations and prospects for the future.

Quarterly financial information on Form 8-K may be required as well.

Anyone may search the SEC's Company Filings database for information regarding including quarterly and annual reports, registration statements for IPOs and other offerings, insider trading reports, and proxy materials.

American Association of Individual Investors
(Offers an a n nual guide to low-load mutual funds):

625 North Michigan Avenue
Chicago, IL 60611
Tel: 312-280-0170 or 800-428-2244

Investment Company Institute
(Publishes an annual directory of mutual funds):

1401 H Street NW, Suite 1200
Washington, DC 20005
Tel: 202-326-5800

Investment Management Education Alliance
(Offers a free Portfolio tool, complete with data from Morningstar, Inc.):

2345 Grand Boulevard
Kansas City, MO 64108
Tel: 816-454-9427

Tax Saving Strategies: A Helpful Checklist

Wed, 11 Oct 2023 17:44:57 GMT

This Financial Guide provides tax saving strategies for deferring income and maximizing deductions and includes some strategies for specific categories of individuals, such as those with high income and those who are self-employed.

Before getting into the specifics, however, we would like to stress the importance of proper documentation. Many taxpayers forgo worthwhile tax deductions because they have neglected to keep receipts or records. Keeping adequate records is required by the IRS for employee business expenses, deductible travel and entertainment expenses, and charitable gifts and travel. But don't do it just because the IRS says so. Neglecting to track these deductions can lead to overlooking them. You also need to maintain records regarding your income. If you receive a large tax-free amount, such as a gift or inheritance, make certain to document the item so that the IRS does not later claim that you had unreported income.

The checklist items listed below are for general information only and should be tailored to your specific situation. If you think one of them fits your tax situation, we'd be happy to discuss it with you.

Avoid or Defer Income Recognition

Deferring taxable income makes sense for two reasons. Most individuals are in a higher tax bracket in their working years than they are during retirement. Deferring income until retirement may result in paying taxes on that income at a lower rate. Additionally, through the use of tax-deferred retirement accounts you can actually invest the money you would have otherwise paid in taxes to increase the amount of your retirement fund.

You can achieve the same effect of deferring income by accelerating deductions, for example, by paying a state estimated tax installment in December instead of at the following January due date.

Max Out Your 401(k) or Similar Employer Plan

Many employers offer plans where you can elect to defer a portion of your salary and contribute it to a tax-deferred retirement account. For most companies, these are referred to as 401(k) plans. For many other employers, such as universities, a similar plan called a 403(b) is available.

Check with your employer about the availability of such a plan and contribute as much as possible to defer income and accumulate retirement assets.

Some employers match a portion of employee contributions to such plans. If this is available, you should structure your contributions to receive the maximum employer matching contribution.

If You Have Your Own Business, Set Up and Contribute to a Retirement Plan

If you have your own business, consider setting up and contributing as much as possible to a retirement plan. These are allowed even for a sideline or moonlighting business. Several types of plans are available which minimize the paperwork involved in establishing and administering such a plan.

Contribute to an IRA

If you have income from wages or self-employment income, you can build tax-sheltered investments by contributing to a traditional or a Roth IRA. You may also be able to contribute to a spousal IRA -even where the spouse has little or no earned income.

All IRAs defer the taxation of IRA investment income and in some cases can be deductible or be withdrawn tax-free.

To get the most from IRA contributions, fund the IRA as early as possible in the year. Also, pay the IRA trustee out of separate funds, not out of the amount in the IRA. Following these two rules will ensure that you get the most tax-deferred earnings possible from your money.

Defer Bonuses or Other Earned Income

If you are due a bonus at year-end, you may be able to defer receipt of these funds until January. This can defer the payment of taxes (other than the portion withheld) for another year. If you're self-employed, defer sending invoices or bills to clients or customers until after the new year begins. Here, too, you can defer some of the tax, subject to estimated tax requirements.

This may even save taxes if you are in a lower tax bracket in the following year. Be advised, however, that the amount subject to social security or self-employment tax increases each year.

Accelerate Capital Losses and Defer Capital Gains

If you have investments on which you have an accumulated loss, it may be advantageous to sell them prior to year-end. Capital losses are deductible up to the amount of your capital gains plus $3,000. If you are planning on selling an investment on which you have an accumulated gain, it may be best to wait until after the end of the year to defer payment of the taxes for another year (subject to estimated tax requirements).

For most capital assets held more than 12 months (long-term capital gains) the maximum capital gains tax is 20 percent. However, make sure to consider the investment potential of the asset. It may be wise to hold or sell the asset to maximize the economic gain or minimize the economic loss.

Watch Trading Activity in Your Portfolio

When your mutual fund manager sells stock at a gain, these gains pass through to you as realized taxable gains, even though you don't withdraw them, so you may prefer a fund with low turnover, assuming satisfactory investment management.

Turnover isn't a tax consideration in tax-sheltered funds such as IRAs or 401(k)s. For growth stocks you invest in directly and hold for the long term, you pay no tax on the appreciation until you sell them. No capital gains tax is imposed on appreciation at your death.

Use the Gift-Tax Exclusion to Shift Income

You can give away $17,000 ($34,000 if joined by a spouse) per donee in 2023, per year without paying federal gift tax. You can give $17,000 to as many donees as you like. While the gift on these transfers is not taxable, any income earned on these gifts will be taxed at the donee's tax rate, which in many cases is lower.

Special rules apply to children under age 18. Also, if you directly pay the medical or educational expenses of the donee, such gifts will not be subject to gift tax.

Invest in Treasury Securities

For high-income taxpayers, who live in high-income-tax states, investing in Treasury bills, bonds, and notes can pay off in tax savings.

The interest on Treasuries is exempt from state and local income tax. Also, investing in Treasury bills that mature in the next tax year results in a deferral of the tax until the next year.

Consider Tax-Exempt Municipal Bonds

Interest on state or local municipal bonds is generally exempt from federal income tax and from tax by the issuing state or locality. For that reason, interest paid on such bonds is somewhat less than that paid on commercial bonds of comparable quality.

However, for individuals in higher brackets, the interest from municipal bonds will often be greater than from higher-paying commercial bonds after reduction for taxes. Gain on sale of municipal bonds is taxable and loss is deductible. Tax-exempt interest is sometimes an element in the computation of other tax items. Interest on loans to buy or carry tax-exempts is non-deductible.

Give Appreciated Assets to Charity

If you're planning to make a charitable gift, it generally makes more sense to give appreciated long-term capital assets to the charity, instead of selling the assets and giving the charity the after-tax proceeds.

Donating the assets instead of the cash prevents your having to pay capital gains tax on the sale, which can result in considerable savings, depending on your tax bracket and the amount of tax that would be due on the sale. Additionally, you can obtain a tax deduction for the fair market value of the property.

Many taxpayers also give depreciated assets to charity. The deduction is for fair market value; no loss deduction is allowed for depreciation in value of a personal asset. Depending on the item donated, there may be strict valuation rules and deduction limits.

Keep Track of Mileage Driven for Business, Medical or Charitable Purposes

If you drive your car for business, medical or charitable purposes, you may be entitled to a deduction for miles driven. For 2023, it's 65.5 cents per mile for business, 22 cents for medical and moving purposes (members of the armed forces only for tax years 2018-2025), and 14 cents for service for charitable organizations. To substantiate the deduction, you need to keep detailed daily records of the mileage driven for these purposes.

Take Advantage of Your Employer's Benefit Plans to Get an Effective Deduction for Items Such as Medical Expenses

Medical and dental expenses are generally only deductible to the extent they exceed 7.5 percent of your adjusted gross income (AGI). For most individuals, particularly those with high incomes, this eliminates the possibility of a deduction. You can effectively get a deduction for these items if your employer offers a Flexible Spending Account, sometimes called a cafeteria plan.

These plans permit you to redirect a portion of your salary to pay these types of expenses with pretax dollars. Another such arrangement is a Health Savings Account. Ask your employer if they provide either of these plans.

Check Out Separate Filing Status

Certain married couples may benefit from filing separately instead of jointly. Consider filing separately if you meet the following criteria:

One spouse has large medical expenses, miscellaneous itemized deductions, or casualty losses.
The spouses' incomes are about equal.

Separate filing may benefit such couples because the adjusted gross income "floors" for taking the listed deductions will be computed separately. On the other hand, some tax benefits are denied to couples filing separately. In some states, filing separately can also save a significant amount of state income taxes.

If Self-Employed, Take Advantage of Special Deductions

You may be able to expense up to $1,160,000 in 2023 for qualified equipment purchases for use in your business immediately instead of writing it off over many years. Additionally, self-employed individuals can deduct 100 percent of their health insurance premiums as business expenses. You may also be able to establish a Keogh, SEP or SIMPLE IRA plan, or a Health Savings Account, as mentioned above.

If Self-Employed, Hire Your Child in the Business

If your child is under age 18, he or she is not subject to employment taxes from your unincorporated business (income taxes still apply). This will reduce your income for both income and employment tax purposes and shift assets to the child at the same time; however, you cannot hire your child if he or she is under the age of 8 years old.

Take Out a Home-Equity Loan

Due to tax reform legislation passed in 2017, the following information applies only to tax years prior to 2018. For tax years 2018-2025, interest on home equity loans is not deductible when used for the purposes listed below.

Most consumer-related interest expense, such as from car loans or credit cards, is not deductible. Interest on a home equity loan, however, can be deductible. It may be advisable to take out a home-equity loan to pay off other nondeductible obligations.

Bunch Your Itemized Deductions

Certain itemized deductions, such as medical or employment-related expenses, are only deductible if they exceed a certain amount. It may be advantageous to delay payments in one year and prepay them in the next year to bunch the expenses in one year. This way you stand a better chance of getting a deduction.

Recordkeeping: Frequently Asked Questions

Wed, 11 Oct 2023 17:35:57 GMT

What kind of records do I need to keep in my business?

Complete and accurate financial record keeping is crucial to your business success. Good records provide the financial data that helps you operate more efficiently. Accurate and complete records enable you to identify all your business assets, liabilities, income, and expenses. That information helps you pinpoint both the strong and weak phases of your business operations.

Moreover, good records are essential for the preparation of current financial statements, such as the income statement (profit and loss) and cash-flow projection. These statements, in turn, are critical for maintaining good relations with your banker. Finally, good records help you avoid underpaying or overpaying your taxes. In addition, good records are essential during an Internal Revenue Service audit, if you hope to answer questions accurately and to the satisfaction of the IRS.

To assure your success, your financial records should show how much income you are generating now and project how much income you can expect to generate in the future. They should inform you of the amount of cash tied up in accounts receivable. Records also need to indicate what you owe for merchandise, rent, utilities, and equipment, as well as such expenses as payroll, payroll taxes, advertising, equipment and facilities maintenance, and benefit plans for yourself and employees.

Records will tell you how much cash is on hand and how much is tied up in inventory. They should reveal which of your product lines, departments, or services are making a profit, as well as your gross and net profit.

The Basic Recordkeeping System

A basic record-keeping system needs a basic journal to record transactions, accounts receivable records, accounts payable records, payroll records, petty cash records, and inventory records.

An accountant can develop the entire system most suitable for your business needs and train you in maintaining these records on a regular basis. These records will form the basis of your financial statements and tax returns.

What do I need to know about automating part or all of my business?

You must have a clear understanding of your firm's long- and short-range goals, the advantages and disadvantages of all of the alternatives to a computer and, specifically, what you want to accomplish with a computer.

Compare the best manual (non-computerized) system you can develop with the computer system you hope to get. It may be possible to improve your existing manual system enough to accomplish your goals. In any event, one cannot automate a business without first creating and improving manual systems.

Business Applications Performed by Computers

A computer's multiple capabilities can solve many business problems from keeping transaction records and preparing statements and reports to maintaining customer and lead lists, creating brochures, and paying your staff. A complete computer system can organize and store many similarly structured pieces of information, perform complicated mathematical computations quickly and accurately, print information quickly and accurately, facilitate communications among individuals, departments, and branches, and link the office to many sources of data available through larger networks.

Computers can also streamline such manual business operations as accounts receivable, advertising, inventory, payroll, and planning. With all of these operations, the computer increases efficiency, reduces errors, and cuts costs.

Computer Business Applications

Computers also can perform more complicated operations, such as financial modeling programs that prepare and analyze financial statements and spreadsheets and accounting programs that compile statistics, plot trends, and markets, and do market analysis, modeling, graphs, and forms. Various word processing programs produce typewritten documents and provide text-editing functions while desktop publishing programs enable you to create good quality print materials on your computer. Critical path analysis programs divide large projects into smaller, more easily managed segments or steps.

How can I ensure that I'm choosing the right computer system?

To computerize your business you need to choose the best programs for your business, select the right equipment, and then implement the various applications associated with the software. In addition, application software is composed of programs that make the computer perform particular functions, such as payroll check writing, accounts receivable, posting or inventory reporting and are normally purchased separately from the computer hardware. QuickBooks is a good example of this type of software.

To determine your requirements, prepare a list of all functions in your business. in which speed and accuracy are needed for handling volumes of information. These are called applications.

For each of these applications make a list of all reports that are currently produced. You should also include any pre-printed forms such as checks, billing statements or vouchers. If such forms don't exist, develop a good idea of what you want - a hand-drawn version will help. For each report list the frequency with which it is to be generated, who will generate it and the number of copies needed. In addition to printed matter, make a list of information that you want to display on the computer video screen (CRT).

For all files you are keeping manually or expect to computerize list, identify how you retrieve a particular entry. Do you use account numbers or are they organized alphabetically by name? What other methods would you like to use to retrieve a particular entry? Zip code? Product purchased? Indeed, the more detailed you are, the better your chance of finding programs compatible with your business.

How can I successfully implement a new computer system?

When implementing computer applications for your business, problems are inevitable, but proper planning can help you avoid some and mitigate the effects of others. First, explain to each affected employee how the computer will change his or her position. Set target dates for key phases of the implementation, especially the last date for format changes. Be sure the location for your new computer meets the system's requirements for temperature, humidity, and electrical power. Prepare a prioritized list of applications to be converted from manual to computer systems, and then train, or have the vendors train, everyone who will be using the system.

After installation, each application on the conversion list should be entered and run parallel with the preexisting, corresponding manual system until you have verified that the new system works.

System Security

If you will have confidential information in your system, you will want safeguards to keep unauthorized users from stealing, modifying or destroying the data. You can simply lock up the equipment, or you can install user identification and password software.

Data Safety

The best and cheapest insurance against lost data is to back up information on each diskette regularly. Copies should be kept in a safe place away from the business site. Also, it is useful to have and test a disaster recovery plan and to identify all data, programs, and documents needed for essential tasks during recovery from a disaster.

Finally, be sure to employ more than one person who can operate the system, and ensure that all systems are continually monitored.

Retirement Plan Options For Small Businesses

Wed, 11 Oct 2023 17:31:53 GMT

According to the US Small Business Administration, small businesses employ half of all private-sector employees in the United States. However, a majority of small businesses do not offer their workers retirement savings benefits.

If you're like many other small business owners in the United States, you may be considering the various retirement plan options available for your company. Employer-sponsored retirement plans have become a key component for retirement savings. They are also an increasingly important tool for attracting and retaining the high-quality employees you need to compete in today's competitive environment.

Besides helping employees save for the future, however, instituting a retirement plan can provide you, as the employer, with benefits that enable you to make the most of your business's assets. Such benefits include:

Tax-deferred growth on earnings within the plan
Current tax savings on individual contributions to the plan
Immediate tax deductions for employer contributions
Easy to establish and maintain
Low-cost benefit with a highly-perceived value by your employees

Types of Plans

Most private sector retirement plans are either defined benefit plans or defined contribution plans. Defined benefit plans are designed to provide a desired retirement benefit for each participant. This type of plan can allow for a rapid accumulation of assets over a short period of time. The required contribution is actuarially determined each year, based on factors such as age, years of employment, the desired retirement benefit, and the value of plan assets. Contributions are generally required each year and can vary widely.

A defined contribution plan, on the other hand, does not promise a specific amount of benefit at retirement. In these plans, employees or their employer (or both) contribute to employees' individual accounts under the plan, sometimes at a set rate (such as 5 percent of salary annually). A 401(k) plan is one type of defined contribution plan. Other types of defined contribution plans include profit-sharing plans, money purchase plans, and employee stock ownership plans.

Small businesses may choose to offer a defined benefit plan or any of these defined contribution plans. Many financial institutions and pension practitioners make available both defined benefit and defined contribution "prototype" plans that have been pre-approved by the IRS. When such a plan meets the requirements of the tax code it is said to be qualified and will receive four significant tax benefits.

The income generated by the plan assets is not subject to income tax because the income is earned and managed within the framework of a tax-exempt trust.
An employer is entitled to a current tax deduction for contributions to the plan.
The plan participants (the employees or their beneficiaries) do not have to pay income tax on the amounts contributed on their behalf until the year the funds are distributed to them by the employer.
Under the right circumstances, beneficiaries of qualified plan distributors are afforded special tax treatment.

It is necessary to note that all retirement plans have important tax, business, and other implications for employers and employees. Therefore, you should discuss any retirement savings plan that you consider implementing with your accountant or financial advisor.

Here's a brief look at some plans that can help you and your employees save.

SIMPLE: Savings Incentive Match Plan

A SIMPLE IRA plan allows employees to contribute a percentage of their salary each paycheck and to have their employer match their contribution. Under SIMPLE IRA plans, employees can set aside up to $15,500 in 2023 ($14,000 in 2022) by payroll deduction. If the employee is 50 or older then they may contribute an additional $3,500. Employers can either match employee contributions dollar for dollar - up to 3 percent of an employee's wage - or make a fixed contribution of two percent of pay for all eligible employees instead of a matching contribution.

SIMPLE IRA plans are easy to set up by filling out a short form. Administrative costs are low and much of the paperwork is done by the financial institution that handles the SIMPLE IRA plan accounts. Employers may choose either to permit employees to select the IRA to which their contributions will be sent or to send contributions for all employees to one financial institution. Employees are 100 percent vested in contributions, get to decide how and where the money will be invested, and keep their IRA accounts even when they change jobs.

SEP: Simplified Employee Pension Plan

A SEP plan allows employers to set up a type of individual retirement account - known as a SEP IRA - for themselves and their employees. Employers must contribute a uniform percentage of pay for each employee. Employer contributions are limited to whichever is less: 25 percent of an employee's annual salary or $66,000 in 2023 (up from $61,000 in 2022). SEP plans can be started by most employers, including those who are self-employed.

SEP plans have low start-up and operating costs and can be established using a single quarter-page form. Businesses are not locked into making contributions every year. You can decide how much to put into a SEP IRA each year - offering you some flexibility when business conditions vary.

401(k) Plans

401(k) plans have become a widely accepted savings vehicle for small businesses and allow employees to contribute a portion of their own incomes toward their retirement. The employee contributions, not to exceed $22,500 in 2023 ($20,500 in 2022), reduce a participant's pay before income taxes, so that pre-tax dollars are invested. If the employee is 50 or older then they may contribute another $7,500 in 2023. Employers may offer to match a certain percentage of the employee's contribution, increasing participation in the plan.

While more complex, 401(k)plans offer higher contribution limits than SIMPLE IRA plans and IRAs, allowing employees to accumulate greater savings.

Profit-Sharing Plans

Employers also may make profit-sharing contributions to plans that are unrelated to any amounts an employee chooses to contribute. Profit-sharing Plans are well suited for businesses with uncertain or fluctuating profits. In addition to the flexibility in deciding the amounts of the contributions, a Profit-Sharing Plan can include options such as service requirements, vesting schedules and plan loans that are not available under SEP plans.

Contributions may range from 0 to 25 percent of eligible employees' compensation, to a maximum of $66,000 in 2023 (up from $61,000 in 2022) per employee. The contribution in any one year cannot exceed 25 percent of the total compensation of the employees participating in the plan.

Contributions need not be the same percentage for all employees. Key employees may actually get as much as 25 percent while others may get as little as three percent. A plan may combine these profit-sharing contributions with 401(k) contributions (and matching contributions).

Your Goals for a Retirement Plan

Business owners set up retirement plans for different reasons. Why are you considering one? Do you want to:

Take advantage of the tax breaks, to save more money than you'd otherwise be able to.
Provide competitive benefits in addition to - or in lieu of - high pay to employees?
Primarily save for your own retirement?

You might say "All of the above." Small employers who want to set up retirement plans generally fall into one of two groups. The first group includes those who want to set up a retirement plan primarily because they want to create a tax-advantage savings vehicle for themselves and thus want to allocate the greatest possible part of the contribution to the owners. The second group includes those who just want a low-cost, simple retirement plan for employees.

If there were one plan that was most efficient in doing all these things, there wouldn't be so many choices. That's why it's so important to know what your goal is. Each type of plan has different advantages and disadvantages, and you can't really pick the best ones unless you know what your real purpose is in offering a plan. Once you have an idea of what your motives are, you're in a better position to weigh the alternatives and make the right pension choice.

If you do decide that you want to offer a retirement plan, then you are definitely going to need some professional advice and guidance. Pension rules are complex and the tax aspects of retirement plans can also be confusing. Make sure you confer with your accountant before deciding which plan is right for you and your employees.

Turn your Vacation Into a Tax Deduction

Wed, 11 Oct 2023 17:18:30 GMT

How would you like to legally deduct every dime you spend on vacation this year? This financial guide offers strategies that help you do just that.

Tim, who owns his own business, decided he wanted to take a two-week trip around the US. So he did - and was able to legally deduct every dime that he spent on his "vacation." Here's how he did it.

1. Make all your business appointments before you leave for your trip.

Most people believe that they can go on vacation and simply hand out their business cards in order to make the trip deductible.

Wrong.

You must have at least one business appointment before you leave in order to establish the "prior set business purpose" required by the IRS. Keeping this in mind, before he left for his trip, Tim set up appointments with business colleagues in the various cities that he planned to visit.

Let's say Tim is a manufacturer of green office products looking to expand his business and distribute more product. One possible way to establish business contacts - if he doesn't already have them - is to place advertisements looking for distributors in newspapers in each location he plans to visit. He could then interview those who respond when he gets to the business destination.

Tim wants to vacation in Hawaii. If he places several advertisements for distributors, or contacts some of his downline distributors to perform a presentation, then the IRS would accept his trip for business.

It would be vital for Tim to document this business purpose by keeping a copy of the advertisement and all correspondence along with noting what appointments he will have in his diary.

2. Make Sure your Trip is All "Business Travel."

In order to deduct all of your on-the-road business expenses, you must be traveling on business. The IRS states that travel expenses are 100 percent deductible as long as your trip is business-related you are traveling away from your regular place of business longer than an ordinary day's work and you need to sleep or rest to meet the demands of your work while away from home.

Tim wanted to go to a regional meeting in Boston, which is only a one-hour drive from his home. If he were to sleep in the hotel where the meeting will be held (in order to avoid possible automobile and traffic problems), his overnight stay qualifies as business travel in the eyes of the IRS.

Remember: You don't need to live far away to be on business travel. If you have a good reason for sleeping at your destination, you could live a couple of miles away and still be on travel status.

3. Make sure that you deduct all of your on-the-road-expenses for each day you're away.

For every day you are on business travel, you can deduct 100 percent of lodging, tips, car rentals, and 50 percent of your food. Tim spends three days meeting with potential distributors. If he spends $50 a day for food, he can deduct 50 percent of this amount, or $25. The IRS doesn't require receipts for travel expense under $75 per expense - except for lodging.

For 2021 and 2022 only, business-related meals purchased from a restaurant (for eat-in or take-out) are deductible at 100 percent.

Let's look at an example:

If Tim pays $6 for drinks on the plane, $6.95 for breakfast, $12.00 for lunch, $50 for dinner, he does not need receipts for anything since each item was under $75. He would, however, need to document these items in a diary. A good tax diary is essential in order to audit-proof your records. Adequate documentation shall consist of amount, date, place and business reason for the expense.

If, however, Tim stays in the Bates Motel and spends $22 on lodging, will he need a receipt? The answer is yes. You need receipts for all paid lodging.

Not only are your on-the-road expenses deductible from your trip, but also all laundry, shoe shines, manicures, and dry-cleaning costs for clothes worn on the trip. Thus, your first dry cleaning bill that you incur when you get home will be fully deductible. Make sure that you keep the dry cleaning receipt and have your clothing dry cleaned within a day or two of getting home.

4. Sandwich weekends between business days.

If you have a business day on Friday and another one on Monday, you can deduct all on-the-road expenses during the weekend.

Tim makes business appointments in Florida on Friday and one on the following Monday. Even though he has no business on Saturday and Sunday, he may deduct on-the-road business expenses incurred during the weekend.

5. Make the majority of your trip days business days.

The IRS says that you can deduct transportation expenses if business is the primary purpose of the trip. A majority of days in the trip must be for business activities, otherwise, you cannot make any transportation deductions.

Tim spends six days in San Diego. He leaves early on Thursday morning. He had a seminar on Friday met with distributors on Monday and flew home on Tuesday, taking the last flight of the day home after playing a complete round of golf. How many days are considered business days?

All of them. Thursday is a business day since it includes traveling - even if the rest of the day is spent at the beach. Friday is a business day because he had a seminar. Monday is a business day because he met with prospects and distributors in pre-arranged appointments.

Saturday and Sunday are sandwiched between business days, so they count, and Tuesday is a travel day.

Since Tim accrued six business days, he could spend another five days having fun and still deduct all his transportation to San Diego. The reason is that the majority of the days were business days (six out of eleven). However, he can only deduct six days worth of lodging, dry cleaning, shoe shines, and tips. The important point is that Tim would be spending money on lodging, airfare, and food, but now most of his expenses will become deductible.

With proper planning, you can deduct most of your vacations if you combine them with business. Bon Voyage!

The Home Office Deduction

Wed, 11 Oct 2023 17:08:22 GMT

Under the IRS rules, a taxpayer is allowed to deduct expenses related to business use of a home, but only if the space is used "exclusively" on a "regular basis." To qualify for a home office deduction you must meet one of the following requirements:

Exclusive and regular use as your principal place of business
A place for meeting with clients or customers in the ordinary course of business
A place for the taxpayer to perform administrative or management activities associated with the business, provided there is no other fixed location from which the taxpayer conducts a substantial amount of such administrative or management activities

A separate structure not attached to your dwelling unit that is used regularly and exclusively for your trade or profession also qualifies as a home office under the IRS definition.

The exclusive-use test is satisfied if a specific portion of the taxpayer's home is used solely for business purposes or inventory storage. The regular-basis test is satisfied if the space is used on a continuing basis for business purposes. Incidental business use does not qualify.

In determining the principal place of business, the IRS considers two factors: Does the taxpayer spend more business-related time in the home office than anywhere else? Are the most significant revenue-generating activities performed in the home office? Both of these factors must be considered when determining the principal place of business.

Employees

For tax years prior to 2018, employees could claim home office expenses as deductions provided they met additional rules such as business use must also be for the convenience of the employer (not just the employee). To qualify for the home-office deduction, an employee must satisfy two additional criteria.

First, the use of the home office must be for the convenience of the employer (for example, the employer does not provide a space for the employee to do his/her job). Second, the taxpayer does not rent all or part of the home to the employer and use the rented portion to perform services as an employee for the employer. Employees who telecommute may be able to satisfy the requirements for the home-office deduction.

To qualify for the home-office deduction, an employee must satisfy two additional criteria. First, the use of the home office must be for the convenience of the employer (for example, the employer does not provide a space for the employee to do his/her job).

Second, the taxpayer does not rent all or part of the home to the employer and use the rented portion to perform services as an employee for the employer. Employees who telecommute may be able to satisfy the requirements for the home-office deduction.

Expenses

Home office expenses are classified into three categories:

Direct Business Expenses relate to expenses incurred for the business part of your home such as additional phone lines, long-distance calls, and optional phone services. Basic local telephone service charges (that is, monthly access charges) for the first phone line in the residence generally do not qualify for the deduction.

Indirect Business Expenses are expenditures that are related to running your home such as mortgage or rent, insurance, real estate taxes, utilities, and repairs.

Unrelated Expenses such as painting a room that is not used for business or lawn care are not deductible.

Deduction Limit

You can deduct all your business expenses related to the use of your home if your gross income from the business use of your home equals or exceeds your total business expenses (including depreciation). But, if your gross income from the business use of your home is less than your total business expenses, your deduction for certain expenses for the business use of your home is limited.

Nondeductible expenses such as insurance, utilities, and depreciation that are allocable to the business are limited to the gross income from the business use of your home minus the sum of the following:

The business part of expenses you could deduct even if you did not use your home for business (such as mortgage interest, real estate taxes, and casualty and theft losses that are allowable as itemized deductions on Schedule A (Form 1040)). These expenses are discussed in detail under Deducting Expenses, later.
The business expenses that relate to the business activity in the home (for example, business phone, supplies, and depreciation on equipment), but not to the use of the home itself.

If your deductions are greater than the current year's limit, you can carry over the excess to the next year. They are subject to the deduction limit for that year, whether or not you live in the same home during that year.

Sale of Residence

If you use property partly as a home and partly for business, tax rules generally permit a $500,000 (married filing jointly) or $250,000 (single or married filing separately) exclusion on the gain from the sale of a primary residence provided certain ownership and use tests are met during the 5-year period ending on the date of the sale:

You owned the home for at least 2 years (ownership test), and
You lived in the home as your main home for at least 2 years (use test).

If the part of your property used for business is within your home, such as a room used as a home office for a business there is no need to allocate gain on the sale of the property between the business part of the property and the part used as a home. However, if you used part of your property as a home and a separate part of it, such as an outbuilding, for business other rules apply such as whether the use test was met (or not met) for the business part and whether or not there was business use in the year of the sale.

If you need more information about whether you qualify for the exclusion, please don't hesitate to call us.

Simplified Home Office Deduction

If you're one of the more than 3.4 million taxpayers who claimed deductions for business use of a home (commonly referred to as the home office deduction), don't forget about the new simplified option available for taxpayers starting with 2013 tax returns. Taxpayers claiming the optional deduction will complete a significantly simplified form.

The new optional deduction is capped at $1,500 per year based on $5 a square foot for up to 300 square feet. Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method. Business expenses unrelated to the home, such as advertising, supplies, and wages paid to employees are still fully deductible.

Current restrictions on the home office deduction, such as the requirement that a home office must be used regularly and exclusively for business and the limit tied to the income derived from the particular business, still apply under the new option.

Tax Deductions

The "home office" tax deduction is valuable because it converts a portion of otherwise nondeductible expenses such as a mortgage, rent, utilities, and homeowners insurance into a deduction.

Remember however, that an individual is not entitled to deduct any expenses of using his/her home for business purposes unless the space is used exclusively on a regular basis as the "principal place of business" as defined above. The IRS applies a 2-part test to determine if the home office is the principal place of business.

Do you spend more business-related time in your home office than anywhere else?
Are the most significant revenue-generating activities performed in your home office?

If the answer to either of these questions is no, the home office will not be considered the principal place of business, and the deduction cannot be taken.

A home office also increases your business miles because travel from your home office to a business destination--whether it's meeting clients, picking up supplies, or visiting a job site--counts as business miles. And, you can depreciate furniture and equipment (purchased new for your business or converted to business use), as well as expense new equipment used in your business under the Section 179 expense election.

Taxpayers taking a deduction for business use of their home must complete Form 8829. If you have a home office or are considering one, please call us. We'll be happy to help you take advantage of these deductions.

7 Ways To Save Even More Income Taxes

Wed, 11 Oct 2023 16:57:29 GMT

1. IRA Funding Trick

If you don't have enough cash to make a deductible contribution to your IRA by April 15th, here is how you can still take the tax deduction for that tax year. To get started, all you need is an existing IRA.

Begin by having $6,000 distributed to you from your IRA. Once you have the $6,000, immediately deposit it back into your IRA. If you do this before April 15th, this counts as your deductible contribution for the year. The best part of this is that you have 60 days to "make up" the $6,000 withdrawal (and avoid penalties and taxes). To do this, simply deposit a $6,000 "rollback" into the same IRA account within 60 days and you will be able to avoid taxes and penalties on the original $6,000 distribution made to you.

This is a type of short-term loan from your IRA to make this year's deductible contribution before the April 15th due date; however, you can only do this once in a 12-month period. If you don't replace the money within 60 days, you may owe income tax and a 10 percent withdrawal penalty if you're under the age of 59 1/2.

A 2014 Tax Court opinion, Bobrow v. Commissioner, T.C. Memo. 2014-21 held that the limitation applies on an aggregate basis, meaning that an individual could not make an IRA-to-IRA rollover if he or she had made such a rollover involving any of the individual's IRAs in the preceding 1-year period. The IRS issued a revised regulation regarding this decision, which became effective on January 1, 2015.

The ability of an IRA owner to transfer funds from one IRA trustee directly to another is not affected because such a transfer is not a rollover and, therefore, is not subject to the one-rollover-per-year limitation.

2. Determine the "Best" Retirement Plan Option

As a self-employed small business owner, there are several retirement plan options available to you, but understanding which option is most advantageous to you can be confusing. The "best" option for you may depend on whether you have employees and how much you want to save each year.

There are four basic types of plans:

Traditional and Roth IRAS
Simplified Employee Pension (SEP) Plan and Savings Incentive Match Plan for Employees (SIMPLE)
Self-employed 401(k)
Qualified and Defined Benefit Plans

To make sure you are getting the most out of your financial future, contact the office to determine your eligibility and to figure out which plan is best for your tax situation.

3. Make Your Landlord Pay for Improvements

Instead of paying for leasehold improvements at your place of business, you can ask your landlord to pay for them. In return, you offer to pay your landlord more in rent over the term of the lease. By financing your leasehold improvements this way, both you and your landlord can save money on taxes.

Under the Tax Cuts and Jobs Act of 2017 (i.e., tax reform), qualified leasehold improvement was superseded by qualified improvement property (QIP). Ordinarily, you must deduct the cost of qualified improvements made to your place of business over a 39-year period (similar to that of depreciating real estate); however, up to $1,000,000 in qualified leasehold (as well as restaurant and retail) improvements can be expensed using the Section 179 deduction (subject to certain rules), thanks to tax reform legislation passed in late 2017. Improvements must be interior, that is, roof HVAC systems, façade work and other exterior improvements such as on the roof do not qualify.

Per the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Qualified Improvements to Property placed in service after 2017 are allowed over a 15-year period (vs. 39 years). In most cases, post-2017 QIP retroactively qualifies for the bonus depreciation deduction as well.

The PATH Act changed the definition of qualified property from qualified leasehold improvements to qualified improvement property. The rules regarding qualified improvement property differ from those for qualified leasehold improvement property in that the improvement does not have to be made pursuant to a lease and does not have to be made to a building more than three years old. For tax years 2016 and 2017, the rules still apply for defining qualified leasehold improvements. In addition, the 15-year recovery period for leasehold, retail, and restaurant improvements was made permanent by the PATH Act as well.

Qualified leasehold improvements completed before 2008 were eligible for a special 15-year recovery period. If in the year your lease term ends you move to another location, you can deduct the portion of the improvement cost that you have not previously deducted.

This normal scenario won't save you tax in the earlier years of the lease. Your landlord will have to put up the initial cash for the improvements, but you will cover that over time with increased payments in your rent. Since your landlord will be paying for the improvements, you will save tax early in the lease and your landlord will benefit as well!

At the same time, your landlord will gain depreciation deductions for the cost of the leasehold improvements. When you leave, your landlord will still have the improved property to offer other future tenants. It is a great opportunity for a win-win situation giving you faster access to invested monies.

4. Deduct Home Entertainment Expenses

If you host a company picnic or holiday party at your home, then the cost of meals at your home is a deductible expense and you can deduct 100% of your meal expenses. However, under tax reform, and starting in 2018, entertainment-related expenses are no longer deductible.

Prior to tax reform, 50 percent of your business-related entertainment expenses (with some exceptions) were generally deductible.

5. Deduct Holiday Gifts Without Receipts

Don't overlook the deductible benefit of business gifts during the holidays or at any other time of the year. Whether you are a rank-and-file employee, a self-employed individual, or even a shareholder-employee in your own corporation, you can deduct the cost of gifts made to clients and other business associates as a business expense. The law limits your maximum deduction to $25 in value for each recipient for which the gift was purchased with cash.

6. Deduct Your Home Computer.

Tax reform legislation passed in 2017 repealed certain itemized deductions on Schedule A, Itemized Deductions for tax years 2018 through 2025, including employee business expense deductions related to home office use. Prior to 2018, If you purchased a computer and used it for work-related purposes as an employee, you were able to deduct the cost as long as you met certain requirements such as your computer must be used for convenience and as a condition of your employment, for instance, or if you telecommute two days a week and work in the office the other three days.

If you are self-employed, you can take advantage of Section 179 expensing even if you don't claim the home office deduction. Section 179 allows you to write off new equipment (including computers) in the year it was purchased as long as it is used for business more than 50 percent of the time (subject to certain rules).

7. Have Your Company Buy You Dinner

Prior to tax reform, i.e., for tax years before 2018, this expense was 100 percent deductible. Furthermore, per tax reform legislation, this expense is nondeductible after 2025. However, for tax years prior to 2018, the following was allowed: If you are in a partnership or a shareholder-employee in a regular C or S corporation, and you have to work overtime, your company can, on occasion, provide you with meal money for dinner.

The cost of this "fringe benefit" is 50 percent deductible for your company under Section 132 of the Internal Revenue Code and you don't have to pay personal income tax on the value of the meal.

Your company can pay directly for the meal or can instead, provide you with dinner money. But, in order for this to work, the amount of money you receive for your meal must be reasonable. If the IRS decides that the amount of money you received from your employer was unreasonable, the entire amount will be considered taxable personal income and will not be deductible.

7 Biggest Misconceptions Business Owners Have About Their Returns

Wed, 11 Oct 2023 16:47:33 GMT

One of the biggest hurdles you'll face in running your own business is staying on top of your numerous obligations to federal, state, and local tax agencies. Tax codes seem to be in a constant state of flux, making the Internal Revenue Code barely understandable to most people.

The old legal saying that "ignorance of the law is no excuse" is perhaps most often applied in tax settings. It is safe to assume that a tax auditor presenting an assessment of additional taxes, penalties, and interest will not look kindly on an "I didn't know I was required to do that" claim. On the flip side, it is surprising how many small businesses overpay their taxes, neglecting to take deductions they're legally entitled to that can help them lower their tax bill.

Preparing your taxes and strategizing as to how to keep more of your hard-earned dollars in your pocket becomes increasingly difficult with each passing year. Your best course of action to save time, frustration, money, and an auditor knocking on your door, is to have a professional accountant handle your taxes.

Tax professionals have years of experience with tax preparation, religiously attend tax seminars, read scores of journals, magazines, and monthly tax tips, among other things, to correctly interpret the changing tax code.

When it comes to tax planning for small businesses, the complexity of tax law generates a lot of folklore and misinformation that also leads to costly mistakes. With that in mind, here is a look at some of the more common small business tax misperceptions.

1. All Start-up Costs Are Immediately Deductible

Business start-up costs refer to expenses incurred before you begin operating your business. Business start-up costs include both start-up and organizational costs and vary depending on the type of business. Examples of these types of costs include advertising, travel, surveys, and training. These start-up and organizational costs are generally called capital expenditures.

Costs for a particular asset (such as machinery or office equipment) are recovered through depreciation or Section 179 expensing. When you start a business, you can elect to deduct or amortize certain business start-up costs.

You can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs paid or incurred; however, the $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000, and any remaining costs must be amortized.

2. Overpaying the IRS Makes You "Audit Proof"

The IRS doesn't care if you pay the right amount of taxes or overpay your taxes. They do care if you pay less than you owe and you can't substantiate your deductions. Even if you overpay in one area, the IRS will still hit you with interest and penalties if you underpay in another. It is never a good idea to knowingly or unknowingly overpay the IRS. The best way to "Audit Proof" yourself is to properly document your expenses and make sure you are getting good advice from your tax accountant.

3. You Can Take More Deductions if You Are Incorporated

Self-employed individuals (sole proprietors and S Corps) qualify for many of the same deductions that incorporated businesses do, and for many small businesses, being incorporated is an unnecessary expense and burden. Start-ups can spend thousands of dollars in legal and accounting fees setting up a corporation, only to discover soon thereafter that they need to change their name or move the company in a different direction. In addition, plenty of small business owners who incorporate don't make money for the first few years and find themselves saddled with minimum corporate tax payments and no income.

4. The Home Office Deduction Is a Red Flag for an Audit

While it used to be a red flag, this is no longer true as long as you keep excellent records that satisfy IRS requirements. Because of the proliferation of home offices, tax officials cannot possibly audit all tax returns containing the home office deduction. In other words, there is no need to fear an audit just because you take the home office deduction. A high deduction-to-income ratio, however, may raise a red flag and lead to an audit.

5. Business Expenses Are Not Deductible if You Don't Take the Home Office Deduction

You are still eligible to take deductions for business supplies, business-related phone bills, travel expenses, printing, wages paid to employees or contract workers, depreciation of equipment used for your business, and other expenses related to running a home-based business, whether or not you take the home office deduction.

Tax reform legislation passed in 2017 repealed certain itemized deductions on Schedule A, Itemized Deductions of Form 1040 for tax years 2018 through 2025, including employee business expense deductions related to home office use.

6. Requesting an Extension on Your Taxes Is an Extension To Pay Taxes

Extensions enable you to extend your filing date only. Penalties and interest begin accruing from the date your taxes are due.

7. Part-Time Business Owners Cannot Set Up Self-Employed Pension Plans

If you start up a company while you have a salaried position complete with a 401K plan, you can still set up a SEP-IRA for your business and take the deduction.

Understanding how the tax system works is beneficial to any business owner, whether you run a small to medium-sized business or are a sole proprietor. Whether it is a missed payment or filing deadline, an improperly claimed deduction, or incomplete records, a tax headache is only one mistake away. Furthermore, even if you delegate the tax preparation to someone else, you are still liable for the accuracy of your tax returns.

Tax Planning For Small Business Owners

Wed, 11 Oct 2023 16:40:58 GMT

Tax planning is the process of looking at various tax options to determine when, whether, and how to conduct business and personal transactions to reduce or eliminate tax liability.

Many small business owners ignore tax planning. They don't even think about their taxes until it's time to meet with their accountants, but tax planning is an ongoing process, and good tax advice is a valuable commodity. It is to your benefit to review your income and expenses monthly and meet with your CPA or tax advisor quarterly to analyze how you can take full advantage of the provisions, credits, and deductions that are legally available to you.

Although tax avoidance planning is legal, tax evasion - reducing the amount of tax owed through deceit, fraud, or concealment - is not. Frequently what sets tax evasion apart from tax avoidance is the IRS's finding that there was fraudulent intent on the part of the business owner. The following are four of the areas the IRS examiners commonly focus on as pointing to possible fraud:

Failure to report substantial amounts of income such as a shareholder's failure to report dividends or a store owner's failure to report a portion of the daily business receipts.
Claims for fictitious or improper deductions on a return, such as a sales representative's substantial overstatement of travel expenses or a taxpayer's claim of a large deduction for charitable contributions when no verification exists.
Accounting irregularities such as a business's failure to keep adequate records or a discrepancy between amounts reported on a corporation's return and amounts reported on its financial statements.
Improper allocation of income to a related taxpayer in a lower tax bracket, such as where a corporation makes distributions to the controlling shareholder's children.

Tax Planning Strategies

Countless tax planning strategies are available to small business owners. Some tax strategies target the owner's individual tax situation, and some target the business itself. Regardless of how simple or how complex a tax strategy is; however, it will be based on structuring the tax strategy to accomplish one or more of these often-overlapping goals:

Reducing the amount of taxable income
Lowering your tax rate
Controlling the time when the tax must be paid
Claiming any available tax credits and deductions
Controlling the effects of the Alternative Minimum Tax
Avoiding the most common tax planning mistakes

To plan effectively, you'll need to estimate your personal and business income for the next few years. Many tax planning strategies will save tax dollars at one income level but create a larger tax bill at other income levels. You will want to avoid having the "right" tax plan made "wrong" by erroneous income projections. Once you know your approximate income, you can take the next step: estimating your tax bracket.

You should already be projecting your sales revenues, income, and cash flow for general business planning purposes. The better your estimates are, the better the odds that your tax planning efforts will succeed.

Maximizing Business Expenses

Business meal expenses are legitimate deductions that can lower your tax bill and save you money, provided you follow certain guidelines. Business must be discussed before, during, or after the meal to qualify as a deduction. Furthermore, the surroundings must be conducive to a business discussion. For instance, a small, quiet restaurant would be an ideal location for a business dinner. A nightclub would not.

Under the Tax Cuts and Jobs Act of 2017, the deduction remains at 50 percent for taxpayers who incur food and beverage expenses associated with operating a trade or business. Employee meals while on business travel also remain deductible at 50 percent. For tax years 2018 through 2025, the 50 percent deduction expands to include expenses incurred for meals furnished to employees for the employer's convenience. Amounts after 2025 are not deductible, however.

Under the TCJA, the deduction for business entertainment expenses was eliminated. Meals still qualify at 50 percent (except for tax years 2021 and 2022), but costs must be listed separately.

Important Business Automobile Deductions

If you use your car for business, such as visiting clients or going to business meetings away from your regular workplace, you may be able to take certain deductions for the cost of operating and maintaining your vehicle. You can deduct car expenses by taking either the standard mileage rate or using actual expenses. The mileage reimbursement rate for 2023 is 65.5 cents per business mile.

If you own two cars, another way to increase deductions is to include both cars in your deductions. This deduction works because business miles driven is determined by business use. To figure business use, divide the business miles driven by the total miles driven. This strategy can result in significant deductions. Whichever method you decide to use to take the deduction, always keep accurate records such as a mileage log and receipts.

Increase Your Bottom Line When You Work At Home

The home office deduction is quite possibly one of the most difficult deductions ever to come around the block. Yet, there are so many tax advantages it becomes worth the navigational trouble. Here are a few common tips for home office deductions that can make tax season significantly less traumatic for those of you with a home office.

Strategies such as prominently displaying your home phone number and address on business cards, having business guests sign a guest log book when they visit your office, as well as deducting long-distance phone charges, keeping a time and work activity log, retaining receipts, and paid invoices all help make a case for a home office. Keeping these receipts makes it so much easier to determine percentages of deductions later on in the year.

Section 179 expensing for tax year 2023 allows you to immediately deduct, rather than depreciate over time, $1,160,000 of the first $2,890,000 of qualifying equipment placed in service during the current tax year. Equipment can be new or used and includes certain software. All depreciable equipment in a home office meets the qualifications. Indexed to inflation for tax years after 2018, the deduction was enhanced under the Tax Cuts and Jobs Act of 2017 to include improvements to nonresidential qualified real property such as roofs, fire protection, alarm systems, security systems, and heating, ventilation, and air-conditioning systems.

The "Bonus Depreciation" for qualified assets (new equipment only - no used equipment and no software) placed in service for tax years 2015, 2016, and through September 26, 2017, is 50 percent. Businesses with eligible property placed in service after September 27, 2017, and before January 1, 2023, are allowed to deduct 100 percent of the cost immediately. The bonus depreciation will be phased downward over four years: 80 percent in 2023, 60 percent in 2024, 40 percent in 2025, and 20 percent in 2026.

Some deductions can be taken whether or not you qualify for the home office deduction itself. Consider meeting with a tax professional to learn more about home office deductions.

Maximize Your Wealth With a Winning Exit Plan

Wed, 11 Oct 2023 16:33:47 GMT

Selecting your business successor is a fundamental objective of planning an exit strategy and requires a careful assessment of what you want from the sale of your business and who can best give it to you.

There are only four ways to leave your business: transfer ownership to family members, Employee Stock Option Plan (ESOP), sale to a third party, and liquidation. The more you understand about each one, the better the chance is that you will leave your business on your terms and under the conditions you want. With that in mind, here's what you need to know about each one.

1. Transfer Ownership to Your Children

Transferring a business within the family fulfills many people's personal goals of keeping their business and family together, but while most business owners want to transfer their business to their children, few end up doing so for various reasons. As such, it's necessary to develop a contingency plan to convey your business to another type of buyer.

Transferring your business to your children can provide financial well-being for younger family members unable to earn comparable income from outside employment, as well as allow you to stay actively involved in the business with your children until you choose your departure date.

It also affords you the luxury of selling the business for whatever amount of money you need to live on, even if the value of the business does not justify that sum of money.

On the other hand, this option also holds the potential to increase family friction, discord, and feelings of unequal treatment among siblings. Parents often feel the need to treat all of their children equally. In reality, this is difficult to achieve. In most cases, one child will probably run or own the business at the perceived expense of the others.

At the same time, financial security also may be diminished, rather than enhanced, and the very existence of the business is at risk if it's transferred to a family member who can't or won't run it properly. In addition, family dynamics, in general, may also significantly diminish your control over the business and its operations.

2. Employee Stock Option Plans (ESOP)

If your children have no interest or are unable to take over your business, there is another option to ensure the continued success of your business: the Employee Stock Ownership Plan (ESOP).

ESOPs are qualified retirement plans subject to the regulatory requirements of the Employee Retirement Income Security Act of 1974 (ERISA). There's one important difference, however; the majority (more than half) of their investment must be derived from their own company stock.

Whether it's due to lack of interest from your children, an economic downturn or a high asking price that no one is willing to pay, what an ESOP does is create a third-party buyer (your employees) where none previously existed. After all, who more than your employees has a vested interest in your company?

ESOPs are set up as a trust (complete with trustees) into which either cash to buy company stock or newly issued stock is placed. Contributions the company makes to the trust are generally tax deductible, subject to certain limitations and because transactions are considered stock sales, the owner who is selling (you) can avoid paying capital gains. Shares are then distributed to employees (typically based on compensation levels) and grow tax-free until distribution.

If your company is a stable, well-established one with steady, consistent earnings, then an ESOP might be just the ticket to creating a winning exit plan from your business.

If you have any questions about setting up an ESOP for your business, give us a call today.

3. Sale to a Third Party

In a retirement situation, a sale to a third party too often becomes a bargain sale--and the only alternative to liquidation. But if the business is well prepared for sale this option just might be your best way to cash out. In fact, you may find that this so-called "last resort" strategy just happens to land you at the resort of your choice.

Although many owners don't realize it, most or all of your money should come from the business at closing. Therefore, the fundamental advantage of a third party sale is immediate cash or at least a substantial upfront portion of the selling price. This ensures that you obtain your fundamental objectives of financial security and, perhaps, avoid risk as well.

If you do not receive the bulk of the purchase price in cash, at closing, however, your risk will suddenly become immense. You will place a substantial amount of the money you counted on receiving in the unpredictable hands of fate. The best way to avoid this risk is to get all of the money you are going to need at closing. This way any outstanding balance payable to you is "icing on the cake."

4. Liquidation

If there is no one to buy your business, you shut it down. In liquidation, the owners sell off their assets, collect outstanding accounts receivable, pay off their bills, and keep what's left, if anything, for themselves.

The primary reason liquidation is considered an exit plan is that a business lacks sufficient income-producing capacity apart from the owner's direct efforts and apart from the value of the assets themselves. For example, if the business can produce only $75,000 per year and the assets themselves are worth $1 million, no one would pay more for the business than the value of the assets.

Service businesses, in particular, are thought to have little value when the owner leaves the business. Since most service businesses have little "hard value" other than accounts receivable, liquidation produces the smallest return for the owner's lifelong commitment to the business. Smart owners guard against this. They plan ahead to ensure that they do not have to rely on this last-ditch method to fund their retirement.

If you need assistance figuring out which exit strategy is best for you and your business, please don't hesitate to contact the office. The sooner you start planning, the easier it will be.

Successfully Pass On Your Family Business To Next Generation

Wed, 11 Oct 2023 16:28:02 GMT

Starting a family business is a difficult adventure, especially when day-to-day tasks can overshadow your goals. We know your business is something you want to last, and planning ahead will help you achieve that success.

Old wisdom is clear: The critical issue concerning succession was to identify, develop, and install the successor to the business's top executive. That seems simple, but most people don't consider all the other elements like non-family executives and advisors.

The predominant family business statistic has been that only 30 percent of family businesses survive the second generation. The need for succession planning to avoid becoming a victim of that dismal statistic was the reason for developing the family business field.

But family business experts have come to realize that a 30 percent "survival" rate rather than being a symbol of failure is actually a phenomenal success achieved by the advantages that family strength brings to business enterprises.

We now know that the analogy of "passing the baton" is terribly inadequate. We now understand that succession rarely involves an incumbent and a successor. Instead, the process involves all of the key players, including family members, executives, and advisors.

Not just a matter of successor development and the incumbent's preparedness to let go, the process is a complex stew of social, cultural, financial, legal, strategic, moral, and other dimensions that resist logical, "business-like" thinking.

Success, we came to recognize, depends on being able to combine and balance businesslike thinking with family-like thinking. Clearly, "succession" is inadequate to describe the process. Among the many categories of planning - besides succession - too often neglected in family business were strategic, estate, operational, and governance.

Failure to plan in any of these areas can be fatal. In many instances, the issue was not "how to" but "why not?" What would keep a family business from doing what it should and could to achieve its goal of self-preservation?

The need to develop processes dealing with the massive complexity of changes relating to personal, family, and corporate finances (including the effort to deal with the estate-tax issue) is key. This includes issues of strategy and structure in the business, family values in relationships and structure, governance and accountability, and each of the key players' personal journeys.

If you run a family business it's extremely important to start the planning process now.

Please call us and we'd be happy to talk to you about how to get started.

Your Business Succession: How To Plan For It

Wed, 11 Oct 2023 16:23:42 GMT

You have spent a great deal of your lifetime building a business. Now you are ready to transfer the business to a younger generation. This Financial Guide discusses some of the unique issues in planning for and implementing the transfer of the family-owned business.

In a small business the owner(s) typically develops a unique bond to the business, unlike the typical corporation/employee relationship. The owner is often interested in ensuring that the business remains intact after his or her retirement or death. Perhaps the business owner would like to pass the business on to family members or sell the business to valued employees.

At any given time, close to half of U.S. small businesses are facing the transfer-of-ownership issue. Founders are trying to decide what to do with their businesses; however, the options are few. The following is a list of options to consider:

Retain family ownership and management control.
Retain ownership but hire outside management.
Sell to an outsider or employee.
Close the doors.

To be one of the few family businesses that survive a transfer of ownership requires a good understanding of your business and your family. There are four basic reasons why family firms fail to transfer the business successfully from generation to generation:

Lack of viability of the business.
Lack of planning.
Little desire on the owner's part to transfer the firm.
Reluctance of offspring to join the firm.

These factors, alone or in combination, make transferring a family business difficult, if not impossible. The primary cause for failure, however, is the lack of planning. With the right plan in place, the business, in most cases, will remain healthy.

The family/business strategic plan is needed to maintain a healthy, viable business. This plan establishes policies for the family's role in the business. For example, it may include an entry and exit policy that outlines the criteria for working in the business. It should include the creed or mission statement that spells out your family's values and basic policies for the business. The family strategic plan will address other issues that are important to your family. By implementing this plan, you may avoid later conflicts about compensation, sibling rivalry, ownership and management control.

A succession plan will ease the founding or current generation's concerns about transferring the firm. It outlines how succession will occur and how to know when the successor is ready. Many founders do not want to let go of the company because they are afraid the successors are not prepared, or they are afraid to be without a job. Often, heirs sense this reluctance and plan an alternative career. If, however, the heirs see a plan in place that outlines the succession process, they may be more apt to continue in the family business.

An estate plan is critical for the family and the business. Without it, you will pay higher estate taxes than necessary. Taking the time to develop an estate plan ensures that your estate goes primarily to your heirs rather than to taxes.

Although it is not easy, the commitment made by all family members during the planning process is the key ingredient for business continuity and success. The first rule for successfully operating and transferring the family firm is: Share information with all family members, active and non-active. By doing this, you will eliminate problems that arise when decisions are made and implemented without the knowledge and counsel of all family members.

This Financial Guide will help you plan for a successful transfer of ownership and avoid many of the problems family businesses face when a transfer of ownership occurs. The Guide discusses each of the planning areas listed above, gives an overview of methods for implementing the transfer and provides a planning checklist.

What Makes The Family Business Unique?

This section will explore the nature of the family business as a dual operating system and will identify issues of greatest concern to family business owners, as identified by family business owners across the United States. As you review these issues, you will see that, although you and your family are unique, the challenges you face are not, because almost every family business shares the same problems.

Also, the perspectives of the individuals involved in a family business will be presented. We tend to confuse personality with understanding the viewpoints of the different actors involved in the family business (active and non-active) can help alleviate conflicts that may arise.

What Is a Family Business?

Defined simply, a family business is any business in which a majority of the ownership or control lies within a family and in which two or more family members are directly involved.

It is also a complex, dual system consisting of the family and the business. Family members involved in the business are part of a task system (the business) and part of a family system. This is where conflict may occur because each system has its own rules, roles, and requirements. For example, the family system is an emotional one, stressing relationships and rewarding loyalty with love and care. Entry into this system is by birth, and membership is permanent.

The role you have in the family-husband/father, wife/mother, child/brother/sister carries with it certain responsibilities and expectations. In addition, families have their own style of communicating and resolving conflicts, which they have spent years perfecting. These styles may be good for family situations but may not be the best way to resolve business conflicts.

Conversely, the business system is unemotional and contractually based. Entry is based on experience, expertise, and potential. Membership is contingent upon performance, and performance is rewarded materially. Like the family system, roles in the business, such as president, manager, employee and stockholder/owner, carry specific responsibilities and expectations. And like the home environment, businesses have their own communication, conflict resolution, and decision-making styles.

Conflicts arise when roles assumed in one system intrude on roles in the other, when communication patterns used in one system are used in the other or when there are conflicts of interest between the two systems. For example, a conflict may arise between parent and child, between siblings or between a husband and wife when roles assumed in the business system carry over to the family system.

The boss and employee roles a husband and wife might assume at work most likely will not be appropriate as at-home roles. Alternatively, a role assumed in the family may not work well in the business. For instance, offspring who are the peacemakers at home may find themselves mediating management conflicts between family members whether or not they have the desire or qualifications to do so.

A special case of role carryover may occur when an individual is continually cast in a particular role. This happens primarily to children. Everyone grows up with a label: the good one, the black sheep, the smart one. While a person may outgrow a label, the family often perceives that person as still carrying the attribute. This perception may affect the way that person operates in the business.

Family communication patterns don't always affect the business, but when they do it can be very embarrassing. Family members often say things to each other in a way that they wouldn't speak to employees or even friends. This problem is compounded when communication is misread by the family member(s). Parents might be surprised by a son or daughter's negative reaction to a business directive or performance evaluation despite the fact that it is perceived as criticism from Dad or Mom, not from the boss.

System overlap is apparent when conflicts of interest arise between the family and the business. Some families put personal concerns before business concerns instead of trying to achieve a balance between the two. It is important to understand that the family's strong emotional attachments and an overriding sense of loyalty to each other create unique management situations. For example, solving a family problem, such as giving an unemployable or incompetent relative a position in the firm, ignores the company's personnel needs but meets the needs of family loyalty.

Another example of conflict of interest occurs when business owners feel that giving children equal salaries is fair. Siblings who have more responsibility but receive the same pay as those with less responsibility usually resent it. In cases of sibling rivalry, it isn't unusual for one sibling to withhold information from another or try to engage in power plays, i.e., behaviors that can be detrimental to the firm.

Much of this behavior can be eliminated or managed by devising policies that meet the needs of both the family and the business. Developing these policies is part of the family strategic planning process. Before discussing them, you should make sure you have identified all the issues that need to be addressed.

Issues in the Family Business

The list below contains the issues that most family businesses face:

Participation-who can participate in the family business and under what circumstances.
Leadership and ownership-how to prepare the next generation to assume responsibility for the business.
Letting go-how to help the entrepreneur let go of the family business.
Liquidity and estate taxes.
Attracting and retaining non-family executives.
Compensation of family members-equality versus merit.
Successors-who chooses and how to choose among multiple successors.
Strengthening family harmony.

All of these issues and the others you include in the Family Business Assessment Inventory can potentially cause business conflict and family stress. But there are three steps you can take to manage conflict and stress in a family business:

Identify issues that may cause conflict and stress.
Discuss these issues with the family.
Devise a policy to address them.

A discussion of policy making, as well as establishing a forum conducive to it, will be addressed later, in the section Family Retreat.

Who Are the Actors?

The next consideration in understanding the family business is to understand the perspectives of those involved. Without this understanding, managing a family business will be difficult. The actors in the family business can be divided into two groups: (1) family members and (2) non-family members. Each group has its own perspective and set of concerns and is capable of exerting pressures within the family and the firm.

Family Members - neither an Employee nor an Owner: Children and in-laws are usually in this group. Although they may not be part of the business operations, they can exert pressure within the family that affects the business. For example, children may resent the time a parent spends in the business. This creates a problem because parents usually develop guilt feelings as a result of their neglect and the resentment expressed by the children. In-laws, on the other hand, are viewed either as outsiders and intruders or as allies and therefore are usually ignored or misunderstood.

For example, a daughter-in-law is usually expected to support her husband's efforts in the business without a clear understanding of family or business dynamics. She may contribute to family problems or find herself in the middle of a family struggle. The son-in-law faces similar, if not worse, problems. He may be placed in a competitive situation with his wife's brothers. If he isn't involved in the family business, he can still exert pressure on the business in his role as his wife's confidant.

Family Members - an Employee but not an Owner: This family member works in the business but does not have an ownership position. For this individual, conflict may arise for a number of reasons. For example, if he or she compares himself or herself to a family member who has an ownership position but is not an employee, a sense of inequity may result. The member may voice his or her resentment: I'm doing all the work, and they just sit back and get all the profits. Or resentment may occur when decisions are made by owners alone. Here, he or she may feel: I'm working here every day. I know how decisions are going to affect the company. Why didn't they ask me? Family members employed in or associated with a family business generally expect to be treated differently from non-family employees.

Family Members - an Employee and an Owner: This individual may have the most difficult position. He or she must effectively handle all the actors in both systems. As an owner, he or she is responsible for the well-being and continuance of the business, as well as the daily business operations. He or she must deal with the concerns of both family and non-family employees. Often, the founder, as the sole owner and chief executive, fails in this category.

Family Members - not an Employee but an Owner: This group usually consists of siblings and retired relatives. Their major concern usually is the income provided by the business; thus, anything that threatens their security may cause conflict. For example, if the managing owners want to pursue a growth strategy that will consume cash and has an element of risk, they may face resistance from retired relatives who are concerned primarily about dividend payments.

Non-family Members - an Employee but not an Owner: This group deals with the issues of nepotism and coalition building and the effects of family conflicts on daily operations. Owners' concerns for non-owner employees usually involve recruiting and motivating non-family employees and non-family owner-managers who will have little or no opportunity for advancement, accepting children of non-family managers into the business, and minimizing political moves that support family members over non-owner employees.

Non-family Members - an Employee and an Owner: With the emergence of stock-option plans, this group has become more important. Employees may become owners during a succession. In companies where a successor has been chosen, partial ownership of the company by its employees can foster cooperation with the new management because the employees will personally share the benefits and responsibilities of the company. In cases where there is no successor, selling the company to the employees who have helped build it makes good business sense. Employees who own the company will want to be treated like owners, which may be difficult for family members to understand and accept.

A thorough understanding of the behavioral consequences of an employee stock ownership program (ESOP) should be grasped before a family implements such a program. Understanding the perspective of the individuals around you, both family and non-family will make communicating and decision making easier.

Strategic Planning

When conflict occurs in the family business, it can be traced to a disparity in the goals of the individuals, the family or the business. Perhaps a family member works in the business out of economic necessity, not because he or she wants to. Or perhaps the potential successor has plans for the business that differ from current management plans-different generations usually have different goals.

Whatever the cause, the conflict must be addressed and resolved to avoid and prevent more serious problems later.

One way to define and align family and business goals is through business and family strategic planning.

In these plans, you will create a mission statement for the business and for the family that allows each element to complement the other. Once you have completed this task, set goals for the family business that will allow the family and business to prosper. Next, develop a strategy to accomplish these goals and, finally, formulate policies and procedures that control the family's involvement in the business.

Business Strategic Planning

Strategic planning for family-owned businesses requires that you integrate family issues, such as:

What are the long-term personal and professional goals of family members?
What is the family mission? Why are you committed to establishing and operating the business?
How do you envision the firm in the future?
Will family members be active in management or will they be passive members?
How will issues such as compensation, benefits and performance evaluation be handled?

The answers to these questions will affect the business strategy and should be resolved before strategic planning begins.

Strategic planning involves analyzing the business in its environment and devising a process for guiding its development and success in the future. This process involves assessing the internal operations and the current external environment (i.e., economic, technological, social and political forces) that affect the business. To begin this process, identify internal strengths and weaknesses that may constrain or support a strategy. Components of this assessment include (1) the organizational structure, (2) the culture and (3) the resources.

Make a list of the opportunities available (growth, new markets, a change in regulations) and the threats (increased competition, shortage of raw materials, price cutting) to your business. This should give you some insight into the current situation and provide a strategic direction.

Next, list the objectives of you and your family, identifying personal needs and risk orientation. Many of these objectives and goals will be addressed in your family strategic plan. Also, you will find that your personal objectives will affect the strategy you choose. For example, if there is a great opportunity for growth in your market but you have a low-risk orientation and a high personal need for security, you probably should not pursue high growth. It would be not only risky but also expensive. Growth consumes cash, and cash must be generated internally or financed externally. Your personal objectives should mesh with your strategy.

Once you have identified opportunities in the industry, assessed the strengths and weaknesses of the firm, and listed your personal objectives, you can proceed with the strategic plan. This will involve:

Developing a mission statement
Setting objectives
Developing strategies to meet objectives
Developing action steps to implement the strategy.

Let's consider each of these four elements in greater detail:

1. Mission Statement: The mission statement answers the question "What business are you in?" It defines your customers and explains why you are in business. The mission statement embodies the heart of the business and gives direction to every facet of the business. To be effective, it should:

Include specifications that allow measurement
Establish the individuality of the firm
Define the business in which the firm wants to be involved
Be relevant to all with a stake in the firm
Be exciting and inspiring.

2. Objectives: You should set reasonable objectives for the firm, based on the mission statement, to ensure accomplishment of the firm's mission. Objectives should be clearly stated, realistic, measurable, time specific and challenging. Objectives can be created for

Revenue growth
Earnings growth
Sales and market share growth
New plants or stores
Product/service quality or corporate image.

3. Strategies : Strategies are determined by your answer to the earlier question: "What will the firm be like in the future?" Your strategic options include the following:

Stability-success is derived from little change (rare).
Profit strategy-sacrifice future growth for profits today.
Growth strategy-growth may be achieved through vertical integration (expansion from within), horizontal integration (buy a competitor), diversification, merger or retrenchment (turnaround or divestment).

4. Action Steps: Once the strategy is selected, action steps should be specified that will guide the firm's daily activities. An example of an action step is creating a budget to project the costs of a strategy. This process also is known as tactical planning. The steps in tactical planning should be practical and easy to implement and account for; their purpose is to convert goals into manageable, realistic steps that can be individually implemented.

Family Strategic Planning

The entire family should develop a mission statement or creed that defines why it is committed to the business. By sharing priorities, strengths and weaknesses, and the contribution each member can make to the business, the family will begin to create a unified vision of the firm. This vision will include personal goals and career objectives.

An important issue to consider is how to set priorities for the family and the business, i.e., decide which will come first, the family or the business. How you answer this question will influence your planning. Some family members will opt for the business first, reasoning that, without a business, there will be no financial security for the family. Others will opt for the family first, reasoning that no business is worth the loss of family harmony.

A third alternative is to serve both family and business perhaps not equally, but as fairly as possible. Under this alternative, all decisions are made to satisfy both family and business objectives. For example, a family may have a policy that any family member may join the business, but he or she must meet the requirements of the job. You may find this is the best alternative because it forces a commitment to both the family and the business.

The Family Retreat

Trying to plan a business strategy during normal office hours is almost impossible. Plan a family business retreat to discuss the goals of the individual family members and the goals of the business. The first retreat should focus on reviewing the firm's history, defining family and business values and missions, creating a statement about the future of the business and reviewing areas that need more attention.

The purpose of the retreat is to provide a forum for introspection, problem-solving and policy-making. For some participants, this will be their first opportunity to talk about their concerns in a non-confrontational atmosphere. It is also a time to celebrate the family and enhance its inner strength.

A retreat usually lasts two days and is held far enough away so you won't be disturbed or tempted to go to the office. Every member of the family, including in-laws, should be invited. Begin planning your retreat about six weeks in advance.

Your actual agenda will be tailored to meet the unique needs of your family and business. Usually, families will identify some of the following issues for discussion at their first retreat:

A family creed or mission statement.
Management succession.
Estate planning.
Strategic business planning.
The reward system.
Performance evaluation.
Communication within the family.
Preparing adult children to enter the business.
Transition timing.
Exit and entry policies.

A series of questions that can be used to identify topics for discussion is included below. You may consider using a retreat facilitator, a professional experienced in helping family-owned businesses. The facilitator helps identify issues for discussion before the retreat and keeps the atmosphere non-confrontational during the retreat. The facilitator does not solve the family's problems but guides the family in doing so.

The retreat is the beginning of a process. When a consensus is reached by the participants, policies should be set, courses of action planned and responsibility for implementation assigned. When agreement cannot be reached, further discussions should be planned, possibly with the continued assistance of the facilitator.

One important outcome of the retreat should be making plans for periodic family meetings and retreats in the future, so the dialogue will continue.

Open communications will enable the family to come to grips with problems and issues while they are fairly easy to solve. Once family members have reached a consensus on the continuity of the firm and their roles in it, you can begin planning for succession.

Succession Planning

Succession is the transferring of leadership to the next generation. It is a process rather than an event. While there is a time frame within which the transition will occur, the actual amount of time taken for the process is arbitrary. It will depend on you, your family and the type of business you are in. This is a difficult process for most family businesses. The failure to face and plan for succession is an all-too-common problem. There are a number of forces that act against succession planning:

For the Founder:

Fear of death.
Reluctance to let go of power and control.
Personal loss of identity.
Fear of losing work activity.
Feelings of jealousy and rivalry toward successor.

For the Family:

Founder's spouse's reluctance to let go of role in firm.
Norms against discussing family's future beyond lifetime of parents.
Norms against "favoring" siblings.
Fear of parents' death.

For Employees:

Reluctance to let go of personal relationship with founder.
Fears of differentiating among key managers.
Reluctance to establish formal controls.
Fear of change

Environmental:

Founder's colleagues and friends continue to work.
Dependence of clients on founder.
Cultural values that discourage succession planning.

Overcoming the forces against succession planning requires the commitment of the family and employees of the business. Succession occurs in four phases:

Initiation,
Selection
Education
Transition

Let's now consider each of these phase in further depth:

1. Initiation

The initiation phase is that period of time when the children learn about the family business. It occurs from the time the children are born. A child can receive either a positive or a negative impression of the family business. If parents bring home the negative aspects of the business, complaining about it and about employees and relatives, the children will view the business in a very poor light.

Other ways to destroy children's interest in the business is to be secretive about it or to convey an unwelcome or hands-off attitude. There are families in which children are welcome to join the family business, but no one has told them so.

Owners are often cautious about systematically conditioning their children to enter the family business, an attitude that stems primarily from their awareness of individual differences and their belief that their children should be free to select a career path. If you do want your children to enter the business, or at least have that as a career alternative, there are some steps you can take to initiate them into the firm. The first step in motivating your children is to be certain that is what you want.

Your lack of conviction about their involvement will be communicated to them. This may be interpreted as doubt about their ability, about the viability of the business or about the potential of the parent-child relationship to survive the strain of succession. Any of these situations can cause your child to lose interest in the business.

Assuming your children know that you want them to enter the business, you should talk with them often and openly about it. Be realistic, but stress the positive aspects. Your business provides you with many positive experiences to share with your children. Your children should learn what values the business represents, what the business culture represents and where the business is headed.

2. Selection

Selection is the process of choosing who will be the firm's leader in the next generation. Of the entire transition process, this can be the most difficult step, especially if you must choose among a number of children. Selecting a successor may be viewed by siblings as favoring one child over the others, a perception that can be disastrous to family well-being and sibling harmony.

Owners select successors on the basis of age, sex, qualifications or performance. Because of the potential for emotional upheaval, some owners avoid the issue entirely, adopting an attitude of "Let them figure it out when I'm gone." Nevertheless, there are several solutions to this dilemma. Assuming you have more than one child who is or can become qualified for the position of president, you can select your successor based on age. For example, the oldest child becomes the successor. Unfortunately, the oldest may not be the best qualified. Placing age or sex restrictions on succession is not a good idea.

Alternatively, you could have a "horse race." Let the candidates fight it out, and the "best person" wins. While this is the style in some major corporations, it is not the best option for all family businesses.

Family business owners may want to take advantage of a successor selection model developed for corporate executive succession. In this model, family members, using the strategic business plan, develop specific company objectives and goals for the future president or chief executive officer.

The job description includes the requirements for the position such as skills, experience and possibly personality attributes. For example, if a firm plans to pursue growth in the next five years, the potential successor would be required to have a thorough understanding of business valuations and financial statements, the ability to negotiate and a good relationship with local financial institutions.

Designing such job descriptions provides a number of benefits. First, it removes the emotional aspect from successor selection. If necessary, the successor can acquire any special training the job description outlines. Second, it provides the business with a set of future goals and objectives that have been developed by the whole family. Finally, the founder may feel more comfortable knowing objectives are in place that will ensure a growing, healthy business. If you have an outside board of directors, you may want to solicit their input regarding successor selection.

3. Education

Training or educating the successor in the firm is a delicate process. Many times a parent finds it difficult to train a child to be a successor. If so, an alternative trainer may be found within the firm. A successful trainer will be logical, committed to the task, credible and action-oriented. These attributes, when tied into a program that is mission-aligned, results-oriented, reality-driven, learner-centered and risk sensitive, will produce a well-trained beneficiary. All of this, of course, is easier stated than accomplished.

A training variant of the Management by Objectives (MBO) concept is the training by objectives (TBO) concept. This concept can be an effective method for providing both the training for and the evaluation of successors.

In the TBO process, both the trainer (you or a non-family manager) and the trainee (potential successor) work together to define what the trainee will do, the time period for action and the evaluation process to be used. This system allows the successor to be placed in a useful, responsible position with well-delineated objectives. It also provides for steps of increased responsibility as goals are met and new, more rigorous goals are established. It is important that the successor enter the firm in a well-defined position.

Instead of entering the company as "assistant to the president," which requires that he or she follow the president around all day, the successor (or any other child) should enter with a specific job description. In a small business, this is very difficult because everyone is usually responsible for all tasks. Nevertheless, the successor cannot be evaluated effectively if he or she is not given responsibility and authority for certain tasks.

Your business will enable you to determine which criteria are necessary for good training. Usually, an owner wants to assess a successor in the following areas:

Decision-making process.
Leadership abilities.
Risk orientation.
Interpersonal skills.
Temperament under stress.

An excellent way to assess these skills is to let the successor give his or her insight on a current problem or situation. This is not a test and should not be confrontational. Instead, solicit advice and try to determine the thinking process that is generating your successor's suggestions. For example, you may be faced with a pricing decision. Give the successor all the information needed to determine whether or not to raise prices, then sit back and listen.

Ask questions when appropriate these should be "Why?" and "What if?" After the successor is finished, say "I was considering. . . ." This way each of you can learn how the other thinks and makes decisions.

It is possible that your leadership style differs from that of your successor. Your employees are used to your style. If your successor's style is very autocratic and uncaring, your company is going to experience problems.

Potential successors should be introduced into your outside network (e.g., customers, bankers, and business associates), something many managers neglect. This will give everyone time to get to know your successor and allow the successor to work with business associates and bankers and to get acquainted with customers.

4. Transition

The actual transfer of control to the successor occurs when you retire. Research indicates that transitions are smoothest when:

They are timely.
They are final and do not include the entrepreneur's participation in daily activities.
The entrepreneur is publicly committed to an orderly succession plan.
The entrepreneur has articulated and supervised the formulation of company principles regarding management accountability, policies, objectives, and strategies.

The transition can be effected gradually by relinquishing more and more responsibility to the successor. One expert advises the entrepreneur to take a number of planned absences before actually relinquishing control. Let the successor see what it is like to manage the business alone.

Also, this allows you to see that the business is not going to fall apart without you.

Once you announce your retirement date, do not rescind it. There is no such thing as semi-retirement. By the time your children are in their 40s, they expect leadership roles in the firm. If you refuse to let go, they may leave.

Letting Go

There are many reasons why entrepreneurs cannot let go of the family business. Primary among these are financial ones. As a business owner, you may be used to a large salary and benefits, such as a car or insurance. After working hard in the business most of your life, you want your retirement years to be comfortable, not filled with financial anxieties. There are several ways to ensure your financial security after retirement. Business owners usually consider either taking what they need from the company after they retire or arranging a buy-out that will give them the needed liquidity without placing an undue financial burden on the company. If you don't sell the company and your financial security is contingent on its daily operations, you will be less likely to retire completely.

Your successor needs full control, and you probably won't let that happen. Also, the company may not be able to support you and the successor and still pursue the strategy you have set for it. Finally, you may not be able to meet your financial goals from income generated by the company.

To avoid these problems, consult with a financial planner or an attorney to determine the method of transfer that is best for you. There are tax consequences to the outright sale of the business to your children. Also, an outright sale may burden the company with too much debt. Other alternatives include an installment sale or private annuity or funding a buy-sell with insurance proceeds. To provide effectively for your retirement, seek professional assistance in this area.

There are other reasons why the entrepreneur doesn't want to let go. One of the primary reasons is the fear of retirement. To understand this fear, it is necessary to appreciate the relationship between work, the meaning of life and social evaluation. For many founders, work and the business are synonymous with a meaningful life. The intense involvement the entrepreneur has with the business increases the importance of the job and his or her identity. Removal from work is like losing a part of oneself.

Work is important to the entrepreneur because it provides economic returns, opportunities to contribute to society, status and self-respect. It also provides social interaction, personal identity, structured time, escape from loneliness and isolation, and personal achievement.

That's a lot to ask someone to give up. Especially important is the loss of status and social power. The leader of a firm wields a great deal of influence and enjoys public impact and public exposure. Retirement means giving up this power.

Because this loss is unpleasant, it is not uncommon for a founder to give a successor the responsibility for running a firm and still try to retain power and privileges from a position on the board of directors.

The entrepreneur who successfully lets go has:

A sound financial plan for retirement
Activities outside the business that can provide social contact and power
Confidence in the successor
A willingness to listen to outside advisors.

Consider a Board of Directors

Most small businesses do not have a board of directors, but a board can be invaluable during the succession process. A board can help management determine objectives and strategies, provide specialized expertise and even arbitrate feuds among family members.

The board is usually composed of both insiders and outsiders. Although family businesses usually are operated in a very private manner, there are benefits to making outsiders board members. They come with different backgrounds and perspectives and provide checks and balances. Outside directors don't work out well if they lack knowledge about the firm and its environment, or if they are uncommitted to board responsibilities.

The first step would be to establish goals and objectives for the board. You should set these objectives before you recruit or make a commitment to any members. Boards can expand your network, provide input into the succession process, judge the successor's progress or help determine a transition date. But boards should not get overly involved in operational or day-to-day issues.

The second step is recruiting. A board should have five to seven members, including three or four outsiders. Select them carefully. You can find them in civic and charitable organizations, among acquaintances and at local universities.

You should know and have a good rapport with prospective members, and you should determine their ability to provide concrete advice and direction for the business. The following are a few good questions to ask:

What is their background?
How are they thought of in the community?
What do your present directors think of them?
Do they have the qualifications to help realize the goals and objectives you have set?

The remainder of the board is composed of top insiders. Your potential successor may be invited to attend the meetings, or you may choose to make him or her a member of the board.

Making Succession Work

To make succession work, you must communicate. This is the key ingredient. Use the family retreat as well as family meetings. Family meetings can educate the family in discussions about the nature of the firm, the kinds of leadership skills needed, entry and exit conditions, decision-making policies and conflict resolution procedures. Casual conversations about these issues can contribute to your formal planning later on.

Family meetings do not have to be formal affairs, but they should occur regularly and have an agenda. Parents don't have to lead the meeting; have the offspring organize and conduct a portion of the meeting. Use the meetings to defuse any potential time bombs.

Anticipate problems. Will there be any problems with non-family members? If so, which ones? How will they be a problem, and what can you do (short of firing them) to handle it?

Sibling rivalry is another problem to consider. Does it exist? If so, how will you resolve it? It may not be a problem until the successor is named. Develop a code of conduct for sibling relations. This code will outline how siblings must act toward each other (i.e., in a way conducive to a healthy business), including how to work together, how to play together and how to keep spouses informed about what's going on. Anticipate problems that may arise and meet them head-on.

Estate Planning

In the family business, the bulk of your assets are often tied up in the business. This can not only create a large estate tax bill, but it also means that the estate may not have sufficient liquidity to pay those taxes. Estate tax laws are continuously changing. It is critical that you discuss your estate with your financial advisors to assess the adequacy of your current estate plan.

A key objective of estate planning is to pay the least amount of estate tax possible under the law, though this may be subordinate to your decisions about who and how much- to benefit with your assets. A rule in tax law called "unified credit exemption equivalent" exempts a certain amount of your assets from estate tax. This is in addition to the blanket exemption for assets left to charity and the general exemption for assets left one's surviving spouse. In 2023, the exemption equivalent exempts up to $12.92 million ($12.06 million for persons dying 2022). This means that you can pass $12.92 million in assets to your heirs free of estate taxes in 2023.

Estate plans typically make use of legal devices such as living trusts, marital deduction trusts, the unified credit/exemption equivalent trust, the dynastic trust, annual exclusion gifts, unified credit/exemption equivalent gifts, and the statutory grantor retained interest trust. You should contact your advisor regarding the applicability of these tools to your situation under the current estate tax laws.

The tax code also makes available a tool for deferring the estate tax the installment payment of the federal estate tax that is attributable to the value of a family business. The provision allows an extended payout of the estate tax.

The annual exclusion gift consists of gifts of cash or other property of $17,000 in 2023 ($16,000 in 2022) or less per recipient per year. These gifts are free of federal gift taxation. Such gifts, as well as their appreciation in value and future income from them, are also excluded from federal estate and generation-skipping transfer taxation. This provision can be used to transfer portions of your business to your beneficiaries over your lifetime, reducing the amount of your estate that is subject to taxation.

It cannot be emphasized enough that it is important to seek professional guidance when planning your estate.

Implementation

There are a variety of techniques which can be used to transfer your family business to relatives, partners, employees or others. The technique which is best for you will vary depending upon the structural form of your business, your intentions and the nature of the transfer (e.g., sale or gift). Here are some of the techniques developed before the recent estate and gift tax changes:

Outright gift - transfer ownership of all or a portion of your business to your heirs with no compensation.
Annual gifting - transfer a portion of your business annually to take advantage of the gift tax rules. A family limited partnership or corporation is often used in this situation.
Outright sale - sell ownership in your business for cash or other assets (e.g. stock swap).
Installment sale - sell ownership in the business in exchange for future interest and principal payments. A self canceling installment note may even be used in a sale to family members, where the balance of the note is cancelled in the event of your death.
Combination gift/sale - a combination of the above which can be used in the case of transfers to heirs.
Buy/Sell agreement - an agreement, typically between co-owners, where one agrees to buy the business from another for a set amount. Such agreements are often funded with life insurance.
Employee Stock Ownership Plan - establish a tax advantaged plan which can transfer ownership of the business to your employees over time as your sell your business interest to the ESOP.

Planning Checklist

Transferring the family business requires the family to make a determined effort to do the following:

Communicate.
Create a business strategic plan, including (1) business mission, (2) business goals, and (3) a strategy to achieve goals.
Create a family strategic plan, including (1) a unified vision of the family's role in the business, (2) a code of conduct for family members, (3) joint operating policies that serve the family and business, and (4) a family creed.
Prepare a Succession Plan, including arranging for successor training and setting a retirement date.
Prepare an Estate Plan.
Championing your successor.

There are many organizations, books, and magazines that can help you plan and manage a successful family business. Gather as much information and read as many references as possible before you devise a plan for managing and transferring the family business. You will find that following the guidelines discussed in this Financial Guide will make the process easier and more successful.

Summary

Succession is a process that may extend from three to six years, or longer depending on your age and on your successor's age. It occurs in phases. Over a period of time, you initiate or educate your children to the family business. After determining a successor, you develop a plan to transfer leadership in the family business. The decision to announce who the successor is and when the transition will occur depends on the family.

There are benefits to making an early announcement, including (1) reassuring employees, suppliers, and customers, (2) allowing siblings time to adjust to the decision and to make alternative career decisions, if necessary, and (3) enabling the entrepreneur to plan for retirement.

The fundamental goal should be to pass the family business successfully to the next generation. To do this you must feel financially secure, secure with the company's future goals and plans and secure with your successor.

Show Me The Money! Strategies For Securing a Loan

Wed, 11 Oct 2023 16:23:40 GMT

Most small businesses owners will, at some point in their life, go to a bank or other lending institution to borrow money for expansion of their operation. Unfortunately, many of them will fall victim to several of the common, but potentially destructive myths that concern applying for loans such as:

Lenders are lined up and eager to provide money to small businesses.
Banks are willing sources of financing for start-up businesses.
When it comes to seeking money, the company speaks for itself.
A bank, is a bank, is a bank, and all banks are the same.
Banks, especially large ones, do not need and really do not want the business of a small firm.
Loans are obtained by talking the lender out of funds.

About 48 percent of business owners report a major bank as their primary financing relationship, with another 34 percent noting that a regional or community bank is their main financing partner for capital, according to a 2014 working paper, The State of Small Business Lending: Credit Access During the Recovery and how Technology May Change the Game , published by the Harvard Business Review.

This places banks among the largest sources of credit; and makes them one of the most vital components to small business survival. Understanding what your bank wants, and how to properly approach them, can mean the difference between getting your money for expansion and having to scrape through finding cash from other sources.

A Mile in the Banker's Shoes

There is a name for people who simply walk into a bank and ask for money... Bank Robbers. To present yourself as a trustworthy businessperson, dependable enough to repay borrowed money, you need to first understand the basic principles of banking. Your chances for receiving a loan will greatly improve if you can see your proposal through a banker's eyes and appreciate the position that they are coming from.

Banks have a responsibility to government regulators, depositors, and the community in which they reside. While a bank's cautious perspective may be irritating to a small business owner, it is necessary in order to keep the depositors money safe, the banking regulators happy, and the economic health of the community growing.

Picking a Local Favorite

Banks differ in the types of financing they make available, interest rates charged, willingness to accept risk, staff expertise, services offered, and in their attitude toward small business loans.

Selection of a bank is essentially limited to your choices from the local community. Banks outside of your area are not anxious to make loans to your firm because of the higher costs of checking credit and of collecting the loan in the event of default.

Furthermore, a bank will typically not make business loans to any size business unless a checking account or money market account is maintained. Out-of-town banks know that non-local firms are not likely to keep meaningful deposits at their institution because it is too costly in both time and expense to do so.

Ultimately your task is to find a business-oriented bank that will provide the financial assistance, expertise, and services your business requires now and is likely to require in the future. Your accountant will be able to assist you in deciding which bank will best suit your needs and provide the greatest value.

Realize the Value of Schmooze

Devote time and effort to building a background of information and goodwill with the bank you choose, and get to know the loan officer you will be dealing with early on.

Building a favorable climate for a loan request should begin long before the funds are actually needed. The worst possible time to approach a new bank is when your business is in the throes of a financial crisis.

Remember that bankers are essentially conservative lenders with an overriding concern for minimizing risk. Logic dictates that this is best accomplished by limiting loans to businesses they know and trust.

Experienced bankers know full well that every firm encounters occasional difficulties; a banker you have taken the time and effort to build a rapport with will have faith that you can handle these difficulties.

A responsible reputation for debt repayment may also be established with your bank by taking small loans, repaying them on schedule, and meeting all facets of the agreement in both letter and spirit. By doing so, you gain the bankers trust and loyalty. He or she will consider your business a valued customer, favor it with privileges, and make it easier for you to obtain future financing.

Enter with a Silver Platter

Lending is the essence of the banking business and making mutually beneficial loans is as important to the success of the bank as it is to the small business. This means that understanding what information a loan officer seeks--and providing the evidence required to ease normal banking concerns--is the most effective approach to getting what is needed.

A sound loan proposal should contain information that expands on the following points:

What is the specific purpose of the loan?
Exactly how much money is required?
What is the exact source of repayment for the loan?
What evidence is available to substantiate the assumptions that the expected source of repayment is reliable?
What alternative source of repayment is available if management's plans fail?
What business or personal assets, or both, are available to collateralize the loan?
What evidence is available to substantiate the competence and ability of the management team?

Even a brief examination of these points suggests the need for you to do your homework before making a loan request because an experienced loan officer will ask probing questions about each of them. Failure to anticipate these questions or providing unacceptable answers is damaging evidence that you may not completely understand the business and/or are incapable of planning for your firm's needs.

Before you apply for a loan here's what you should do:

1. Write a Business Plan

To present you and your business in the best possible light, the loan request should be based on and accompanied by a complete business plan. This document is the single most important planning activity that you can perform. A business plan is more than a device for getting financing; it is the vehicle that makes you examine, evaluate, and plan for all aspects of your business. A business plan's existence proves to your banker that you are doing all the right activities. Once you've put the plan together, write a two-page executive summary. You'll need it if you are asked to send "a quick write-up."

2. Have an accountant prepare historical financial statements.

You can't talk about the future without accounting for your past. Internally generated statements are OK, but your bank wants the comfort of knowing an independent expert has verified the information. In addition, you must understand your statement and be able to explain how your operation works and how your finances stand up to industry norms and standards.

3. Line up references.

Your banker may want to talk to your suppliers, customers, potential partners or your team of professionals, among others. When a loan officer asks for permission to contact references, promptly answer with names and numbers; don't leave him or her waiting for a week.

Walking into a bank and talking to a loan officer will always be something of a stressful situation. You're exposing yourself to the possibility of rejection, scrutiny, and perhaps even criticism of your business. Preparation for, and thorough understanding of this evaluation process, is essential to minimize the stressful variables and optimize your potential to qualify for the funding you seek.

Keep in mind that many times a company fails to qualify for a loan not because of a real flaw, but because of a perceived flaw that was improperly addressed or misrepresented. Finally, don't be shy about calling your accountant with questions; their experience and invaluable advice will be able to best prepare you for working with your bank.

Marketing and Pricing: Frequently Asked Questions

Wed, 11 Oct 2023 16:04:18 GMT

How do I research whether my small business' product or service will sell?

Market research is the most critical element of successful business planning because it provides the basic data that will determine if and where you can successfully sell your product or service and how much to charge. It is a process that involves scrutinizing your competition and your customer base, and interviewing potential suppliers.

There are a number of benefits to conducting market research such as helping you create primary and alternative sales approaches to a given market, making profit projections from a more accurate base, organizing marketing activities, developing critical short/mid-term sales goals, and establishing the market's profit boundaries, but first, you must define your goals and organize the collection/analysis process.

What market research questions should I ask?

Your research questions should revolve around the demographic data of your customers such as age, location, and income (what they can afford). Your research should also address larger questions such as what type of demand there is for your product, how you might generate demand. In addition, you will want to find out how many competitors provide the same service or product and whether you can you effectively compete with regard to price, quality, and delivery.

You also might want to ask yourself whether you can price the product or service so as to assure a profit. Finally, it is helpful to understand the general economy of your service or product area and the areas within your market that are declining or growing.

What costs should I consider when determining how much to charge for my products or services?

Every component of a service or product has a different, specific cost. Many small firms fail to analyze each component of their commodity's total cost, therefore failing to price profitably. Once this analysis is done, prices can be set to maximize profits and eliminate any unprofitable service. Cost components include material, labor and overhead costs.

Material Costs. These are the costs of all materials found in the final product.

Labor Costs. Labor costs are the costs of the work that goes into the manufacturing of a product. The direct labor costs are derived by multiplying the cost of labor per hour by the number of person-hours needed to complete the job. Remember to use not only the hourly wage but also the dollar value of fringe benefits. These include social security, workers' compensation, unemployment compensation, insurance, retirement benefits, etc.

Overhead Costs. Overhead costs are any costs that are not readily identifiable with a particular product. These costs include indirect materials, such as supplies, heat, and light, depreciation, taxes, rent, advertising, transportation, and insurance. Overhead costs also cover indirect labor costs, such as clerical, legal, and janitorial services. Be sure to include shipping, handling, and/or storage as well as other cost components.

Part of the overhead costs must be allocated to each service performed or product produced. The overhead rate can be expressed as a percentage or an hourly rate. It is important to adjust your overhead costs annually. Charges must be revised to reflect inflation and higher benefit rates. It's best to project the costs semiannually, including increased executive salaries and other projected costs.

How to Profitably Grow Your Business With Less Stress

Wed, 11 Oct 2023 15:59:34 GMT

Do You Have A Business Or A Job?

Michael Gerber is a business consulting "guru" whose observations concerning small businesses have had a profound impact on how his students see their businesses and their role as a business owner.

Gerber observed that most people go into business for the wrong reason. They are skilled technicians. They do a good job of what the business provides to the customer. They believe they can earn more by doing it in their own business than for someone else. They leave and open their own shop. This is what Gerber calls an "entrepreneurial seizure."

These technicians believe they will find more freedom in their business but they discover it is the hardest job in the world. There is no escape. They are the ones who are doing the work! They are the "business!" But if they are the business, they haven't really created a business at all. They have only created a job for themselves!

According to Gerber, the role of the owner is quite different. The role of the business owner is to create a business that works independently of him or herself . There is an "end point" where the business functions independently of the owner. At this point, the business owner may choose to sell it or not. By then, he or she will have created a ready-to-sell "money making machine" and may choose whether to devote effort to it or not. The business can also be duplicated from place to place.

The model for this effort is the "turnkey franchise," such as McDonalds. The franchise creator, by establishing, documenting, and testing detailed systems, Ray Kroc made a uniform business with a certain look, providing a consistent experience to the customer. Ray controlled the design of the restaurant, sold uniformly made food and equipment, and provided the "scripts" for the service people. These scripts contained detailed procedures for preparing the food.

Likewise, the business owner should start with an idea of what this business should look like. This includes an organizational chart that could start with the business owner in each box. The chart documents the organization with responsibilities for chief executive, marketing, accounting, finance, and production employees. Gradually, the business owner tests, measures, and documents procedures for each position then replaces them with others until he or she isn't needed at all.

The shorthand phrase for the business systems could be "Here's how we do it here."

The business becomes a learning place where each person finds satisfaction in performing their parts to the best of their abilities.

Small business owners should be grateful to Michael Gerber for his profound observations and the challenge he has presented to us. Each morning, we should ask ourselves: "Am I going to a business, or am I going to a job?" If we are going to a job, we have Gerber's model for change.

Employees must think in order to provide outstanding service. Gerber's approach can sometimes be inflexible when dealing with changes we deal with today.

More important than "Here's how we do it here," we need to know "What's important here." We need to define the values of our business. People need to be more important than the systems that are supposed to serve them. Systems shouldn't override common sense.

Uncover Your Business's Most Valuable Hidden Asset

Wed, 11 Oct 2023 15:53:58 GMT

Quick! What is your most valuable business asset?

If you are like most business people, your mind might quickly fly over your balance sheet. Is it your equipment? Is it your location? Is it your accounts receivable?

For most businesses, the most valuable business asset isn't on the balance sheet.

It's their customer list. And those businesses for which this isn't the most valuable business asset should change their orientation to make it so.

The hardest, most expensive sale we ever make to a customer is the first one.

In that first, critical, transaction we earn or lose the trust of the customer. Once we have the trust of the customer, we open the door to many more sales and to referrals, which most of us agree are the very best new customers to get.

Many businesses frantically work at bringing in new businesses while they neglect developing the "acre of diamonds" at their doorstep represented by their customer list.

Why would you want to know the lifetime value of a customer?

The lifetime value of a customer is a measure of the value of the customer to your business. It is the potential contribution of the customer to your business over a period of time. When you know the lifetime value of a customer, you have a benchmark for how much you would or should be willing to invest to acquire a customer.

When you evaluate the effectiveness of your marketing, instead of focusing on the response ratio (how many responded compared to messages delivered), you should focus on the return received (number of customers times lifetime value) for the investment made (campaign cost). Suddenly you find you can justify a much greater promotion investment when you look at your returns in this way, and this provides the engine for significant business growth.

Chances are your competitors are too cheap to make the necessary investment, and this can give you a competitive advantage.

How can you quantify the "lifetime value of a customer?"

Estimate the profit for the transactions you expect to have with the customer over the period you expect to do business with him or her. If this is an unknown long term, use five years. You should collect statistics of the transactions done with customers and how long you keep customers. Also, factor in the benefit for referrals from your customers.

Here's an example:

At a computer software store, customers make average purchases each year of $500. The average gross profit is 30 percent. Most customers do business with the store for five years. One out of three customers refers a new customer.

Average purchases $ 500

Years X 5

Total purchases $2,500

Gross profit percent X .30

Total gross profit $750

Add 1/3 gross profit for referrals $250

Total lifetime value $1,000

If this business invested $1,000 to get a new customer, it would "break even."

Obviously, the business wants to make a profit, but now it has a benchmark to work on based on its own situation. Also, advertising and promotion now represent an investment on which a return can be measured, instead of just an expense "thrown against the wall."

Try applying this lifetime value approach in your business as a growth strategy.

Developing a Unique Selling Proposition

Wed, 11 Oct 2023 15:46:56 GMT

When developing your marketing message, it's helpful to develop a Unique Selling Proposition or USP.

What is a USP?

The USP very clearly answers the question, "Why should I do business with you instead of your competitors?"

The USP may be used repetitively in your marketing literature to build the customer's or client's identification of your company with your product or service.

The two major benefits of developing the USP

First, it clearly differentiates your business in the eyes of your current and potential customers or clients. Second, it focuses your team on delivering the promise of the USP, helping to improve your internal performance.

Here are some successful examples of USPs (some so successful they were used as slogans in advertising as well) that you are probably already familiar with:

M&M's: "The milk chocolate that melts in your mouth, not in your hand"
FedEx: "When it absolutely, positively has to be there overnight"
Geico: "15 minutes could save you 15% on car insurance"
Walmart: "Save money. Live better."
DeBeers: "A diamond is forever"

Developing your USP

Developing your USP is not difficult, but it does require paying close attention to what your customers are thinking (or your target market if you're just starting out).

Think about it from your customer's perspective.

Let's say you opened a tiny patisserie in Philadelphia. You know your pastries are delicious, albeit pricey because you only use the highest quality ingredients. Your friends and family agree, and so do many of your customers. But what is it that keeps your customers coming back? Is it the ambience of your shop, the friendly service, or even the location tucked away in a tree-lined alley? The point is to build your USP around the features that best market your product.

Figure out what motivates your customers to buy your product or service.

To figure out - and understand - what motivates your customers to buy your product you'll need to go beyond basic demographics such as age, gender, and income. You'll need to employ psychology. People may be visiting your patisserie because it has an international flavor, because it makes them feel like trendsetters, or even because they've always wanted to visit France. Whatever the reason, make sure you incorporate it into your USP.

Ask your customers why they buy your product or service over a competitor's.

Once you have an established customer base, simply ask them why they visit your shop and buy your pastries instead of another bakery. You might be surprised at what you hear.

Once you have this information from your customers you can develop your USP.

The Nicest Way To Build Your Business

Wed, 11 Oct 2023 15:38:13 GMT

"People don't care how much you know until they know how much you care."

It's interesting to see how many small businesses try as soon as possible to follow the example of some large corporations to build an impersonal "corporate image."

People actually prefer to do business with people, not institutions. The last time you called an organization with a problem, weren't you frustrated and didn't you experience emotional pain while "going through voice mail hell" or being transferred until you got connected with a person who could solve your problem? Corporate leaders with good marketing sense understood this.

When we think of Hewlett Packard, we think of Bill and Dave. Lee Iacocca rebuilt Chrysler largely by being the corporate spokesperson in commercials. No advertising has been more successful for Wendy's than Dave Thomas telling us about his latest fast food offering. According to John Sculley, former president of Apple Computer, it requires 16 times the investment for an existing customer to replace the profits of one who is lost.

Keeping existing customers is a key to running a successful business.

Why we lose customers?

According to a study conducted by the Technical Assistance Research Project in Washington D.C., 3 percent leave for convenience, 9 percent because of a relationship, 15 percent because of product, price or delivery problems, and 5 percent for other miscellaneous reasons.

That leaves 68 percent for the most significant reason: perceived indifference. Customers want to feel important and appreciated. A key to building customer loyalty is to build a relationship with customers/clients/patients where they feel important and appreciated!

In any business, but especially a business where there is contact with a customer and a representative of the company either in person or on the telephone, the best way I know to cement that relationship is through personal notes - thank you notes!

Personalize thank you notes by hand addressing the envelope and using a real postage stamp. A hand-written note is best. But if your handwriting is terrible, be sure to sign the letter in blue ink.

When should you write thank you notes?

When you are getting started in business or in sales, you should write a note after any contact, including meeting someone at a seminar or when you exchange business cards. Learn to be sincerely appreciative and express that appreciation. If you deal with a problem, apologize personally with a personal note and be sure the problem is resolved as quickly as possible; maybe even sending another note after it's done.

You certainly will want to acknowledge major purchases and referrals with thank you notes. You can sometimes exploit or manipulate people and make a sale. But when you become an "assistant buyer," a friend who helps the customer make transactions in his or her best interest, and express your interest in the customer as a person, you are building a business or a sales career that will provide for you and your family for years to come.

How To Get Your Customers To Trust You

Wed, 11 Oct 2023 15:31:32 GMT

An extremely powerful marketing tool that we get "too busy" or "too smart" to use is the testimonial.

Videotape

According to marketing guru Dan Kennedy, "What others say about you and your product, service, or business is at least 1000 percent more convincing than what you say, even if you are 1000 percent more eloquent."

The reason is obvious. Customers doubt what we say about ourselves, but believe other customers. And the more customers who say good things about us, the more prospective customers will believe them. Is this a new idea?

Frank Bettger discussed the power of testimonials in Chapter 18 of How I Raised Myself From Failure To Success In Selling, published in 1949, and I'm sure there are earlier examples.

When Ira Hayes of National Cash Register made sales calls, his presentation principally consisted of showing binders of testimonial letters to his customers.

Time management consultant Larry Dolan told marketing guru Dan Kennedy, that he closes every inquiry he gets for a speaking engagement. He has no brochure, no demo tape, and no video tape. When a prospective client calls, Larry simply sends a hand-addressed box of copies of testimonial letters.

Can you imagine the power of hundreds of letters praising his presentation? This is more compelling and believable than anything Larry could say about himself.

So when you send a sales letter, include as many testimonials as possible. The testimonials are more likely to make the sale than your letter. When you make a sales presentation, have a supply of testimonial letters. If possible, get audio tapes and video tapes with testimonials.

Include testimonials in your advertisements. In some cases, an entire advertising campaign can be built around a series of testimonials. Those who are not permitted to use testimonials about the results of their products or services may be able to use testimonials about how they deliver their products or services. If these limitations apply to you, get legal counsel to advise you about what you can do.

For example, "The team at the Dr. Roth's office are so nice I would like to visit there for my summer vacation. They made me very comfortable when I had always been stressed out going to a dentist. Their office is so fun and oriented to patients that when I go there I feel like I'm at Disneyland! They took care of all of the paperwork for my insurance claims and helped me arrange a payment plan for my co-payment."

How To Get Testimonials

First, you must provide an outstanding product and service. Then, ask your customers for help. Interview your customers about what they really like about your product and the service you provide. What do they especially like about working with you and your company? Ask if they would write what they told you in a letter or if you can write it for them for their approval. Ask if you can tape record or video record your interview. If you make a presentation, request that the audience complete evaluation forms. Some of the comments could be valuable testimonials.

Another source of testimonials is a client/customer advisory board. We had a client advisory board for our firm last year. As a warm up, we asked the participants to tell about how they were involved with our firm. They responded with at least a half hour of beautiful testimonials, many of which we incorporated in our firm brochure. (Facilitating client/customer advisory boards is one of the services we offer.) Ask for, collect, and use testimonials for your business and you will see an improvement in your results!

Referrals: The Secret to Building a Better Business Faster

Wed, 11 Oct 2023 15:24:47 GMT

Who are the very best new customers you get? Who is most likely to buy from you and continue being a good customer in the future? Isn't it a prospective customer who was referred to you by another customer who is an advocate for your business?

Referrals are the best prospective customers because they have already developed some trust for you and your company. Their defenses are down, and their minds and hearts are open. These are the ideal conditions for doing business.

The most expensive customers to get are those in the "cold market," through advertising or other promotional activities. Yet that's where most of the marketing effort for companies seems to go. You can market much more effectively by devoting more of your organization's time and resources to developing referrals.

You can encourage your customers to give you more referrals.

1. You must deserve referrals . You have to deliver the products and awesome service that people can't help talking about.

2. You must ask for referrals . At the end of every sales interview, whether you make a sale or not, you must ask for referrals. When you make a sale, you have only completed one-half of your mission. The other half is to get referrals. Don't leave the job half done. To encourage the customer to make referrals, help him isolate people in his or her mind: Is there a business associate, like him or her, who you can talk to? A customer? A supplier? Is there a golf buddy? Listen for names that come up during your conversation.

Script a brief profile or description of what you are looking for in a prospective customer. Trigger the customer's mental search with the question, "Who do you know who... (give profile)? If he or she was here, right now, you wouldn't hesitate to introduce us, would you? That's all I'm asking you to do."

If the customer hesitates to give a name, say... "That's all right, Mr. Wright. I think I understand how you feel. Give me the name of someone you know, under fifty, who is making money. I promise you I'll never mention your name." "Mr. Wright, my name is John Smith. I'm in the life insurance business. A mutual friend gave me your name with the understanding that I wouldn't mention his name. He told me that you have been very successful and that you would be a good man for me to talk to. Could you spare five minutes now, or would you rather I stop by some other time?"

The prospective customers never asked who made the referral, and some of these people were John's best leads.

Part of our introductory procedure for new clients is to review a list of "Our Commitments To Each Other." The final client commitment is: "You will consider referring to us at least two other business persons whom you believe would benefit from an association from us." The expectation of providing referrals is planted at the beginning of our relationship.

3. Show appreciation. This is the real key to continuing receiving leads from a customer and cultivating him or her as a center of influence. Thank the customer for making the referral. Write a thank-you note. Call the customer with a report of the results of your interview. Make a big, appreciative fuss about the wonderful thing your customer has done. Give thank-you gifts in appreciation: send flowers, take him or her out to dinner, or give tickets to a show or athletic event.

What is appropriate considering the lifetime value of a customer for your business? Many people build their businesses with customer appreciation events. For example, marketing guru Dan Kennedy knows a chiropractor who has a monthly patient appreciation luncheon where he gives jeweled appreciation pins to patients who made referrals that month. There are different "levels" indicated by different jewels. Shades of Amway and Mary Kay! Patients are invited to bring family members to the luncheon to see them receive their award, which is given with an appreciative hug by the chiropractor. Photographs of the luncheons are posted in the reception room.

Important Questions:

If this were your chiropractor, would you want to make a referral?
How can you use this extremely powerful idea to build your business?
If you use salespeople in your business, do you train them in how to get referrals from customers?
Do you maintain a file of all customers who buy your products for follow up promotions encouraging referrals?
We can work with you to help build strong referrals for your business.

Developing An Advertising Program: A Basic Review

Wed, 11 Oct 2023 15:16:28 GMT

By developing an effective advertising plan, you increase the likelihood of a positive return on your advertising investment, regardless of the amount you spend.

Advertising is an investment in your business, similar to other investments to improve and expand your business. The return you receive depends on the planning and thought that precede the actual commitment and expenditure of advertising dollars.

This Financial Guide is not intended to be an in-depth analysis of advertising principles and alternatives - that is beyond its scope. Rather, it is intended only to provide a basic review - to stimulate your thinking - of how to develop an effective advertising program. Unless you are very familiar with the opportunities in this area, you should seek the advice of an advertising professional.

The basic premise of an advertising plan requires you to thoroughly analyze the answers to key questions before you can make effective advertising decisions. There are four key questions to ask yourself:

What do I want my advertising to accomplish?
Whom should my advertising speak to?
What should my advertising say?
What advertising medium should I use?

In the specific business situation, each question has any number of potential answers. As you think about each question do not accept any answer until you have considered and explored the full range of possibilities.

What Do I Want My Advertising To Accomplish?

The first step in developing your advertising plan is to specify your advertising goals. Be as precise as you can as to why you are advertising and what you want to achieve. Everyone wants advertising to increase business, but for your advertising plan to work it requires you to be more precise. Some possible goals for your advertising are:

Increase awareness of your business.
Attract competitors' customers.
Increase the likelihood of keeping current customers and developing their loyalty.
Generate immediate sales or sales leads.

It is possible you may want your advertising to achieve all of these goals plus some others. What is important is that you prioritize your goals. Advertising works best when it is developed to meet one specific goal at a time.

Whom Should My Advertising Speak To?

Once you determine your advertising goals you can then select the target audience for your message. Advertising that tries to reach "everyone" rarely succeeds. Successful advertising is written with a specific customer in mind. Try to picture the person you must reach in order to achieve your advertising goals. Try to describe your target consumers in each of the following:

Demographics: Gender, age, income, location of residence or business, etc.
Behaviors: Current awareness of your business; the products, services or vendors they currently use; loyalty to either you or your competitor's business, etc.
Needs or desires: What benefits consumers look for, the basis on which they will decide whether to use your product or service and how your business can fulfill those needs, etc.

What Should My Advertising Say?

Once you know who your target audience is and what they are looking for in terms of the product or service you offer, you can decide what your advertising will say.

Advertising should always be written to communicate a message that will be seen as important by your target customer. Your advertising should clearly and convincingly "speak" to your target audience, explaining the important benefits your product or service offers.

In deciding how to discuss the major benefits of your product or service in your advertising keep "AIDA" in mind: attract Attention, hold Interest, arouse Desire and motivate Action.

Where Should I Place My Advertising?

Every month new advertising options become available. Beyond "traditional" media you can place ads in airports, on ski lifts and on televisions monitors in the front of grocery carts. Where you place your advertising should be guided by a simple principle: go where your target audience will have the highest likelihood of seeing or hearing it. Many advertising media work well to reach a diverse range of target consumers. There is no single medium inherently good or bad. A good medium for one product or service may be a poor medium for another.

As you consider media choices look for one that fits your advertising goals, reaches your target efficiently and cost-effectively and is within your advertising budget. Based on these considerations, the following summarizes the relative advantages and disadvantages of the advertising media most frequently used by small businesses:

Internet Marketing or Online Marketing

Internet marketing, online marketing or e-marketing are terms used for marketing your products or services over the Internet. Internet marketing is a great way to reach a wide, international audience at a relatively low cost. The nature of the medium allows consumers to find what they are looking for when they want, at their own convenience. It provides instant response and is very interactive.

Internet marketing methods include search engine marketing, display advertising, email marketing, and interactive advertising, all completed through your website. Internet marketing can be very creative, cost effective and interactive.

Television

Television provides a means for reaching a great number of people in a short period of time. Small businesses will typically use either spot television or cable television. A spot television ad is placed on one station in one market. The number of people in your target audience who see your ad depends on how many viewers are tuned into the television station at a specific time. Cable advertising is placed either on a local cable television channel or on a cable network. The number of people reached by cable advertising depends on the cable penetration and cable/channel program viewership in a given market.

Beyond television's reach, an additional advantage is its ability to convey your message with sight, sound, and motion. The disadvantages of television advertising are: relatively higher cost - both the terms of airtime and production, limited length of exposure, short airtime (making it difficult to present a complex or detailed message) and the clutter of many other ads.

Television ads may require multiple exposures to achieve message retention and consumer action. Also, many commercials are considered intrusive, prompting viewers to switch channels to avoid them.

Radio

Radio, like television, has the ability to quickly reach a large number of consumers. The major advantage of radio lies in its ability to efficiently target narrowly defined segments of consumers. The vast array of radio program formats lets an advertiser gear ads to almost any target audience.

Beyond this advantage, radio is commonly used by small businesses because it is relatively inexpensive (both in terms of airtime and production costs) and because deadlines for placing radio advertising are relatively short, providing an advertiser with increased flexibility. The disadvantages of radio are: an advertiser is limited to an audio message so there is no visual product or service identification, ad clutter can be high and exposure to the message is short and fleeting. Finally, similar to television, multiple exposures may be required for message retention and consumer reaction. Also, listeners may change stations to avoid commercials.

Newspapers

Newspapers permit and advertiser to reach a large number of people within a specified geographic area. Newspaper advertising has several advantages for the small business. An advertiser has flexibility in terms of as size and placement within the newspaper. Exposure to the ad is not limited, so readers can take their time with your message. Short deadlines permit quick response to changing market conditions. Disadvantages of newspaper advertising include:

Declining readership and market penetration
Ad space can be expensive
Clutter of competitive advertising and a relatively short lifespan (newspapers are typically read once, then discarded), thus requiring multiple insertions.

Magazines

Magazines provide an advertiser with the means to reach highly targeted audiences. Specific groups can be reached by placing an advertisement in a magazine whose editorial content specializes in topics of interest to that target. This is true both of consumer and business publications. Audiences can be reached by placing ads in magazines which have well-defined geographic, demographic or lifestyle focus.

Beyond the ability to reach specific audiences, the advantage of magazines include:
Relatively long ad life and repeated ad exposure (magazines are typically looked through several times before discard);
Excellent reproduction quality and pass-along value.

The disadvantages of magazines include:

Long lead time
Limited flexibility in terms of ad placement and format
The potential for high costs in production and placement.

Outdoor (Billboards)

Outdoor advertising is typically used to reinforce or remind the consumer of the advertising messages communicated through other media. The advantages of outdoor advertising are:

The ability to completely cover a market
High levels of viewing frequency.

The disadvantages of outdoor advertising are related to viewing time. Because target consumers are typically moving, an outdoor advertisement must communicate with a minimum of words. Messages must be simple, direct, and easily understood.

Direct Mail

Direct mail advertisers use targeted mailing lists to reach highly specialized audiences. In addition to low waste in ad exposure, direct mail provides an advertiser with great flexibility in the message presentation. The disadvantages of direct mail include:

Relatively high cost per contact
Obtaining updated, accurate mailing lists
Difficulty in getting the audience's attention (direct mail is often considered "junk mail").

Yellow Pages

The Yellow Pages are an advertising medium that shares many of the strengths of other advertising media while at the same time avoiding some of the limitations or disadvantages. As such, the Yellow Pages are best used to complement or extend the effects of advertising placed in other media. Like other media, the Yellow Pages permit an advertiser to select a well-defined geographic area, ranging from a neighborhood to an entire metropolitan area.

The advantages of the Yellow Pages are:

Once the geography is defined, an ad has permanence, i.e., the Yellow Pages are kept as a regular reference.
They support your other advertising by providing a convenient way for consumers to contact sources and obtain information on the products or services they desire at the time they are ready to "take action."
The Yellow pages are relatively low in cost in terms of both ad production and placement.

The disadvantages of the Yellow Pages include:

Lack of timeliness (ads can be changed only once per year and, as a result, there is no opportunity for "price advertising")
Potential clutter in some classifications
Not as much creative flexibility as other print media.

Pricing Your Products and Services: A Basic Review

Wed, 11 Oct 2023 15:10:51 GMT

Pricing goods and services is one of the most difficult tasks in the business arena. Many small businesses fail to make a profit simply because they don't consider all the factors necessary to make prices competitive and yield that elusive profit.

Before setting prices, you must understand your market, distribution costs, and competition. Remember, the marketplace responds rapidly to technological advances and international competition. You must keep abreast of the factors that affect pricing and be ready to adjust quickly.

This Financial Guide does not attempt to be an in-depth discussion of pricing analysis. Rather, it is intended only to provide a basic review of the several pricing strategies - and perhaps encourage you to take a fresh look at your present strategies. Professional financial guidance will be helpful in working up and evaluating the financial aspects of the analysis for your financial resources.

Retail Cost and Pricing

A common pricing practice among small businesses is to follow the manufacturer's suggested retail price. The suggested retail price is easy to use, but it does have one major shortcoming - it doesn't adequately account for the element of competition.

Competitive Position

An alternative to the manufacturer's suggested retail price is to base your price on those of your competitors. For example, a small retailer should compare prices with a store that's comparable in size and customer volume. It's risky to compete with a large store's prices because they can buy in larger volume, and their cost per unit may be less.

Instead, price products based on your local small-store analysis, and then highlight other competitive factors, like personalized customer service and convenient location. There are any number of factors that influence a consumer's decision to buy from a certain business, including price, convenience, and courteous and attentive service.

Pricing Below the Competition

Some vendors have been very successful pricing their goods or services below the competition. Since this strategy reduces the profit margin per sale, it requires a company to reduce its costs and:

Obtain the best prices possible for merchandise
Locate the business in an inexpensive location or facility
Closely control inventory
Limit the line to fast-moving items
Design advertising to concentrate on price specials
Limit other services.

One word of caution: Pricing goods below the competition can be difficult to sustain. Why? Because every cost component must be constantly monitored and adjusted, it exposes a business to pricing wars. Competitors can match the lower price, leaving both parties out in the cold.

Pricing Above the Competition

This strategy is possible when the cost of an item is not the customer's greatest concern. Considerations important enough for customers to justify paying higher prices include:

Service considerations, including delivery, speed of service, satisfaction in handling customer complaints, knowledge of product or service, and helpful, friendly employees
A convenient or exclusive location
Exclusive merchandise.

Multiple Pricing

This approach involves selling a number of units for a single price, for example, two items for $1.98 and is useful for low-cost consumable product, such as shampoo or toothpaste. Many stores find this an attractive pricing strategy for sales and year-end clearances.

Cost Factors and Pricing

Every component of a service or product has a different, specific cost. Many small firms fail to analyze each component of their commodity's total cost, and, therefore, fail to price profitably. Once this analysis is done, prices can be set to maximize profits and eliminate any unprofitable service.

Cost components include material, labor, and overhead costs:

Material cost is the cost of all materials found in the final product. For example, wood used to manufacture a chair is considered a direct material.
Labor cost is the cost of the work that goes into the manufacturing of a product. An example would be the wages of all production-line workers producing a certain commodity. The direct labor costs are derived by multiplying the cost of labor per hour by the number of person-hours needed to complete the job.
Remember; do not only use the hourly wage but, also the dollar value of fringe benefits, which include social security, workers' compensation, unemployment compensation, insurance, and retirement benefits.
Overhead Cost is any cost that is not readily identifiable with a particular product such as supplies, utilities, depreciation, taxes, rent, advertising, transportation, and insurance. Overhead costs also cover indirect labor costs, such as clerical, legal and janitorial services. Be sure to include shipping, handling, and/or storage as well as other cost components. a portion of overhead costs must be allocated to each service performed or product produced. The overhead rate can be expressed as a percentage or an hourly rate. This is a complex task. It is best to consult with an expert in this area. It is important to review your overhead costs periodically. Charges must be revised to reflect inflation and higher benefit rates. It's best to project the costs quarterly, including increased executive salaries and other projected costs.

Figuring Costs and Profits for a Consultant Service

As a consultant, you will most likely price your service by the hour. Remember to charge for an adequate number of hours. Travel time is usually listed as an extra charge.

It's unlikely that all your time will be billed to clients. Therefore, hourly or contract fees must be set high enough to cover expenses during slow periods. That is why one-half of the total normal working hours for a given year are used in figuring overhead rates. Try to obtain long-term, monthly, or contract assignments when possible.

Summary

Your price structure and policy are major components of your public image and are crucial to securing and keeping your clientele.

Pricing for service businesses may be more complex than retail pricing. The equation, however, is the same: Cost + Operating Expenses + Desired Profit = Price

The key to success is to have a well-planned strategy. Establish your policies and constantly monitor prices and operating costs to ensure a profit. Accuracy increases profits!

Evaluating Your Market: A Basic Review

Wed, 11 Oct 2023 15:07:39 GMT

Market evaluation is the most critical element of successful business planning. It provides the basic data that will determine if and where you can successfully sell your product or service and how much to charge.

If you are thinking of starting a new business or expanding into new markets, proper market evaluation is critical to success. While it may sound deceptively simple to figure out if a market exists for your product or service, it's probably one of the most challenging requirements of a business. The process involves scrutinizing your competition and your customer base and interviewing potential suppliers.

The information collected can help you adopt your product or service to better meet customer needs. In some rare cases, it might lead to a totally new, but financially rewarding venture. This Financial Guide covers some of the basic considerations of market evaluation. It is intended as a basic introduction to a complex determination to help focus the thinking for those business people with limited experience in marketing. In many cases, a professional guidance can be extremely helpful.

Market Research

There are a number of benefits to conducting market research including:

Create primary and alternative sales approaches to a given market,
Make profit projections from a more accurate base,
Organize marketing activities,
Develop critical short/mid-term sales goals, and
Establish the market's profit boundaries.

So, how should you go about conducting your research? Two of the most important first steps are defining your goals and organizing the collection/analysis process. Maintain a set of well-documented and easily accessible files so you can store and retrieve data as needed.

Questions to Ask

Your research should ask these basic questions:

Who are your customers?
What are their needs and resources?
Is the service or product essential in their operations or activities?
Can the customer afford the service or product?
Where can you create a demand for the service or product?
Can you compete effectively in price, quality, and delivery?
Can you price the product or service to assure a profit?
How many competitors provide the same service or product?
What is the general economy of your service or product area?
What areas within your market are declining or growing?

Market Data

Knowing your market not only requires an understanding of your product, but also an understanding of your customers' social and economic characteristics. In conducting your research, you can access relevant market information from these sources:

The Small Business Administration (SBA) provides immediate, round-the-clock information on its services, publications, and programs. Users can access a national calendar of events, such as training programs, small business seminars, and international trade fairs. Most information is available at no cost.

The Small Business Development Centers (SBDCs) offer the latest in high-technology hardware, software, and telecommunications. Each BIC offers electronic bulletin boards, computer databases, on-line information exchange, periodicals and brochures, counseling, videotapes, reference materials, texts, start-up guides, application software, computer tutorials and interactive media. SBDCs are located around the country. One-on-one counseling with seasoned marketing veterans also is available through the Service Corps of Retired Executives, better known as SCORE.

Other sources include:

Trade association studies and journal articles.
Regional planning organization studies on growth trends.
Banks, realtors and insurance companies.
Customer surveys in your market area, which you can conduct on your own or search out existing material.

Finally, research on competitors is extremely important. Visit industry trade shows to find out what your competitors are selling and how they are marketing their products. Similarly, stay current on information in industry magazines and publications.

Research data will help you develop the basic assumptions in your financial projections - and tell you whether or not to go into business. Once you have obtained and analyzed this information, it becomes the foundation of your business plan. You should not view market research, however, as a one-time activity. Once you establish your business, you should continually be in touch with your customers. You may also have to adapt your product/service and/or marketing strategy to keep up with your customers' changing needs.

Export Markets

In general, you should be well-established in the U.S. market before committing resources and taking on additional risk to explore export markets. Some products, such as used equipment that is obsolete in the United States but new to other countries, may be particularly well-suited for exporting right from the start. Whatever your product or service, it is never too early to explore its export potential.

Researching international markets involves many of the same steps as domestic market evaluation. The first step is to identify the countries with the largest and fastest-growing markets for your product. The SBA's Office of International Trade can help. Information on this service can be found on the SBA's internet site. The National Trade Data Bank, maintained by the U.S. Department of Commerce, also contains valuable market information.

From your list of possible markets, you will want to determine which of these offer the best prospects. You should examine the markets in greater detail, looking at how your product quality and price compares with that of goods already available. You also should determine who your major customers are.

With this information, you can pick one or two export markets to explore initially. You can add more markets later as your export skills develop. Now you are ready to conduct more in-depth market research on this target market(s), just as you did before establishing your business.

Summary

A small business owner must know and understand the market. Market research is simply an orderly, objective way of learning about people-the people who will buy from you and sustain your business venture.

Financial Planning Tips For Business Owners

Wed, 11 Oct 2023 15:02:13 GMT

1. Consider establishing an employee stock ownership plan (ESOP).

If you own a business and need to diversify your investment portfolio, consider establishing an ESOP. ESOP's are the most common form of employee ownership in the U.S. and are used by companies for several purposes, among them motivating and rewarding employees and being able to borrow money to acquire new assets in pretax dollars. In addition, a properly funded ESOP provides you with a mechanism for selling your shares with no current tax liability. Consult a specialist in this area to learn about additional benefits.

2. Make sure there is a succession plan in place.

Have you provided for a succession plan for both management and ownership of your business in the event of your death or incapacity? Many business owners wait too long to recognize the benefits of making a succession plan. These benefits include ensuring an orderly transition at the lowest possible tax cost. Waiting too long can be expensive from a financial perspective (covering gift and income taxes, life insurance premiums, appraiser fees, and legal and accounting fees) and a nonfinancial perspective (intra-family and intra-company squabbles).

3. Consider the limited liability company (LLC) and limited liability partnership (LLP) forms of ownership.

These entity forms should be considered for both tax and non-tax reasons.

4. Avoid nondeductible compensation.

Compensation can only be deducted if it is reasonable. Recent court decisions have allowed business owners to deduct compensation when (1) the corporation's success was due to the shareholder-employee, (2) the bonus policy was consistent, and (3) the corporation did not provide unusual corporate prerequisites and fringe benefits.

5. Purchase corporate owned life insurance (COLI).

COLI can be a tax-effective tool for funding deferred executive compensation, funding company redemption of stock as part of a succession plan and providing many employees with life insurance in a highly leveraged program. Consult your insurance and tax advisers when considering this technique.

6. Consider establishing a SIMPLE retirement plan.

If you have no more than 100 employees and no other qualified plan, in 2023, you may set up a Savings Incentive Match Plan for Employees (SIMPLE) into which an employee may contribute up to $15,5000 per year if you're under 50 years old and $19,000 a year, if you're over 50. As an employer, you are required to make matching contributions. Talk with a benefits specialist to fully understand the rules and advantages and disadvantages of these accounts.

7. Establish a Simplified Employee Pension (SEP) IRA or Individual 401(k) Plan before December 31st.

If you are self-employed and want to deduct contributions to a new retirement plan for this tax year, you must establish the plan by December 31st. You don't actually have to put the money into your retirement account until the due date of your tax return (generally April 15). Consult with a specialist in this area to ensure that you establish a retirement plan that maximizes your flexibility and your annual contributions.

8. Section 179 expensing.

Businesses may be able to expense up to $1,160,000 in 2023 for equipment purchases of qualifying property placed in service during the filing year, instead of depreciating the expenditures over a longer time period. The limit is reduced by the amount by which the cost of Section 179 property placed in service during the tax year 2023 exceeds $2,890,000.

9. Don't forget deductions for health insurance premiums.

If you are self-employed or are a partner or a 2-percent S corporation shareholder-employee you may deduct 100 percent of your medical insurance premiums for yourself and your family as an adjustment to gross income. The adjustment does not reduce net earnings subject to self-employment taxes, and it cannot exceed the earned income from the business under which the plan was established. You may not deduct premiums paid during a calendar month in which you or your spouse is eligible for employer-paid health benefits.

10. Review whether compensation may be subject to self-employment taxes.

If you are a sole proprietor, an active partner in a partnership, or a manager in a limited liability company, the net earned income you receive from the entity may be subject to self-employment taxes.

11. Don't overlook minimum distributions at age 72 and rack up a 50 percent penalty.

The Further Consolidated Appropriations Act, 2020, which went into effect on January 1, 2020, included the SECURE (Setting Every Community Up for Retirement) Act and increased the age for required minimum distributions (RMDs) to the year a taxpayer turns age 72. In prior years, minimum distributions were generally required at age 70 1/2. Now, these minimum distributions from qualified retirement plans and IRAs must begin by April 1 of the year after the year in which you reach age 72. The amount of the minimum distribution is calculated based on your life expectancy or the joint and last survivor life expectancy of you and your designated beneficiary. If the amount distributed is less than the minimum required amount, an excise tax equal to 50 percent of the amount of the shortfall is imposed.

12. Don't double up your first minimum distributions and pay unnecessary income and excise taxes.

You are allowed to delay the first distribution until April 1 of the year following the year you reach age seventy-two. In subsequent years, the required distribution must be made by the end of the calendar year. This creates the potential to double up in distributions in the year after you reach age 72. This double-up may push you into higher tax rates than normal. In many cases, this pitfall can be avoided by simply taking the first distribution in the year in which you reach age 72.

13. Don't forget filing requirements for household employees.

Employers of household employees must withhold and pay social security taxes annually if they paid a domestic employee more than $2,600 a year in 2023. Federal employment taxes for household employees are reported on your individual income tax return (Schedule H, Form 1040). To avoid underpayment of estimated tax penalties, employers will be required to pay these taxes for domestic employees by increasing their own wage withholding or quarterly estimated tax payments. Although the federal filing is now required annually, many states still have quarterly filing requirements.

14. Consider funding a nondeductible regular or Roth IRA.

Although nondeductible IRAs are not as advantageous as deductible IRAs, you still receive the benefits of tax-deferred income. One way to do this is to convert a traditional IRA to a ROTH IRA. You can withdraw all or part of the assets from a traditional IRA and reinvest them (within 60 days) in a Roth IRA. The amount that you withdraw and timely contribute (convert) to the Roth IRA is called a conversion contribution.

If properly (and timely) rolled over, the 10 percent additional tax on early distributions will not apply. However, a part or all of the distribution from your traditional IRA may be included in gross income and subjected to ordinary income tax. You can roll over all or part of the withdrawal into a Roth IRA; however, any amounts that you do not roll over will generally be taxable (except for the part that is a return of nondeductible contributions) income and may be subject to the 10 percent additional tax on early distributions.

15. Calculate your tax liability as if filing jointly and separately.

In certain situations, filing separately may save money for a married couple. If you or your spouse is in a lower tax bracket or if one of you has large itemized deductions, filing separately may lower your total taxes. Filing separately may also lower the phase-out of itemized deductions and personal exemptions, which are based on adjusted gross income. When choosing your filing status, you should also factor in the state tax implications.

16. Avoid the hobby loss rules.

If you choose self-employment over a second job to earn additional income, avoid the hobby loss rules if you incur a loss. The IRS looks at a number of tests, not just the elements of personal pleasure or recreation involved in the activity.

17. Review your will and plan ahead for postmortem tax strategies.

A number of tax planning strategies can be implemented soon after death. Some of these, such as disclaimers, must be implemented within a certain period of time after death. A number of special elections are also available on a decedent's final individual income tax return. Also, review your will as the estate tax laws are in flux and your will may have been written with differing limits in effect. In 2023, estates of $12,920,000 (up from $12,060,000 in 2022) are exempt from the estate tax with its 40 percent maximum tax rate (made permanent starting in tax year 2013).

18. Check to see if you qualify for the Child Tax Credit.

For tax years 2018 through 2025, the child tax credit increases to $2,000 per child, up from $1,000 in 2017, thanks to the passage of the TCJA. The enhanced child tax credit, which was made permanent by the Protecting Americans from Tax Hikes Act of 2017 (PATH), remains under TCJA. The refundable portion of the credit increases from $1,000 to $1,400 so that even if taxpayers do not owe any tax, they can still claim the credit. Under TCJA, a $500 nonrefundable credit is also available for dependents who do not qualify for the child tax credit (e.g., dependents age 17 and older).

Employee Benefits: How To Handle Them

Wed, 11 Oct 2023 14:45:59 GMT

Many companies offer a variety of employee benefits to their staff in order to keep them satisfied. The types of benefits include, but are not limited to, health insurance, retirement plans, vacation, and sick leave. This Financial Guide provides an overview of the types of benefits that businesses provide for employees and what's involved in offering them.

Employee benefits play an increasingly important role in the lives of employees and their families and have a significant financial and administrative impact on a business. Most companies operate in an environment in which an educated workforce has come to expect a comprehensive benefits program. Indeed, the absence of a program or an inadequate program can seriously hinder a company's ability to attract and keep good personnel. Employers must be aware of these issues and be ready to make informed decisions when they select employee benefits.

Designing the right benefit plan for your employees is a complex task. There are many issues to consider, including tax and legal aspects, funding, and finding the right vendors or administrators.

You may want to contact your insurance carrier, broker, or benefits consultant for assistance in designing and implementing your benefit plan.

What Is An Employee Benefit Plan?

An employee benefit plan protects employees and their families from economic hardship brought about by sickness, disability, death or unemployment. It also provides retirement income to employees and their families, and establishes a system under which leave or time off from work can occur should the employee need it.

Mandated Benefits

The employer must pay in whole or in part for certain legally mandated benefits and insurance coverage:

Social Security.
Unemployment insurance.
Workers' compensation.

Funding for the Social Security program comes from payments by employers, employees, and self-employed persons that are deposited into an insurance fund that provides income during retirement years. Full retirement benefits normally become available at age 65. For younger individuals, the date for maximum benefits is being adjusted to age 67. These benefits are discussed in more detail in the Retirement Benefit Plans section of this Financial Guide. Other aspects of Social Security deal with survivor, dependent and disability benefits, Medicare, Supplemental Security Income, and Medicaid.

Unemployment insurance benefits are payable under the laws of individual states from the Federal-State Unemployment Compensation Program. Employers contribute to the program based on total payroll.

Workers' compensation provides benefits to workers disabled by occupational illness or injury. Each state mandates coverage and provides benefits. In most states, private insurance or an employer self-insurance arrangement provides the coverage. Some states mandate short-term disability benefits as well.

Optional Benefits

A comprehensive benefit plan can include the following elements:

Health insurance.
Disability insurance.
Life insurance.
A retirement plan.
Flexible compensation (cafeteria plans).
Leave.

A benefit plan can also include bonuses, service awards, reimbursement of employee educational expenses and prerequisites appropriate to employee responsibility.

Why Offer Your Employees Benefits?

Here are some of the reasons employers offer benefits:

To attract and hold capable people.
To keep up with competition.
To foster good morale.
To keep employment channels open by providing opportunities for advancement and promotion as older workers retire.

A combination of benefits programs are the most effective and efficient means of meeting economic security needs. For many employers, a benefit plan is an integral part of total compensation, because employers either pay the entire cost of a benefit plan or have employees contribute a small portion of premium costs for their coverage.

Health, Disability, and Life Insurance Plans

Employers might offer medical and dental plans, disability benefits, and life insurance.

Medical and Dental Plans

A serious illness or injury can be devastating to an employee and his or her family. It can threaten their emotional and economic well-being. Thus, adequate health insurance is important to employees and is part of a solid group plan.

Group health plans help attract and keep employees who can make your business a success. They relieve your employees of the anxiety of health care costs by providing the care they need before an illness becomes disabling, thus helping you avoid costly employee sick days.

Group health plans usually cost less than purchasing several individual policies with comparable coverage. Moreover, there are tax advantages to offering health care benefits: your contribution as an employer may be deductible and the insurance is not taxable income to your employees.

As an employer, you can choose either an insured (also known as an indemnity or fee-for-service plan) or a pre-paid plan (also known as a health maintenance organization).

Traditional Indemnity Plans. An indemnity plan allows the employee to choose his or her own physician. The employee typically pays for medical care and then files a claim form with the insurance company for reimbursement. These plans use deductibles and coinsurance as well. A deductible is a fixed amount of medical expenses an employee pays before the insurance plan reimburses any more expenses.

Coinsurance is a percentage of medical expenses the employee pays, with the plan paying the remaining portion. A typical coinsurance amount is 20 percent, with the plan paying 80 percent of approved medical expenses. Listed below are the most common types of insurance arrangements (indemnity plans) providing health care to groups of employees.

A basic health insurance plan, covering hospitalization, surgery and physicians' care in the hospital.
A major medical insurance plan, usually supplementing a basic plan by reimbursing charges not paid by that plan.
A comprehensive plan, covering both hospital and medical care with one common deductible and coinsurance feature.

Health Maintenance Organizations. Health maintenance organizations (HMOs) provide health care for their members through a network of hospitals and physicians. Comprehensive benefits typically include preventive care, such as physical examinations, well-baby care, and immunizations, and stop smoking and weight control programs.

The main characteristics of HMOs are as follows:

The choice of primary care providers is limited to one physician within a network; however, there is frequently a wide choice for the primary care physician.
There is no coverage outside the HMO network of hospitals and physicians.
Costs are lower, due to limited choice. Physicians are encouraged to keep patients healthy; accordingly, they often are paid on a per capita basis, regardless of how much care the patient needs.
The employer prepays HMO premiums on a fixed, per-employee basis.
Employees do not have to apply for reimbursement of charges, but they may have small co-payments for medical services.

Preferred Provider Organizations. Preferred provider organizations (PPOs) fall between the conventional insurance and health maintenance organizations and are offered by conventional insurance underwriters. A PPO is a network of physicians and/or hospitals that contract with a health insurer or employer to provide health care to employees at predetermined discounted rates.

Some of the key elements of a PPO are:

It offers a broad choice of health care providers. Because of the broader choice of providers, PPOs are more expensive than HMOs.
It may have fewer comprehensive benefits than HMOs, but the benefits usually can meet almost any need.
PPO providers usually collect payments directly from insurers.

Although there is no requirement for employees to use the PPO providers, there are strong financial reasons to do so.

Dental Benefits. Medical insurance frequently includes dental plans. Most plans cover all or portions of the cost for the following services:

Cleaning, x-rays and oral examinations.
Fillings.
Crowns and dentures.
Root canals.
Oral surgery.
Orthodontia (these portion of the cost covered here are generally quite limited, if at all)

Health Savings Accounts. The HSA allows employees to deduct contributions to the HSA even if they do not itemize deductions. The HSA plan allows employees who are covered by a high-deductible health plan to contribute pre-tax amounts that will be used to cover medical expenses or used later for retirement. Qualified amounts contributed to an employee's HSA by an employer can be excluded by the employee. Distributions from the HSA are not taxable as long as they are used for medical expenses.

Disability Benefits

A disability plan provides income replacement for the employee who cannot work due to illness or accident. These plans are either short-term or long-term. They can be distinct from workers' compensation because they pay benefits for non-work-related illness or injury.

Short-Term Disability. Short-term disability is usually defined as an employee's inability to perform the duties of his or her normal occupation. Benefits may begin on the first or the eighth day of disability and are usually paid for a maximum of 26 weeks. The employee's salary determines the benefit level, ranging from 60 to 80 percent of pay. You, as an employer, may specify the number of days of sick leave paid at 100 percent of salary. The employee can use these before short-term disability begins.

Long-Term Disability. Long-term disability (LTD) benefits usually begin after short-term benefits conclude. LTD benefits continue for the length of the disability or until normal retirement. Again, benefit levels are a percentage of the employee's pay, usually between 60 and 80 percent. Social Security disability frequently offsets employer-provided LTD benefits. Thus, if an employee qualifies for Social Security disability benefits, these are deducted from benefits paid by the employer.

Life Insurance

Traditionally, life insurance pays death benefits to beneficiaries of employees who die during their working years. There are two main types of life insurance:

Survivor income plans, which make regular payments to survivors.
Group life insurance plans, which normally make lump-sum payments to specified beneficiaries.

Protection provided by one-year, renewable, group term life insurance with no cash surrender value or paid-up insurance benefit, is very popular. Frequently, health insurance programs offer this coverage.

You should use the same principles for selecting a life insurance program as you do for selecting health insurance. Finding a benefit plan that meets your budget constraints and fills the needs of your employees is crucial. Among the sources to check are:

Your local chamber of commerce.
Independent insurance agents.
Trade associations of your business.
State departments (or commissions) of insurance.
Community business leaders.
Benefit consultants or actuaries.
Service Corps of Retired Executives (SCORE) (affiliated with the U.S. Small Business Administration).

To reduce risk, select insurance underwriters with top ratings from Best's (Best Insurance Reports: Property-Casualty Ed. and Life-Health Ed. Published annually by A.M. Best Company, Oldwick, N.J.). HMOs and Blue Cross/Blue Shield are not rated by Best but are regulated by state governments.

Check with other users and state regulators on the history of the particular plan you are considering.

Self-Insurance

Rising costs are prompting small business owners to take a look at a form of health care coverage previously considered an option only for big business: self-insurance. With self-insurance, the business predetermines and then pays a portion or all of the medical expenses of employees in a manner similar to that of traditional healthcare providers.

Funding comes through the establishment of a trust or a simple reserve account. As with other health care plans, the employee may pay a portion of the cost of premiums. Catastrophic coverage is usually provided through a "stop-loss" policy, a type of coinsurance purchased by the company.

The plan may be administered directly by the company or through an administrative services contract.

The advantages of self-insurance are listed below:

Programs can be flexible. They are designed to reflect employee needs, including medical and dental care, prescriptions and so on.
Mandated benefit laws and state insurance premium taxes do not affect these plans.
The employer retains control over the timing and amount of funds paid into the plan and can manage costs more directly.
Administration of these plans can be more efficient.
Over time, these plans can save money.

The drawbacks to self-insurance include the following:

Health care is costly and heavy claims years may prove extraordinarily expensive.
Commitment for the long haul is necessary to achieve significant savings.

While insurance can be a viable option for small businesses, it should be undertaken only after careful study.

The Affordable Care Act

The Patient Protection and Affordable Care Act of 2010, in concert with the enactment of the Health Care and Education Tax Credits Reconciliation Act of 2010, resulted in a number of changes that affect smaller business owners. Here are the highlights:

If you have 50 or fewer full-time equivalent (FTE) employees (generally, workers whose income you report on a W-2 at the end of the year) you are considered a small business under the health care law.

As a small business, you may get insurance for yourself and your employees through the SHOP (Small Business Health Options Programs) Marketplace. This applies to non-profit organizations as well.

If you have fewer than 25 employees, you may qualify for the Small Business Tax Credit. Non-profit organizations can get a smaller tax credit. Small businesses and tax-exempt organization that employ 25 or fewer, full-time equivalent workers with average incomes of $50,000 or more as adjusted for inflation since 2014 (e.g., for 2021 returns it was $56,000), and, that pay at least half (50 percent) of the premiums for employee health insurance coverage are eligible for the Small Business Health Care Tax Credit.

Starting in 2014, the tax credit is worth up to 50 percent of your contribution toward employees' premium costs (up to 35 percent for tax-exempt employers). The tax credit is highest for companies with fewer than 10 employees who are paid an average of $30,700 or less in 2023 ($28,700 in 2022). The smaller the business, the bigger the credit is. For tax years 2010 through 2013, the maximum credit was 35 percent for small business employers and 25 percent for small tax-exempt employers such as charities.

The credit is available only if you get coverage through the SHOP Marketplace, which opened to employers with 100 or fewer FTEs starting in 2016.

Additional Tax on Businesses Not Offering Minimum Essential Coverage. Effective January 1, 2015, an additional tax will be levied on businesses with 100 or more full-time equivalent (FTE) employees that do not offer minimum essential coverage and employers with more than 50 full-time employees starting in 2016. This penalty is sometimes referred to as the Employer Shared Responsibility Payment or "Play or Pay" penalty.

Excise Tax on High Cost Employer-Sponsored Insurance. Often referred to as the "Cadillac Tax," it was repealed under the Further Consolidated Appropriations Act, 2020.

Balancing Cost, Quality and Accessibility

In summary, when deciding on a health, disability, or life insurance plan, consider what you and your workers want in a plan.

Determine all costs associated with the plan and investigate the quality of potential insurance carriers, and examine the quality of each plan, including the benefits and restrictions such as:

Hospital coverage (inpatient care).
Outpatient services.
Physical coverage.
Substance abuse treatment.
Mental health coverage.
Prescriptions.

Questions To Ask Before Signing a Benefits Contract

Who is the insurance company?
Is it committed to small business?
How solvent is it? What is its rating?
What is the carrier's reputation for customer service?
What is the choice of doctors and hospitals?
How does the company manage health care costs?
Who administers the plan?
What information must the employer provide?
How are the employees enrolled?

When Problems Arise

From time to time problems arise with benefit delivery. Patience on the part of the provider, the employer, and the employee usually brings a resolution.

Occasionally, unusually prolonged and difficult problems develop that do not yield to resolution. Such instances should be brought to the attention of your state's insurance department or commission, which is responsible for regulating insurance companies.

Retirement Benefit Plans

A financially secure retirement is a goal of all Americans. Since many of us will spend one-fourth to one-fifth of our lives in retirement, it is more essential than ever to begin preparations at an early age. Many financial planners report that an individual requires about 75 percent of his or her preretirement income to maintain the same standard of living enjoyed during one's working years.

Social Security, employer-sponsored retirement programs, and personal savings are the three sources of post-retirement income.

Social Security Benefits

Social Security provides retirement benefits for most persons employed or self-employed for a set period of time (currently 40 quarters; about 10 years). Benefits paid at retirement, traditionally at age 65, are based on a person's earnings history. The age at which you can retire at full benefits increases depending upon your current age. For younger individuals, full benefits begin at about age 67. Payments may begin at age 62 at a reduced rate or, if delayed beyond full retirement age, at an increased rate.

For a person with earnings equal to the U.S. average, the benefit will be about 40 percent of pay. For someone with maximum earnings, the benefit would be about 25 percent of the portion of pay subject to Social Security tax.

Every worker should understand Social Security retirement benefits. By completing the "Request for Social Security Earnings Information" you can receive a projection of benefits. Forms can be obtained through Social Security Online , local Social Security offices or by calling 1-800-772-1213.

Planning Aid: To obtain an immediate copy of this form, please click on Request for Social Security Earnings Information.

Employer-Sponsored Retirement Plans

A retirement plan makes good sense and can attract and reward employees. The benefits and tax advantages of supplementing Social Security with a qualified retirement plan are significant.

A qualified plan is one meeting IRS specifications. Currently, such contributions are tax-deductible, and earnings accumulate on a tax-deferred basis. In addition, benefits earned are not part of the participant's taxable income until received, and certain distributions are eligible for special tax treatment.

Whether you are a sole proprietorship, a partnership or a corporation (employing many people or only yourself as the owner/employee), there is a wide range of options available. These can range from simple plans, which you establish and maintain, to complex versions, which require an actuary, attorney or employee benefits consultant. If you are active in the business, you can be included as a plan participant. Accountants, banks, insurance, and investment professionals, as well as other financial institutions, can provide information on retirement plan products.

Employers can benefit from tax credits for start-up costs. You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SEP, SIMPLE IRA Plans, or qualified plan. The credit equals 50 percent of the cost to set up and administer the plan and educate employees about the plan, up to a maximum of $500 per year for each of the first 3 years of the plan. Employers can choose to start claiming the credit in the tax year before the tax year in which the plan becomes effective as long as:

You must have had 100 or fewer employees who received at least, $5,000 in compensation from you for the preceding year.
At least, one participant must be a non-highly compensated employee.

The employees generally cannot be substantially the same employees for whom contributions were made or benefits accrued under a plan of any of the following employers in the 3-tax-year period immediately before the first year to which the credit applies.

You.
A member of a controlled group that includes you.
A predecessor of (1) or (2).

The credit is part of the general business credit, which can be carried back or forward to other tax years if it cannot be used in the current year. However, the part of the general business credit attributable to the small employer pension plan startup cost credit cannot be carried back to a tax year beginning before January 1, 2002.

You cannot deduct the part of the startup costs equal to the credit claimed for a tax year, but you can choose not to claim the allowable credit for a tax year. To take the credit, employers should use Form 8881, Credit for Small Employer Pension Plan Startup Costs.

Depending on whether you are a sole proprietor, a partnership or a small corporation, the following plans are available:

Defined benefit plans - A retirement plan favoring older, more highly paid employees.
Profit-sharing plans - A flexible plan based on profits and contributions that can be discretionary from year to year.
Money purchase plans - A method that often favors younger workers. Steady plan contributions are required.
Individual retirement accounts (IRAs) - A simple plan; allowing modest contributions.
Simplified employee pension (SEP) plans - A plan for small businesses combining features of IRA and profit-sharing plans, offering flexibility and easy self-administration.
401(k) - The most popular plan today for businesses with employees, providing employees with the ability to save for their retirement with pre-tax dollars. Can be at low cost to employers.
SIMPLE IRA Plans - A new type of plan which combines IRA and 401(k) features.
Stock bonus - Benefits in the form of company stock.
Employee Stock Ownership Plan (ESOP) - Another plan based on company stock.

Designing the Right Corporate Plan

Selecting the right pension plan for a corporation results from a process of identifying business needs and expectations, including

Need for flexibility.
Current age of key employees.
Current number of employees and plans for growth.
Maximization of retirement benefits.

Although there are many different types of retirement plan options available to corporations, they fall into two general categories: defined benefit plans and defined contribution plans:

Defined Benefit Plans. With this plan, the benefits an employee will receive are predetermined by a specific formula - typically tied to the employee's earnings and length of service - and indexed for inflation. The law allows a pension of up to $265,000 a year in 2023 ($245,000 in 2022).

The employer is responsible for making sure that the funds are available when needed (the employer bears funding and investment risks of the plan).

Such a plan can generally provide larger benefits faster (through tax-deductible contributions) than other plans. The price of providing a higher degree of tax savings and being able to rapidly shelter larger sums of retirement capital is having to meet additional reporting requirements. Defined benefit plans typically cost more to administer, requiring certifications by enrolled actuaries, and insurance payments to the Pension Benefit Guaranty Corporation (PBGC), which may review plan terminations.

Defined Contribution Plans. Also known as individual account plans, defined contribution plans specify the amount of funds placed in a participant's account (for example, 10 percent of salary). The amount of funds accumulated, and the investment gains or losses solely determine the benefit received at retirement. The employer bears no responsibility for investment returns, although the employer does bear a fiduciary responsibility to select or offer a choice of sound investment options.

Defined benefit plans are typically better for older employees (usually age 45+). For example, these plans can provide the ability to fund for years of employment before the inception of the plan. While some contribution flexibility is available, factors determining the cost of promised benefits (e.g., number and ages of employees, rates of return on investments) will mandate the level of required deposits to the plan.

There are several basic types of defined contribution plans, including (1) simplified employee pension plans (SEPs), (2) profit-sharing plans, (3) money purchase plans, (4) 401(k) plans, (5) stock bonus plans, (6) employee stock ownership plans (ESOP), and (7) SIMPLE IRA plans.

1. Simplified Employee Pension Plans. A simplified employee pension (SEP) suits many small corporations. It requires no IRS approval, no initial filings, and no annual reporting to the government. Although SEP plans are called "pensions," they are actually IRAs, except that contributions to them aren't subject to the IRA dollar limits. The total deferral per employee each year can be up to $66,000 in 2023 (up from $61,000 in 2022) indexed for inflation or 25 percent of his or her annual earnings, whichever is less. There is also a limit on how much of an employee's earnings may be included in the percentage computation.

Contributions must be made on a nondiscriminatory basis to all employees who are at least age 21 and who have worked for any part of three of the past five years earning a minimal amount. Contributions can vary from year to year - you may even skip entire years. To be deductible for a year, the contribution must be paid no later than the due date of an employer's income tax return for the year, including extensions. Once made, the entire contribution is owned by the employee.

Complete specifications for the plan can be found in IRS Form 5305. The form itself serves as the plan document, requiring only the insertion of a business name, the checking of three boxes and a signature. The form is not filed with the IRS, but rather copied for all employees and then placed in the firm's files. Many employers instead use plan documents provided by financial institutions.

2. Profit-Sharing Plans. Similar to a SEP, a profit-sharing plan offers the flexibility of making contributions - up to the lesser of $66,000 in 2023 (up from $61,000 in 2022) or 25 percent of compensation.

Alternatively, rather than selecting a percentage, a flat amount (for example, $100,000) could be allocated among eligible employees, generally proportionate to compensation. Historically, contributions could only be paid out of profits; this is no longer required.

Profit-sharing plans differ from SEPs in several distinct ways. An employer can apply a vesting schedule to the company's contributions, based on an employee's length of service with the company after the contribution is made. If an employee is terminated before becoming "fully vested," his or her funds will revert to the plan (reducing future contributions) or be reallocated among the remaining participants. In addition, profit-sharing plans permit the exclusion of part-time employees and can allow participants to borrow from the plan.

Profit-sharing plans, as all other qualified retirement plans, require the preparation of formal master documents as well as annual tax filings. A standardized master or prototype plan will often satisfy requirements and will typically be less expensive and simpler to set up and operate than an individually designed plan.

3. Money-Purchase Plans. With a money purchase plan, the employer is usually committed to making annual contributions equal to a designated percentage of each employee's compensation. This percentage may not exceed 25 percent of compensation, with a maximum contribution per employee of $66,000 in 2023 (up from $61,000 in 2022), indexed for inflation. Contributions must be made even in years in which there are no profits.

4. 401(k) Plans. These tax-deferred savings plans have become highly popular in recent years. The basic idea of a 401(k) is simple: it is a profit-sharing plan adopted by an employer that permits employees to set aside a portion of their compensation through payroll deduction for retirement savings. The amounts set aside are not taxed to the employee and are a tax-deductible business expense for the employer. Set-asides (called "elective deferrals") for any employee can't exceed $22,500 in 2023 ($20,500 in 2022) indexed for inflation. Elective deferrals don't count in figuring the employer's deduction limits. Thus, the employer's contribution up to the profit-sharing deduction limit plus the elective deferral, are tax-sheltered.

An employer's discretionary matching contribution can provide an incentive for employee participation as well as serve as an employee benefit. Employer contributions can be capped, to limit costs and a vesting schedule can be applied to employer deposits (employees are always 100 percent vested in their own contributions).

For employees, the opportunity to reduce federal - and often state and local - taxes through participation in a 401(k) plan offers significant benefits. While savings are intended for retirement, certain types of loans can provide employees with access to their funds - employees repay borrowed principal plus interest to their own account.

Special non-discrimination tests apply to 401(k) plans, which may limit the amount of deferrals that highly compensated employees are allowed to make. To avoid these limits, some employer contribution on behalf of lower-paid employees may be required.

Some employers automatically enroll employees in the 401(k), giving them the right to opt-out. After 2007, automatic enrollment arrangements (with the right to opt-out) can escape the nondiscrimination tests if certain prescribed minimum employer contributions are made and certain prescribed investment types are available.

401(k)s can allow employee deferrals to go into a Roth account (based on a Roth IRA concept). Withdrawals from an account maintained 5 years or more can be tax-free after age 59 1/2. The amount deferred into the Roth 401(k) is currently taxable (unlike amounts deferred into the regular 401(k)).

Tax professionals consider that the Roth 401(k) favors high-income individuals. If that describes you, consult your tax adviser on deferring into a Roth 401(k), where this is offered.

5. Stock Bonus Plans. This is similar to a profit-sharing plan. The plan invests in employer stock, which is generally distributed to participants at retirement.

6. Employee Stock Ownership Plans. A special breed of qualified plan - the employee stock ownership plan (ESOP) - provides retirement benefits for employees. In addition, an ESOP can be used as a market for company stock, for financing the company's growth, to increase the company's cash flow or as an estate planning tool.

ESOP funds must be primarily invested in employer securities. ESOPs are stock bonus plans or stock bonuses combined with money purchase plans. Tax-deductible contributions to the plan are used to buy stock for eligible employees. On retirement, the employee may take the shares or redeem them for cash. Complicated rules must be adhered to in the establishment and maintenance of an ESOP plan. Expert advice should be sought.

7. SIMPLE IRA Plans. Employers with 100 or fewer employees can establish "SIMPLE" retirement plans. The SIMPLE IRA Plan combines the features of an IRA and a 401(k). Employees can contribute to the SIMPLE IRA Plan, pre-tax, and the employer must make either a matching contribution for employees who contribute or a contribution for each eligible employee. The limit on the employee's contribution is $15,500 in 2023 ($14,000 in 2022), indexed for inflation. The penalties for withdrawing money from the Simple IRA Plan before age 59-1/2 can be higher than with other plans.

Plans Available to Non-Corporate Employers

Non-corporate employers can adopt any of the plans listed above that corporate employers can, except, of course, those based on stock in the employer corporation (stock bonus and ESOP plans). Defined benefit, profit-sharing, money purchase and 401(k) plans sponsored by non-corporate employers - that is, self-employed persons - who participate in the plans, which are sometimes referred to as "Keogh" plans.

Contribution limits for unincorporated businesses are the same as for corporate plans of the same type, except for contributions on behalf of the self-employed owner - sole proprietor, partner or LLC member, who for this purpose is treated as an employee. Contributions for a self-employed owner are based on the owner's self-employment net earnings. The contribution ceiling for money purchase, profit sharing, and SEP plans are the same: in effect, 20 percent of earnings (technically, 25 percent of earnings reduced by the contribution) up to a maximum contribution of $66,000 in 2023 (up from $61,000 in 2022), indexed for inflation. For defined benefit plans, a self-employed owner's benefit is based on self-employment net earnings less deductible contributions.

In plans such as 401(k)s or SIMPLE IRA plans where employees defer part of their salary, self-employed owners are deferring part of their self-employment earnings. For employees, deferred salary is excluded from taxable pay; for self-employed owners, deferred self-employment earnings are deducted.

Keogh plans, like comparable corporate plans, must be established by the end of the year for which you are making the contribution. Once established, you have until your tax return filing date - including extensions - to make the contribution.

SIMPLE IRA Plans generally must be established by October 1 of the year they go into effect.

A SEP may be established by the tax return due date, including extensions, for the year it goes into effect. Thus, a plan effective for 20232 can be created in 2024; contributions to that plan in 2024 will be deductible on the 2023 return if designated as for 2023 and made by the 2023 return due date including extensions.

Employee contributions. These are important elements of many employer plans, allowing employees to make their own tax-sheltered investments within the company plan.

In many cases such contributions are "pretax"-that is, from salary (reducing taxable pay), as in the case of 401(k)s, SIMPLE IRA Plans, and certain SEP Plans, called SARSEPs, formed before 1997. Pretax "employee" contributions can also be made by self-employed owners, in which case they reduce taxable self-employment earnings. The ceilings on such contributions are discussed above (SARSEP and 401(k) ceilings are the same).

Additional pretax contributions are allowed for participants age 50 or over. In 2023 the ceiling amount of such contributions, called "catch-up" contributions (misleadingly, since the amount or lack of prior contributions is irrelevant), for 401(k)s is $7,500, for IRAs it is $1,000, and for SIMPLE IRA Plans, the amount is $3,500.

Employee contributions may also be after-tax. That is, they are not excludable (when made by employees) or deductible (where made by self-employed owners) but still grow tax-free once invested, until withdrawn. The contributions come back tax-free; only the earnings are taxed.

Employee after-tax contributions may be attached to a plan, such as a 401(k), or be to a standalone plan (maybe called a savings plan) for employees' contributions alone, or with some employer match.

Credit for low-income participants. "Lower-bracket" taxpayers age 18 and over are allowed a tax credit for their contributions to a plan or IRA. The "Saver's Credit" is allowed on joint returns of couples (filing jointly) with (modified) adjusted gross income (AGI) below $65,000 (up from $64,000 in 2019). The credit is a percentage (10, 20, and 50 percent) of the contribution, up to a contribution total (considering all contributions to all plans and IRAs) of $2,000. The lower the AGI, the higher the credit percentage: the maximum credit is $1,000 (50 percent of $2,000). Head-of-household dollar amount and the AGI credit percentage ranges are indexed for inflation.

The credit is allowed whether the contribution is pre-tax (credit is in addition to a deduction or exclusion) or after-tax.

Review plan decisions. There have been a number of recent law changes, especially in the already popular 401(k).

Those lacking tax-favored retirement plans should give plan adoption a new look. Those with such plans already should review the options, and what's required to take advantage of them. Professional guidance is essential and, as pointed out above, encouraged by the law.

Individual Retirement Accounts. An employer may establish IRAs for its employees to which the employees contribute though this is not usual. An employer may establish IRAs for employees within an employer plan. But virtually all IRAs are set up by the individual worker, employed or self-employed (occasionally for the worker's spouse) without the involvement of any employer.

An IRA is a tax-favored savings plan that allows workers to make contributions with pre-tax dollars (where a deduction is allowed, see below) and defer taxation on earnings until retirement.

There are several limitations to IRAs:

The maximum contribution that you can make to a traditional or Roth IRA is the smaller of $6,500 or the amount of your taxable compensation for 2023. This limit can be split between a traditional IRA and Roth IRA, but the combined limit is $6,500. If you are 50 years of age or older before the end of 2023, the maximum contribution that can be made to a traditional or Roth IRA is the smaller of $7,500 or the amount of your taxable compensation for 2023.
The account holder may not use funds to purchase life insurance or collectibles (except gold or silver coins issued by the U.S. Government).
IRA contributions up to the ceiling are deductible if neither the taxpayer nor his or her spouse is covered by a corporate or unincorporated retirement plan. The deduction is limited (phases out) at prescribed income levels (which increase each year) where the taxpayer is covered by a plan or where (using higher levels) the taxpayer's spouse is covered although the taxpayer is not. A nondeductible contribution is allowed in other cases, and nondeductible contribution is allowed to Roth IRAs subject to income limits. Also, low-income taxpayers are allowed the up-to-$1,000 tax credit described above (under Employee Contributions) for IRA contributions.

Where to Get Pension Information

The variety of plans and related regulations are numerous. You should consult with your professional advisors regarding which options are available to you and which one best first your company's needs.

Questions To Ask Before Finalizing a Pension Plan

Does the plan require a given level of contribution each year?
Do the plan provisions (eligibility, hours of service and vesting of employer contributions) meet current and future needs?
What are the costs of establishing and administering a plan and trust, including providing annual employee reports?
What investment options are offered?
Are there any loads (charges) associated with deposits (front-end charges) or surrenders (rear-end charges) from the plan?
Can - and should - employees make individual investment selections? What types of reports do participants receive?

Leave

The old concept of "two weeks with pay" has given way to a wide variety of paid and unpaid leave plans for all businesses. Typically, these include:

Annual leave.
Holidays (national and state).
Sick leave.
Personal leave (birthday, other reason of choice).
Emergency leave.
Compassionate leave (funeral, family illness).
Religious observance.
Community service (voting, jury duty, court witness, National Guard, Civil Air Patrol, volunteer fire department).
Education/training.
Leave without pay.
Leave of absence (paid or unpaid).
Parental (formerly maternity) leave.

In a strict sense, paying people for not working is a costly, unprofitable concept. However, time off from the grind is a tradition of the American workplace, and rightly so. Benefits can far outweigh costs. Among the many benefits for the employee are rest, relaxation, a new perspective, travel, pursuit of hobbies and release from daily tensions. The employer also benefits - the employee returns refreshed from the break in the daily routine, possibly with new ideas and renewed energy for doing a better job. Employers also can observe the performance of employees in new situations, as they fill in for their vacationing coworkers, potentially leading to better allocation of workforce talents.

Eligibility for Leave

In determining employee eligibility for leave, an employer must find the answers to many questions, including the following.

How much paid leave time can the company afford per year?
How many categories of leave should there be?
Can employees carry over unused leave from one year to the next? If so, how much?
Are there leave rights during probation?
Who gets first choice of dates in scheduling annual leave? How are conflicts resolved? By seniority?
Can employees borrow leave in advance?
At what point does extended/borrowed paid leave become unpaid leave and extended/borrowed unpaid leave become unemployment?
Are employees eligible for more leave after a certain number of years with the company?

Employers must determine when eligibility for leave begins: Immediately? After the first year? Many employers establish a paid annual leave schedule by declaring employees eligible for so many hours leave after they have worked a specified number of hours; for example, two hours leave for every 80 hours worked or one day for so many weeks worked.

Limits on sick and other leave are vital. You should restrict sick leave to illness or medical examinations and treatment. It must not become an extension of annual leave. Accordingly, it is wise to reserve the right to require physician certification of an illness.

Although the vast majority of employees will not abuse time allowed for compassionate, emergency or other leave categories, clear policies should be established on requesting such leave and on its duration.

Budget Considerations

Granting paid or unpaid leave is a costly benefit. Depending on the nature of an employee's work, you may need to require overtime from other employees or hire temporary employees to cover the absence. Extended leave situations pose special problems.

Questions To Ask Before Finalizing a Leave Plan

Is the business open on all holidays? If not, on which ones?
If the business is open on holidays, do you work with full or limited staff, paying them double time as may be required by law?
How many hours/days are allowed as leave for voting, jury duty, religious observance, funerals, etc.?
How are insured benefits handled during unpaid leave?
Which state laws affect leave?

Perquisites

While all employees are usually eligible for benefits such as health and other insurance, retirement plans and leave, key employees have come to expect certain additional benefits related to their increased levels of responsibility. Among the perquisites or perks employers may want to consider for top

performers and key or even all, employees are:

Company automobile.
Extra vacation.
Special parking privileges.
Personal expense accounts.
Spouse travel on company business.
Sabbaticals (with pay).
Professional memberships.
Professional publications.
Loans/mortgages.
Estate planning.
Legal services.
Medical expense reimbursement.
Physical examinations/health screening.
Physical exercise facilities.
Executive dining room.
Matched donations to universities, colleges and/or charities.
Tuition programs.
Dependent day care (on- or off-site).
Merchandise discounts.
Holiday gifts.
Employee assistance programs (EAPs) (substance abuse, debt, interpersonal relationships, psychological, financial, other types of counseling).
Service awards.
Credit unions.

Like basic benefits, perquisites help attract and keep good employees. You can balance the far higher cost of providing some perquisites with expectations of increased production from the employees who benefit.

Key employees responsible for generating contacts for new business should receive consideration for company automobiles, personal expense accounts, professional memberships, and publications, club memberships, spouse travel on company business, credit cards, home entertainment allowances, end-of-year bonuses, and sabbaticals.

Sales staff responsible for keeping current customers satisfied should receive consideration for company automobiles (if needed for their duties), credit cards, personal expense accounts, professional memberships and publications, sales commissions, spouse travel on company business and end-of-year bonuses.

All employees should receive consideration for EAPs, physical exercise facilities (if you have them), parking, tuition programs, dependent daycare, holiday gifts, service awards, credit unions, matched donations to universities, colleges and/or charities, physical examinations or health screenings when offered and merchandise discounts.

Offer legal services and loans and mortgages on a case-by-case basis. Some perquisites, such as extra vacation, should be given only as a reward for extraordinary service to your company.

You may want to consider employer-employee cost-sharing of such pre-requisites as physical exercise facilities, dependent daycare, parking and, perhaps, some health screening services.

Before beginning any program of perquisites, check current tax law for treatment of each item:

Can you, as the employer, deduct it as a business expense?
Will it become taxable income for your employee?

Flexible Compensation or "Cafeteria" Plans

To accommodate today's many variations in family relationships, lifestyles, and values, flexible compensation or "cafeteria" benefit plans have emerged. In addition to helping meet employee needs, cafeteria plans also help employers control overall benefit costs.

The idea behind cafeteria plans is that amounts which would otherwise be taken as taxable salary are applied, usually tax-free, for needed services like health or childcare.

Example: Employee John earning $60,000 allocates $4,000 of salary to cover health care costs through a cafeteria plan. John is taxed on $56,000; the $4,000 is tax-free. Had John taken the full $60,000 and paid $4,000 of health care costs directly, he would have paid tax on the full $60,000, probably with no offsetting medical expense deduction.

Besides saving employee income and social security taxes, salary diverted to cafeteria plan benefits isn't subject to social security tax on the employer. With a cafeteria plan, employees can choose from several levels of supplemental coverage or different benefits packages. These can be selected to help employees achieve personal goals or meet differing needs, such as health coverage (family, dental, vision), retirement income (401(k) plans) or specialized services (dependent care, adoption assistance, legal services (legal services amounts are taxable).

Careful planning and communication are the keys to the success of flexible compensation. Employees must fully understand their options to make the choices of greatest benefit to them and their families. Both employers and employees must fully understand the tax consequences of the various options.

Keeping Current on Benefit Plans

The government has certain requirements for qualified pension or profit-sharing plans, as well as for most health and welfare plans. It is essential for you to stay current on developments that may affect your plan. Even small changes in tax laws can have a significant impact on your plan's ability to help you and your employees achieve your goals. Information on these requirements is available from the IRS and from qualified accountants and financial advisors.

Communications

Once you've implemented a benefits program, you'll want to tell your employees about it. Good communication is important in enabling employees to use the plan effectively and to appreciate the role of benefits in their total compensation.

Benefits orientation should be part of the orientation of a new employee. You can use newsletters, staff memos or employee meetings with audiovisuals to announce plan changes or answer employees' questions.

Planning Pointers

Before you implement any benefit plan, you should ask yourself some questions:

How much are you willing to pay for this coverage?
What kinds of benefits interest your employees? Do you want employee input?
What do you think a benefits plan should accomplish? Do you think it is more important to protect your employees from economic hardship now or in the future?
Is a good medical plan more important than a retirement plan?
Do you want to administer the benefits plan, or do you want the administration done by an insurance carrier?
What is your employee group like today? Can you project what it might look like in the future?

You now have some basic benefits information as well as the basic questions that need answers before you go benefit shopping for your employees.

If you are serious about offering your employees a satisfactory benefit plan, the next step may be to contact an insurance broker or carrier, the local chamber of commerce or trade associations. There may be off the shelf products that will suit your needs. A benefit consultant or actuary can help you design a specialized benefit program.

An adequate benefit program has become essential to today's successful business, large or small. With careful planning, you and your employees can enjoy good health and retirement protection at a cost your business can afford.

Travel and Entertainment: Maximizing the Tax Benefits

Wed, 11 Oct 2023 14:32:01 GMT

Don't overpay your income taxes by overlooking expenses that you are entitled to deduct. Use this Financial Guide to ensure you are handling your business travel and meal costs in a tax-wise manner.

This Financial Guide shows you how to take advantage of all of the travel and entertainment expenses you're legally entitled to and offers guidance on which expenses are deductible and what percentage of them you can deduct. It also discusses the importance of following IRS rules for keeping records and substantiating your expenses in order to avoid an audit.

Travel Expenses

Tax law allows you to deduct two types of travel expenses related to your business, local and what the IRS calls "away from home."

First, local travel expenses. You can deduct local transportation expenses incurred for business purposes, for example, the cost of getting from one location to another via public transportation, rental car, or your own automobile. Meals and incidentals are not deductible as travel expenses, although as you will read later in this guide, you can deduct meals as an entertainment expense as long as certain conditions are met.
Second, you can deduct away from home travel expenses-including meals and incidentals; however, if your employer reimburses your travel expenses, your deductions are limited.

Local Transportation Costs

The cost of local business transportation includes rail fare and bus fare, as well as the costs of using and maintaining an automobile used for business purposes. For those whose main place of business is their personal residence, business trips from the home office and back are considered deductible transportation and not non-deductible commuting.

Please see the special section below for the most effective ways of deducting auto expenses.

You generally cannot deduct lodging and meals unless you stay away overnight. Meals may be partially deductible as an entertainment expense as discussed below.

Away From-Home Travel Expenses

You can only deduct one-half of the cost of meals (50 percent) in 2023. However, due to the economic devastation caused by the coronavirus pandemic, in 2021 and 2022, taxpayers were able to deduct 100 percent of the cost of business meals and beverages purchased from restaurants. Lodging expenses incurred while traveling away from home are fully deductible (no pandemic-related change). The IRS also allows you to deduct 100 percent of your transportation expenses as long as business is the primary reason for your trip.

You do not need to eat the food at the restaurant; you can order take-out and still take the 100 percent deduction.

To be deductible, travel expenses must be "ordinary and necessary", although "necessary" is liberally defined as "helpful and appropriate," not "indispensable." The deduction is also denied for that part of any travel expense that is "lavish or extravagant," though this rule does not bar deducting the cost of first-class travel or deluxe accommodations or (subject to percentage limitations below) deluxe meals.

What does "away from home" mean?

To deduct the costs of lodging and meals (and incidentals-see below) you must generally stay somewhere overnight. In other words, away from your regular place of business longer than an ordinary day's work and you need to sleep or rest to meet the demands of your work while away from home. Otherwise, your costs are considered local transportation costs and the costs of lodging and meals are not deductible.

Where is your "home" for tax purposes?

The general view is that your "home" for travel expense purposes is your place of business or your post of duty. It is not where your family lives (some courts have stated that it's the general area of your residence). Here is an example:

George's family lives in Boston and George works in Washington, DC. George spends the weekends in Boston and the weekdays in Washington, where he stays in a hotel and eats out. For tax purposes, George's "home" is in Washington, not Boston, therefore, he cannot deduct any of the following expenses: cost of traveling back and forth between Washington and Boston, cost of eating out in Washington, cost of staying in a hotel in Washington, or any costs incurred traveling between his hotel in Washington and his job in Washington (the latter are considered non-deductible commuting costs).

There are some rules in the tax law concerning where a taxpayer's "home" is for purposes of deducting travel expenses that are less clear such as when a taxpayer works at a temporary site or works in two different places.

We'll cover these rules briefly in these two examples:

Example #1: Joe, who lives in Connecticut, works eight months out of the year in Connecticut (from which he usually earns about $50,000) and four months out of the year in Florida (from which he usually earns about $15,000). Joe's "tax home" for travel expense purposes is Connecticut. Therefore, the costs of traveling to and from the "lesser" place of employment (Florida), as well as meals and lodging costs incurred while working in Florida, are deductible.

Example #2: Susan works and lives in New York. Occasionally, she must travel to Maryland on temporary assignments, where she spends up to a week at a time. Assuming Susan's employer does not reimburse her for travel expenses, she can deduct the costs of meals and lodging while she's in Maryland, as well as the costs of traveling to and from Maryland. This holds true because her work assignments in Maryland are considered temporary since they will end within a foreseeable time. If an assignment is considered indefinite, that is, expected to last for more than a year, under the tax law, travel, meal, and lodging costs are not deductible.

Here's a list of some deductible away-from-home travel expenses:

Meals limited to 50 percent in 2023 (100 percent in 2021 and 2022) and lodging while traveling or once you get to your away-from-home business destination.
The cost of having your clothes cleaned and pressed away from home.
Costs for telephone, fax or modem usage.
Costs for secretarial services away-from-home.
The costs of transportation between job sites or to and from hotels and terminals.
Airfare, bus fare, rail fare, and charges related to shipping baggage or taking it with you.
The cost of bringing or sending samples or displays, and of renting sample display rooms.
The costs of keeping and operating a car, including garaging costs.
The cost of keeping and operating an airplane, including hangar costs.
Transportation costs between "temporary" job sites and hotels and restaurants.
Incidentals, including computer rentals, stenographers' fees.
Tips related to the above.

However, many away-from-home travel expenses are not deductible or are restricted in some way. These include:

Commuting expenses. The costs of traveling between your home and your job are not deductible.

Travel as a form of education. Trips that are educational in a general way, or improve knowledge of a certain field but are not part of a taxpayer's job, are not deductible.

Job search expenses. Tax reform eliminated miscellaneous deductions for tax years 2018 through 2025.

Seeking a new location. Travel costs (and other costs) incurred while you are looking for a new place for your business (or for a new business) must be capitalized and cannot be deducted currently.

Luxury water travel: If you travel using an ocean liner, a cruise ship, or some other type of "luxury" water transportation, the amount you can deduct is subject to a per-day limit.

Seeking foreign customers: The costs of traveling abroad to find foreign markets for existing products are not deductible.

Starting in 2008, travel (and other) costs incurred in unsuccessfully trying to acquire a specific business are currently deductible.

Meal and Entertainment Expenses

Prior to tax reform, there were limits and restrictions on deducting meal and entertainment expenses, with most deductible at 50 percent. Due to COVID-19 legislation, for tax years 2021 and 2022, the deductible amount for business-related meals was 100 percent. Meal costs must be "ordinary and necessary" and not "lavish or extravagant" and directly related to or associated with your business. They must also be substantiated.

Under tax reform, there were a number of changes, the most notable being that entertainment expenses paid or incurred after December 31, 2017, are not deductible unless they fall under specific exceptions, for example, expenses incurred for social activities primarily for the benefit of your employees. As such, reasonable costs for food and refreshments for year-end parties for employees are 100 percent deductible.

Prior to 2018, if you rented a skybox or other private luxury box for more than one event, say for the season, at the same sports arena, you generally could deduct more than the price of a non-luxury box seat ticket. Each game or other performance counted as one event, and the deduction for those seats was subject to the 50 percent entertainment expense limit. Starting January 1, 2018, however, that deduction is eliminated. Furthermore, even if the costs of food and beverages are separately stated, you cannot deduct these expenses.

Deductions are still disallowed for depreciation and upkeep of "entertainment facilities" such as yachts, hunting lodges, fishing camps, swimming pools, and tennis courts. However, the costs of entertainment provided at such facilities are no longer deductible. Prior to 2018, these expenses were deductible at 50 percent, subject to entertainment expense limitations.

Dues paid to country clubs or social or golf and athletic clubs are not deductible nor are dues that you pay to professional and civic organizations. Prior to 2018, these dues were deductible at 50 percent as long as your membership has a business purpose. Such organizations included business leagues, trade associations, chambers of commerce, boards of trade, and real estate boards.

How Do You Prove Expenses Are "Directly Related?"

The following section applies only to expenses incurred before January 1, 2018. As noted earlier, most entertainment-related expenses are no longer deductible.

Expenses are directly related if you can show:

There was more than a general expectation of gaining some business benefit other than goodwill.
You conducted business during the entertainment.
Active conduct of business was your main purpose.

There is a presumption (in the eyes of the IRS) that events that take place in what it considers places non-conducive to doing business are not directly related to your business. These places include nightclubs, theaters, sporting events or cocktail parties. It also includes meetings with a group of people who are not business associates, at cocktail lounges, country clubs, or athletic clubs.

However, you can overcome the presumption by showing that you engaged in a business discussion or otherwise conducted business during the event.

How Do You Meet The "Associated With" Test?

The following section applies only to expenses incurred before January 1, 2018. As noted earlier, most entertainment-related expenses are no longer deductible.

Even if you can't show that the entertainment was "directly related" as discussed above, you can still deduct the expenses as long as you can prove the entertainment was "associated" with your business. To meet this test, the entertainment must directly precede or come after a substantial business discussion. Further, you must have had a clear business purpose when you took on the expense.

For Whom Can You Get The Deduction?

The following section applies only to expenses incurred before January 1, 2018. As noted earlier, most entertainment-related expenses are no longer deductible.

The person entertained must be a business associate. That is, someone who could reasonably be expected to be a customer or conduct business with you, including an employee or professional advisor.

In circumstances where it's customary to entertain a business associate with his or her spouse, and your spouse also attends, entertainment of both spouses is deductible, thanks to the "closely connected rule."

Recordkeeping and Substantiation Requirements

Tax law requires you to keep records that will prove the business purpose and amounts of your business travel, entertainment, and local transportation costs.

Which Records You Must Keep

You must substantiate the following business expenses:

Travel expenses while away from home (including meals and lodging).
Business meals and entertainment if allowed under a tax code exception, and
Business gifts.

To substantiate these items, you must prove:

The amount.
The time and place of the travel, entertainment, or recreation, or the date and a description of the business gift.
The business purpose, and
The business relationship of the recipient of entertainment or gifts.

The most frequent reason for IRS's disallowance of travel and entertainment expenses is the failure to show the place and business purpose of an item. Therefore, pay special attention to these aspects of your record-keeping.

Keeping a diary or logbook and recording your business-related activities at or close to the time the expense is incurred is one of the best ways to document your business expenses.

Here's how these rules apply to your record-keeping for travel expenses, entertainment expenses, and business gifts.

Away-from-home travel expenses. You must document the following for each trip:

The amount of each expense, e.g., the cost of each transportation, lodging and meal. You can group similar types of incidentals together, i.e., "meals, taxis."
The dates of your departure and return and the number of days you spent on business.
Your destination.
The business reason for the travel or the business benefit you expect.

Entertainment expenses (exceptions allowed under the tax code) for tax years before 2018. You must prove the following for each claimed deduction for entertainment expenses:

The amount of each separate expense, though incidentals may be totaled on a daily basis.
The date of the entertainment.
The name, title, and occupation (showing business relation) of the people you entertained.

Business gifts. You must keep the following documentation for a business gift to substantiate the deduction:

The cost of the gift and the date it was made.
The business reason for the gift.
The name, title, and occupation of the recipient.
A description of the gift.

Employees "Fully Reimbursed"

Employees who are "fully reimbursed" by their employer must:

Adequately account to their employer.
Receive full reimbursement.
Return any excess reimbursement.

As a fully reimbursed employee, you must adequately account to your employer by means of an expense account statement. If you are covered by (and follow) an "accountable plan," and your reimbursements don't exceed your expenses, you won't have to report the reimbursements as gross income. Some per diem arrangements (by which you receive a flat amount per day) and mileage allowances can avoid detailed expense accounting to the employer, but proof of time, place, and business purpose is still required.

However, if your employer's reimbursement plan is not "accountable," you must report the reimbursements as income. Prior to 2018, you could deduct these expenses on your tax return as miscellaneous itemized deductions on Form 1040 Schedule A, subject to the two percent-of-adjusted-gross-income floor. Tax reform, however, eliminated miscellaneous deductions for tax years 2018 through 2025.

Auto Expenses

If you are self-employed and use a car for business, you have two choices as to how to claim the deduction for auto expenses. Parking fees and tolls may be deducted no matter which method you use.

You can deduct the actual business-related costs of gas, oil, lubrication, repairs, tires, supplies, parking, tolls, chauffeur salaries, and depreciation, or
You can use the standard mileage deduction, which is an inflation-adjusted amount that is multiplied by the number of business miles driven.

From 2018 through 2025, employees who use their cars for business but either don't get reimbursed or are reimbursed under an employer's "non-accountable" reimbursement plan can no longer deduct auto expenses on Form 1040 Schedule A.

The standard mileage rate produces a larger deduction for some business owners, while others fare better (tax-wise) by deducting actual expenses. Figuring your deduction using both methods tells you which method is better for you tax-wise.

Expensing and depreciating vehicle costs. Deduction options and amounts depend on the percentage used for business. Also, if the car is used more than 50 percent for business, it can be included as business property and qualify for Section 179 expensing in the year of purchase. The deduction is reduced proportionately to the extent the car is used for personal purposes. If you take this deduction, you can't use the actual mileage for that vehicle in any year.

Depreciation. Assuming the car costs more than the Section 179 limit, or Section 179 is not available or is not claimed, depreciation is also allowed. Several depreciation options are available, but there are limits to the amount of depreciation that can be claimed per year. Depreciation otherwise allowable is reduced by the proportion of personal use. For example, a car used 20 percent for personal use is depreciated at 80 percent of the amount otherwise allowed.

Accelerated depreciation is defined as depreciation that is at a rate higher than normal that results from dividing the vehicle's cost by the number of years it will be used. It is not allowed where personal use is 50 percent or more. If you claimed accelerated depreciation in a prior year and your business use then falls to 50 percent or less, you become subject to "recapture" of the excess depreciation (i.e., it's included in income). Of course, using the standard mileage deduction described below allows you to avoid these limits.

Determining whether to use the standard mileage deduction. If you opt for the standard mileage rate, you simply multiply the current cents-per-mile rate by the number of business miles you drive for the year. Be aware, however, that the standard mileage deduction may understate your costs. This is especially true for taxpayers who use the car 100 percent for business, or close to that percentage.

Once you choose the standard mileage rate, you cannot use accelerated depreciation even if you opt for the actual cost method in a later year. You may use only straight line.

The standard mileage method usually benefits taxpayers who have less expensive cars or who travel a large number of business miles. To determine which method is better for you, make the calculations each way during the first year you use the car for business.

You may use the standard mileage for leased cars if you use it for the entire lease period. Or, you can deduct actual expenses instead, including leasing costs.

Recordkeeping. Tax law requires that you keep travel expense records and that you give information on your return showing business versus personal use. Not only is keeping good records essential in case of an audit, but it also allows you to make the most of your auto deductions.

For example, you won't be able to determine which of the two options is better if you don't know the number of miles driven and the total amount you spent on the car. If you use the actual cost method, you'll have to keep receipts as well. For many business owners, using a separate credit card for business simplifies your record-keeping.

Don't forget to deduct the interest you pay to finance a business-use car if you're self-employed.

Cash Flow - The Pulse of Your Business

Wed, 11 Oct 2023 14:25:34 GMT

Many small business owners do not fully understand their cash flow statement. This is surprising, given that all businesses essentially run on cash, and cash flow is the lifeblood of your business.

Some business experts even say that a healthy cash flow is more important than your business's ability to deliver its goods and services! That's hard to swallow, but consider this: if you fail to satisfy a customer and lose that customer's business, you can always work harder to please the next customer. But if you fail to have enough cash to pay your suppliers, creditors, or employees, you're out of business!

What Is Cash Flow?

Cash flow, simply defined, is the movement of money in and out of your business; these movements are called inflow and outflow. Inflows for your business primarily come from the sale of goods or services to your customers. The inflow only occurs when you make a cash sale or collect on receivables, however. Remember, it is the cash that counts! Other examples of cash inflows are borrowed funds, income derived from sales of assets, and investment income from interest.

Outflows for your business are generally the result of paying expenses. Examples of cash outflows include paying employee wages, purchasing inventory or raw materials, purchasing fixed assets, operating costs, paying back loans, and paying taxes.

An accountant is the best person to help you learn how your cash flow statement works. Please contact us and we can prepare your cash flow statement and explain where the numbers come from.

Cash Flow Versus Profit

Profit and cash flow are two entirely different concepts, each with entirely different results. The concept of profit is somewhat broad and only looks at income and expenses over a certain period, say a fiscal quarter. Profit is a useful figure for calculating your taxes and reporting to the IRS.

Cash flow, on the other hand, is a more dynamic tool focusing on the day-to-day operations of a business owner. It is concerned with the movement of money in and out of a business. But more important, it is concerned with the times at which the movement of the money takes place.

Theoretically, even profitable companies can go bankrupt. It would take a lot of negligence and total disregard for cash flow, but it is possible. Consider how the difference between profit and cash flow relate to your business.

If your retail business bought a $1,000 item and turned around to sell it for $2,000, then you have made a $1,000 profit. But what if the buyer of the item is slow to pay his or her bill, and six months pass before you collect on the account? Your retail business may still show a profit, but what about the bills it has to pay during that six-month period? You may not have the cash to pay the bills despite the profits you earned on the sale. Furthermore, this cash flow gap may cause you to miss other profit opportunities, damage your credit rating, and force you to take out loans and create debt. If this mistake is repeated enough times, you may go bankrupt.

Analyzing Your Cash Flow

The sooner you learn how to manage your cash flow, the better your chances of survival. Furthermore, you will be able to protect your company's short-term reputation as well as position it for long-term success.

The first step toward taking control of your company's cash flow is to analyze the components that affect the timing of your cash inflows and outflows. A thorough analysis of these components will reveal problem areas that lead to cash flow gaps in your business. Narrowing, or even closing, these gaps is the key to cash flow management.

Some of the more important components to examine are:

Accounts receivable. Accounts receivable represent sales that have not yet been collected in the form of cash. An accounts receivable is created when you sell something to a customer in return for his or her promise to pay at a later date. The longer it takes for your customers to pay on their accounts, the more negative the effect on your cash flow.
Credit terms. Credit terms are the time limits you set for your customers' promise to pay for their purchases. Credit terms affect the timing of your cash inflows. A simple way to improve cash flow is to get customers to pay their bills more quickly.
Credit policy. A credit policy is the blueprint you use when deciding to extend credit to a customer. The correct credit policy - neither too strict nor too generous - is crucial for a healthy cash flow.
Inventory. Inventory describes the extra merchandise or supplies your business keeps on hand to meet the demands of customers. An excessive amount of inventory hurts your cash flow by using up money that could be used for other cash outflows. Too many business owners buy inventory based on hopes and dreams instead of what they can realistically sell. Keep your inventory as low as possible.
Accounts payable and cash flow. Accounts payable are amounts you owe to your suppliers that are payable sometime in the near future - "near" meaning 30 to 90 days. Without payables and trade credit, you'd have to pay for all goods and services at the time you purchase them. For optimum cash flow management, examine your payables schedule.

Some cash flow gaps are created intentionally. For example, a business may purchase extra inventory to take advantage of quantity discounts, accelerate cash outflows to take advantage of significant trade discounts, or spend extra cash to expand its line of business.

For other businesses, cash flow gaps are unavoidable. Take, for example, a company that experiences seasonal fluctuations in its line of business. This business may normally have cash flow gaps during its slow season and then later fill the gaps with cash surpluses from the peak part of its season. Cash flow gaps are often filled by external financing sources. Revolving lines of credit, bank loans, and trade credit are just a few of the external financing options available that you may want to discuss with us.

Monitoring and managing your cash flow is important for the vitality of your business. The first signs of financial woe appear in your cash flow statement, giving you time to recognize a forthcoming problem and plan a strategy to deal with it. Furthermore, with periodic cash flow analysis, you can head off those unpleasant financial glitches by recognizing which aspects of your business have the potential to cause cash flow gaps.

Employee Benefits: Frequently Asked Questions

Wed, 11 Oct 2023 14:18:09 GMT

As a Small Employer What Do I Need to Know about Employee Benefits?

The employer must pay in whole or in part for certain legally mandated benefits and insurance coverage, including Social Security, unemployment insurance, and workers' compensation. Funding for the Social Security program comes from mandatory contributions from employers, employees and self-employed persons into an insurance fund that provides income during retirement years.

Full retirement benefits normally become available at age 66 for people born after 1943, and age 67 for those born in 1960 or later. Other aspects of Social Security deal with survivor, dependent and disability benefits, Medicare, Supplemental Security Income (SSI) and Medicaid. Unemployment insurance benefits are payable under the laws of individual states from the Federal-State Unemployment Compensation Program

A comprehensive benefit plan might include the following elements health insurance, disability insurance, life insurance, a retirement plan, flexible compensation, and sick, personal, and vacation leave. A benefit plan might also include bonuses, service awards, reimbursement of employee educational expenses and perquisites appropriate to employee responsibility.

As an employer, before you implement any benefit plan, it's important to decide what you're willing to pay for this coverage. You may also want to seek employee input on what benefits interest them. For instance, is a good medical plan more important than a retirement plan? Furthermore, you must decide whether it is more important to protect your employees from economic hardship now or in the future. Finally, you must decide if you want to administer the plan or have the insurance carrier do it.

What Types of Medical Plans are Available for Employees?

Today, most health insurance falls under what is called "managed care" in which you pay monthly premiums, as well as co-pays and deductibles. The four main types of health insurance are briefly described below. For more information contact your plan administrator.

In addition, due to the passage of the Affordable Care Act of 2010, which was upheld by the Supreme Court in July 2012, starting in 2014 states may opt to create a "healthcare exchange" that enable individuals and small businesses to compare health plans, get answers to questions, find out if they are eligible for tax credits for private insurance or health programs like the Children's Health Insurance Program (CHIP), and enroll in a health plan that meets their needs.

Health maintenance organizations (HMOs) provide health care for their members through a network of hospitals and physicians. Comprehensive benefits typically include preventive care, such as physical examinations, well baby care and immunizations, and stop-smoking and weight control programs. The choice of primary care providers is limited to one physician within a network; however, there is frequently a wide choice for the primary care physician.

A preferred provider organization (PPO) is a network of physicians and/or hospitals that contracts with a health insurer or employer to provide health care to employees at predetermined discounted rates. PPOs offer a broad choice of health care providers.

Point of Service (POS) health care plans are similar to HMOs in that you choose a primary-care doctor from the plan's network, but you must have a referral in order to see in-network specialists. You can also see out of network providers as long as you get a referral first.

Another option to consider is a high-deductible health insurance combined with a health-savings account (HSA) or a health reimbursement arrangement (HRA). By law, the two must be linked.

HSAs should not be confused with FSAs (Flexible Spending Accounts). Money that you set aside in a health savings account or a health reimbursement arrangement to pay for certain medical expenses is tax-free. HSAs must be linked to a high-deductible health insurance plan, and HRAs often are. (For preventive care, such as cancer screenings, you might not have to pay the deductible first.) Typically, a special debit type card is used for the HSA or HRA account to keep track of expenses and payments.

What Types of Disability Benefits do Companies Provide to Employees?

A disability plan provides income replacement for the employee who cannot work due to illness or accident. These plans are either short term or long term and are distinct from workers' compensation because they pay benefits for non-work-related illness or injury.

Short-term disability (STD) is usually defined as an employee's inability to perform the duties of his or her normal occupation. Benefits may begin on the first or the eighth day of disability and are usually paid for a maximum of 26 weeks. The employee's salary determines the benefit level, ranging from 60 to 80 percent of pay.

Long-term disability (LTD) benefits usually begin after short-term benefits conclude. LTD benefits continue for the length of the disability or until normal retirement. Again, benefit levels are a percentage of the employee's pay, usually between 60 and 80 percent. Social Security disability frequently offsets employer-provided LTD benefits. Thus, if an employee qualifies for Social Security disability benefits, these are deducted from benefits paid by the employer.

What Types of Life Insurance Plans are Available for Employees?

Traditionally, life insurance pays death benefits to beneficiaries of employees who die during their working years. Most employers purchase a group life policy for their employees. Typically an employee is provided with life insurance coverage that is at least equal to their yearly salary. For example, an employee who makes $50,000 per year would receive $50,000 of coverage. The employer is responsible for the premium but may require employees to pay part of the premium cost.

What is Self-Insurance?

With self-insurance, the business predetermines and then pays a portion or all of the medical expenses of employees in a manner similar to that of traditional healthcare providers. Funding comes through the establishment of a trust or a simple reserve account and a self-insured employer assumes the risk for paying the health care claim costs for its employees.

As with other health care plans, the employee generally pays a portion of the cost of premiums. Catastrophic coverage is usually provided through a "stop-loss" policy, a type of coinsurance purchased by the company. The plan may be administered directly by the company or through an administrative services contract. Businesses with self-insured health plans are not subject to taxes, benefit requirements, profit limits, or other provisions of the Affordable Care Act.

What is a "Cafeteria Plan?"

The idea behind cafeteria plans is that amounts which would otherwise be taken as taxable salary are applied, usually tax-free, for needed services like health or child care. Besides saving employee income and social security taxes, salary diverted to cafeteria plan benefits isn't subject to social security tax on the employer. With a cafeteria plan, employees can choose from several levels of supplemental coverage or different benefit packages. These can be selected to help employees achieve personal goals or meet differing needs, such as health coverage (family, dental, vision), retirement income (401(k) plans) or specialized services (dependent care, adoption assistance, legal services - legal services amounts are taxable).

Travel and Entertainment: Frequently Asked Questions

Wed, 11 Oct 2023 14:13:33 GMT

Can I deduct the cost of meals on days I call on customers or clients away from my office?

Generally not. Usually, you can only deduct costs of meals when you're away from home overnight. Even so, the deduction is allowed only to the extent of 50 percent of the cost of meals and related tips. Also, because business-related entertainment expenses were eliminated under tax reform, starting in 2018, the deduction for meals at entertainment events is deductible (at 50%) only when costs for meals are itemized separately from entertainment costs.

For tax years 2021 and 2022, the deduction was allowed at 100 percent if purchased from a restaurant (eat-in or take-out).

Must I report employer reimbursements for travel, entertainment and meals?

Under tax reform, miscellaneous itemized deductions subject to the 2-percent floor were eliminated for tax years 2018-2025. However, prior to tax reform (i.e., for tax years prior to 2018), the following applied:It depends. If you give your employer a detailed expense accounting, return any excess reimbursement, and meet other requirements, you don't have to report the reimbursement and you don't deduct the expenses.

This means that any deduction limits are imposed on your boss, not you, and the 2-percent limit on miscellaneous itemized deductions won't affect your travel, entertainment and meals costs.

What are the limits on deductible travel, entertainment and meals costs?

Prior to tax reform (i.e., for tax years before 2018), the deduction for business entertainment and business meals could not exceed 50 percent of the cost. Note that due to the coronavirus pandemic, business-related meals purchased from a restaurant (eat-in or take-out) were deductible at 100 percent for tax years 2021 and 2022. There are no dollar limits. Expenses must be "ordinary and necessary" (meaning appropriate and helpful) and not "lavish or extravagant," but this doesn't bar deluxe accommodations, travel or meals. Additionally, there were additional special limitations on skyboxes and luxury water travel.

Starting in 2018 and continuing through tax year 2025, no deduction is allowed for business entertainment. Tax reform also eliminated deductions for expenses relating to sporting events such as those for skybox expenses (previously 50%), tickets to sporting events (previously 50%), and transportation to and from sporting events (previously 50%).

Can I deduct living expenses on temporary assignment away from the area where I live and work?

Yes. Living expenses at the temporary work site are away from home travel expenses. An assignment is temporary if it's expected to last no more than a year. If it's expected to last more than a year, the new area is your tax home, so you can't deduct expenses there as away from home travel.

What expenses can I deduct while traveling away from home?

A wide range of expenses can be deducted while traveling away from home.

Here are the main ones:

Transportation fares, or actual costs (or a standard per mile rate) of using your own vehicle. Also, transportation costs of getting around in the work area-to and from hotels, restaurants, offices, terminals, etc.
Lodging and meals (subject to the 50 percent limit on meals; 100 percent in 2021 and 2022)
Phone, fax, laundry, baggage handling
Tips related to the above

What can't be deducted as travel expenses?

The following travel expenses cannot be deducted:

Costs of commuting between your residence and a work site, but it's a deductible business trip if your residence is your business headquarters.
Travel as education
Job hunting in a new field or looking for a new business site

What can I deduct for business entertainment?

Prior to 2018 and the passage of the TCJA, the following generally applied:

There should be a business discussion before, during, and after the meals and entertainment.
The deduction for entertainment and meals is limited to 50 percent of the cost. In 2021 and 2022 restaurant meals were deductible at 100 percent.
There were further limitations for club dues, entertainment facilities, and skyboxes.
Spouses of business associates and your own spouse could be included in the entertainment in settings where spouse attendance is customary.

After tax reform, and starting in 2018, the rules changed and the entertainment expense deduction was eliminated entirely with the exception of certain activities such as office holiday parties, which remain 100% deductible. For example, the deduction for business entertainment expenses is eliminated but meals remain deductible at 50 percent (100 percent in 2021 and 2022). In addition, the following now applies:

Entertainment-related Meals. Prior to tax reform expenses for meals purchased during entertainment activities such as meals included at a sporting event were deductible at 50%. Starting in 2018; however, the deduction is eliminated unless the costs of meals are invoiced separately.

Sporting Events. Tax reform eliminated all deductions relating to sporting events including deductions for sky box expenses (previously 50%), tickets to sporting events (previously 50%), tickets to qualified charitable events (previously 100%), and transportation to and from sporting events (previously 50%).

Club Memberships. While there was never a deduction for club dues, business owners were able to take a 50% deduction for expenses incurred at a business, recreational, or social club as long as it was related to their trade or business. Under tax reform, however, that deduction has been eliminated.

How do I prove my travel and entertainment expenses?

If you're an employee who is reimbursed for expenses you'll need to file an expense report for your employer, which is a written accounting of your expense while on travel. If you received a cash advance, you'll also need to return to the employer any amounts in excess of your expenses.

Some per diem arrangements and mileage allowances called "accountable plans" take the place of detailed accounting to the employer, if time, place and business purpose are established.

For tax years 2018 through 2025, miscellaneous itemized deductions (Form 1040, Schedule A) have been eliminated due to tax reform (Tax Cuts and Jobs Act of 2017). Prior to tax reform (i.e., tax years prior to 2018), the following held true: Where expenses aren't fully reimbursed by your employer or excess reimbursements aren't returned, detailed substantiation to IRS is required and, if you're an employee, your deductions are subject to the 2-percent floor on miscellaneous itemized deductions. In addition, your expense records should be "contemporaneous," that is, recorded close to the time expenses are incurred.

Recordkeeping For Your Taxes: Frequently Asked Questions

Wed, 11 Oct 2023 13:55:17 GMT

What pieces of paper do I need to keep in order to do my taxes?

Keep detailed records of your income, expenses, and other information you report on your tax return. A good set of records can help you save money when you do your taxes and will be your trusty ally in case you are audited.

There are several types of records that you should keep. Most experts believe it's wise to keep most types of records for at least seven years, and some you should keep indefinitely.

What type of records do I need to keep?

Keep records of all your current year income and deductible expenses. These are the records that an auditor will ask for if the IRS selects you for an audit.

Here's a list of the kinds of tax records and receipts to keep that relate to your current year income and deductions:

Income (wages, interest/dividends, etc.)
Exemptions (cost of support)
Medical expenses
Taxes
Interest
Charitable contributions
Child care
Business expenses
Professional and union dues
Uniforms and job supplies
Education, if it is deductible for income taxes
Automobile, if you use your automobile for deductible activities, such as business or charity
Travel, if you travel for business and are able to deduct the costs on your tax return

While you're storing your current year's income and expense records, be sure to keep your bank account and loan records too, even though you don't report them on your tax return. If the IRS believes you've underreported your taxable income because your lifestyle appears to be more comfortable than your taxable income would allow, having these loan and bank records may be just the thing to save you.

How long should I keep these records?

Keep the records of your current year's income and expenses for as long as you may be called upon to prove the income or deduction if you're audited.

For federal tax purposes, this is generally three years from the date you file your return (or the date it's due, if that's later), or two years from the date you actually pay the tax that's due, if the date you pay the tax is later than the due date. IRS requirements for record keeping are as follows:

You owe additional tax and situations (2), (3), and (4), below, do not apply to you; keep records for 3 years.
You do not report income that you should report, and it is more than 25 percent of the gross income shown on your return; keep records for 6 years.
You file a fraudulent return; keep records indefinitely.
You do not file a return; keep records indefinitely.
You file a claim for credit or refund* after you file your return; keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.
You file a claim for a loss from worthless securities or bad debt deduction; keep records for 7 years.
Keep all employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

Should I keep my old tax returns? If so, for how long?

Yes, keep your old tax returns.

One of the benefits of keeping your tax returns from year to year is that you can look at last year's return while preparing this year's. It's a handy reference and reminds you of deductions you may have forgotten.

Another reason to keep your old tax returns is that there may be information in an old return that you need later.

Audits and your old tax returns

Here's a reason to keep your old returns that may surprise you. If the IRS calls you in for an audit, the examiner will more than likely ask you to bring your tax returns for the last few years. You'd think the IRS would have them handy, but that's not the way it works. More than likely, your old returns are stored in a computer, in a storage area, or on microfilm somewhere. Usually, your IRS auditor has just a report detailing the reason the computer picked your return for the audit. So having your old returns allows you to easily comply with your auditor's request.

How long should I keep my old tax returns?

You may want to keep your old returns forever, especially if they contain information such as the tax basis of your house. Probably, though, keeping them for the previous three or four years is sufficient.

If you throw out an old return that you find you need, you can get a copy of your most recent returns (usually the last six years) from the IRS. Ask the IRS to send you Form 4506, Request for Copy or Transcript of Tax Form. When you complete the form, send it, with the required small fee, to the IRS Service Center where you filed your return.

What other types of tax records should I keep?

You need to keep some other types of tax records and receipts because they tell you how much you paid for something that you may later sell.

Keep the following types of records:

Records of capital assets, such as coin and antique collections, jewelry, stocks, and bonds.
Records regarding the purchase and improvements to your home.
Records regarding the purchase, maintenance, and improvements to your rental or investment property.

How long should I keep these records? You need to keep these records as long as you own the item so you can prove the cost you use to figure your gain or loss when you sell the item.

Are there any non-tax records I should keep?

There are other records you should keep, even though they don't appear to have any use for your tax returns. Here are a few examples:

Insurance policies, to show whether you were to be reimbursed in case you suffer a casualty or theft loss, have medical expenses, or have certain business losses.
Records of major purchases, in case you suffer a casualty or theft loss, contribute something of value to a charity or sell it.
Family records, such as marriage licenses, birth certificates, adoption papers, divorce agreements, in case you need to prove change in filing status or dependency exemption claims.
Certain records that give a history of your health and any medical procedures, in case you need to prove that a certain medical expense was necessary.
These categories are the most universal and should cover most of your recordkeeping needs. Everyone's needs are unique, however, and there may be other records that are important to you. Skimming through our Tax Library Index might highlight other categories that apply to you.

What kind of recordkeeping system do I need?

Unless you own or operate your own business, partnership, or S corporation, recordkeeping does not have to be fancy.

Your recordkeeping system can be as casual as storing receipts in a box until the end of the year, then transferring the records, along with a copy of the tax return you file, to an envelope or file folder for longer storage.

To make it easy on yourself, you might want to separate your records and receipts into categories, and file them in labeled envelopes or folders. It's also helpful to keep each year's records separate and clearly labeled.

If you have your own business, or if you're a partner in a partnership or an S corporation shareholder, you might find it valuable to hire a bookkeeper or accountant.

Do you contribute to charity?

If you donate to a charity, you must have receipts to prove your donation.

Starting in 2007, contributions in cash or by check aren't deductible at all unless substantiated by one of the following:

A bank record that shows the name of the qualified organization, the date of the contribution, and the amount of the contribution. Bank records may include: a canceled check, a bank or credit union statement or a credit card statement.
A receipt (or letter or other written communication) from the qualified organization showing the name of the organization, the date of the contribution, and the amount of the contribution.
Payroll deduction records. The payroll records must include a pay stub, Form W-2 or other document furnished by the employer that shows the date and the amount of the contribution, and a pledge card or other document prepared by or for the qualified organization that shows the name of the organization.

Besides deducting your cash and non-cash charitable donations, you can also deduct your mileage to and from charity work. If you deduct mileage for your charitable efforts, keep detailed records of how you figured your deduction.

Are you employed by someone else?

If you work for someone else and spend your own money on company business, keep good records of your business expense receipts. You will need these records to either get a reimbursement from your employer or to prove business-related deductions that you take on your taxes.

Do you have income from tips?

If you make tips from your job, the hand of the IRS reaches here too, and if you are ever audited, the IRS will be interested in records of how much you made in tips.

Do you own property?

If you own property, be particularly careful to keep receipts or some other proof of all your expenses, especially for repairs and improvements.

Do you hire domestic workers?

It's important to keep accurate information about who works for you, including nannies and housekeepers, when and where they worked for you, and how much you paid them for the work.

Do you have a business?

If you have a business, you must keep very careful records of all your business expenses, including vehicle mileage, entertainment expenses, and travel expenses.

If you have a business, just because you have cash in your pocket doesn't mean you're in the black on the books. Keeping up-to-date records of all transactions and costs will not only help you tax wise, it will tell you if your business is actually profitable.

Do you travel for your business?

If you travel for business, keep good receipts and logs of all your travel expenses, including those for meals and entertainment. You will need this information whether you work for yourself or for someone else.

Small Business: Frequently Asked Questions

Wed, 11 Oct 2023 13:41:42 GMT

How can I ensure that my small business will survive the transition into the next generation?

Less than one-third of family businesses survive the transition from first to second generation ownership. Of those that do, about half do not survive the transition from second to third generation ownership. At any given time, 40 percent of U.S. businesses are facing the transfer of ownership issue.

Founders are trying to decide what to do with their businesses; however, the options are few.

The following is a list of options to consider:

Close the doors.
Sell to an outsider or employee.
Retain ownership but hire outside management.
Retain family ownership and management control.

There are four basic reasons why family firms fail to transfer the business successfully:

Lack of viability of the business.
Lack of planning.
Little desire on the owner's part to transfer the firm.
Reluctance of offspring to join the firm.

The primary cause for failure is the lack of planning. With the right succession plans in place, the business, in most cases, will remain healthy.

What's involved in succession planning for family businesses?

Transferring the family business requires the family to make a determined effort to do the following:

Create a business strategic plan.
Create a family strategic plan.
Prepare an Estate Plan.
Prepare a Succession Plan, including arranging for successor training and setting a retirement date.

These are the four plans that make up the transition process. By implementing them, you will virtually ensure the successful transfer of your business within the family hierarchy.

Q: What is a business strategic plan?

A: A business strategic plan defines goals, objectives, and targets for a company and outlines its resources will be allocated in order to achieve them. When a strategic business plan is in place, it allows each generation an opportunity to chart a course for the firm. Setting business goals as a family will ensure that everyone has a clear picture of the company's future. A strategic plan is long-term in nature and focuses on where you want the business to be at some future date.

Q: What is a family strategic plan?

A: The family strategic plan establishes policies for the family's role in the business and is needed to maintain a healthy, viable business. For example, it should include the creed or mission statement that spells out your family's values and basic policies for the business, and it may include an entry and exit policy that outlines the criteria for working in the business. The plan should consider which family members desire to have a part in management of the business versus those who desire a more passive role.

Q: What is an estate plan?

A: An estate plan is a written document that outlines the disposal of one's estate and includes such things as a will, trust, power of attorney, and a living will. An estate plan is critical for the family and the business because, without it, you will pay higher estate taxes than necessary, allocating less of the estate to your heirs. The estate plan should be used in conjunction with the succession plan to see that the family business is transferred in a tax effective manner.

Q: What is a succession plan?

A: A succession plan identifies key individuals who will be groomed to take over the business when the time comes. It also outlines how succession will occur and how to know when the successor is ready. Having a succession plan in place goes a long way toward easing the founding or current generation's concerns about transferring the firm.

How do I know whether I have what it takes to run my own business?

Before starting out, list your reasons for wanting to go into business. Some of the most common reasons for starting a business include wanting to be self-employed, wanting financial and creative independence, and wanting to maximize your skills and knowledge.

When determining what business is "right for you," consider what you like to do with your time, what technical skills you have, recommendations from others, and whether any of your hobbies or interests are marketable. You must also decide what kind of time commitment you're willing to make to running a business.

Then you should do research to identify the niche your business will fill. Your research should address such questions as what services or products you plan to sell, whether your idea fits a genuine need, what competition exists, and how you can gain a competitive advantage. Most importantly, can you create a demand for your business?

What should I include in a business plan?

The following outline of a typical business plan can serve as a guide that you can adapt to your specific business:

Introduction
Marketing
Financial Management
Operations
Concluding Statement

Q: What should be included in the introduction to my business plan?

A: The introductory section of your business plan should give a detailed description of the business and its goals, discuss its ownership and legal structure, list the skills and experience you bring to the business, and identify the competitive advantage your business possesses.

Q: What should be included in the marketing section of my business plan?

A: In the marketing section, you should discuss what products/services your business offers and the customer demand for them. Furthermore, this section should identify your market and discuss its size and locations. Finally, you should explain various advertising, marketing, and pricing strategies you plan to utilize.

Q: What should be included in the financial management section of my business plan?

A: In this section, explain the source and amount of initial equity capital. Also, develop a monthly operating budget for the first year as well as an expected return on investment, or ROI, and monthly cash flow for the first year. Next, provide projected income statements and balance sheets for a two-year period, and discuss your break-even point. Explain your personal balance sheet and method of compensation. Discuss who will maintain your accounting records and how they will be kept. Finally, provide "what if" statements that address alternative approaches to any problem that may develop.

Q: What should be included in the operations section of my business plan?

A: This section explains how the business will be managed on a day-to-day basis. It should cover hiring and personnel procedures, insurance, lease or rent agreements. It should also account for the equipment necessary to produce your products or services and for production and delivery of products and services.

Q: What should be included in the concluding statement of my business plan?

A: In the ending summary statement, summarize your business goals and objectives and express your commitment to the success of your business. Also, be specific as to how you plan to achieve your goals.

Is a home-based business right for me?

To succeed, your business must be based on something greater than a desire to be your own boss: an honest assessment of your own personality, an understanding of what's involved, and a lot of hard work.

You have to be willing to plan ahead and then make improvements and adjustments along the road.

Overall, it is important that you establish a professional environment in your home; you should even set up a separate office in your home, if possible.

What legal requirements might affect a home-based business?

A home-based business is subject to many of the same laws and regulations affecting other businesses. Be sure to consult an attorney and your state department of labor to find out which laws and regulations will affect your business. For instance, be aware of your city's zoning regulations. Also, certain products may not be produced in the home.

Most states outlaw home production of fireworks, drugs, poisons, explosives, sanitary or medical products, and toys. Some states also prohibit home-based businesses from making food, drink, or clothing.

In terms of registration and accounting requirements, you may need a work certificate or a license from the state, a sales tax number, a separate business telephone, and a separate business bank account.

Finally, if your business has employees, you are responsible for withholding income and social security taxes, and for complying with minimum wage and employee health and safety laws.

How can I avoid running into cash flow problems in my small business?

Failure to properly plan cash flow is one of the leading causes of small business failures. Experience has shown that many small business owners lack an understanding of basic accounting principles. Knowing the basics will help you better manage your cash flow.

A business's monetary supply can exist either as cash on hand or in a business checking account available to meet expenses. A sufficient cash flow covers your business by meeting obligations (i.e., paying bills), serving as a cushion in case of emergencies, and providing investment capital.

The Operating Cycle

The operating cycle is the system through which cash flows, from the purchase of inventory through the collection of accounts receivable. It measures the flow of assets into cash. For example, your operating cycle may begin with both cash and inventory on hand. Typically, additional inventory is purchased on account to guarantee that you will not deplete your stock as sales are made. Your sales will consist of cash sales and accounts receivable - credit sales. Accounts receivable are usually paid 30 days after the original purchase date. This applies to both the inventory you purchase and the products you sell. When you make payment for inventory, both cash and accounts payable are reduced. Thirty days after the sale of your inventory, receivables are usually collected, which increases your cash. Now your cash has completed its flow through the operating cycle and is ready to begin again.

Cash-flow analysis should show whether your daily operations generate enough cash to meet your obligations, and how major outflows of cash to pay your obligations relate to major inflows of cash from sales. As a result, you can tell if inflows and outflows from your operation combine to result in a positive cash flow or in a net drain. Any significant changes over time will also appear.

A monthly cash-flow projection helps to identify and eliminate deficiencies or surpluses in cash and to compare actual figures to past months. When cash-flow deficiencies are found, business financial plans must be altered to provide more cash. When excess cash is revealed, it might indicate excessive borrowing or idle money that could be invested. The objective is to develop a plan that will provide a well-balanced cash flow.

What steps can I take to improve my business cash flow?

To achieve a positive cash flow, you must have a sound plan. Your business can increase cash reserves in a number of ways:

Collecting receivables : Actively manage accounts receivable and quickly collect overdue accounts. Revenues are lost when a firm's collection policies are not aggressive.
Tightening credit requirements : As credit and terms become more stringent, more customers must pay cash for their purchases, thereby increasing the cash on hand and reducing the bad-debt expense. While tightening credit is helpful in the short run, it may not be advantageous in the long run. Looser credit allows more customers the opportunity to purchase your products or services.
Manipulating price of products : Many small businesses fail to make a profit because they erroneously price their products or services. Before setting your prices, you must understand your product's market, distribution costs, and competition. Monitor all factors that affect pricing on a regular basis and adjust as necessary.
Taking out short-term loans: Loans from various financial institutions are often necessary for covering short-term cash-flow problems. Revolving credit lines and equity loans are common types of credit used in this situation.
Increasing your sales : Increased sales would appear to increase cash flow. However, if large portions of your sales are made on credit, when sales increase, your accounts receivable increase, not your cash. Meanwhile, inventory is depleted and must be replaced. Because receivables usually will not be collected until 30 days after sales, a substantial increase in sales can quickly deplete your firm's cash reserves.

Should I keep a cash reserve in my small business?

You should always keep enough cash on hand to cover expenses and as an added cushion for security. Excess cash should be invested in an accessible, interest-bearing, low-risk account, such as a savings account, short-term certificate of deposit or Treasury bill.

Limited Liability Companies: Frequently Asked Questions

Wed, 11 Oct 2023 13:35:47 GMT

Who should form an LLC?

You should consider forming an LLC (limited liability company) if you are concerned about personal exposure to lawsuits arising from your business. For example, if you decide to open a store-front business that deals directly with the public, you may worry that your commercial liability insurance won't fully protect your personal assets from potential slip-and-fall lawsuits or claims by your suppliers for unpaid bills. Running your business as an LLC may help you sleep better because it instantly gives you personal protection against these and other potential claims against your business.

Not all businesses can operate as LLCs, however. Businesses in the banking, trust, and insurance industry, for example, are typically prohibited from forming LLCs.

Should I choose an LLC or an S-corporation?

While the S-corporation's special tax status eliminates double taxation, it lacks the flexibility of an LLC in allocating income to the owners.

An LLC may offer several classes of membership interests while an S-corporation may only have one class of stock.

Any number of individuals or entities may own interests in an LLC. However, ownership interest in an S-corporation is limited to no more than 100 shareholders. Also, S-corporations cannot be owned by C-corporations, other S-corporations, many trusts, LLCs, partnerships, or nonresident aliens. Also, LLCs are allowed to have subsidiaries without restriction.

What is an LLC Operating Agreement?

An LLC operating agreement allows you to structure your financial and working relationships with your co-owners in a way that suits your business. In your operating agreement, you and your co-owners establish each owner's percentage of ownership in the LLC, his or her share of profits (or losses), his or her rights and responsibilities, and what will happen to the business if one of you leaves.

Do I need to have an Operating Agreement?

Although most states' LLC laws don't require a written operating agreement, you shouldn't consider starting business without one. Here's why an operating agreement is necessary:

It helps to ensure that courts will respect your personal liability protection by showing that you have been conscientious about organizing your LLC.
It sets out rules that govern how profits will be split up, how major business decisions will be made, and the procedures for handling the departure and addition of members.
It helps to avert misunderstandings between the owners over finances and management.
It keeps your LLC from being governed by the default rules in your state's LLC laws, which might not be to your benefit.

Must I hold LLC meetings?

Although a corporation's failure to hold shareholder or director meetings may subject the corporation to alter ego liability, this is not the case for LLCs in many states. In California for example, an LLC's failure to hold meetings of members or managers is not usually considered grounds for imposing the alter ego doctrine where the LLC's Articles of Organization or Operating Agreement do not expressly require such meetings.

Exceptions to Limited Liability

While LLC owners enjoy limited personal liability for many of their business transactions, it is important to realize that this protection is not absolute. This drawback is not unique to LLCs, however -- the same exceptions apply to corporations. An LLC owner can be held personally liable if he or she:

personally and directly injures someone
personally guarantees a bank loan or a business debt on which the LLC defaults
fails to deposit taxes withheld from employees' wages
intentionally does something fraudulent, illegal, or clearly wrong-headed that causes harm to the company or to someone else, or
treats the LLC as an extension of his or her personal affairs, rather than as a separate legal entity.

This last exception is the most important. In some circumstances, a court might say that the LLC doesn't really exist and find that its owners are really doing business as individuals, who are personally liable for their acts. To keep this from happening, make sure you and your co-owners:

Act fairly and legally. Do not conceal or misrepresent material facts or the state of your finances to vendors, creditors, or other outsiders.
Fund your LLC adequately. Invest enough cash into the business so that your LLC can meet foreseeable expenses and liabilities.
Keep LLC and personal business separate. Get a federal employer identification number, open up a business-only checking account, and keep your personal finances out of your LLC accounting books.
Create an operating agreement. Having a formal written operating agreement lends credibility to your LLC's separate existence.

A good liability insurance policy can shield your personal assets when limited liability protection does not. For instance, if you are a massage therapist and you accidentally injure a client's back; your liability insurance policy should cover you. Insurance can also protect your personal assets in the event that your limited liability status is ignored by a court.

In addition to protecting your personal assets in such situations, insurance can protect your corporate assets from lawsuits and claims. Be aware, however, that commercial insurance usually does not protect personal or corporate assets from unpaid business debts, whether or not they're personally guaranteed.

Incorporating: Frequently Asked Questions

Wed, 11 Oct 2023 13:33:15 GMT

What is a corporation?

A corporation is a legal entity that exists separately from its owners. The creation of a corporation occurs when properly completed articles of incorporation are filed with the correct state authority, and all fees are paid.

What is the difference between an "S" corporation and a "C" corporation?

All corporations start as "C" corporations and are required to pay income tax on taxable income generated by the corporation. A C-corporation becomes an S-corporation by completing and filing federal form 2553 with the IRS. An S-corporation's net income or loss is "passed-through" to the shareholders and is included in their personal tax returns. Because income is NOT taxed at the corporate level, there is no double taxation as with C-corporations. Subchapter S-corporations, as they are also called, are restricted to having no more than 100 shareholders.

Do I need an attorney to incorporate?

An attorney is not a legal requirement for incorporating a business in any state except South Carolina, where a signature by a South Carolina attorney licensed to practice in the state is required on articles of incorporation. In every other state, you can prepare and file the articles of incorporation yourself. However, if you are unsure of what steps your business should take and you don't have the time to research the matter yourself, a consultation with a good corporate attorney is often well worth the money you spend.

How do I know if my name is available?

We will request your two top name choices. We will check these as part of your order. If neither of these is available, we will contact you for other name choices.

How do I name my corporation?

First, we recommend that you spend some time coming up with a name for your corporation. Although each state has different rules concerning the naming of your corporation, the most common rule is that it must not be deceptively similar to another already formed company. The corporate name must include a suffix. Some examples are "Incorporated", "Inc.", "Company", and "Corp." However, your state may have different suffix requirements.

What are the benefits of incorporating?

The primary advantage of incorporating is to limit your liability to the assets of the corporation only. Usually, shareholders are not liable for the debts or obligations of the corporation. So if your corporation defaults on a loan, unless you haven't personally signed for it, your personal assets won't be in jeopardy. This is not the case with a sole proprietorship or partnership. Corporations also offer many tax advantages that are not available to sole proprietors.

Some other advantages include:

A corporation's life is unlimited and is not dependent upon its members. If an owner dies or wishes to sell their interest, the corporation will continue to exist and do business.
Retirement funds and qualified retirement plans (like 401k) may be set up more easily with a corporation.
Ownership of a corporation is easily transferable.
Capital can be raised more easily through the sale of stock.
A corporation possesses centralized management.

What is a Registered Agent?

Most every state requires that a corporation has a registered agent. That agent must have a physical location in the formation state. The registered agent can typically be any person (usually a resident of the state) or any properly registered company who is available during normal business hours to receive official state documents or service of process (lawsuit).

How many Directors/Shareholders do I need?

Most states allow for one person to act as shareholder, director, and all officer roles.

How many shares of stock should I choose, and at what par value?

We provide a default of 200 shares, although you can choose any amount you want on all orders. Your par value is not requested on all orders, and is usually expressed as "No Par Value" or some dollar amount per share such as "$1.00" or "$0.10." Some states require that you do not issue your stock for less than the par value. Some states also base their fees on the number of shares authorized, multiplied by the par value.

What is a Federal Tax Identification Number or EIN?

Your corporation is required to have an Employer Identification Number (EIN) also known as your Federal Tax Identification Number so that the IRS can track payroll and income taxes paid by the corporation. But, like a social security number, an EIN is used for most everything the business does. Your bank will require an EIN to open your corporate bank account.

We provide two EIN services:

Basic EIN Service - We prepare and email your SS4 (EIN application) & easy one-page instructions for obtaining your EIN. You need only review, sign and fax or call in the information to the IRS to get your EIN.
Full EIN Service - We actually obtain your company's EIN for you.

What do I need to do AFTER I incorporate?

You must have your initial shareholder(s) meeting to elect your director(s), if your director(s) haven't been designated in the articles. Then, you must have your initial organizational meeting of your directors. At this meeting, you will need to elect your officers, adopt your company's bylaws, and issue your stock (among other actions).

How do I get started?

Once you have decided on a name, order your corporation online. Once we receive your paid order, we verify the availability of your name choices, draft your articles, file them with the state and send you all appropriate documents after they have been filed.

Business Forms of Organization: Frequently Asked Questions

Wed, 11 Oct 2023 13:29:03 GMT

Which kinds of business organization or business entity will limit my liability to business creditors?

Corporations, limited liability companies (LLCs), limited partnerships, and limited liability partnerships (LLPs) are the three most common business entities that limit liability. General partnerships and sole proprietorships don't limit owners' liability. Limited partnerships limit the liability of some partners (limited partners) and not others (general partners).

What is the "corporate double tax" and how can it be avoided?

Double taxation of corporations results in a significant tax burden on corporate income. Often referred to as the "corporate double tax," it occurs when a business corporation (or an entity treated for tax purposes as a business corporation) pays a federal tax on its income, and tax is also paid by its owners in the form of individual income tax on capital gains and dividends when they collect corporate profits.

Double taxation occurs even if the corporation retains its after-tax earnings (as opposed to distributing them as dividends) because the value of the stock increases to reflect an increase in assets held by the corporation. Shareholders that decide to sell their stock will realize a capital gain and pay tax on that gain.

The tax on the corporation is called an "entity level tax" and an entity so taxed is called a "C-corporation" (C-corp). The double tax can be avoided one of two ways:

By electing to be an S-corp. While this doesn't change its nature under state business law, but in most cases eliminates federal tax at the corporate level.
By postponing profits distributions to corporate owners, the second tax (on the owners) can be postponed.

Which types of business entity are best for tax purposes?

It depends. Generally speaking, the "pass-through" type of entity saves tax overall by eliminating tax at the entity level. pass-through entity owners are taxed directly on their share of entity profits. Another pass-through advantage is that owners can take tax deductions for startup or operating losses, against their income from investments or other businesses.

Which are the "pass-through" entities?

You have much control over whether the entity you choose is treated as a pass-through entity for federal tax purposes (see below), but the leading pass-through forms are general partnerships, limited partnerships, LLPs, LLCs, S-corps, and sole proprietorships.

If your business is in the form of a partnership (any type) or limited liability company, you may choose whether your business is treated for tax purposes as a corporation or a partnership (or, if you're the only one in the LLC, as a corporation or disregarded for tax purposes). Tax and business advisors call this choice the "check-the-box" system. If it's actually incorporated, or you choose to have it treated as a corporation, you may qualify to have it treated as a pass-through by electing S-corp status.

Your choice under check-the-box is binding. That is, if you choose one entity (say, corporation) in one year and another (say, partnership) the next year, you must pay tax as if you sold last year's entity and put the proceeds into this year's.

What entities will let me both limit my liability and avoid the double tax?

S-corps (usually) and all of the following, assuming that you don't choose to have them treated as corporations: LLCs; LLPs; and limited partnerships, for the limited partners. For sole owners, the choice is limited to S-corps or, in states that allow single-owners, LLCs.

What's so great about limited liability companies (LLCs)?

LLCs combine limited liability with pass-through tax treatment. They can offer benefits unavailable from S-corps, their nearest rival (for businesses other than professional practices). The key benefits:

A way to allocate certain tax benefits disproportionately among owners.
Opportunity for greater loss deductions.
Avoiding or reducing tax when a new owner joins the business or when distributions are made to owners in business liquidation.

State law varies when it comes to allowing single-owner LLCs; some states allow it and some states don't. Where it is allowed, the owner can choose under check-the-box rules to have the LLC disregarded for tax purposes (without losing LLC limited liability), and pay tax directly on LLC income.

In states where single-member LLCs aren't allowed S-corps are a good alternative, and they can also postpone tax, as compared to LLCs, where the business is to be bought out by a corporate giant.

What special considerations are there if my business is a professional practice?

Limitation of liability, especially malpractice liability, is a major concern. No entity will protect you against liability for your own malpractice. But LLCs, Professional Limited Liability Companies (PLLCs), and LLPs, where available for professional practices, will protect you against liability for malpractice of co-owner professionals in the firm, and maybe (depending on state law) for other debts. Professional Corporations (PCs) may not protect against liability for a co-owner's malpractice, depending on state law.

The tax rules governing those in LLCs, PLLCs, and LLPs are about the same, and somewhat more liberal than those for PCs.

What are the federal tax consequences of changing your form of business organization?

This is a critical decision that should be studied carefully with professional guidance, but briefly stated:

There's no tax on a change from C-corp to S-corp or vice versa.
There is no tax on a change from LLC, partnership or sole proprietorship to a C or S-corp.
There is no tax on a change from a proprietorship or partnership to LLC or vice versa.
There is a tax on a change from C or S-corp to an LLC, partnership or sole proprietorship.

Do state business entity rules follow federal tax rules?

Keep in mind the difference between state business law and state tax law. The tax status you choose for your entity under the federal check-the-box system doesn't make it that entity for state business law purposes. So, for example, choosing corporate tax treatment for a partnership won't bring corporate limited liability.

There is a trend for states to treat the entity chosen under federal check-the-box as the entity recognized for state tax purposes, but this is optional with the state.

State law may accept pass-through status for an entity (such as an S-corp or an LLC) and still impose a tax of some kind on the entity.

The Home-Based Business: Some Basics You Should Consider

Wed, 11 Oct 2023 13:24:51 GMT

This Financial Guide reviews some of the special considerations of the home-based business.

More than 52 percent of businesses today are home-based. Every day, people are striking out and achieving economic and creative independence by turning their skills into dollars. Garages, basements, and attics are being transformed into the corporate headquarters of the newest entrepreneurs - home-based businesspeople.

And, with technological advances in smartphones, tablets, and iPads as well as a rising demand for "service-oriented" businesses, the opportunities seem to be endless.

This Financial Guide discusses some of the basics you should consider in starting a home-based business. It does not attempt to cover all aspects of home-based businesses, but rather, addresses the general requirements of what's needed to start up a business in your home.

Is a Home-Based Business Right for You?

Choosing a home business is like choosing a spouse or partner: Think carefully before starting the business. Instead of plunging right in, take the time to learn as much about the market for any product or service as you can. Before you invest any time, effort, and money take a few moments to answer the following questions:

Can you describe in detail the business you plan on establishing?
What will be your product or service?
Is there a demand for your product or service?
Can you identify the target market for your product or service?
Do you have the talent and expertise needed to compete successfully?

Before you dive head first into a home-based business, it's essential that you know why you are doing it and how you will do it. To succeed, your business must be based on something greater than a desire to be your own boss: an honest assessment of your own personality, and understanding of what's involved, and a lot of hard work. You have to be willing to plan ahead, and then make improvements and adjustments along the road. While there are no "best" or "right" reasons for starting a home-based business, it is vital to have a very clear idea of what you are getting into and why. Ask yourself these questions:

Are you a self-starter?
Can you stick to business if you're working at home?
Do you have the necessary self-discipline to maintain schedules?
Can you deal with the isolation of working from home?

Working under the same roof that your family lives under may not prove to be as easy as it seems. It is important that you work in a professional environment; if at all possible, you should set up a separate office in your home. You must consider whether your home has enough space for a business and whether you can successfully run the business from your home.

Compliance with Laws and Regulations

A home-based business is subject to many of the same laws and regulations affecting other businesses and you will be responsible for complying with them. There are some general areas to watch out for, but be sure to consult an attorney and your state department of labor to find out which laws and regulations will affect your business.

Zoning

Be aware of your city's zoning regulations. If your business operates in violation of them, you could be fined or closed down.

Restrictions on Certain Goods

Certain products may not be produced in the home. Most states outlaw home production of fireworks, drugs, poisons, sanitary or medical products, and toys. Some states also prohibit home-based businesses from making food, drink, or clothing.

Registration and Accounting Requirements

You may need the following:

Work certificate or a license from the state (your business's name may also need to be registered with the state)
Sales tax number
Separate business telephone
Separate business bank account

If your business has employees, you are responsible for withholding income, social security, and Medicare taxes, as well as complying with minimum wage and employee health and safety laws.

Planning Techniques

Money fuels all businesses. With a little planning, you'll find that you can avoid most financial difficulties. When drawing up a financial plan, don't worry about using estimates. The process of thinking through these questions helps develop your business skills and leads to solid financial planning.

Estimating Start-Up Costs

To estimate your start-up costs, include all initial expenses such as fees, licenses, permits, telephone deposit, tools, office equipment and promotional expenses.

Business experts say you should not expect a profit for the first eight to 10 months, so be sure to give yourself enough of a cushion if you need it.

Projecting Operating Expenses

Include salaries, utilities, office supplies, loan payments, taxes, legal services and insurance premiums, and don't forget to include your normal living expenses. Your business must not only meet its own needs but make sure it meets yours as well.

Projecting Income

It is essential that you know how to estimate your sales on a daily and monthly basis. From the sales estimates, you can develop projected income statements, break-even points, and cash-flow statements. Use your marketing research to estimate initial sales volume.

Determining Cash Flow

Working capital--not profits--pays your bills. Even though your assets may look great on the balance sheet, if your cash is tied up in receivables or equipment, your business is technically insolvent. In other words, you're broke.

Make a list of all anticipated expenses and projected income for each week and month. If you see a cash-flow crisis developing, cut back on everything but the necessities.

****

Remember, preparation is the foundation of success. Learn how to strengthen your home-based business. Success doesn't just happen--you have to make it happen.

Raising Capital: How To Get Money For a Small Business

Wed, 11 Oct 2023 13:16:06 GMT

In addition to drive, ambition and a great deal of planning, starting and expanding a small business generally requires capital. Capital may come from family, friends, lenders or others. This Financial Guide provides an overview of how to get the capital you need to start or grow your business.

One key to successful business start-up and expansion is your ability to obtain and secure appropriate financing. Raising capital is one of the most basic of all business activities. But as many new entrepreneurs quickly discover, raising capital may not be easy. In fact, it can be a complex and frustrating process and professional guidance should be considered, especially with regard to financial information needed for the loan proposal. This Financial Guide focuses on ways a small business can raise money and explains how to prepare a loan proposal.

Finding Sources of Money

There are several sources to consider when looking for financing. It is important to explore all of your options before making a decision. These include:

Personal Savings. The primary source of capital for most new businesses comes from savings and other forms of personal resources. While credit cards are often used to finance business needs, there may be better options available, even for very small loans.
Friends and Relatives. Many entrepreneurs look to private sources such as friends and family when starting out in a business venture. Often, money is loaned interest free or at a low interest rate, which can be beneficial when getting started.
Banks and Credit Unions. The most common source of funding, banks and credit unions, will provide a loan if you can show that your business proposal is sound.
Venture Capital Firms. These firms help expanding companies grow in exchange for equity or partial ownership.

Borrowing Money

It is often said that small business people have a difficult time borrowing money, but this is not necessarily true. Banks make money by lending money; however, the inexperience of many small business owners in financial matters often prompts banks to deny loan requests.

Requesting a loan when you are not properly prepared sends a signal to your lender. That message is: "High Risk!" To be successful in obtaining a loan, you must be prepared and organized. You must know exactly how much money you need, why you need it, and how you will pay it back. You must be able to convince your lender that you are a good credit risk.

The bank official who reviews the loan request is focused on repayment. Most loan officers request a copy of your business credit report to determine your ability to repay. The lending officer will consider the following issues while using the information you provided and the credit report:

Have you invested at least 25% or 50% of savings or personal equity into the business for the loan you are requesting? (Keep in mind that 100% of your business will not be financed by an investor.)
Do your work history, your credit report and letters of recommendation show a healthy record of credit worthiness? This is a key factor.
Do you have the training and experience necessary to operate a successful business?
Do your loan proposal and business plan document your knowledge of and dedication to the success of the business?
Is the cash flow of the business sufficient to make the monthly payments on the requested loan?

Terms of loans may vary from lender to lender, but there are two basic types of loans: short-term and long-term.

A short-term loan generally has a maturity date of one year. These include working capital loans, accounts receivable loans, and lines of credit.

Long-term loans generally mature between one and seven years. Real estate and equipment loans are also considered long-term loans but may have a maturity date of up to 25 years. Long-term loans are used for major business expenses such as purchasing real estate and facilities, construction, durable equipment, furniture and fixtures, vehicles, etc.

How to Write a Loan Proposal

Approval of your loan request depends on how well you present yourself, your business and your ,financial needs to a lender. Remember, lenders want to make loans, but they must make loans they know will be repaid. The best way to improve your chances of obtaining a loan is to prepare a written proposal.

A good loan proposal will contain the following key elements:

General Information

Business name, names of principals, social security number for each principal, and the business address.
Purpose of the loan: exactly what the loan will be used for and why it is needed.
Amount required: the exact amount you need to achieve your purpose.

Business Description

History and nature of the business: details of what kind of business it is, its age, number of employees and current business assets.
Ownership structure: details on your company's legal structure.

Management Profile

Develop a short statement on each principal in your business; provide background, education, experience, skills, and accomplishments.

Market Information

Clearly define your company's products as well as your markets. Identify your competition and explain how your business competes in the marketplace. Profile your customers and explain how your business can satisfy their needs.

Financial Information

Financial statements: balance sheets and income statements for the past three years. If you are just starting out, provide projected balance sheets and income statements.
Personal financial statements on yourself and other principal owners of the business.
Collateral you would be willing to pledge as security for the loan.

How Your Loan Request Will Be Reviewed

When reviewing a loan request, the bank official is primarily concerned about repayment. To help determine this ability, many loan officers will order a copy of your business credit report from a credit-reporting agency. Therefore, you should work with these agencies to help them present an accurate picture of your business. Using the credit report and the information you have provided, the lending officer will consider the following issues:

Have you invested savings or personal equity in your business totaling at least 25 to 50 percent of the loan you are requesting? (Remember, a lender or investor will not finance 100 percent of your business.)
Do you have a sound record of creditworthiness as indicated by your credit report, work history, and letters of recommendation? This is very important.
Do you have sufficient experience and training to operate a successful business?
Have you prepared a loan proposal and business plan that demonstrate your understanding of and commitment to the success of the business?
Does the business have sufficient cash flow to make the monthly payments on the amount of the loan request?

SBA Programs

The SBA offers a variety of financing options for small businesses. The SBA's assistance usually is in the form of loan guarantees; i.e., it guarantees loans made by banks and other private lenders to small business clients. Generally, the SBA can guarantee up to $3.75 million or 75 percent of the total loan value. The average size of an SBA-guaranteed loan is $368,737.

Whether you are looking for a long-term loan for machinery and equipment, a general working capital loan, a revolving line of credit, or a "microloan," the SBA has a financing program to fit your needs.

The SBA guaranteed more than 50,000 loans totaling $19.2 billion to America's small businesses small businesses in fiscal year 2014 that otherwise would not have had such access to capital. It also provides assistance to small businesses and aspiring entrepreneurs through its Small Business Development Centers located throughout the United States and its territories.

The 7(a) Loan Guaranty Program, financing that can satisfy the requirements of almost any new or growing small business. The SBA offers a number of specialized loan and lender delivery programs.

The 7(a) Loan Guaranty Program

The 7(a) Loan Guaranty Program is the SBA's primary loan program. The SBA reduces risk to lenders by guaranteeing major portions of loans made to small businesses. This enables the lenders to provide financing to small businesses when funding is otherwise unavailable on reasonable terms.

The eligibility requirements and credit criteria of the program are very broad in order to accommodate a wide range of financing needs.

When a small business applies to a lending institution for a loan, the lender reviews the application and decides if it merits a loan on its own or if it requires additional support in the form of an SBA guaranty. SBA backing on the loan is then requested by the lender. In guaranteeing the loan, the SBA assures the lender that, in the event, the borrower does not repay the loan, the government will reimburse the lender for its loss. By providing this guaranty, the SBA helps tens of thousands of small businesses every year get financing they would not otherwise obtain.

To qualify for an SBA guaranty, a small business must meet the 7(a) criteria and the lender must certify that it could not provide funding on reasonable terms except with an SBA guaranty. SBA can guarantee as much as 85 percent on loans of up to $150,000 and 75 percent on loans of more than $150,000.

SBA's maximum exposure amount is $3,750,000. Thus, if a business receives an SBA-guaranteed loan for $5 million, the maximum guarantee to the lender will be $3,750,000 or 75 percent. SBA Express loans have a maximum guarantee set at 50 percent.

How The Procedure Works. You submit a loan application to a lender for initial review. If the lender approves the loan subject to an SBA guaranty, a copy of the application and a credit analysis are forwarded by the lender to the nearest SBA office. After SBA approval, the lending institution closes the loan and disburses the funds; you make monthly loan payments directly to the lender. As with any loan, you are responsible for repaying the full amount of the loan. There are no balloon payments, prepayment penalties, application fees or points permitted with 7(a) loans. Repayment plans may be tailored to each individual business.

Permissible Use of Proceeds. You can use a 7(a) loan to expand or renovate facilities; purchase machinery, equipment, fixtures and leasehold improvements; finance receivables and augment working capital; refinance existing debt (with compelling reason); finance seasonal lines of credit; construct commercial buildings; and/or purchase land or buildings.

Terms. The SBA's loan programs are generally intended to encourage longer term small-business financing. However, actual loan maturities are based on the ability to repay, the purpose of the loan proceeds and the useful life of the assets financed. However, maximum loan maturities have been established: 25 years for real estate, up to 10 years for equipment (depending on the useful life of the equipment) and generally up to seven years for working capital. Short-term loans and revolving lines of credit are also available through the SBA to help small businesses meet their short-term and cyclical working capital needs.

Interest Rates. Both fixed and variable interest rate structures are available. The maximum rate is composed of two parts, a base rate, and an allowable spread. There are three acceptable base rates (A prime rate published in a daily national newspaper, London Interbank One Month Prime plus 3 percent and an SBA Peg Rate).

Lenders are allowed to add an additional spread to the base rate to arrive at the final rate. For loans with maturities of shorter than seven years, the maximum spread will be no more than 2.25 percent. For loans with maturities of seven years or more, the maximum spread will be 2.75 percent. The spread on loans of less than $50,000 and loans processed through Express procedures have higher maximums.

Fees. Loans guaranteed by the SBA are assessed a guarantee fee. This fee is based on the loan's maturity and the dollar amount guaranteed, not the total loan amount. The lender initially pays the guaranty fee and they have the option to pass that expense on to the borrower at closing. The funds to reimburse the lender can be included in the overall loan proceeds.

On loans under $150,000 made after October 1, 2013, the fees will be set at zero percent. On any loan greater than $150,000 with a maturity of one year or shorter, the fee is 0.25 percent of the guaranteed portion of the loan. On loans with maturities of more than one year, the normal fee is 3 percent of the SBA-guaranteed portion on loans of $150,000 to $700,000, and 3.5 percent on loans of more than $700,000. There is also an additional fee of 0.25 percent on any guaranteed portion of more than $1 million.

Collateral. The SBA expects every 7(a) loan to be fully secured, but the SBA will not decline a request to guarantee a loan if the only unfavorable factor is insufficient collateral, provided all available collateral is offered. This means every SBA loan is to be secured by all available assets (both business and personal) until the recovery value equals the loan amount or until all assets have been pledged (to the extent that they are reasonably available). Personal guarantees are required from all owners of 20 percent or more of the equity of the business, and lenders can require personal guarantees of owners with less than 20 percent ownership. Liens on personal assets of the principals may be required.

Eligibility. SBA provides loans to businesses; so the requirements of eligibility are based on specific aspects of the business and its principals. As such, the key factors of eligibility are based on what the business does to receive its income, the character of its ownership and where the business operates.

SBA generally does not specify what businesses are eligible. Rather, the agency outlines what businesses are not eligible. However, there are some universally applicable requirements. To be eligible for assistance, businesses must:

Operate for profit
Be small, as defined by SBA
Be engaged in, or propose to do business in, the United States or its possessions
Have reasonable invested equity
Use alternative financial resources, including personal assets, before seeking financial assistance
Be able to demonstrate a need for the loan proceeds
Use the funds for a sound business purpose
Not be delinquent on any existing debt obligations to the U.S. government

Ineligible Businesses. A business must be engaged in an activity SBA determines as acceptable for financial assistance from a federal provider. For a list of businesses types are not eligible for assistance because of the activities they conduct visit the SBA website.

What You Need to Take to the Lender. Once you have decided to apply for a loan guaranteed by the SBA, you will need to collect the appropriate documents for your application. The SBA does not provide direct loans. The process starts with your local lender, working within SBA guidelines.

Use the checklist below to ensure you have everything the lender will ask for to complete your application. Once your loan package is complete, your lender will submit it to the SBA.

SBA Loan Application - To begin the process, you will need to complete an SBA loan application form. Access the most current form here: Borrower Information Form - SBA Form 1919
Personal Background and Financial Statement - To assess your eligibility, the SBA also requires you complete a Statement of Personal History and Personal Financial Statement .
Business Financial Statements - To support your application and demonstrate your ability to repay the loan, prepare and include the following financial statements:
Profit and Loss (P&L) Statement - This must be current within 90 days of your application. Also include supplementary schedules from the last three fiscal years.
Projected Financial Statements - Include a detailed, one-year projection of income and finances and attach a written explanation as to how you expect to achieve this projection.
Ownership and Affiliations - Include a list of names and addresses of any subsidiaries and affiliates, including concerns in which you hold a controlling interest and other concerns that may be affiliated by stock ownership, franchise, proposed merger or otherwise with you.
Business Certificate/License - Your original business license or certificate of doing business. If your business is a corporation, stamp your corporate seal on the SBA loan application form.
Loan Application History - Include records of any loans you may have applied for in the past.
Income Tax Returns - Include signed personal and business federal income tax returns of your business's principals for previous three years.
Resumes - Include personal resumes for each principal.
Business Overview and History - Provide a brief history of the business and its challenges. Include an explanation of why the SBA loan is needed and how it will help the business.
Business Lease - Include a copy of your business lease, or note from your landlord, giving terms of proposed lease.
If You are Purchasing an Existing Business - The following information is needed for purchasing an existing business:
Current balance sheet and P&L statement of business to be purchased
Previous two years federal income tax returns of the business
Proposed Bill of Sale including Terms of Sale
Asking price with schedule of inventory, machinery and equipment, furniture and fixtures

In addition to the standard loan guaranty, the SBA has targeted programs under 7(a) that are designed to meet specialized needs. Unless otherwise indicated, they are governed by the same rules, regulations, interest rates, fees, etc. as the regular 7(a) loan guaranty.

The 7(m) MicroLoan Program

The 7(m) MicroLoan Program provides small loans up to $50,000. Under this program, the SBA makes funds available to nonprofit intermediaries; these, in turn, make the loans. The average loan size is $13,000.

Use of Proceeds. Microloans can be used for working capital, inventory or supplies, furniture or fixtures, and machinery or equipment. Proceeds from an SBA microloan cannot be used to pay existing debts or to purchase real estate.

Terms Interest Rates and Fees. Loan repayment terms vary according to several factors such as loan amount, planned use of funds, requirements determined by the intermediary lender, and the needs of the small business borrower. The maximum repayment term allowed for an SBA microloan is six years. Interest rates vary, depending on the intermediary lender and costs to the intermediary from the U.S. Treasury. Generally, these rates will be between 8 and 13 percent.

Collateral. Each nonprofit lending organization will have its own requirements but must take as collateral any assets purchased with the microloan. In most cases, the personal guaranties of the business owners are also required.

Eligibility. Virtually all types of for-profit businesses that meet SBA eligibility requirements qualify.

The CAPLines Program

The CAPLines Loan Program is the program under which the SBA helps small businesses meet their short-term and cyclical working-capital needs. The maximum CAPLines loan is $5 million.

Four loan programs for small businesses are available under CAPLines:

Seasonal Line. Finances the cost associated with contracts, subcontracts or purchase orders. Proceeds can be disbursed before the work begins. If used for one contract or subcontract when all the expenses are incurred before the buyer pays, it will generally not revolve. If used for more than one contract or subcontract, or for contracts and subcontracts where the buyer pays before all work is done, the line of credit can revolve. The loan maturity is usually based on the length of the contract, but no more than 10 years. Contract payments are generally sent directly to the lender, but alternative structures are available.
Contract Line. Supports the buildup of inventory, accounts receivable or labor and materials above normal usage for seasonal inventory. The business must have been in business for a period of 12 months and must be able to demonstrate that it has a definite established seasonal pattern. The loan may be used over again after a "clean-up" period of 30 days to finance activity for a new season. These loans also may have a maturity of up to five years. The business may not have another seasonal line of credit outstanding but may have other lines for non-seasonal working capital needs.
Builders Line. Provides financing for small contractors or developers to construct or rehabilitate residential or commercial property that will be sold to a third party that is not known at the time construction/rehabilitation begins. Loan maturity is generally three years but can be extended up to five years, if necessary, to facilitate the sale of the property. Proceeds are used solely for direct expenses of acquisition, immediate construction and/or significant rehabilitation of the residential or commercial structures. Land purchase can be included if it does not exceed 20 percent of the loan proceeds. Up to five percent of the proceeds can be used for community improvements that benefit the overall property.
Working Capital Line of Credit. A revolving line of credit (up to $5,000,000) that provides short-term working capital. Businesses that generally use these lines provide credit to their customers or have inventory as their major asset. Disbursements are generally based on the size of a borrower's accounts receivable and/or inventory. Repayment comes from the collection of accounts receivable or sale of inventory. The specific structure is negotiated with the lender. There may be extra servicing and monitoring of the collateral for which the lender can charge additional fees to the borrower.

Use of Proceeds. CAPLines may be used to:

Finance seasonal working-capital needs
Finance direct costs needed to perform construction, service and supply contracts, subcontracts, or purchase orders
Finance direct costs associated with commercial and residential building construction
Provide general working capital lines of credit that have specific requirements for repayment

The Export Working Capital Program

The Export Working Capital (EWCP) Loan provides advances for up to $5 million to fund export transactions from purchase order to collections. This loan has a low guaranty fee and quick processing time.

Contact your local lender to see if they are approved to underwrite EWCP loans. You can apply for EWCP loans before finalizing an export sale or contract.

With an approved EWCP loan in place, you have greater flexibility in negotiating export payment terms. However, disbursements can only be made against firm purchase orders from a foreign buyer or to support foreign accounts receivable.

Use of Proceeds. Proceeds may be used for:

Financing for suppliers, inventory, WIP, or production of export goods or services
Working capital to support foreign accounts receivable during long payment cycles
Financing for standby letters of credit used as bid or performance bonds or as down payment guarantees

The International Trade Loan Program

The International Trade Loan offers loans up to $5 million for fixed assets and working capital for businesses that plan to start or continue exporting.

Eligibility. International Trade Loans are available if your small business is in a position to expand existing export markets or develop new export markets. These loans are also available if your small business has been adversely affected by import competition and can demonstrate that the loan proceeds will improve your competitive position. Contact your existing lender to determine if they are an SBA-approved 7(a) lender. If so, they are authorized to underwrite an International Trade Loan. SBA will work with your lender to determine borrower eligibility.

Use of Proceeds. The borrower may use loan proceeds to acquire, construct, renovate, modernize, improve, or expand facilities and equipment to be used in the United States to produce goods or service involved in international trade and to develop and penetrate foreign markets. Funds also may be used to refinance an existing loan.

Disaster Assistance Loans Program

SBA provides low-interest Disaster Assistance Loans to businesses of all sizes, private non-profit organizations, homeowners, and renters. SBA disaster loans can be used to repair or replace the following items damaged or destroyed in a declared disaster: real estate, personal property, machinery and equipment, and inventory and business assets.

Types of loans include:

Physical Damage loans - These loans to cover repairs and replacement of physical assets damaged in a declared disaster. Homeowners, renters, nonprofit organizations, and businesses of all sizes are eligible to apply for physical disaster assistance. There are two types of Physical Damage loans: Home and personal property loans and Business physical disaster loans.

Home and personal property loans - If you live in a declared disaster area and have experienced damage to your home or personal property, you may be eligible for financial assistance from SBA — even if you do not own a business. As a homeowner, renter or personal property owner, you may apply to SBA for a loan to help you recover from a disaster.Homeowners may apply for up to $200,000 to replace or repair their primary residence. The loans may not be used to upgrade homes or make additions unless required by local building code. If you make improvements that help prevent the risk of future property damage caused by a similar disaster, you may be eligible for up to a 20 percent loan amount increase above the real estate damage, as verified by the SBA.

Renters and homeowners may borrow up to $40,000 to replace or repair personal property such as clothing, furniture, cars, and appliances damaged or destroyed in a disaster.

Business physical disaster - The SBA Business Physical Disaster Loan covers disaster losses not fully covered by insurance. If you own a business located in a declared disaster area that has experienced damage, you may be eligible for financial assistance from SBA. Businesses of any size and most private non-profit organizations may apply to SBA for a loan to recover after a disaster. The SBA Business Physical Disaster Loan covers disaster losses not fully covered by insurance.

SBA makes physical disaster loans of up to $2 million to qualified businesses or most private nonprofit organizations in a declared disaster area that have experienced damage to your business. Businesses of any size and most private nonprofit organizations may apply to the SBA for a loan to recover after a disaster. These loan proceeds may be used for the repair or replacement of real property, machinery, equipment, fixtures, inventory, and leasehold improvements.

Economic Injury Disaster Loans - Small business, small agricultural cooperative, or most private nonprofit organizations. The SBA can provide up to $2 million (maximum term of 30 years, maximum interest rate of 4 percent) to help meet financial obligations and operating expenses that could have been met had the disaster not occurred. Your loan amount will be based on your actual economic injury and your company's financial needs, regardless of whether the business suffered any property damage.
Military Reservists Economic Injury Loans (MREIDL) - Provides funds (up to $2 million, maximum 30 years, maximum interest rate of 4 percent) to help an eligible small business meet its ordinary and necessary operating expenses that it could have met, but is unable to, because an essential employee was called-up to active duty in his or her role as a military reservist.The amount of each loan is limited to the actual economic injury as calculated by SBA. The amount is also limited by business interruption insurance and whether the business and/or its owners have sufficient funds to operate. If a business is a major source of employment, SBA has authority to waive the $2 million statutory limit.
Mitigation Assistance loans - These loans provide funding to cover small business operating expenses after a declared disaster. You can protect your home or business and reduce property damage with the help of SBA. If you've been affected by a disaster, you can rebuild a stronger business by increasing your SBA disaster assistance loan up to 20% of your verified physical damage to make mitigation improvements. Borrowers generally have two years after their loan approval to request an increase for higher rebuilding costs, code-required upgrades or mitigation. Projects covered by this type of loan include improvements related to flooding, wildfires, wind, and earthquakes.

SBA Express Loan Program

The SBA Express Loan Program features an accelerated turnaround time of 36 hours for SBA review in response to an application. Capital is available to businesses seeking loans of up to $350,000 without requiring the the lender to use the SBA process. Lenders use their existing documentation and procedures to make and service loans plus SBA Form 1919. The SBA guarantees up to 50 percent of an SBA Express loan. Loans made under this program generally follow SBA's standards for the 7(a) Loan Program. Your local SBA office can provide you with a list of SBA Express lenders.

Lenders and borrowers can negotiate the interest rate. Rates can be fixed or variable and are tied to the prime rate (as published in The Wall Street Journal), LIBOR, or the optional peg rate (published quarterly in the Federal Register) and may be fixed or variable, but they may not exceed SBA maximums: lenders may charge up to 6.5 percent over the base rate for loans of $50,000 or less, and up to 4.5 percent over for loans over $50,000. Lenders are not required to take collateral for loans up to $25,000; may use their existing collateral policy for loans over $25,000 up to $350,000. For revolving credits, small business owners may take up to seven years after the first disbursement to repay the loan.

The Certified Development Company (504) Loan Program

The Certified Development Company (504) Loan Program enables a nonprofit corporation (Certified Development Company or CDC) to contribute to the economic development of its community. CDCs are located nationwide and operate primarily in their state of incorporation (Area of Operation). CDCs work with SBA and private-sector lenders to provide financing to small businesses through the CDC/504 Loan Program, which provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings.

The Role of CDCs is to market the 504 program; package and process 504 loan applications; close and service 504 loans in its Area of Operation. A portfolio must be diversified by business sector. CDCs should also provide small businesses with financial and technical assistance, or help small businesses obtain assistance from other sources, including preparing, closing, and servicing loans under contract with lenders in SBA's 7(a) Loan Program. Loan amounts to the borrower equal to the value of all or part of the borrower's contribution to a project in the form of cash or land, including site improvements.

Newly certified CDCs will be on probation for a period of two years.

Eligibility. A CDC must:

Be a nonprofit corporation in good standing.
Have at least 25 members representing government organizations responsible for economic development in the Area of Operation and acceptable to SBA; Financial institutions that provide commercial long-term fixed asset financing in the Area of Operation; Community organizations dedicated to economic development in the Area of Operation, such as chambers of commerce, foundations, trade associations, colleges, or universities; Businesses in the Area of Operation; and Additional membership requirements are provided in 13 CFR 120.822.
Have a Board of Directors chosen from the membership, and representing, at least, three of the four membership groups. Additional Board of Directors requirements are provided in 13 CFR 120.823.
Have full-time professional management, including an Executive Director (or the equivalent) managing daily operations and a full-time professional staff qualified by training and experience to market the 504 Program; package and process loan applications; close loans; service, and, if authorized by SBA, liquidate the loan portfolio; and sustain a sufficient level of service and activity in the Area of Operation. CDCs may obtain, under written contract and with prior approval from SBA, marketing, packaging, processing, closing, servicing or liquidation services by qualified individuals and entities who live or do business in the CDC's Area of Operation.
Meet a minimum level of lending activity, providing, at least, two 504 loan approvals each full fiscal year. A CDC's portfolio must reflect an average of one job opportunity per $65,000 of 504 loan funding.

Small Business Investment Company Program

There is a variety of alternatives to bank financing for small businesses, especially business start-ups. The Small Business Investment Company Program fills the gap between the availability of venture capital and the needs of small businesses that are either starting or growing. Licensed and regulated by the SBA, SBICs are privately owned and managed investment firms that make capital available to small businesses through investments or loans. They use their own funds plus funds obtained at favorable rates with SBA guarantees and/or by selling their preferred stock to the SBA.

SBICs are for-profit firms whose incentive is to share in the success of a small business. In addition to equity capital and long-term loans, SBICs provide debt-equity investments and management assistance.

The Small Business Investment Company (SBIC) Program, administered by the U.S. Small Business Administration (SBA), is a multi-billion investment program created in 1958 to bridge the gap between entrepreneurs' need for capital and traditional sources of financing. Over the past five years, the program has channeled $17 billion of capital to more than 5,900 U.S. small businesses representing a variety of industries across the country. These results were achieved through a proven public-private partnership that leverages the full faith and credit of the U.S. government to increase the pool of investment capital available to small businesses.

The SBIC Program provides funding to all types of manufacturing and service industries. Some investment companies specialize in certain fields while others seek out small businesses with new products or services because of the strong growth potential. Most, however, consider a wide variety of investment opportunities.

Surety Bond Program

By law, prime contractors to the federal government must post surety bonds on federal construction projects valued at $150,000 or more. Many state, county, city and private-sector projects require bonding as well. SBA helps small contractors by guaranteeing bid, performance, and payment bonds issued by participating surety companies for contracts up to $6.5 million. SBA can guarantee a bond for a contract up to $10 million if a Federal contracting officer certifies that SBA's guarantee is necessary for the small business to obtain bonding.

Fees. SBA charges the small business 0.729 percent of the contract price for a payment or performance bond. There is no charge for a bid bond. SBA charges the surety company 26 percent of the fee the surety company charges the small business.

Quick Reference to SBA Loan Programs

Click here for information on funding your business. If you are interested in obtaining further information for a specific loan program listed below, click on the loan program and you will be brought to the SBA Web site.

PROGRAM: 7(a) Loan Guaranty Program (the SBA's primary loan program).

Maximum Amount Guaranteed: $3,750,000 in most cases Percent of Guarantee (Max.): 75 percent (85 percent if the total loan is $150,000 or less)
Use of Proceeds: Expansion or renovation; construction of new facility; purchase land or buildings; purchase equipment, fixtures, leasehold improvements; working capital; refinance debt for compelling reasons; seasonal line of credit; inventory acquisition
Maturity. Depends on ability to repay; generally working capital is up to 7 years; machinery/equipment is up to 10 years; real estate and construction, up to 25 years (not to exceed life of equipment) Maximum Interest Rates: Negotiable with lender: loans under 7 years, maximum prime + 2.25 percent; 7 years or more, maximum 2.75 percent over prime; under $50,000, rates may be slightly higher Guaranty and Other Fees: Paid by lender (usually passed onto borrower).
Amount of SBA exposure (based on maturity): 1 year or less - 0.25 percent (0 percent for loans made after Oct. 1, 2013)
Over 1 year and SBA share $150,000 - $700,000 - 3 percent;
Over 1 year and SBA share more than $700,000 -3.5 percent
Additional fee of 0.25 percent on any guaranteed portion of more than $1 million
Eligibility: Must be operated for profit; meet SBA size standards; show good character, management expertise and commitment, and always show ability to repay; may not be involved in speculation or investment

PROGRAM: 7(m) MicroLoan Program

Maximum Amount Guaranteed: $50,000 (total loan amount)
Percent of Guarantee (maximum): NA
Use of Proceeds: Purchase equipment, machinery, fixtures, leasehold improvements; finance increased receivables; working capital; may not be used to repay existing debt
Maturity: Shortest term possible, not to exceed 6 years
Maximum Interest Rates: Negotiable with intermediary
Guaranty and Other Fees: No guaranty fee
Eligibility: Same as 7(a)

PROGRAM: CAPLines, Short-Term and RLCs; Seasonal, Contract, Builders, Standard Asset-Based, Small Asset-Based

Maximum Amount Guaranteed: $5 million
Use of Proceeds: Finance seasonal working-capital needs; costs to perform; construction costs; advances against existing inventory and receivables; consolidation of short-term debts possible
Maturity: Up to 10 years
Eligibility: Existing businesses, see 7(a)

PROGRAM: Export Working Capital Program

Features: Low guaranty fee and quick processing time
Maximum Amount Guaranteed: $5 million (may be combined with the International Trade Loan)
Use of Proceeds: Short-term working-capital loans to finance export transactions
Eligibility: Small business exporters who need short-term working capital; see 7(a) for other qualifications

PROGRAM: International Trade Loan Program, Short- and Long-Term Financing

Features: Loans up to $5 million for fixed assets and working capital for businesses that plan to start or continue exporting.
Maximum Amount Guaranteed: $5 million
Use of Proceeds: Working capital; improvements in U.S. for producing goods or services for international trade; finance an existing loan
Eligibility: Small businesses engaged or preparing to engage in international trade or adversely affected by competition from imports; see 7(a) for other qualifications

PROGRAM: Disaster Assistance Loan Program

Features: Low-interest loans to businesses of all sizes, private non-profit organizations, homeowners, and renters.
Maximum Amount Guaranteed: $2 million
Percent of Guarantee (maximum): Depends on whether done under 7(a) or 504; see both
Use of Proceeds: Repair or replace real estate, personal property, machinery and equipment, and inventory and business assets damaged or destroyed in a declared disaster.
Maturity: 30 years
Maximum Interest Rates: 4 percent
Eligibility: Declared disaster area; essential employee was called-up to active duty in his or her role as a military reservist.

PROGRAM: SBA Express

Features: Lender approves loan, no additional paperwork for SBA, 36 hour turnaround
Maximum Amount Guaranteed: $350,000 (total loan amount)
Percent of Guarantee (maximum): 50 percent
Use of Proceeds: Same as 7(a)
Maturity: Term loan same as 7(a); no more than 7 years on revolving line of credit
Maximum Interest Rates: Negotiable between lender and borrower
Guaranty and Other Fees: See 7(a)
Eligibility: See 7(a)

The Certified Development Company (504) Loan Program

Features: CDCs work with SBA and private-sector lenders to provide financing to small businesses through the CDC/504 Loan Program, which provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings. Must create or retain one job for every $65,000 provided by the SBA, except for small manufacturers, which have a $100,000 job creation or retention goal
Maximum Amount Guaranteed: Limit on SBA portion of project is $4, $4.5, and $5 million
Percent of Guarantee (maximum): 40 percent of project (100 percent SBA-backed debenture); private lender unlimited
Use of Proceeds: Purchase of major fixed assets such as land, buildings, improvements, long-term equipment, construction, renovation
Maturity: 10 or 20 years only
Maximum Interest Rates: Pegged to an increment above the current market rate for 5-year and 10-year U.S. Treasury issues
Guaranty and Other Fees: Fees related to debenture, approximately 3 percent. May be financed with the loan.
Eligibility: Tangible net worth less than $15 million and an average net income less than $5.0 million after taxes for the preceding two years.

Government and Non-Profit Agencies

U.S. Small Business Administration
Th e SBA has offices located throughout the United States. For the one nearest you look under "U.S. Government" in your telephone directory, call the SBA Answer Desk at (800) 827-5722, or visit the SBA website for a list of SBA District Offices .

Business Plans: How To Prepare An Effective One

Tue, 10 Oct 2023 20:57:19 GMT

One of the major steps in starting a new business or getting financing is to prepare a business plan. This Financial Guide provides you with the basic information that you need to include in your business plan.

A well thought out business plan is a valuable tool for any new company or one that is seeking financing. It also provides milestones to gauge your success and the process of developing a business plan helps you think through some important issues that you may not have considered yet.

Before you begin preparing your business plan, take the time to explore and evaluate your business (and personal) goals. You can then use this information to build a comprehensive and effective business plan that will help you reach these goals.

The purpose of this Financial Guide is to provide a basic introduction to preparing a business plan, rather than specific details to be incorporated into the plan since those depend on your specific goals and the nature of the specific business. Professional guidance is recommended when it comes to the actual preparation of the plan, particularly for the financial components.

If You're Starting a New Business

If the reason for preparing the business plan is that you are starting a new business, you should first examine your reasons for wanting to go into business. Some of the most common reasons for starting a business are:

You want to be your own boss.
You want financial independence.
You want creative freedom.
You want to fully use your skills and knowledge.

Next, you need to determine is what business is "right for you." Ask yourself these questions:

What do I like to do with my time?
What technical skills have I learned or developed?
What do others say I am good at?
Will I have the support of my family?
How much time do I have to run a successful business?
Do I have any hobbies or interests that are marketable?

Then, you should identify the niche your business will fill. Start by conducting the research necessary to answer questions like these:

What business am I interested in starting?
What services or products will I sell?
Is my idea practical, and will it fill a need?
What is my competition?
What is my business's advantage over exiting firms?
Can I deliver a better quality service?
Can I create a demand for my business?

You will also need to consider several options for getting your business off the ground:

Do you want to purchase an existing business or start one from scratch?
Are there franchises available for this type of business? If so, does a franchise make sense for you?

The final step before developing your plan is the pre-business checklist. You should answer these questions:

What skills and experience do I bring to the business?
What will be my legal structure?
How will my company's business records be maintained?
What insurance coverage will be needed?
What equipment or supplies will I need?
How will I compensate myself?
What financing will I need?
Where will my business be located?
What will I name my business?
Your answers will help you create a focused, well-researched business plan, and that should serve as a blueprint. It should detail how the business will be operated, managed, and capitalized.

Based on your initial answers to the questions listed above, the next step is to formulate a business plan. A business plan sets forth the mission or purpose of the business venture, describes the product or services to be provided, presents an analysis of the market state, outlines goals that the business has and how it intends to achieve those goals, and last but not least, includes a formal financial plan.

In most cases, a business plan is necessary to obtain external capital for your business, but it also serves a number of other purposes. It forces you to critically evaluate the feasibility of your business and whether it will provide a return which is appropriate to the time and money you will invest in the business. The plan provides a benchmark against which you can evaluate the success of your business in later years.

What the Business Plan Should Include

Whether you are starting a new business, seeking financing for an existing business, attempting to analyze a new market, or wanting to define and evaluate future growth, the following outline of a typical business plan can serve as a guide. However, you should adapt it to your specific business.

Introduction and Mission Statement

In the introductory section of your business plan, you should:

Give a detailed description of the business and its goals.
Discuss the ownership of the business and its goals.
List the skills and experience you bring to the business.
Discuss the advantages you and your business have over your competition.

Products, Services and Markets

In this section, you must describe your products and/or services and:

Identify the customer demand for your product/service.
Describe how your product/service is unique.
Identify your market, as well as its size and locations.
Explain how your product/service will be advertised and marketed.
Explain the pricing strategy.

Financial Management

In this section, you should:

Explain the source and amount of initial equity capital.
Develop a monthly operating budget for the first year.
Develop an expected (return on investment), or ROI, and a monthly cash flow for the first year.
Provide projected income statements and balance sheets for a two-year period.
Discuss your break-even point.
Explain your personal balance sheet and method of compensation.
Discuss who will maintain your accounting records and how they will be kept.
Provide "what if" statements that address alternative approaches to any problem that may develop.

Operations

In this section it is important to:

Explain how the business will be managed on a day-to-day basis.
Discuss hiring and personnel procedures.
Discuss insurance, lease or rent agreements, and issues pertinent to your business.
Account for the equipment necessary to produce your product or services.
Account for production and delivery of products and services.

Concluding Statement

In the ending statement, you summarize your business goals, objectives, and express your commitment to the success of your business.

Once you have completed your business plan, review it with a friend or business associate. When you feel comfortable with the content and structure, make an appointment to review and discuss it with your banker. The business plan is a flexible document that should change as your business grows.

Advantages of Limited Liability Companies

Tue, 10 Oct 2023 20:51:33 GMT

Combining the Best Aspects of Partnerships and Corporations

A Limited Liability Company, or LLC, is not a corporation, although it offers many of the same advantages. An LLC is best described as a combination of a corporation and a partnership. LLCs offer the limited liability of a corporation while allowing more flexibility in managing the business and organization.

An LLC does not pay any income tax itself. It's a "flow through" entity that allows profits and losses to flow through to the tax returns of the individual members, avoiding the double taxation of C corporations.

While setting up an LLC can be more difficult than creating a partnership (or sole proprietorship), running one is significantly easier than running a corporation. Here are the main features of an LLC:

Limited Personal Liability

Like shareholders of a corporation, all LLC owners are protected from personal liability for business debts and claims. This means that if the business itself can't pay a creditor -- such as a supplier, a lender, or a landlord -- the creditor cannot legally come after any LLC member's house, car, or other personal possessions. Because only LLC assets are used to pay off business debts, LLC owners stand to lose only the money that they've invested in the LLC. This feature is often called "limited liability."

While LLC owners enjoy limited personal liability for many of their business transactions, it is important to realize that this protection is not absolute. See Exceptions to Limited Liability.

LLC Taxes

Unlike a corporation, an LLC is not considered separate from its owners for tax purposes. Instead, it is what the IRS calls a "pass-through entity," like a partnership or sole proprietorship. This means that business income passes through the business to the LLC members, who report their share of profits -- or losses -- on their individual income tax returns. Each LLC member must make quarterly estimated tax payments to the IRS.

While an LLC itself doesn't pay taxes, co-owned LLCs must file Form 1065, an informational return, with the IRS each year. This form, the same one that a partnership files, sets out each LLC member's share of the LLC's profits (or losses), which the IRS reviews to make sure the LLC members are correctly reporting their income.

LLC Management

The owners of most small LLCs participate equally in the management of their business. This arrangement is called "member management."

The alternative management structure -- somewhat awkwardly called "manager management" -- means that you designate one or more owners (or even an outsider) to take responsibility for managing the LLC. The non-managing owners (sometimes family members who have invested in the company) simply sit back and share in LLC profits. In a manager-managed LLC, only the named managers get to vote on management decisions and act as agents of the LLC.

Advantages of Incorporating

Tue, 10 Oct 2023 20:43:56 GMT

Why Incorporate?

All legal and tax professionals agree, if your business is not incorporated you may be throwing away thousands of dollars in tax savings and deductions.

In addition, all of your personal assets such as your home, cars, boats, savings and investments are at risk and could be used to satisfy any law suits, debt or liability incurred by the business. Forming a Corporation can provide the protection and tax savings needed to give you peace of mind and make your business even more successful and profitable.

Some Benefits Include:

Liability Protection: Properly forming and maintaining a corporation will provide personal liability protection to the owners or shareholders of the corporation for any debt or liability incurred by the business. Personal liability of the shareholders is normally limited to the amount of money invested in the corporation.

Tax Advantages: Another important benefit is that a corporation can be structured many ways to provide substantial tax savings. You can minimize self-employment taxes and increase the number of allowable deductions lowering the taxes you pay on the income of the business. Many corporations structure retirement and tax-deferred savings plans for their owners and employees which can provide even greater tax savings.

Raising Capital: Sale of stock for the purposes of raising capital is often more attractive to investors than other forms of equity sales. A corporation can also issue Corporate Bonds to raise capital for expenditures without compromising the ownership of the business.

Form of Business Organization: Which Should You Choose?

Tue, 10 Oct 2023 20:36:15 GMT

The decision as to which type of business organization to use when starting a business is a major one. And, it's a decision to be revisited periodically as your business develops. While professional advice is critical in making this decision, it's also important to have a general understanding of the options available. This Financial Guide provides just such an overview.

Businesses fall under one of two federal tax systems:

Taxation of both the entity itself (on the income it earns) and the owners (on dividends or other profit participation the owners receive from the business). This system applies to the business S-corporation-called the "C-corporation" (C-corp) for reasons we'll see shortly and the system of taxing first the corporation and then its owners is called the "corporate double tax."
Pass-through taxation. This type of entity is in itself not taxed; however, each owner is each taxed on their proportionate shares of the entity's income. The leading forms of pass-through entity (further explained below) are:

Partnerships, of various types.
S-corporations (S-corps), as distinguished from C-corps.
Limited liability companies (LLCs).

A sole proprietorship such as John Doe Plumbing or Marcus Welby, M.D. is also considered a pass-through entity even though no "organization" may be involved.

The first major consideration (in this case, a tax consideration) in choosing the form of doing business is whether to choose an entity (such as a C-corp) that has two levels of tax on income or a pass-through entity that has only one level (directly on the owners).

Co-owners and investors in pass through entities may need to have their operating agreements require a certain level of cash distributions in profit years, so they will have funds from which to pay taxes.

Losses are directly deductible by pass-through owners while C-corp losses are deducted only against profits (past or future) and don't pass through to owners.

Business and tax planners therefore typically advise new businesses-those expected to have startup losses-to begin as pass through entities, so the owners can deduct losses currently against their other income, from investments or another business.

The major business consideration (as opposed to tax consideration) in choosing the form of business is limitation of liability, that is, to protect your assets from the claims of business creditors. State law grants limitation of liability to corporations (C and S-corps), LLCs, and partners in certain forms of partnership. Liability for corporations and LLCs is generally limited to your actual or promised investment in the business.

Types of Business Entities

C and S-Corp

The S-Corp (so named from a chapter of the tax code) is a tax device created by federal law in 1958. It is a regular corporation with regular limited liability under state law, whose owners elect pass through status for federal tax purposes. That status requires compliance with a number of often constricting rules but, with some exceptions, complying corporations escape federal corporate tax. As regular business S-corporations under state law, they may be taxed under state tax law as regular corporations, or in some other way. Corporations whose owners don't choose to make the federal S-corp election are called C-corps (after another chapter of the tax code).

Partnerships

Ordinary partnerships, called "general partnerships," do not have limited liability under state law.

Limited partnerships limit liability for some partners but not others. A limited partnership has both general partners (who manage the business) and limited partners (who, in essence, are passive investors). The liability of limited partners is generally limited to their investments. The liability of general partners is theoretically unlimited, but can be limited in practice where the general partner is an entity, such as a corporation, with limited liability. A limited partner who takes on what state law considers "too much" management participation is treated as a general partner, losing limited liability.

Both general and limited partnerships are treated as pass-through entities under federal tax law, but there are some relatively minor differences in tax treatment between general and limited partners.

A still more recent development, not yet adopted everywhere, is the limited liability partnership (discussed below) which was designed for professional practices.

Other partnership forms are the giant "publicly traded partnerships" (treated as C-corps for tax purposes) and limited liability limited partnerships (adopted in only a few states) which limit the liability of general partners (where two or more) as well as of limited partners.

Limited Liability Companies (LLCs)

LLCs have become the most popular business form for new entities, and many existing entities have converted to this form. They exist in some form in every state. They embody limited liability features of corporations and pass-through characteristics of partnerships and S-corps, but are more flexible than S-corps.

For business law purposes, LLC members may be either passive investors or active investor-managers. Unlike with limited partnerships, active management won't affect limitation of liability. For federal tax purposes, LLCs are treated as partnerships (unless they elect otherwise).

Since LLC rules vary from state to state, a characteristic, power or rule in the state where an LLC was created may not apply in some other state where it does business.

Some states do, and some states do not, authorize LLCs with only one member.

Where one becomes the sole surviving LLC member in a state that doesn't allow single member LLCs, consider quickly incorporating (to regain limited liability) and electing S-corp status (to retain pass through treatment).

Choosing the Tax Treatment

Since 1997, the IRS has allowed business owners a previously unheard-of measure of choice as to how the entity will be federally taxed. It allows you to choose between C-corp and pass through treatment (universally called "check-the-box").

A few choices are not allowed. If the entity is incorporated, it must be treated as a corporation (which doesn't preclude an S-corp election if otherwise available). Publicly traded partnerships and publicly traded LLCs must be treated as C-corps.

Special rules apply to foreign entities.

All other forms of partnership may be taxed either as C-corps or as pass-through entities (either as partnerships or, if S-corp status is available and elected, as an S-corp.)

An LLC with two or more members may choose to be taxed as a C-corp, a partnership or an S-corp (if elected). An LLC with a single member (where this is allowed) may choose either to be taxed as a C-corp or an S-corp (if elected) or to have the entity disregarded. In this case, if the LLC is owned by an individual, the individual is taxed directly (and can deduct losses) as with a sole proprietorship.

Typically, partnerships and multimember LLCs choose to be taxed as partnerships while single member LLCs choose to have the entity disregarded. With "check-the-box," the IRS will no longer question your right to combine limited liability with pass through treatment or, if you wish, to waive pass through treatment for an entity otherwise entitled to it (with the exceptions noted above).

Any choice has consequences. For example, if you opted last year for corporate treatment and want partnership treatment this year, you'll be treated as liquidating the corporation, and taxed accordingly (discussed below).

Most-but not all-states that impose corporate taxes follow a taxpayer's federal "check-the-box" choice for state tax purposes. This doesn't necessarily mean that the tax treatment will be the same. For example, a state may accept an LLC's election to be taxed as a partnership and still impose an entity-level tax on the LLC.

An election to be taxed as a certain type of entity for federal tax purposes does not make it such an entity under state business law.

Choosing the Form

Now consider which form will work best for the way you want to run your business and capitalize on its profits or startup losses. "Compared to what?" will be a major consideration so it is necessary to compare a taxable entity (the C-corp) with a pass through entity as well as compare the pass through entity with other types of entities. Tax consequences of changing from one entity to another should also be examined.

A major decision of whether to use a C-corp or some form of pass through C-corp is sometimes necessary from a business standpoint. For example, if interests in the enterprise are to be publicly traded, only the C-corp is appropriate.

For some activities, states may require the corporate form (banks, for example) and S-corp rules may preclude the S-corp form.

From a tax standpoint, while C-corporations present two levels of tax, the first tax (on the corporation) can be at a rate lower than the tax on the owner and the second tax (on the owner) is usually postponed until the owner receives dividends or other assets from the corporation.

Distribution of appreciated assets to the owner, or sale of such assets and distribution of the proceeds, are taxable both to the corporation and then to owners. They are no longer opportunities, as they once were, to avoid two levels of tax.

The tax on the owner may be at reduced capital gains rates. This is the case for appreciated assets distributed in corporate liquidation and, after 2002 and before 2009, it's also usually the case for dividends distributed by ongoing corporations.

Funds can build up in the corporation at a relatively low rate until distributed. However, the eventual tax on the owner, plus the corporate tax, may eat up more of the profits than the single (pass through) tax on the owner does.

A C-corp can minimize corporate tax by paying out all or almost all of its income to owners in the form of compensation and fringe benefits. Assuming these payments are deductible as business expenses, this approximates pass-through treatment, since the corporation isn't taxed on what it receives and then deducts; the owner-recipients alone are taxed on this. This arrangement works best in personal service businesses, where full business expense deduction is more likely to be allowed.

The IRS and the courts may limit deduction in other settings, finding owner compensation to be "unreasonable" and partly nondeductible where it reflects a distribution of profits from capital or from the efforts of non-owners.

To summarize, some businesses may find C-corp status necessary for business purposes. But only comparatively rarely will it be a preferable tax choice for a new business.

Choosing the Pass through Entity

If you decide on a pass-through entity, which of the several do you choose? The following is a brief discussion of the rules applicable to each.

S-corporation

Limitation of liability gives S-corps the edge-for business reasons-over general partnerships, sole proprietorships, limited partnerships (as to limited partners whose partnership activity might expose them to unlimited liability), and LLCs in states that don't allow single member LLCs.

Limited liability comes at a cost, however, since states may impose a tax on S-corps not imposed on entities with unlimited liability.

S-corps are subject to a number of significant rules and restrictions:

All owners must agree to S-corp status. This means that one co-owner can exact a price or impose conditions for his or her agreement.
An S-corp can have only one class of stock, which means that income, losses and other tax attributes are allotted among stockholders in proportion to stock ownership.
The number of co-owners is limited (to 100, with qualifications, counting members of the same family as one stockholder).
There are limitations as to who can be co-owners (for example, a nonresident alien cannot) and as to the kind of business that can qualify for as an S-corp (for example, an insurance company cannot).

Failure to meet, or ceasing to meet, these requirements means loss of S status and conversion to C-corp status and C-corp taxes.

These limits and restrictions will be contrasted, below, with the more liberal tax rules for partnerships and LLCs.

S-corps are often preferred because they are simple to operate. However, they are not suitable for many businesses. The much wider range of options for partnerships and LLCs introduces tax planning complexity which may be more than many or most small businesses can effectively use or understand.

LLCs vs. S-corporations

LLCs and S-corps share the same business advantage-limitation of liability. S-corps are a bit better understood by the business community because LLCs are new and vary from state to state.

The tax advantages of LLCs, as compared to S-corps, are the tax advantages of partnerships. All the points below where LLCs outscore S-corps arise because LLCs can choose partnership tax status.

LLC can to some degree allocate tax attributes, like income or certain kinds of income, depreciation deductions, etc., disproportionately among members to suit their individual tax situations (unlike S-corps limited by the effect of the single-class-of-stock rule).
S-corp owners can deduct startup or operating losses up to their investment plus any debt that the S-corp owes them. LLC members can do the same but can deduct further, up to their share of the debt the LLC owes others.
Adding co-owners after the entity is formed is easier with LLCs. An outsider's transfer of appreciated property for an LLC membership interest is tax-free. A comparable transfer to an S-corp is taxable unless the new co-owner-transferor (or group of transferors) owns more than 80 percent of the S-corp after the transfer.
Complex tax adjustments ("basis adjustments") can be made by the LLC when LLC interests change hands or LLC property is distributed. These adjustments, unavailable with S-corps, can have the effect of reducing amounts taxable to certain LLC members.
Distribution of appreciated LLC property to LLC members is not taxable to the LLC. Comparable S-corp distributions to stockholders are taxable to the S-corp.

Depending on circumstances, S-corp status can be preferable to LLC status when the owners leave the business. The LLC is not taxed when appreciated property is distributed to its members, which is a standard form of business liquidation. But the members would be taxed on distributions exceeding the "basis" (broadly, the amount they invested) of their interests. S-corp owners, on the other hand, can arrange a tax-free exit, via a corporate reorganization in which they transfer their S-corp stock for stock in a corporate acquirer. (Later sale of stock in the acquirer would be taxable.)

Depending on state law, S-corps, and LLCs may be taxed at the entity level in states where they do business.

LLCs vs. Partnerships

LLCs, with their limited liability for all members, have the edge on general and limited partnerships from a business standpoint. While the federal tax treatment of partners and LLC members is basically the same, there are occasional special tax rules for limited partners (especially self-employment tax rules).

It is not clear whether these special tax rules extend to non-manager LLC members.

LLCs are more likely than partnerships to be subject to a state tax.

LLCs vs. Proprietorships

LLCs, with their limited liability, are preferable, where available, for sole proprietors from a business standpoint. Where the sole proprietor so elects, the LLC is ignored and the proprietor is taxed directly under federal tax rules as if no separate entity existed.

Some states do-and some do not-ignore the LLC entity for state tax purposes.

Professional Practice Entities

Professional practices (such as doctors and lawyers) have a number of options as to their form of business entity.

Professional Corporations (P.C.s)

These provide limited liability for general business debts but not for the professional's own malpractice and, in some states, no limited liability for malpractice of fellow practitioners in the firm. They may be C-corps or S-corps. Unlike many other C-corps, a P.C. C-corp can use the cash method of accounting.

LLCs

Most states allow professionals to practice in LLCs, either under a general LLC law or a special Professional Limited Liability Company law (PLLC). In either case, liability is not limited for the professional's own malpractice but, depending on the state, may be limited for the malpractice of other firm members and for other firm debts. These LLCs share the comparative advantages (and minor disadvantages) of other LLCs.

Limited Liability Partnerships (LLPs)

LLPs are general partnerships whose general partners have limited liability. They are designed for professional practices. A partner is liable for his or her own malpractice but not for a partner's malpractice or, depending on state law, other acts of partners. Typically they are required by state law to maintain malpractice insurance, and are obliged to pay a per-partner fee to keep their status, but are not subject to entity-level tax.

Sole Proprietors and Partners

Many practitioners choose to practice as sole proprietors or partners, rather than in a limited liability entity. They reason that their main exposure to liability is to malpractice claims, and the entity won't protect against claims for their own malpractice (or, in some states, for a partner's malpractice). They therefore, choose to rely on malpractice insurance (which practitioners in limited liability entities may have too).

Sole proprietorships and partnerships are less likely than limited liability entities to be subject to state entity level tax.

Other Pros and Cons of C-Corps

A C-corp can be preferable to pass through entities as to fringe benefits. As employees, owner-employees of a C-corp qualify for certain employee fringe benefits. On the other hand, self-employed persons (partners, LLC members, sole proprietors, and more than 2 percent stockholders in S-corps) don't qualify.

Health insurance can be wholly tax-free to C-corp owner-employees (through full deduction by the C-corp and full tax exemption for the owner-employee). However, it is only partly tax-free to the self-employed, because of their limited tax deduction for this item.

Another modest advantage of the C-corp is that they are less likely to be subject to passive loss deduction limitations. These limit the opportunity to deduct losses from activities the taxpayer doesn't "materially participate" in, against income from investments or other businesses. Typically, limited partners have been the group most subject to passive loss limitations.

Another tax disadvantage of C-corp status is its limited ability to report for tax purposes on the cash method of accounting, which generally defers tax as compared to the accrual method.

Further Insights on S-Corps

A qualifying S-corp, generally nontaxable, can be subjected to C-corp taxation on certain items without losing S status for other items. This happens when a C-corp converts to an S-corp and carries over appreciated property later sold at a gain. The S-corp pays a corporate tax on the gain, which is then taxed to stockholders (reduced by the corporate tax). Because S-corps are intended to be operating companies rather than holding companies, this also happens when the S-corp has "excessive" passive investment-type income (interest, dividends, and the like, in excess of 25 percent of gross receipts). Here the excess is subject to corporate tax and is then taxed to stockholders (minus the corporate tax).

Some see S-corps as a way to reduce employment taxes. For example, one earning $120,000 in a sole proprietorship might convert to an S-corp and take $70,000 in pay and $50,000 in dividends. Income taxes are unchanged by this but, it's reasoned, $50,000 now received as dividends escapes employment tax (the $120,000 of self-employment earnings was subject to both retirement and Medicare tax up to $102,000 for 2008 and $97,500 for 2007 and Medicare tax above that). In abuse situations, such as where little or no wages were paid, IRS has treated the dividends as pay subject to employment taxes on the owner-employees and on the S-corp employer. But in cases where substantial wages were paid, along with substantial dividends, IRS has not objected.

Changing To Another Entity

The many advantages of LLCs, for both business and tax reasons, have encouraged many business owners to convert, or consider converting, to the LLC form. But other changes of entity may suit particular situations example, general partnership to LLP (for business reasons) or C-corp to S-corp (for tax reasons). For tax purposes, a change of entity via a check-the-box decision is treated for tax purposes as an actual change of the entity (whatever may happen under state business law).

Here, briefly and in broad outline, is what happens for federal tax purposes when entity status is changed (or treated as changed under-check-the-box). How these apply in your own situation must be reviewed in depth with a tax/business advisor.

C-corp converts to S-corp or vice versa. No tax on the conversion. Pass through treatment applies while it is an S-corp.
C- corp or S-corp converts to LLC, partnership or sole proprietorship. Generally, a tax on the liquidation of the corporation, with pass through treatment for the new entity (in modified form in the case of a liquidating S-corp).
Partnership converts to LLC or vice versa; sole proprietorship converts to single member LLC or vice versa. No tax on conversion-pass through treatment continues.
LLC, partnership or sole proprietorship converts to C or S-corp. Generally, no tax on conversion. Pass through treatment (in modified form) for S-corp income.

Government and Non-Profit Agencies

The Small Business Administration (SBA) has offices located throughout the United States. Contact SBA through their website

Starting a Business? 3 Things You Must Know

Tue, 10 Oct 2023 20:32:05 GMT

Starting a new business is a very exciting and busy time. There is so much to be done and so little time to do it. If you expect to have employees, there are a variety of federal and state forms and applications that will need to be completed to get your business up and running. That's where we can help.

Employer Identification Number (EIN)

Securing an Employer Identification Number (also known as a Federal Tax Identification Number) is the first thing that needs to be done since many other forms require it. The fastest way to apply for an EIN is online through the IRS website or by telephone. Applying by fax and mail generally takes one to two weeks. Note that effective May 21, 2012, you can only apply for one EIN per day. The previous limit was 5.

State Withholding, Unemployment, and Sales Tax

Once you have your EIN, you need to fill out forms to establish an account with the State for payroll tax withholding, Unemployment Insurance Registration, and sales tax collections (if applicable).

Payroll Record Keeping

Payroll reporting and record keeping can be very time-consuming and costly, especially if it isn't handled correctly. Also, keep in mind, that almost all employers are required to transmit federal payroll tax deposits electronically. Personnel files should be kept for each employee and include an employee's employment application as well as the following:

Form W-4 is completed by the employee and used to calculate their federal income tax withholding. This form also includes necessary information such as address and social security number.

Form I-9 must be completed by you, the employer, to verify that employees are legally permitted to work in the U.S.

Other Situations: Frequently Asked Questions

Tue, 10 Oct 2023 20:28:11 GMT

How Can I Resolve A Consumer Complaint?

First, go to the seller of the item. Second, contact the relevant consumer agency. Finally, if neither of these results in satisfaction, you can file a lawsuit or use arbitration.

Contacting the Seller

Before you take your complaint to the store or other entity that sold you the service or product:

Gather any evidence you may need, such as the receipt, a canceled check, photographs showing the problem, a warranty, a contract, or a bill of sale.
Figure out what your goal is. Do you want the product replaced? Do you want your money back? Do you merely want an apology?
Call the store or service provider and ask to make an appointment with the manager, customer service representative, or another appropriate person. Meet face-to-face with that individual and explain as succinctly as possible the nature of the problem and what you want to be done about it. If you talk on the phone, follow up with a letter, and make notes of the dates of your calls and to whom you spoke. If the product is covered by a warranty, it's usually better to follow up with the manufacturer instead of the merchant.
If this doesn't produce results, take your problem to a higher authority. This might be a supervisor or a corporate president. You should put your complaint in writing at this point if you haven't already done so. Your letter should include your name, address, phone numbers, and account number (if relevant). If a product is involved, include the date and place of purchase, and the model and serial number. Briefly, state the problem with the product or service, and write about what you have done so far to resolve it. Finally, tell the letter recipient what you want done, and give him or her a deadline. Include copies of relevant documents (not originals), and keep a copy of your letter. Keep copies of anything you receive from the company.

Contacting an Agency

If you still haven't achieved the result you wanted, look in the phone book for a consumer complaint agency, such as the state, county, or city consumer protection office, or the Better Business Bureau.

Or, you might want to go the trade association route. Some industry trade associations offer help in mediating disputes concerning their members.

If your complaint involves a bank, you might wish to contact the appropriate state banking regulator. Similarly, you might want to contact the state insurance regulator if an insurer is involved, the securities regulator for a securities problem, or the public utility commission for utility-related problems.

If the problem involves a state-licensed trade (e.g., a general contractor or a plumber), call the state licensing department.

If you bought a "lemon" used car, investigate your state's lemon laws by contacting your state consumer protection agency.

If the problem involves mail order or mail fraud, contact your area postal inspector, who can be found in the U.S. government section of the phone book.

There may also be a local television news program hotline for resolving consumer complaints.

Call the agency first to find out what procedures it wants you to follow.

Filing a Lawsuit

When all else fails, you might want to file a court case--either a small claims case, if the amount of money involved is small enough (generally, under $5,000)--or a regular lawsuit. More often than not, simply contacting an attorney and having him or her write a letter to the merchant or service provider indicating that you intend to file a lawsuit will get you the result you are seeking. If a small claims case is involved, you generally won't need to hire an attorney, but if the case doesn't qualify for small claims, you'll probably need to hire an attorney.

How Can I Reduce My Bank Fees?

There are many ways to reduce your bank fees. Here are a few of them:

Are there fees associated with your checking account? If so, then call your bank and find out what you can do to get free checking and free ATM usage. For example, you might need to keep a minimum balance in the account and use only ATMs at your own bank. You may want to ditch banks altogether and join a credit union, which typically charges less for banking services.
Don't keep too much money in a low-interest savings account. Find out how much money you'll need access to in an emergency (generally three to six months' worth of expenses) and keep only that amount in your savings account. The rest of your funds should be invested in the stocks and mutual funds or in the high-interest rate CD (Certificate of Deposit) you can find (check out Bankrate.com).
If you still write checks don't order them through your bank. Many check printers charge less for check orders than the printers used by banks.

How Can I Save On My Insurance Costs?

Here are some ways to save on insurance of all types:

Shop around for a life insurance policy. It pays to check prices on life insurance policies periodically because rates change frequently. Also, if you've quit smoking, you may be entitled to better rates after a few years.
Take a look at your life insurance needs to see whether you even need a policy or are paying for too much coverage.
Insure your home and autos with the same insurer. You may be able to get a break by doing this.
Shop for auto insurance to try to get a lower rate.
Install smoke detectors, burglar alarms, and sprinkler systems to save on homeowner's insurance. Don't forget to ask your insurance agent about other cost saving measures.
Get rid of private mortgage insurance. Once you have enough equity in the home, ask your lender to cancel your private mortgage insurance.

How Can I Cut My Utility Costs?

Here are some thoughts to keep in mind when trying to cut utility costs:

Your utility company or state may have a program that subsidizes making your home more energy-efficient. If not, there's plenty of information out there about making your home more energy efficient such as caulking your windows and making sure your insulation's "R" factor is correct for your location.
Install CFLs (compact fluorescent lights) or LEDs (light-emitting diodes) instead of incandescent bulbs to save energy and money.
Keep the thermostat at the lowest temperature comfortable in winter and the highest temperature comfortable in summer.

How Can I Reduce The Cost Of My Phone Bill?

Today's cost-cutting competition among land-line and mobile phone service providers offers a few opportunities for savings on your phone bills, such as:

Shopping around to make sure you're paying as little as possible for long-distance and mobile phone charges. Take the time to investigate which service provider will save you the most and switch if it is a better deal.
Consider getting rid of your land-line phone altogether.
Use e-mail or Skype to correspond with relatives and friends.

How Can I Reduce The Cost Of My Mortgage?

Consider the following options to help you reduce the cost of your mortgage:

Paying down your mortgage. For most people, paying down a mortgage is an effective way of saving and increasing net worth. Decide that you will pay $100 or $200 per month-or more-in mortgage principal, and do it faithfully.

Refinancing your mortgage. You may be able to save money by refinancing your mortgage., but you need to go through the calculations and see whether the reduction in your monthly payments would be worth the costs involved with refinancing. The general rule is that a reduction of at least two points will make it worthwhile to refinance if you intend to stay in the house for at least five years.

Document Locator System: A Handy Aid For Keeping Track of Your Records

Tue, 10 Oct 2023 20:28:09 GMT

Are you able to locate insurance contracts, wills, and other important personal records quickly and easily? With this simple document locator system, you no longer need to wonder where to file a paper or where to find it.

The Document Locator System

Most people have no idea where to start searching for their important records. They usually keep them scattered in various locations - tax records in a file cabinet, savings bonds in a home safe, wills at an attorney's office, and some contracts or deeds in a bank safe deposit box.

There's a reason many people do not have an organized recordkeeping system: Organizing your records is stressful and confusing.

The Document Locator System is effective because it takes away that stress and confusion. This simple recordkeeping system provides an easy way to keep track of your important personal (not business) records, keeping them organized and available. You will not miss out on a tax deduction because you did not keep the necessary receipt. More importantly, the document locator system will help a spouse or executor locate your documents in case of death or disability.

Set Up Tabbed Sections

Set up tabbed sections in your files with the following captions (customizing sections as appropriate to your particular situation):

Banking
Children
Credit and Loans
Employment
Estate Planning [including wills and post-mortem matters]
Important Personal
Insurance
Investments
Major Assets
Professional Residences
Tax Records
Vehicles [including boats]

File the Documents

File the documents and other records listed in Column 1 in the file sections recommended in Column 2 of the Document Locator. Where the original or a copy is filed elsewhere, note this location in Column 3 of the Document Locator. You can also use Column 3 for any notes regarding the document (such as Passport - "Renew by October 12, 2022" or IRA - "Take first distribution by December 31, 2022"). Where your filing system suggests a file section other than that recommended in Column 2, just substitute your location for the recommended one. For items other than those named here, use the blank spaces at the end of the Locator.

This Document Locator is shown at the end of this Financial Guide.

Put a photocopy of the Document Locator, which will contain the locations of all your important documents, in a fireproof safe or safe deposit box.

In addition to the Document Locator System, prepare a post-mortem letter to a spouse or executor. This is also an essential part of helping your heirs and family members get your affairs in order in the event of death or disability. The purpose of such a letter is to provide them with the information needed to locate records or assets. This will prevent erosion of your estate by unnecessary taxes, unfounded claims, or just plain loss of assets.

The key is to develop and follow some type of recordkeeping system, not necessarily the one recommended here. If you have any questions, contact your financial advisor.

Cull your records every so often. By getting rid of the papers you no longer need, you minimize the ever-encroaching mountains of paper we all have to handle.

Documents You Should Be Able To Locate Easily

Certain documents, records, and other information should be easily locatable in an emergency. These include (1) your personal records, (2) a list of your assets, (3) your estate planning records, and (4) your financial records.

Personal Records

Birth certificates of family members
Death certificates of deceased family members
Marriage license
Divorce decree and custody agreement (if divorced)
Passports (updated)
Social Security numbers for family members
The names and addresses of family members, close relatives, and any persons mentioned in a will
Military records
List of previous employers
List of government employers
Medical records and health insurance cards for family members

In most cases, the reason these documents are needed is self-explanatory.

List of Your Assets

Description of all major assets that you own separately or jointly with your spouse or other person, together with the approximate values and location of deeds, titles, stock certificates, or other evidence of ownership. Include cash, realty, investments, IRAs, retirement plan benefits, life insurance policies, interests in partnerships or other business entities, jewelry and other luxury items, automobiles, boats, antiques, coin collections, collectibles, art objects, and debts owed to you by others.

Appraisals of valuable items
Description of the approximate amounts of pension, military, and/or other benefits you or your spouse may be entitled to on retirement or death
Insurance policies (including group life, individual life, health, casualty, auto, etc.) and identity and phone numbers of insurance agents

Estate Planning Records

The whereabouts of your will and codicils, along with the name and address of the attorney who prepared them
Title to cemetery plot or other burial arrangement
Post-mortem letter to spouse or family members, to be opened after your death
Living will or other directions in case of disability

Financial and Other Records

Location of all safe deposit boxes, keys, and passwords
Important canceled checks
The names and addresses of your CPA, attorney, and any other professionals concerned with your financial affairs
Photographic or video record of house and its contents (for homeowners' insurance purposes)
One statement for each bank account, IRA, mutual fund, broker, or other account you own, along with the name and telephone number of the primary banker, broker, or other contact person for each account
Brokers' confirmation slips for purchases
A statement or other reference for any bank account that is not in your name
One statement or payment stub for each credit card, line of credit, or outstanding loan
Income tax returns for at least six prior years (including all supporting records for the past six years), and all prior gift tax returns
Records showing the original cost of any realty owned, cost of all improvements that can be added to tax basis, and depreciation taken (for business or rental property)
Bills of sale or receipts for major items
Equipment and appliance manuals and warranty information

Recordkeeping Guide: How Long You Should Retain Your Records

Tue, 10 Oct 2023 19:58:42 GMT

Some documents and records need to be kept indefinitely, but most can be discarded after a prescribed period. Here are some rules of thumb as to how long you should keep them. Keep in mind that certain circumstances - legal considerations, for instance - dictate that documents be kept longer. The basic rule is: When in doubt, don't throw it out. If you have any questions, check with your financial advisor.

Some documents and records need to be kept indefinitely but most can be discarded after a prescribed period. Here are some general rules of thumb as to how long you should keep them. Keep in mind that there may be individual circumstances in which legal considerations, for instance, dictate that documents be kept longer. The basic rule is: When in doubt, don't throw it out. If you have any questions, check with your financial advisor.

Keep Indefinitely

Birth certificates
Adoption papers
Custody agreements
Death certificates
Deeds to property
Divorce papers
List of financial assets held (keep current)
Wills and other estate planning documents
Life insurance policies
List of previous employers
Marriage certificates
Passports
Photographic or video record of house and household contents
Military records/records of any governmental employment (e.g., armed forces)
Tax forms and supporting records relating to nondeductible IRA contributions
Records of paid mortgages

Keep for a Prescribed Period

Income tax returns (note that the IRS can audit you for 3 years after you filed a tax return, 6 years if you're self-employed or underreported 25% of your income, and if you don't file a return at all or filed a fraudulent return, there is no limit on the statute of limitations)
Records supporting income tax returns and deductions (W-2s, 1099s, receipts) - 1 year, 3 years if used for tax purposes and 6 years if self-employed
Loans that have been paid off (canceled notes or other evidence) - 7 years
Bank statements - 1 year, 3 years if used for tax purposes and 6 years if self-employed
Brokers' confirmation slips for stock and mutual fund purchases - until security is sold
Records of selling a stock - 3 years
Canceled checks - 1 year, 3 years if used for tax purposes and 6 years if self-employed
Contracts - 7 years after expiration
Medical bills - 3 years
Credit card statements - Until the monthly bill is marked paid, but keep 1 year, 3 years if used for tax purposes and 6 years if self-employed
Utility statements - Until the monthly bill is marked paid, but keep 1 year, 3 years if used for tax purposes and 6 years if self-employed
Pay stubs - 1 year, until you received and reconciled with annual W-2 and social security statement
Receipts for home improvements that can be added to tax basis of home - 6 years after home is sold in a transaction that is not a "rollover" transaction
Insurance papers (all types of insurance) - after policy is renewed or 4 years after expiration or cancellation
Records of selling a house - 3 years after paid off
Owners' manuals for appliances - until item is discarded or sold
Receipts for major warranted purchases - until item is discarded or sold
Warranties and extended service agreements - until expiration
Property tax records and disputes - 6 years after home is sold
Vehicle records (title, registration, purchase receipt, repairs and maintenance recipets, etc) - until sold
Savings bonds - until cashed in

Throw Out Now

Owners' manuals and warranties for appliances and cars you no longer own
Receipts for credit card purchases if not major or related to a tax deduction - after reconciling with monthly credit card statements
ATM receipts - after reconciling with monthly bank statements
Sales receipts (unless used for tax purposes, then 3 years if used for tax purposes and 6 years if self-employed)

Saving Money: 10 Major Ways To Increase Your Nest Egg

Tue, 10 Oct 2023 19:53:09 GMT

The familiar expression "A penny saved is a penny earned" overlooks the impact of taxes; a saved penny is, in fact, worth more, often much more, than an earned penny because you pay tax on an earned penny but not on the penny you save.

Thus, tax-free savings, with earnings compounding over the years, can really increase your nest egg, making it worthwhile to explore the following money-saving techniques.

This Financial Guide provides you with 10 tips for making sure that more of your money is slated for saving and investment. More important, it provides you with links to other Financial Guides that help you implement these tips and maximize the ultimate return.

1. Prepare a Financial Plan

While most people appreciate the importance of a financial plan, too many put it off to the tomorrow that never comes. It is important to identify your goals and determine how best to achieve them. A financial plan can help you do this.

2. Save Your Income

Use an automatic savings plan to make sure that you save a percentage of your paycheck every payroll period. The percentage should be determined by your financial planning needs. Some people need to save 10 percent of their gross pay while others need to save more. If the amount saved goes to a 401(k) plan or another tax-deferred plan, so much the better.

But don't stop with automatic savings. Put aside everything you can. If you invest $50 a month in a mutual fund, you could have as much as $25,000 in ten years, depending on the rate of return.

A well-thought-out budget will help you determine how much you should and can save.

3. Cut Your Mortgage Costs

Consider paying down your mortgage. For most people, paying down a mortgage is an effective way of saving and increasing net worth. Decide that you will pay $100 or $200 per month or more in mortgage principal, and do it faithfully.
Consider refinancing your mortgage. See if you can save money by refinancing your mortgage. Go through the calculations and see whether the reduction in your monthly payments would be worth the costs involved with refinancing. The general rule is that a reduction of at least two points will make it worthwhile to refinance if you intend to stay in the house for at least five years.

4. Cut Your Credit Card and Consumer Debt

To save interest, consider taking advantage of balance transfers, which offer a lower interest rate, typically zero percent (0%) for anyone with excellent credit and a stellar FICO score. You may have to pay a transaction fee of two to five percent (2-5%) on the amount transferred.

5. Cut Your Credit Card Costs

Cut your credit card fees and other costs by switching to a card that charges less interest or one that doesn't charge an annual fee. Better yet, pay cash (or use a debit card) to pay for your purchases and avoid credit cards altogether.

6. Cut Your Bank Fees

There are several ways to reduce your bank fees. Find out what you need to do to get free checking and free ATM usage and do it. You may also want to join a credit union instead of using a bank since credit unions typically charge less for banking services. Here are a few more tips:

Keep a minimum balance in your account to avoid fees.
If you know you will be charged a fee for using another institution's ATM, only use the ATM at your own bank.
Don't keep too much money in a low-interest savings account. Find out how much money you'll need access to in an emergency, typically three to six months' worth of expenses depending on your personal financial situation, and keep only that amount in savings. The rest of your funds should be put to work. With interest rates so low, options include investing in stocks or mutual funds and parking your money in a long-term CD (check rates using Bankrate.com).
If you still write checks, avoid ordering them through your bank. Many check printers charge less for check orders than the printers used by banks.

If you find you are withdrawing too much cash, stop using your ATM card and make yourself physically go to the bank to withdraw the money instead. This may help you to spend less cash.

7. Fine Tune Your Insurance Coverage

Here are some ways to save on insurance of all types:

Life insurance policy. Not everyone needs a life insurance policy, but if you think you need one, then it pays to shop around. If you already have a life insurance policy, then it's a good idea to periodically make sure you are paying the lowest premium on your life insurance policy because rates change frequently. Also, if you've quit smoking, you may be entitled to better rates after a few years.
Examine your life insurance needs. You may find that you are paying for too much coverage.
Insure your home and autos with the same insurer. You should be able to get a break by doing this.
Shop around for auto insurance every few years. You may be able to get a lower rate form a competing insurer.
Smoke detectors, burglar alarms, and sprinkler systems. Installing these types of safety devices usually helps you save on the cost of homeowner's insurance. Don't forget to ask your insurance agent about other savings.
Get rid of private mortgage insurance. Once you have enough equity in the home, ask your lender to cancel your private mortgage insurance.

8. Cut Your Utility Costs

Your utility may have a program that subsidizes making your home more energy-efficient. Look into this possibility. Even if there is no help available from the utility, it is worth it to caulk your windows and make sure your insulation is a high enough "R" factor.

Here are some other ideas:

Use energy-efficient bulbs such as CFLs (compact fluorescent lights) and LEDs (light-emitting diodes) instead of incandescent bulbs. Doing so will save you about 25 to 30 percent. Another advantage is that these types of bulbs last longer.
Keep the thermostat set at the lowest comfortable temperature in winter and the highest comfortable temperature in summer.

9. Cut Your Phone Bills

Today's cost-cutting competition among phone service providers offers many opportunities for savings on your phone bills, such as:

If you have a landline phone, make sure you're paying as little as possible for long-distance charges. Take the time to investigate which long-distance carrier will save you the most, and switch to that carrier. Or, bundle your phone with cable and internet service.
Use e-mail, texting, or Zoom video to correspond with relatives and friends.

10. Forego One Big Expense per Year

For instance, skip your yearly vacation this year or take a less expensive one. Another way to save on a large yearly expense is to swap an expensive health club membership for a membership at the YMCA or shop around. Many fitness facilities offer special rates for new members. Paying one year or six months up front may also give you a break on costs.

Tap Your Retirement Money Early and Minimize Penalties

Tue, 10 Oct 2023 19:53:07 GMT

The purpose of retirement plans such as the 401(k) and Individual Retirement Account (IRA) is to save money for your retirement years. As such, the IRS imposes a penalty of 10 percent for early withdrawals taken from qualified retirement plans before age 59 1/2. Qualified retirement plans include section 401(k) plans, tax-sheltered annuity plans under section 403(b) for employees of public schools or tax-exempt organizations, and individual retirement accounts.

While you should always think carefully about taking money out of your retirement plan before you've reached retirement age, there may be times when you need access to those funds. Fortunately, IRS provisions allow a number of exceptions that may be used to avoid the tax penalty. Here are some of them:

Distributions made to your beneficiary or estate on or after your death.
distributions made to certain unemployed individuals for health insurance premiums.
Distributions made because you are totally and permanently disabled are exempt from the early withdrawal penalty. You are considered disabled if you can furnish proof that you cannot do any substantial gainful activity because of your physical or mental condition. A physician must determine that your condition can be expected to result in death or to be of long, continued, and indefinite duration.
Distributions for qualified higher education expenses are also exempt, provided they are not paid through tax-free distributions from a Coverdell education savings account, scholarships and fellowships, Pell grants, employer-provided educational assistance, and Veterans' educational assistance. Qualified higher education expenses include tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a student at an eligible educational institution, as well as expenses incurred by special needs students in connection with their enrollment or attendance. If the individual is at least a half-time student, room and board are qualified higher education expenses. This exception applies to expenses incurred by you, your spouse, children and grandchildren.
Distributions due to an IRS levy of the qualified plan.
Distributions due to death.
Distributions that are not more than the cost of your medical insurance. Even if you are under age 59 1/2, you may not have to pay the 10 percent additional tax on distributions during the year that is not more than the amount you paid during the year for medical insurance for yourself, your spouse, and your dependents. You will not have to pay the tax on these amounts if all of the following conditions apply: you lost your job, you received unemployment compensation paid under any federal or state law for 12 consecutive weeks because you lost your job, you receive the distributions during either the year you received the unemployment compensation or the following year, you receive the distributions no later than 60 days after you have been reemployed.
Distributions that are excepted from the additional income tax by federal legislation relating to certain emergencies and disasters.
Qualified retirement plan distributions (does not apply to IRAs) you receive after separation from service when the separation from service occurs in or after the year you reach age 55 (age 50 for qualified public safety employees). For distributions to qualified public safety employees on or after December 30, 2022, include distributions to employees with 25 years of service with the plan, distributions to firefighters covered by private sector retirement plans, and distributions to those employees who provide services as a corrections officer or as a forensic security employee, providing for the care, custody, and control of forensic patients, who meet the age requirement above.
Distributions that are qualified reservist distributions. Generally, these are distributions made to individuals called to active duty for at least 180 days after September 11, 2001.
Distributions up to $5,000 made to you from a defined contribution plan if the distribution is a qualified birth or adoption distribution. Attach a statement that provides the name, age, and TIN of the child or eligible adoptee.
Distributions up to $5,000 made to you from a defined contribution plan if the distribution is a qualified birth or adoption distribution.
Distributions made to an alternate payee under a qualified domestic relations order.
Distributions of dividends from employee stock ownership plans.
Corrective distributions made on or after December 29, 2022, the income on excess contributions distributed before the due date of the tax return (including extensions).
Distributions due to terminal illness made on or after December 30, 2022. Distributions that are made after the date on which your physician has certified that you have an illness or physical condition that can reasonably be expected to result in death in 84 months or less after the date of the certification.
Distributions in the form of an annuity. You can take the money as part of a series of substantially equal periodic payments over your estimated lifespan or the joint lives of you and your designated beneficiary. These payments must be made at least annually and payments are based on IRS life expectancy tables. If payments are from a qualified employee plan, they must begin after you have left the job. The payments must be made at least once each year until age 59 1/2, or for five years, whichever period is longer.
If you have out-of-pocket medical expenses that exceed 7.5 percent of your adjusted gross income, you can withdraw funds from a retirement account to pay those expenses without paying a penalty. For example, if you had an adjusted gross income of $100,000 and medical expenses of $12,500, you could withdraw as much as $5,000 from your pension or IRA without incurring the 10 percent penalty tax. You do not have to itemize your deductions to take advantage of this exception.
IRA distributions made for the purchase of a first home, up to $10,000.

Remember that although using the above techniques will help you avoid the 10 percent penalty tax, you are still liable for any regular income tax that's owed on the funds that you've withdrawn. Distributions rolled over into another qualified retirement plan or distributions from a Roth IRA, however, escape both the regular income tax and the 10 percent penalty tax. Rollovers should be made directly between your brokers, to avoid paying the 20 percent withholding required on distributions that you touch.

Reverse Mortgages: How They Can Enhance Your Retirement

Tue, 10 Oct 2023 19:53:06 GMT

If you're 62 or older and looking for money to finance a home improvement, pay off your current mortgage, supplement your retirement income, or pay for healthcare expenses â€“ you may be considering a reverse mortgage. It's a product that allows you to convert part of the equity in your home into cash without having to sell your home or pay additional monthly bills. This Financial Guide explains how reverse mortgages work.

Three types of reverse mortgage plans are available:

Single-purpose reverse mortgages, offered by some state and local government agencies and nonprofit organizations
Federally insured reverse mortgages, known as Home Equity Conversion Mortgages (HECMs) and backed by the U. S. Department of Housing and Urban Development (HUD)
Proprietary reverse mortgages, private loans that are backed by the companies that develop them

This guide describes the similarities and differences among them and discusses the benefits and drawbacks of each. Since each plan differs slightly, it is important to choose the one that best meets your financial needs.

The reverse mortgage is not without risk, however, and knowing the pros and cons will help you acquire the best possible deal should you decide to go with a reverse mortgage. Staying informed of your rights and responsibilities as a borrower may help to minimize your financial risks and avoid the threat of losing your home.

How Does A Reverse Mortgage Work?

A reverse mortgage is a type of home equity loan that allows you to convert some of the equity in your home into cash while you continue to own the home. Reverse mortgages operate like traditional mortgages, only in reverse. Rather than paying your lender each month, the lender pays you.

Reverse mortgages differ from home equity loans in that most reverse mortgages do not require any repayment of principal, interest, or servicing fees as long as you live in the home. The loan is repaid when you die, sell your home, or when your home is no longer your primary residence. The proceeds of a reverse mortgage generally are tax-free, and many reverse mortgages have no income restrictions. When the homeowner dies or moves out, the loan is paid off by a sale of the property. Any leftover equity belongs to the homeowner or the heirs.

In other words, the primary benefit of a reverse mortgage is that it allows homeowners who are age 62 and over to keep living in their homes and to use their equity for whatever purpose they choose. A reverse mortgage might be used to cover the cost of home health care, to pay off an existing mortgage to stop a foreclosure, or to support children or grandchildren.

Who Qualifies for a Reverse Mortgage?

Applicants must be 62 years of age.
Potential borrowers must either completely own their home or only have a couple of mortgage payments remaining.
Reverse mortgage borrowers must live in the home being used as collateral.
Borrowers must have an excellent credit history in order to qualify for reverse mortgage loans.
All homeowners are required to sign the paperwork in order to secure the reverse mortgage.
Primarily, single family one-unit dwellings are required to qualify for a reverse mortgage.
During the reverse mortgage process, the homeowners are responsible for property taxes and repairs to the property as they still own their home.

How Payments Are Received

Depending on the lender, borrowers can choose to receive monthly payments, a lump sum, a line of credit, or some combination.

The line of credit offers the most flexibility by allowing homeowners to write checks on their equity when needed up to the limit of the loan.

Tax Rules

The reverse mortgage payments you receive are nontaxable. Further, if you receive Social Security Supplemental Security Income, reverse mortgage payments do not affect your benefits, as long as you spend them within the month you receive them. This rule is also true for Medicaid benefits in most states.

To find out the exact impact of reverse mortgage payments on benefits you are receiving, check with a benefits specialist at your local area agency on aging or legal services office.

Interest on reverse mortgages is not deductible until you pay off your reverse mortgage debt.

Maximum Loan Amounts

Maximum loan amount limits are based on the value of the home, the borrower's age and life expectancy, the loan's interest rate, and whatever the lender's policies are. Maximum loan amounts range (depending on the lender) from 50% to 75% of the home's fair market value. The general rule is: The older the homeowner and the more valuable the home, the more money will be available.

Example: A 65-year-old homeowner with a home worth $150,000 would be able to get a $30,000 lump sum or credit line. A 90-year-old homeowner with the same home could be eligible for as much as $94,000.

All reverse mortgages have non-recourse clauses, meaning the debt cannot be more than the home's value. Thus, the lender seeks repayment from heirs, family members, or the borrower's income or other assets.

Negative Aspects

Here are some of the downside aspects of reverse mortgages.

You Incur a Large Amount of Interest Debt

Reverse mortgages are rising-debt loans: The interest is added to the loan balance each month since it is not paid currently, and the total interest you owe increases greatly over time as the interest compounds.

Some plans provide for fixed-rate interest. Others have adjustable rates that change based on market conditions.

Fewer Assets for Heirs

Reverse mortgages use up the equity in your home, leaving fewer assets for your heirs.

High Costs

The high up-front costs of reverse mortgage may make them less attractive to some people. All three types of plans charge origination fee, interest rate, closing costs, and servicing fees. Insured plans also charge insurance premiums.

If you are forced to move soon after taking the reverse mortgage (e.g., because of illness), you will almost certainly end up with a great deal less equity to live on than if you had simply sold the house. This is particularly true in the case of loans terminated in five years or less.

Your lender may permit you to finance these costs, so that you won't have to pay them up front. But they will be added to your loan amount. Because of the high up-front costs on all reverse mortgages, effective interest rates for short-term loans are out of this world.

Adjustable Interest Rates

With many reverse mortgage plans, interest rates are adjustable annually or monthly and tied to a financial index, in some cases with limits on how far the rate can go up or down. Reverse mortgages with interest rates that adjust monthly have no limit. Bear in mind that the higher the rate, the faster your equity is used up.

In order to give a fixed rate, one lender requires appreciation sharing, with which it gets a part of any increase in the home's value over and above the debt. Another lender offers percent of value pricing, collecting a fixed percentage of the home's value when the loan comes due. The latter option can be very expensive if the loan must be paid off after only a few years.

Is A Reverse Mortgage For You?

Although a reverse mortgage may be the answer for house-rich and cash-poor retirees, they are not for everyone. For instance, if you plan to move a few years down the road or there is a possibility you will have to move due to illness or any other unforeseen event, then a reverse mortgage makes no sense. They make the most sense for those who plan to stay in their homes permanently. Also, if you already have a substantial mortgage on your home, the reverse mortgage is probably not for you, since you will have to pay it off before you can become eligible.

If you want to pass your home to your children or heirs, the reverse mortgage is also not a good choice since the lender will get most of the equity when the home is sold.

Other Alternatives

Besides the reverse mortgage, here are some alternatives to consider.

Programs that help with real estate taxes, repairs. Many state and local governments have programs that provide special purpose loans to seniors for (1) the deferral of property taxes and (2) making home repairs or improvements. These loans can often prevent retirees' having to sell their homes. To find out whether your state has a special-purpose loan program for property taxes and/or for home repairs and improvements, contact your state agency on aging.
The Qualified Personal Residence Trust (QPRT). If you want to pass your home to your children or other heirs, this option should be considered, especially if your home is worth a great deal and you want to remove it from your estate for estate tax purposes. The QPRT trust allows you to keep the home for a certain amount of time with ownership eventually passing to your heirs.
The sale-leaseback. You sell your home to your kids, and continue to live in it, paying them a fair market rent.

Do not arrange a sale-leaseback without professional guidance.

Getting a Good Deal

Reverse mortgages are complex financial transactions. How do you know you are getting the best deal? Fortunately, there are laws in place (such as the Federal Truth in Lending Act) to make sure you understand the terms and costs involved before you sign. The Federal Truth in Lending Act requires lenders to disclose such things as the Annual Percentage Rate (APR) and payment terms. On plans with adjustable rates, lenders must provide specific information about the variable rate feature. On plans with credit lines, lenders also must inform you of any charges to open and use the account, such as an appraisal, a credit report, or attorney's fees.

If you're considering a reverse mortgage, shop around. Compare your options and the terms various lenders offer. Learn as much as you can about reverse mortgages before you talk to a counselor or lender. That can help inform the questions you ask which could lead to a better deal.

If you want to make a home repair or improvement or you need help paying your property taxes, then you should find out if you qualify for any low-cost single-purpose loans in your area. Area Agencies on Aging (AAAs) generally know about these programs. To find the nearest agency, visit www.eldercare.gov or call 1-800-677-1116. Ask about "loan or grant programs for home repairs or improvements," or "property tax deferral" or "property tax postponement" programs, and how to apply.

All HECM lenders must follow HUD rules. And while the mortgage insurance premium is the same from lender to lender, most loan costs, including the origination fee, interest rate, closing costs, and servicing fees vary among lenders.

If you live in a higher-valued home, you may be able to borrow more with a proprietary reverse mortgage, but the more you borrow, the higher your costs are. The best way to see key differences between a HECM and a proprietary loan is to do a side-by-side comparison of costs and benefits. Many HECM counselors and lenders can give you this important information.

No matter what type of reverse mortgage you're considering, understand all the conditions that could make the loan due and payable. Ask a counselor or lender to explain the Total Annual Loan Cost (TALC) rates: they show the projected annual average cost of a reverse mortgage, including all the itemized costs.

A Summary of Available Plans

This section describes the three types of reverse mortgages available. Although the FHA and lender-insured plans appear similar, important differences exist. This section also discusses advantages athe nd drawbacks of each loan type.

FHA-Insured Home Equity Conversion Mortgages (HECMs)

Backed by the U. S. Department of Housing and Urban Development (HUD), over 90 percent of all reverse mortgages are HECMs. These mortgages offer several payment options:

Monthly loan advances for a fixed term, or for as long as you live in the home
A line of credit
Monthly loan advances plus a line of credit

This type of reverse mortgage is not due as long as you live in your home. With the line of credit option, you may draw amounts as you need them over time. Closing costs, a mortgage insurance premium, and, sometimes, a monthly servicing fee are required. Interest is at an adjustable rate on your loan balance. Interest rate changes do not affect the monthly payment, but rather how quickly your loan balance grows.

The FHA-insured reverse mortgage allows you to change the way you are paid at little cost. This plan also protects you by guaranteeing that loan advances will continue to be made to you if a lender defaults. However, the downside of FHA-insured reverse mortgages is that they may provide smaller loan advances than lender-insured plans. Also, loan costs may be greater than with uninsured plans.

The most widely available plan is the Federal Housing Administration's Government-insured Home Equity Conversion Mortgage (HECM) program. To qualify for an HECM loan, homeowners must be at least 62 and live in a single-family home or condominium that is their principal residence. Under this program, the amount of equity homeowners may borrow depends on where they live, as well as on prevailing interest rates.

For people who have more expensive homes or who need to borrow more, there are alternatives. A program from the Federal National Mortgage Association grants larger reverse mortgages on home equity.

Counseling is required before homeowners can apply for an HECM loan. This counseling allows homeowners to discover whether a reverse mortgage is really the best answer to their cash-flow problems.

For an approved counselor, contact any HECM lender.

Single-purpose reverse mortgages

Offered by some state and local government agencies and nonprofit organizations, these reverse mortgages are the least expensive option. They are not available everywhere and can be used for only one purpose, which is specified by the government or nonprofit lender. For example, the lender might say the loan may be used only to pay for home repairs, improvements, or property taxes. Most homeowners with low or moderate income can qualify for these loans.

Proprietary reverse mortgages

This type of reverse mortgage is a private loan that is backed by the company that develops it. Like HECM loans, they may be more expensive than traditional home loans and upfront costs can be high. There are no income requirements and can be used for any purpose.

Most private reverse mortgages are not insured. Only the strength of the lender backs whatever promises it may make as to payments and other terms. So if you are looking to a reverse mortgage for future income, rather than a lump sum up front, you are better off in a federally insured program.

Government and Non-Profit Agencies

To obtain a current list of lenders participating in the FHA-insured program, sponsored by the Department of Housing and Urban Development (HUD), or additional information on reverse mortgages and other home equity conversion plans, contact:

National Reverse Mortgage Lenders Association ( NRMLA )
1400 16th St., NW
Suite 420
Washington, DC 20036

If you have a question or complaint concerning reverse mortgages, contact:

Federal Trade Commission ( FTC )
Tel. 1-877-382-4357

Although the FTC generally does not intervene in individual disputes, the information you provide may indicate a pattern or practice that requires action by the Commission.

Your Pension: What You're Entitled To

Tue, 10 Oct 2023 19:26:19 GMT

What happens to your pension if your employer goes out of business? How careful does a plan administrator have to be in managing retirement plan assets? What rights does your spouse have in your retirement plan benefits? This Financial Guide answers these and other major questions that you may have.

Federal law, mainly the Employee Retirement Income Security Act (ERISA), provides you with certain safeguards and guarantees as to the money you have in a plan maintained by an employer. This Financial Guide provides the answers to the major questions you may have about your pension plan.

What Does ERISA Do For You?

ERISA sets minimum standards that pension plans in private industry must meet. Thus, if your employer maintains a pension plan, ERISA dictates, for example, the latest date by which you can become a participant and how long you may be required to work before you obtain a vested (nonforfeitable) interest in your pension.

If not for ERISA (or some other federal or state law), plans would, for example, be able to require that employees work ten years before becoming vested in a pension plan or to require them to work five years before having to put in any money for them.

ERISA does not force an employer to establish a pension plan. It merely requires that if the employer establishes a plan, the plan must meet ERISA's standards. The law also does not specify how much money a participant must be paid as a benefit.

What Standards Does ERISA Set?

ERISA does the following (these will be examined in more detail later on in the guide):

Requires plans to provide participants with information about the plan. Participants are employees who have worked a certain length of time and are therefore eligible to participate in the plan.
Sets minimum standards for participation, vesting, benefit accrual and funding. The law defines how long a person may be required to work before becoming eligible to participate in a plan, to accumulate benefits, and to have a vested right to those benefits. The law also has detailed funding rules that require employer plan sponsors to provide adequate funding for your plan.
Requires accountability of plan fiduciaries. ERISA says a fiduciary is anyone who exercises discretionary authority or control over a plan's management or assets, including anyone who provides investment advice to the plan. Fiduciaries who do not follow the ERISA principles of conduct may be liable for restoring losses to the plan.
Gives participants the right to sue for benefits and breaches of fiduciary duty.
Guarantees payment of certain benefits if a defined benefit plan is terminated.

Before we discuss what ERISA guarantees, it is important to distinguish among the different types of employee retirement plans, since the rights guaranteed with pension plans vary according to the type of plan. Generally speaking, there are two types of pension plans: (1) defined benefit plans and (2) defined contribution plans.

What is a Defined Benefit Plan?

A defined benefit plan, usually a traditional pension plan, promises you a specified monthly benefit at retirement. The plan may state this promised benefit as an exact dollar amount, such as $100 per month at retirement. Or, more commonly, it may calculate a benefit through a plan formula that considers such factors as salary and service, for example, one percent of your average salary for the last five years of employment for every year of service with your employer. The amount of your benefit depends on what is promised, not on the performance of the investments.

The general rules of ERISA apply to defined benefit plans, and some specialized rules also apply.

What is a Defined Contribution Plan?

A defined contribution plan, on the other hand, does not promise you a specific amount of benefits at retirement. In these plans, you or your employer (or both) contribute to your individual account under the plan, sometimes at a set rate, such as five percent of your earnings annually.

The contributions are invested on your behalf. When you retire, quit, or otherwise separate from service, you will receive the balance in your account, which is based on contributions plus or minus investment gains or losses. The value of your account will fluctuate due to changes in the value of your investments.

Examples of defined contribution plans include 401(k) plans, 403(b) plans, employee stock ownership plans, and profit-sharing plans. The general rules of ERISA apply to each of these types of plans.

To determine what type of plan your employer provides, check with your plan administrator or read your summary plan description.

There are a number of variations on the defined contribution plan. These include (1) the Money Purchase Plan, (2) the Simplified Employee Pension Plan (SEP), (3) the Profit Sharing Plan and Stock Bonus Plan, (4) the 401 (k) Plan, (5) the "Simple" IRA Plan, and (6) the Employee Stock Ownership Plan (ESOP). They are discussed below:

Money Purchase Plan. A money purchase pension plan requires fixed annual contributions from your employer to your individual account. This is a type of defined contribution plan. Because a money purchase pension plan requires these regular contributions, the plan is subject to certain funding and other rules.

Simplified Employee Pension Plan (SEP). Your employer may sponsor a Simplified Employee Pension plan (SEP). SEPs are relatively simple retirement savings vehicles which allow employers to make contributions on a tax-favored basis to individual retirement accounts (IRAs) owned by the employees. SEPs are subject to fewer reporting and disclosure requirements than other retirement plans. Under a SEP, you as the employee generally set up an IRA to accept your employer's contributions. (Sometimes the employer does this.) Your employer can contribute a percentage of your pay into a SEP each year.

Profit Sharing Plan and Stock Bonus Plan. A profit-sharing or stock bonus plan is a defined contribution plan under which the plan may provide, or the employer may determine, annually, how much will be contributed to the plan (out of profits or otherwise). The plan contains a formula for allocating to each participant a portion of each annual contribution. A profit sharing plan or stock bonus plan may include a 401(k) plan.

401(k) Plan. Your employer may establish a defined contribution plan that is a cash or deferred arrangement, usually called a 401(k) plan. You can elect to defer receiving a portion of your salary, which is instead contributed on your behalf, before taxes, to the 401(k) plan. Sometimes the employer matches your contributions. There are special rules governing the operation of a 401 (k) plan.

Your employer must advise you of any limits that may apply to you.

Although a 401(k) plan is a retirement plan, you may be able to access funds in the plan before retirement. For example, if you are an active employee, your plan can allow you to borrow from the plan. Also, your plan may permit you to make a withdrawal on account of hardship, generally from the funds you contributed. Sponsors cannot make your elective deferrals a condition for the receipt of other benefits, except for matching contributions.

"Simple" Plan. Recent legislation allows self-employed persons and employers with 100 or fewer employees to establish "SIMPLE" retirement plans. The SIMPLE combines the features of an IRA and a 401(k).

Employee Stock Ownership Plan (ESOP). Employee stock ownership plans (ESOPs) are a form of defined contribution plan in which the investments are primarily in employer stock. Congress authorized the creation of ESOPs as one method of encouraging employee participation in corporate ownership.

What Information Does the Plan Have to Provide You With?

ERISA requires plan administrators, the people who run plans, to give you in writing the most important facts you need to know about your pension plan. Some of these facts must be provided to you regularly and automatically by the plan administrator. Others are available upon request, free-of-charge or for copying fees.

Your request for plan information should be made in writing.

The two most important documents you are entitled to are (1) the summary plan description and (2) the summary annual report. The summary annual report is a summary of the annual financial report that most pension plans must file with the Department of Labor. It is available to you at no cost.

To learn more about your plan's assets, ask the plan administrator for a copy of the annual report in its entirety.

What is the Summary Plan Description?

One of the most important documents you are entitled to receive automatically when you become a participant of an ERISA-covered pension plan or a beneficiary receiving benefits under such a plan, is a summary of the plan, called the summary plan description (SPD). Your plan administrator is legally obligated to provide the SPD to you free of charge.

The SPD tells you what the plan provides and how it operates. It tells you when you begin to participate in the plan, how your service and benefits are calculated when your benefit becomes vested when you will receive payment and in what form, and how to file a claim for benefits.

Read your SPD to learn about the particular provisions that apply to you. If a plan is changed you must be informed, either through a revised summary plan description or in a separate document, called a summary of material modifications, which also must be given to you free of charge.

What if You Can't Obtain these Documents?

If you are unable to get the summary plan description, the summary annual report, or the annual report from the plan administrator, you may be able to obtain a copy by writing to the Department of Labor, PWBA, Public Disclosure Room, Room N-5638, 200 Constitution Avenue, N.W., Washington, D.C. 20210, for a nominal copying charge. If possible, provide the name of the plan, employer identification number (a 9-digit number assigned by the IRS) and the plan number (a 3-digit number, such as 002). If you do not have this information, give the name of the plan and the city and state.

Where Else Can I Get Plan Documents?

Documents for some plans are available for public inspection at the IRS. These documents include the applications filed by pension plans to determine if they meet federal tax qualification requirements, applications filed by certain organizations to determine if they qualify as tax-exempt, and the IRS responses to these applications. For information on available documents, contact the IRS Freedom of Information Electronic Reading Room via their website: IRS Freedom of Information Electronic Reading Room

If you terminate employment and you have a vested pension benefit (see below for an explanation of vested benefits) that you are not eligible to receive until later, that information will be reported by your plan to the IRS, which, in turn, will inform the Social Security Administration. This information must also be provided o you by the plan.

Keep the plan administrator informed about any change of address or name change after you leave employment to ensure that you will receive the pension benefit you.

What Age and Length of Service Requirements May Your Plan Impose?

Generally speaking, you must be permitted to become a participant if you have reached age 21 and have completed one year of service. Even if you work part-time or seasonally, you cannot be excluded from the plan on grounds of age or service if you meet this service standard. You must be permitted to begin to participate in the plan no later than the start of the next plan year or six months after meeting the requirements of membership, whichever is earlier.

You must be in the "covered" group of employees to get the benefit of ERISA's age and length of service guarantees. Your employer is allowed to provide one or more plans covering different groups of employees or to exclude certain categories of employees from coverage under any plan. For example, your employer might sponsor one plan for salaried employees and another for union employees. You may not be within the group that the employer defines as covered by the plan.

ERISA imposes certain other participation rules. They depend on the type of employer for whom you work, the type of plan your employer provides, and your age. For example:

If you were an older worker when you were hired, you cannot be excluded from participating in the plan on grounds of age just because you are close to retirement age.
If, upon your entry into the plan, your benefit will be immediately fully "vested," or non-forfeitable (see below), the plan can require that you complete two years of service before you become eligible to participate in the plan. 401 (k) plans, however, cannot require you to complete more than one year of service before you become eligible to participate.
If you work for a tax-exempt educational institution and your plan benefit becomes vested after you earn one year of service, the plan can require that you be at least age 26 (instead of age 21 ) before you can participate in the plan.
If your employer maintains a SEP, you must be permitted to participate if you have performed services for the employer in three of the immediately preceding five years.

How is "Service" Measured?

ERISA has rules for how employers must measure employees' employment to determine how the eligibility, benefit accrual, and vesting rules apply. ERISA generally defines a year of service as 1,000 hours of service during a 12-month period. Different rules apply to counting years of service for purposes of eligibility, benefit accrual, and vesting.

A plan basically has a choice among three methods for determining whether you must be credited with a year of service for participation, vesting, and, in some circumstances, benefit accrual: the general method of counting service, a simplified equivalency method, or the elapsed time method. Refer to your summary plan description to see which method is used by your plan.

What is Benefit Accrual and How Does it Work?

When you participate in a pension plan, you accrue (earn) pension benefits. Your accrued benefit is the amount of benefit that has accumulated or been allocated in your name under the plan as of a particular point in time. ERISA generally does not set benefit levels or specify precisely how benefits are to accumulate.

Plans may use any definition of service for purposes of benefit accrual as long as the definition is applied on a reasonable and consistent basis. Service for benefit accrual generally takes into account only the years of service you earn after you become a plan participant, not all service you have performed since you were hired by your employer. Employees who work less than full-time, but at least 1,000 hours per year, must be credited with a pro rata portion of the benefit that they would accrue if they were employed full-time.

To illustrate: If a plan requires 2,000 hours of service for full benefit accrual, then a participant who works 1,000 hours must be credited with at least 50 percent of the full benefit accrual .

A special rule applies to SEPs: all participants who earn a certain minimum amount in compensation from their employers are entitled to receive a contribution.

Since ERISA generally does not regulate the amount of your benefit, you can estimate how much pension you are building up only by examining the summary plan description or the plan document. These documents should explain how you earn service credit for full benefit accrual each plan year.

Are Plan Features Other Than Accrued Benefits Protected?

Your accrued benefit includes more than just the amount of benefit you have accumulated. Your plan provides you with various rights and options, some of which are protected rights attached to your benefit amount. As a general rule, protected rights cannot be reduced or eliminated, nor can they be granted or denied at your employer's discretion. If a plan feature you care about has been eliminated, this section is designed to help you determine whether it was a protected right.

The rights that are protected include (1) optional forms of benefit payments, (2) early retirement benefits, and (3) retirement-type subsidies.

Optional forms of benefit payment. An example of an optional form of benefit that your plan may provide is the right to receive payment of your benefits in a lump sum payment rather than as an annuity.
Early retirement benefit. ERISA does not require a pension plan to provide participants with the option to retire earlier than at the plan's normal retirement age, but if such an option is offered, a plan generally may not be changed to eliminate the right to take such an early retirement as to benefits accrued before the change.
Retirement-type subsidy. Retirement-type subsidies are also a protected part of your benefit and cannot be eliminated retroactively.

Certain important plan features are not protected, such as a Social Security supplement, the right to direct investments, the right to a particular form of investment, the right to take a loan from a plan, or the right to make employee contributions at a particular rate on either a before or after-tax basis.

Can Your Plan Reduce Future Benefits?

ERISA does not prohibit your employer from amending the plan to reduce the rate at which benefits accrue in the future. For example, a plan that pays $5 in monthly benefits at age 55 for years of service through 2001, may be amended to provide that years of service beginning in 2002 will be credited at the rate of $4 per month.

If you are a participant in a defined benefit plan or a money purchase plan, you must receive written notice of a significant reduction the rate of future benefit accruals after the plan amendment is adopted and at least 15 days before the effective date of the plan amendment. The written notice must describe the plan amendment and its effective date.

The 2001 Tax Relief Act put teeth in this rule by imposing a penalty excise for a plan's failure to provide notice to participants (or QDRO recipients) of plan amendments making a significant reduction in the rate of future benefit accrual. The penalty generally is imposed on the employer and applies after June 6, 2001. "Egregious" (for example, intentional) failure to give notice can in effect void the amendment. The toughened provision was prompted by widespread conversions of regular defined benefit pension plans to cash balance plans.

What if You Leave Your Job and Return Later?

A break in service can have serious consequences for your pension if it extends for a long enough time and your pension benefit is not yet fully vested. However, ERISA does not permit your accrued benefit to be forfeited if you have a short break in service. ERISA in general guarantees that your service credit cannot be forfeited for absences shorter than five consecutive years.

If you need to take a leave of absence, you should carefully examine your plan's rules so that you do not lose pension benefits you have accrued.

If you continue to work past normal retirement age without retiring, you continue to accrue benefits, regardless of age. However, a plan can limit the total number of years of service that will be taken into account for benefit accrual for anyone under the plan. If you retire and later go back to work with your employer, you must be allowed to continue to accrue additional benefits, subject to any such limit on total years of service credited under the plan.

Plans that provide for the payment of early retirement benefits may suspend payment of those benefits if you are re-employed before reaching normal retirement age. However, if the plan suspends payment of benefits before normal retirement age, under circumstances that would not have permitted a suspension after normal retirement age and the plan pays an actuarially reduced early retirement benefit, the plan must actuarially recalculate your monthly payment when you later begin to again receive payments.

Under certain circumstances (described below), your pension payments after you reach normal retirement age may be suspended if you return to work. For example, ERISA permits a multi-employer plan to suspend the payment of normal retirement benefits if you return to work in the same industry, the same trade, and the same geographical area covered by the plan as when benefits commenced.

Before suspending benefit payments, the plan must notify you of the suspension during the first calendar month in which the plan withholds payments. The notification must give you the information on why benefit payments are suspended, a general summary and a copy of the plan's suspension of benefit provisions, a statement regarding the Department of Labor regulations, and information on how you can request a review of the decision to suspend benefit payments. If most of this information is contained in the plan's summary plan description, the notification may simply refer to the appropriate pages of the summary plan description.

A plan that suspends benefit payments must tell you how you can request an advance determination of whether a particular type of reemployment would result in a suspension.

If you are a retiree and are considering taking a job, write to the administrator of your plan to ask if your pension benefits will be suspended.

What is Vesting and How does it Work?

Vesting refers to the amount of time you must work before earning a non-forfeitable right to your accrued benefit. When you are fully vested, your accrued benefit is yours, even if you leave the company before reaching retirement age.

Generally, if you are employed when you reach your plan's normal retirement age (usually 65), you will be fully vested. You also must be permitted to earn a vested right to your accrued benefit through service as described below.

You are always entitled to 100 percent vesting in your own contributions and salary reduction contributions and their investment earnings. However, if your employer contributes to your accrued benefit (as most do) you may be required to complete a certain number of years of service with the employer before the employer portion of your accrued benefit becomes vested. Thus, if you terminate employment before working for a long enough period with your employer, you may forfeit all or part of the accrued benefit provided by your employer.

You must be permitted to earn vesting credit according to a vesting schedule that is at least as generous as prescribed in ERISA vesting schedules. Plans may provide a different standard, as long it is more generous than these minimums.

Check your summary plan description for a description of your employer's vesting schedule.

With some exceptions, once you begin participating in a pension plan, all of your years of service with the employer after you reach age 18 must be taken into account to determine whether and to what extent your accrued benefits are vested. This includes services you earned before you began to participate in the plan and services you earned before the effective date of ERISA.

However, ERISA does allow plans to disregard certain periods for purposes of determining an employee's vesting service.

For further details on what periods of service may be disregarded, see your summary plan description or the plan document to find out what periods are counted in your plan.

When you receive a benefit statement, compare the amount of your accrued benefit with the amount or percentage of your vested benefit to determine its accuracy. If these items are not clear from your benefit statement, ask your plan administrator.

The plan administrator may send you a benefit statement each year. If not, you may request a copy.

In order to keep track of your vesting service, you may want to keep records of your hire date, the date you began participating in the plan, and the dates of any leaves of absence that could affect your total service.

If the plan's vesting schedule is changed after you have completed at least three years of service, you have the right to select the vesting schedule that existed prior to the change for the entire length of your service, rather than the new schedule.

Plans are considered top-heavy if they are tax-qualified and more than 60 percent of the benefits accrue to certain owners and officers, otherwise known as key employees. This could, for example, occur in small companies that have frequent turnover of rank-and-file workers. In years in which a plan is top-heavy, you have the right to both faster vesting and minimum benefits, if you are not a key employee. The 2001 Tax Relief Act eased the top-heavy rules for 2002 and after. This could have the effect of increasing key employees' shares in the plan and reducing others' shares.

When Will Your Benefits Be Paid?

ERISA provides specific rules governing when you may or must begin receiving your pension benefits. First, ERISA sets the latest date by which the plan must permit you to begin receiving your benefit. Under this rule, payment must begin by the 60th day after the end of the plan year in which the latest of the following events occur:

Your reaching of age 65 or, if earlier, the normal retirement age specified by your plan
The end of 10th year after you began participation in the plan
Your termination of service

Example: Your plan must provide a minimum-that you will be entitled to begin to receive your benefit 60 days after the end of the plan year in which you reach age 65 if you began participation in the plan at least 10 years before that year.

Your plan may allow you to receive payment of your benefit earlier than required by the above rule (and many plans do, subject to the rules described below). However, as long as the present value of your vested accrued benefit is greater than $5,000, the plan cannot force you to begin receiving your benefit before you reach the age that is generally considered normal retirement age (or age 62 if later) .

If the present value of your vested accrued benefit under the plan is $5,000 or less, the plan may require you to receive your benefit when it first becomes distributable, such as when you terminate. Under the 2001 Tax Relief Act, such amounts, if more than $1,000, are automatically rolled over to an IRA for your benefit unless you decide otherwise. This rule becomes effective after implementing regulations are issued.

How Early May Your Plan Allow You to Take Payments?

ERISA provides rules governing the times at which a pension plan may permit you to receive benefits. As these limitations on "distribution events" for payment vary, depending on the type of pension plan, you should consult your summary plan description for the specific conditions under which you will be entitled to receive your benefits. After the event occurs that permits payment of your benefit, your plan may require some reasonable period of time during which to calculate your benefit and determine your payment schedule, or to value your account balance and to liquidate any investments in which your account is invested.

The following are a few general rules about possible distribution events for which your plan may provide.

If your plan is a defined benefit plan or a money purchase plan, it will set a normal retirement age, which is generally the time at which you will be eligible to begin receiving your vested accrued benefit. These types of plans may permit earlier payments, however, either by providing for early retirement benefits, for which the plan may set additional eligibility requirements, or by permitting benefits to be paid when you terminate employment, suffer a disability, or die.
If your plan is a 401(k) plan, it may permit you to take some or all of your vested accrued benefit when you terminate employment, retire, die, become disabled, reach age 59-1/2, or if you suffer a hardship.
If your plan is a profit-sharing plan or a stock bonus plan, your plan may permit you to receive your vested accrued benefit after you terminate employment, become disabled, die, reach a specific age, or after a specific number of years have elapsed.

Your plan's summary plan description should describe all of the rules applicable to any of the events that permit distributions.

When Must You Take Payment?

ERISA also sets a date by which you must begin to receive your benefits, regardless of your wishes or the plan's rules, if your plan is tax-qualified. This mandatory beginning date is generally April 1 of the calendar year following the calendar year in which you reach age 72. ERISA provides rules for determining how much of your accrued benefit you must then receive each year.

Unless you own more than 5 percent of the business, the plan can allow you to postpone taking money out of your retirement plan beyond age 72 if you're still employed.

In What Form Will Your Benefits Be Paid?

With some very important limits, your plan can dictate the forms in which you may receive your accrued benefit. The protections that ERISA provides about form of benefit payments vary again depending on whether you have a defined benefit plan, money purchase plan, or other kind of defined contribution plan.

If you are covered under a defined benefit plan or a money purchase plan, your benefit must be available in the form of a life annuity, which means you will receive equal periodic payments (e.g., monthly, quarterly, etc.) for the rest of your life. If you are married, your benefit must be available in the form of a qualified joint and survivor annuity. (That form of benefit payment is described in the next section on spousal rights to benefit payments.) It is also free to offer benefits in a lump sum, as an alternative, subject to the participant's or spouse's right to insist on an annuity.

Be careful about choosing a lump sum payout instead of an annuity under a defined benefit plan. The lump sum can be calculated legally in an amount that is less than what pension advisers consider the present value of the annuity. Consult a professional before deciding.

If you are covered under a defined contribution plan that is not a money purchase plan, the plan may choose to pay your benefits in a single lump sum payment, or in any other form it chooses. If it offers a life annuity option, however, and you choose that option, you and your spouse (if any) will be protected by being offered a life annuity or a joint and survivor annuity that satisfies the requirements of ERISA.

What Will Your Surviving Spouse Get When You Die?

ERISA provides some guarantees for surviving spouses of deceased participants who had earned a vested pension benefit before death. The nature of the guaranteed interest depends on the type of plan and whether the participant dies before or after the annuity starting date-i.e., before or after payment of the pension benefit is scheduled to begin.

The rules we discuss apply to participants who completed an hour of service (or paid leave) on or after August 23, 1984. ERISA's survivor annuity rules are different if you are the surviving spouse of a participant who left employment before that date.

In the case of a defined benefit plan (traditional pension plan) or a money purchase plan, the plan must provide for a qualified joint and survivor annuity. In the case of a defined contribution plan (a 401(k) plan or profit-sharing plan), the protections are somewhat different. Let's take a look at each of these.

The summary plan description will tell you the type of plan involved and whether survivor annuities or other death benefits are provided under the plan.

What is a Qualified Joint and Survivor Annuity (QJSA)?

The QJSA requirement applies to defined benefit plans and money purchase plans. ERISA says the retirement benefit payment must be paid in a series of equal, periodic payments over your lifetime, with a payment continuing to your spouse for life if you die first unless you and your spouse have chosen otherwise. The periodic payment to your surviving spouse must be at least 50 percent and not more than 100 percent of the periodic payment received during your joint lives.

If the plan provides other forms of benefit payment, and you and your spouse want to waive your rights to receive the QJSA and select one of the other payment forms, you can do so as long as:

You and your spouse receive a timely explanation of the QJSA,
Your waiver is made in writing within certain time limits, and
Your spouse consents to the waiver in writing, as witnessed by a notary or plan representative.

What is a Qualified Pre-Retirement Survivor Annuity (QPSA)?

A survivor annuity must also be offered by a defined benefit or money purchase plan if a married participant with a vested benefit dies before he or she begins receiving benefits. This survivor annuity is called a qualified preretirement survivor annuity (QPSA), and ERISA specifies how the QPSA is calculated. You and your spouse must be given a timely explanation of the QPSA. You may only waive the right to a QPSA in writing, and your spouse must consent to the waiver of the QPSA in writing, witnessed by a notary or plan representative.

What Survivor Benefit Rules Apply to Defined Contribution Plans (such as 401(k) Plans)?

Most profit-sharing and stock bonus plans, e.g., 401(k) plans, generally need not offer a survivor annuity. However, there are different rules for such plans that protect the spouse as a beneficiary.

Before you begin to receive your benefits under such a plan your spouse is automatically presumed to be your beneficiary. Thus, if you die before you receive your benefits, all of your benefits will automatically go to your surviving spouse. If you wish to select a beneficiary other than your spouse, your spouse must consent in writing, witnessed by a notary or plan representative. This protects your spouse in the event of your death before any payout has been made.

However, when it is time for you to take payouts from the plan (e.g., you terminate employment or reach retirement,) you may choose without your spouse's consent among any optional forms of payment offered by the plan, including a life annuity. If you choose a life annuity, however, your spouse is then protected by QJSA rules, and the benefit will be paid as a QJSA unless you and your spouse consent to a different form, as outlined above.

For more in-depth information on the rules governing QJSA and QPSA rights, IRS publications are available.

How Do You Make a Claim for Benefits?

Under ERISA you have a right to make a claim for benefits due under a plan. ERISA requires all plans to have a reasonable written procedure for processing your claims for benefits and for appealing if your claim is denied. The summary plan description should contain a description of your plan's procedures.

If you believe you are entitled to a benefit from a pension plan, but your plan fails to set up a claims procedure, present the claim to the plan administrator.

If you make a claim for benefits that is denied, the plan must notify you in writing, generally within 90 days after receipt of the claim, of the reasons for the denial and the specific plan provisions on which the denial is based. If the plan denies your claim because the administrator needs more information to make a decision, the administrator must tell you what information is needed. Any notice of denial must also tell you how to file an appeal.

If special circumstances require your plan to take more time to examine your request, it must tell you within 90 days that additional time is needed, why it is needed, and the date by which the plan expects to make a final decision. If you receive no answer at all in 90 days, this is treated the same as a denial, and you can appeal.

You must be allowed at least 60 days to appeal any denial. After receiving your appeal, the plan generally must issue a ruling within 60 days, unless the plan provides for a special hearing. If the plan notifies you that it must hold a hearing, or that it has other special circumstances, it may have an additional 60 days.

The plan must furnish you with a final decision on your appeal and the reasons for the decision with references to the relevant plan documents. If you disagree with the final decision, you may then file a lawsuit seeking your benefit under ERISA, as explained below. But courts generally require that you complete all the steps available to you under the claims procedure in a timely manner before you seek relief through a lawsuit. This is called "exhausting your administrative remedies."

Can You Choose Your Own Investments?

In certain defined contribution plans, instead of one group or individual making all the investment decisions for the plan's assets, plan officials provide a number of investment options, and ask you to decide how to invest your account balance by choosing among those options.

The Department of Labor has rules about plans that permit you to direct your own investments. Under these rules, only if you truly exercise independent control in making your investment choices will plan officials be excused from fiduciary responsibility for your investment decisions.

A plan in which you actually exercise independent control over the investment of your individual account is called a 404(c) plan (after section 404(c) of ERISA). If you are a participant in a 404(c) plan, you are responsible for the consequences of your investment decision, and you cannot sue the plan officials for investment losses that result from your decision.

You are entitled to receive a broad range of information about the investment choices available under a 404(c) plan.

A plan that intends to relieve plan officials of fiduciary duties over investments must inform you of that fact.

A 404(c) plan must give you sufficient information about investment options for you to be able to make informed decisions. The information you are entitled to receive without asking includes the following:

Notice that the plan officials may be relieved of liability for losses.
A description of each investment option, including the investment goals, risk, and return characteristics.
Information about designated investment managers.
An explanation of when and how to make investment instructions and any restrictions on when you can change investments.
A statement of the fees that may be charged to your account when you change investment options or buy and sell investments.
Information about your shareholder voting rights and the manner in which confidentiality will be provided on how you vote your shares of stock.
The name, address, and phone number of the plan fiduciary or other person designated to provide certain additional information on request.
For security investors, a copy of the most recent prospectus for the security.

Effective starting in 2007, a plan may arrange to provide individual investment advice, without liability for plan officials, subject to strict conditions.

How Must Your Plan Be Funded?

ERISA sets minimum funding rules to make sure sufficient money is available to pay promised pension benefits to you when you retire. Funding rules establish the minimum amounts that employers must contribute to plans to ensure that plans have enough money to pay benefits when due. The minimum funding rules apply to defined benefit plans and money purchase plans.

Defined benefit plans generally fund future benefits over time. The plans consider probable investment gains and losses and make assumptions about factors such as future interest rates and potential workforce changes. ERISA provides detailed funding rules to protect you from financing methods that could prove inadequate to pay the promised benefits when they are due.

ERISA provides severe sanctions against an employer who fails to meet the funding obligations. Any employer who fails to comply with the minimum funding requirements is charged an excise tax on the amount of the accumulated funding deficiency unless the employer receives a waiver of the minimum funding requirements. This tax is imposed whether the under-funding was accidental or intentional.

Certain actions can also be taken by the Department of Labor and the Pension Benefit Guaranty Corporation to enforce the minimum funding standards.

A plan that intends to relieve plan officials of fiduciary duties over investments must inform you of that fact.

If a defined benefit plan is less than 90 percent funded, you must be notified each year about the plan's funding status and PBGC's guarantees. This rule is effective for plan years beginning after December 8, 1994.

Can Your Plan Be Terminated?

Although pension plans must be established with the intention of being continued indefinitely, employers are allowed to terminate plans.

If your plan terminates or becomes insolvent, ERISA provides you with some protection. In a tax-qualified plan, your accrued benefit must become 100 percent vested as soon as the plan terminates, to the extent then funded.

If a partial termination occurs, for example, if your employer closes a particular plant or division that results in the layoff of a substantial portion of plan participants, immediate 100 percent vesting, to the extent funded, also is required for affected employees.

What If Your Plan Terminates Without Enough Money to Pay the Benefits?

If your terminated plan is a defined benefit plan insured by the Pension Benefit Guaranty Corporation, PBGC will guarantee the payment of your vested pension benefits up to the limits set by law. Benefits that are not guaranteed or that exceed PBGC's limits may be paid, depending on the plan's funding and on whether PBGC is able to recover additional amounts from the employer.

If a plan terminates, and the plan purchases annuity contracts from an insurance company to pay pension benefits in the future, plan fiduciaries must take certain steps to select the safest available annuity. Thus, in accordance with Department of Labor guidance, the plan must conduct a thorough search with respect to the financial soundness of insurance companies that provide annuities, to better assure the future payment of benefits to participants and beneficiaries.

Is Your Accrued Benefit Protected if Your Plan Merges?

Your employer may choose to merge your plan with another plan. If your plan is terminated as a result of the merger, the benefit you would be entitled to receive after the merger must be at least equal to the benefit you were entitled to receive before the merger.

Special rules apply to mergers of multi-employer plans, which are generally under the jurisdiction of the PBGC.

Suing Under ERISA

As a plan participant or beneficiary, you may bring a civil action in court to do any of these things:

Recover benefits due you and enforce your rights under the plan.
Get access to the plan documents you requested in writing.

If your plan administrator does not supply the plan documents within 30 days of your written request, a court could find the plan administrator personally liable for up to $100 per day (unless the failure results from circumstances reasonably beyond his or her control).

Clarify your right to future benefits.
Get appropriate relief from a breach of fiduciary duty.
Enjoin any act or practice that violates the terms of the plan or any provision of Title I of ERISA, such as the reporting and disclosure, participation, vesting or funding, and fiduciary provisions, or to obtain other relief.
Enforce the right to receive a statement of vested benefits on termination of employment.
Obtain review of a final action of the Secretary of Labor; restrain the Secretary from taking action contrary to ERISA; or compel the Secretary to take action.
Obtain review of any action of the PBGC or its agents that adversely affects you.

A lawsuit under ERISA is filed in a federal district court. If you seek benefits or clarification of your right to future benefits, you can choose to file in a state court.

The court has the discretion to order either party in the suit (you or the plan, fiduciaries, or sponsor) to pay reasonable attorney fees and costs in a suit under ERISA.

Does the Government Ever Sue Employers or Sponsors?

The Secretary of Labor may directly bring a civil action under ERISA to enforce the fiduciary duty provisions of ERISA (explained later). The Labor Secretary also has limited authority to bring a civil action to enforce ERISA's participation, vesting, and funding standards with respect to a tax-qualified plan. In addition, the Secretary has the discretion to intervene in lawsuits filed in federal court to enforce rights under ERISA.

If you sue in federal court claiming a breach of fiduciary duty, you must provide a copy of the complaint to the Secretary of Labor and the Secretary of the Treasury by certified mail.

It is not necessary to provide such notice to any government agency if you bring a lawsuit solely to recover benefits under the plan.

Can You Be Fired for Suing for Making a Claim Under ERISA?

ERISA prohibits employers from promising pensions and then firing or disciplining workers to avoid paying a pension. To that end, ERISA says it is unlawful for an employer to discharge, fine, suspend, expel, discipline, or discriminate against you or any beneficiary for the purpose of interfering with the attainment of any right to which you may become entitled under the plan or the law.

Also, employers cannot take any of these steps against you for exercising your rights under a plan or under ERISA, or for giving information or testimony in any inquiry or proceeding relating to ERISA. Further, the use of force or violence to restrain, coerce, or intimidate you for the purpose of interfering with your rights or prospective rights is punishable by a fine of up to $10,000 and/or up to one year in prison.

Can Your Creditors Get to Your Pension if You Get into Financial Trouble?

In general, your pension benefits cannot be taken away from you by people to whom you owe money. However, the IRS can attach such benefits for tax claims. And the law makes a limited further exception when family support is at stake. Thus, a state court can transfer some of your pension benefit by issuing a qualified domestic relations order (QDRO), and the plan must honor the order.

What Is a QDRO?

Before a plan honors a domestic relations order awarding part or all of your pension benefit to your spouse, former spouse, child or other dependent, the plan must determine whether the order is a qualified domestic relations order (QDRO.) The order must meet these requirements:

It must relate to child support, alimony, or marital property rights
It must be made under state domestic relations law.
It should clearly specify your name and last known mailing address and the name and last known address of each alternate payee. (The alternate payee is the spouse, ex-spouse, or dependent to whom the benefits are awarded.)
It must state the name of your plan; the amount or percentage - or the method of determining the amount or percentage - of the benefit to be paid to the alternate payee; and the number of payments or time period to which the order applies.

It cannot provide a type or form of benefit that is not provided under the plan, and it cannot require the plan to provide an actuarially increased benefit.

If an earlier QDRO applies to your benefit, the earlier QDRO takes precedence over a later one.

In certain situations, a QDRO may provide that payment is to be made to an alternate payee before you are entitled to receive your benefit. For example, if you are still employed, a QDRO could require payment to an alternate payee to begin on or after your "earliest retirement age," whether or not the plan would allow you to receive benefits at that time.

If you are in the process of a divorce, and a QDRO is being prepared for your family, be sure that the QDRO addresses (1) whether a benefit is payable to an alternate payee on your death and (2) the consequences of the death of the alternate payee.

The court's order can be in the form of a state court judgment, decree or order, or court approval of a property settlement agreement.

Who Enforces ERISA?

The Department of Labor enforces Title I of ERISA, which, in part, establishes participants' rights and fiduciaries' duties. However, certain plans are not covered by the protections of Title I. They are:

Federal, state, or local government plans, including plans of certain international organizations
Certain church or church association plans
Plans maintained solely to comply with state workers' compensation, unemployment compensation or disability insurance laws
Plans maintained outside the United States primarily for non-resident aliens
Unfunded excess benefit plans-plans maintained solely to provide benefits or contributions in excess of those allowed for tax-qualified plans

The Labor Department's Pension and Welfare Benefits Administration is the agency charged with enforcing the rules governing the conduct of plan managers, investment of plan assets, reporting and disclosure of plan information, enforcement of the fiduciary provisions of the law, and workers' benefit rights.

Other federal agencies that regulate plans include:

The Internal Revenue Service is responsible for ensuring compliance with the Internal Revenue Code, which establishes the rules for operating a tax-qualified pension plan, including pension plan funding and vesting requirements. A pension plan that is tax-qualified can offer special tax benefits both to the employer sponsoring the plan and to the participants who receive pension benefits.

The Pension Benefit Guaranty Corporation, PBGC, a non-profit, federally-created corporation, guarantees payment of certain pension benefits under defined benefit plans (traditional pension plans) that are terminated with insufficient money to pay benefits.

Survivors Benefits: A Guide To This Often overlooked Insurance Add-On

Tue, 10 Oct 2023 19:26:17 GMT

Many people think that Social Security only provides retirement checks, but that's just part of what the Social Security Administration (SSA) does. In the event of your death, your survivors may also be entitled to Social Security benefits, an important consideration when figuring out how much life insurance you'll need to provide for your family when you die.

Part of the Social Security tax you pay goes toward survivors benefits. When someone who has worked and paid into Social Security dies, these survivors benefits can be paid to certain family members, including widows, widowers (and divorced widows and widowers), children, and dependent parents. It's a benefit that shouldn't be overlooked when figuring out your life insurance needs.

You, along with millions of other people, earn survivors benefits by working and paying Social Security taxes and roughly 98 percent of the children in this country are eligible for benefits if a working parent should die. In fact, Social Security pays more benefits to children than any other federal program.

Eligibility for Survivors Benefits

When you die, certain members of your family may be eligible for survivors benefits if you paid Social Security taxes and earned enough "credits." Most people earn a maximum of four credits per year. In 2023, you earn one (1) Social Security and Medicare credit for every $1,640 in covered earnings annually. You must earn $6,560 to get the maximum four (4) credits for the year.The number of credits you need to get retirement benefits depends on your date of birth. The younger you are, the fewer credits are needed to be eligible for survivors benefits, but nobody needs more than 40 credits (10 years of work).

If you stop working before you have enough credits to qualify for benefits, your credits will remain on your Social Security record. If you return to work, later on, you can then add credits so that you may qualify. No retirement benefits can be paid until you have the required number of credits.

If you are like most people, however, you will earn many more credits than you need to qualify for Social Security. While these extra credits do not increase your Social Security benefit, the income you earn while working will increase your benefit.

Under a special rule, benefits can be paid to your children, as well as your spouse who is caring for the children even if you don't have the number of credits needed. Benefits can be paid as long as you have credit for one-and-one-half years of work in the three years just before your death.

Who Can Get the Benefits?

When you die, your widow or widower may be able to receive full benefits at full retirement age. Full retirement age is age 66 for people born in 1945-1956 and gradually increases to age 67 for people born in 1962 or later. Reduced widow or widower benefits can be received as early as age 60. If your surviving spouse is disabled, benefits can begin as early as age 50.

In addition, a widow or widower can be paid benefits at any age if she or he takes care of your child who is under 16 or disabled and who gets benefits.

Dependent parents, age 62 or older (for parents to qualify as dependents, you would have had to provide at least one-half of their support) and unmarried children under age 18 (up to age 19 if they are attending elementary or secondary school full time) are also eligible for survivors benefits. Your children can get benefits at any age if they were disabled before age 22 and remain disabled, and under certain circumstances, benefits can also be paid to your stepchildren or grandchildren.

There is a special one-time payment of $255 that can be made when you die if you have accumulated enough work credits. This payment can be made only to your spouse or minor children if they meet certain requirements.

If you have been divorced, your former wife or husband who is age 60 or older (50-59 if disabled) can get benefits if your marriage lasted at least 10 years. Your former spouse, however, does not have to meet the age or length-of-marriage rule if he or she is caring for his/her child who is younger than age 16 or who is disabled and also entitled based on your work. The child must be your former spouse's natural or legally adopted child.

Benefits paid to you as a surviving divorced spouse who meets the age or disability requirement as a widow or widower won't affect the benefit rates for other survivors getting benefits on the worker's record. However, if you are the surviving divorced mother or father who has the worker's child under age 16 or disabled in your care, your benefit will affect the amount of the benefits of others on the worker's record.

Benefits paid to a surviving divorced spouse who is 60 or older will not affect the benefit rates for other survivors getting benefits.

How Much Are the Benefits?

The amount of money your family receives from Social Security depends on your average lifetime earnings. The higher your earnings, the higher their benefits will be. There is a limit to the benefits that can be paid to you and other family members each month. The limit varies but is generally between 150 and 180 percent of the deceased's benefit amount.

To get an estimate of the Social Security survivor's benefits that could be paid to your family, go to SSA.gov and create an online mySocialSecurity account. Creating an account gives you the control to check your Social Security Statement, change your address, verify your reported earnings, estimate your future benefits, and much more. You can also call Social Security at 800-772-1213 and ask for a Request for Earnings and Benefit Estimate Statement .

How to Apply for Benefits

When you apply for benefits, you will need to furnish certain information including proof of death - either from a funeral home or death certificate, your Social Security number as well as the deceased worker's, your birth and marriage certificates (if applicable), dependent children's Social Security numbers, if available, and birth certificates.

How you sign up for survivors benefits depends on whether or not you are getting other Social Security benefits, but in general, survivors receive:

A widow or widower, at full retirement age or older, generally receives 100 percent of the worker's basic benefit amount;
A widow or widower, age 60 or older, but under full retirement age, receives about 71-99 percent of the worker's basic benefit amount; or
A widow or widower, any age, with a child younger than age 16, receives 75 percent of the worker's benefit amount.
Children receive 75 percent of the worker's benefit amount.

No Other Social Security Benefits

You should apply for survivors benefits promptly because, in some cases, benefits may not be retroactive. The rules are complicated and vary depending on your situation, so you should talk to a Social Security representative about the options available to you.

Getting Other Social Security Benefits

If you are getting benefits as a wife or husband based on your spouse's work when you report the death to SSA, your payments will change to survivors benefits.

If you are getting benefits based on your own work, you may be able to get more money as a widow or widower. If so, you will receive a combination of benefits that equals the higher amount. You will need to complete an application to switch to survivors benefits, and SSA will need to see your spouse's death certificate. In addition, if you get Social Security survivors benefits, the amount of your benefits may be reduced if your earnings exceed certain limits. There are no limits once you reach 70.Pensions from work not covered by Social Security.

If you get a pension from work where you paid Social Security taxes, that pension will not affect your Social Security benefits. However, if you get a pension from work that was not covered by Social Security - for example, the federal civil service, some state or local government employment or work in a foreign country - your Social Security benefit may be reduced.

If You Still Work

If you work while getting Social Security survivors benefits and are younger than full retirement age, your benefits may be reduced if your earnings exceed certain limits. The full retirement age was 65 for people born before 1938 but gradually increases to 67 for people born in 1960 or later. There is no earnings limit beginning with the month you reach full retirement age. Also, your earnings will reduce only your benefits, not the benefits of other family members.

To find out what the limits are this year and how earnings above those limits reduce your Social Security benefits, contact Social Security .

If You Remarry

In general, you cannot get survivors benefits if you remarry; however, remarriage after 60 (50 if disabled) will not prevent benefit payments on your former spouse's record - and, at 62 or older, you may get benefits on the record of your new spouse if they are higher.

Medicare

Medicare is a health insurance plan for people who are 65 or older. People who are disabled or have kidney failure also can get Medicare. Like Social Security, Medicare is financed by a portion of the payroll taxes paid by workers and their employers.

If you live in Puerto Rico you will not receive Medicare Medical Insurance (Medicare Part B) automatically. You will need to sign up for it during your initial enrollment period or you will pay a higher premium. To sign up, call the Social Security Administration at 1-800-772-1213 or contact your local Social Security office.

Medicare has four parts:

Part A: Hospital Insurance - helps pay for inpatient care in a hospital or skilled nursing facility (following a hospital stay), some home health care and hospice care.
Part B: Medical Insurance - helps pay for doctors' services and many other medical services and supplies that are not covered by hospital insurance.
Part C: Medicare Advantage - Medicare Advantage Plans are not part of original Medicare, but instead are plans offered by private health insurers approved by Medicare. People with Medicare Parts A and B can choose to receive all of their health care services through one of these provider organizations under Part C. It may also provide Prescription Drug Coverage (Part D).
Prescription Drug Coverage - helps pay for medications doctors prescribe for treatment.

Many retirees sign up for Medigap supplement insurance plans that cover gaps (and costs) that Original Medicare (Parts A and B) does not cover. Medicare supplement plans include Plans A, B, C, D, F, G, K, L, M, and N. Each of these plans has different coverages and in some states, Plans F and G, offer high-deductible options as well.

For assistance navigating Medicare, contact your local State Health Insurance Program (SHIP) .

Confidentiality of Your Personal Information

Social Security keeps personal information on millions of people. That information, such as your Social Security number, earnings record, age, and address, is kept confidential. Generally, SSA will discuss this information only with you and needs your permission if you want someone else to help with your Social Security business.

If you send a friend or family member to an SSA office to conduct your Social Security business, send your written consent with them. Only with your written permission can SSA discuss your personal information with them and provide the answers to your questions.

In the case of a minor child, the natural parent or legal guardian can act on the child's behalf in taking care of the child's Social Security business.

The privacy of your records is guaranteed. There are times when the law requires Social Security to give information to other government agencies to conduct other government health or welfare programs such as Aid to Families with Dependent Children, Medicaid, and SNAP, the Supplemental Nutrition Assistance Program (formerly known as food stamps). Programs receiving information from Social Security are prohibited from sharing that information.

Death of a Loved One: Frequently Asked Questions

Tue, 10 Oct 2023 18:57:45 GMT

What papers will I need if a family member dies?

Here is a list of the papers that you will probably need:

Certified copies of the death certificate (at least 10). You can purchase them through the funeral director or directly from the County Health Department.
Copies of all insurance policies, which may be located in the deceased's safe deposit box or among his or her personal belongings.
Social Security numbers of the deceased, the spouse, and any dependent children.
Military discharge papers, if the deceased was a veteran. If you cannot find a copy, write to The Department of Defense, National Personnel Record Center, 1 Archives Drive, St. Louis, MO 63138.
Marriage Certificate, if the spouse of the deceased will be applying for benefits. Copies of marriage certificates are available at the Office of the County Clerk where the marriage license was issued.
Birth Certificates of dependent children. Copies are available at either the State or the County Public Health offices where the child was born.
The Will, which may be with the deceased's lawyer.
A complete list of all property including real estate, stocks, bonds, savings accounts and personal property of the deceased.

If the death is not unexpected, you should try to gather these papers in advance (other than the death certificate, of course) to lessen the strain at the time of death.

What steps should I take regarding the deceased's assets?

You should check with your financial advisor as to how you should handle the following assets of the deceased, but some general rules of thumb include:

Insurance Policies. You may need to change the beneficiaries of policies held by the spouse of the deceased. Moreover, if the spouse does not have any dependents, it might be wise to reduce the amount of life insurance coverage. Auto and home insurance may also need revision.
Automobiles. Check with your State DMV to see if the title of the deceased's car needs to be changed.
Bank Accounts. If the deceased and his or her spouse had a joint bank account, title will automatically pass to the surviving spouse. Notify the bank to change its records to reflect this change in ownership. If a bank account was held only in the name of the deceased, that asset will have to go through probate (unless it's a trust account).
Stocks and Bonds. To change title to stocks or bonds, check with the deceased's broker.
Safe Deposit Box. In most states, you will need a court order to open a safe deposit box that is rented only the name of the deceased.

In most states, only the will and other materials pertaining to the death can be removed before the will has been probated.

Credit Cards. Any credit cards exclusively in the name of the deceased should be canceled (and any payments due should be paid by the estate). As to credit cards in the names of both the deceased and his or her spouse, the surviving spouse should notify the credit card companies of the death and ask that the card should be reissued in the survivor's name only.

You should update your own will if it provides that any of your property will pass to the deceased upon your death.

How can I avoid overpaying for the funeral of a family member?

The best way to avoid overpaying for a funeral is to plan ahead. Further, it pays to know about the "Funeral Rule," the regulation of the Federal Trade Commission (FTC) concerning funeral industry practices. The Funeral Rule provides that:

The funeral provider must give you, over the phone, price and other readily available information that reasonably answers your questions.
The funeral provider must give you (1) a general price list, (2) a disclosure of your important legal rights, and (3) information about embalming, caskets for cremation, and required purchases.
The funeral provider must disclose in writing any service fees for paying for goods or services on your behalf (such as flowers, obituary notices, pallbearers, and clergy honoraria). While some funeral providers charge you only their cost for these items, others add a service fee to their cost. The funeral provider must also inform you of any refunds, discounts, or rebates from the supplier of any such item.
The funeral provider must disclose in writing your right to buy, and make available to you, an unfinished wood box (a type of casket) or an alternative container for direct cremation.
You do not have to purchase unwanted goods or services or pay any fees as a condition to obtain those products and services you do want. In addition to the fee for the services of the funeral director and staff, you need to pay only for those goods and services selected by you or required by state law.
The funeral provider must give you an itemized statement of the total cost of the funeral goods and services you selected; this statement must disclose any legal, cemetery, or crematory requirements for you to purchase any specific funeral goods or services.
The funeral provider is prohibited from telling you that a particular funeral item or service can indefinitely preserve the body of the deceased in the grave or claiming that funeral goods such as caskets or vaults will keep out water, dirt, or other gravesite substances.

If you have a problem concerning funeral matters, and cannot resolve it with the funeral director, contact your federal, state, or local consumer protection agencies, the Funeral Consumers Alliance, or the International Conference of Funeral Examining Boards.

What Social Security benefits are surviving family members entitled to?

The deceased is considered covered by Social Security if he or she paid into Social Security for at least 40 quarters. Check with your local Social Security office or call 800-772-1213 to determine if the deceased was eligible. If the deceased was eligible, there are two types of possible benefits.

One-Time Death Benefit

Social Security pays a death benefit toward burial expenses. Complete the necessary form at your local Social Security office, or ask the funeral director to complete the application and apply the payment directly to the funeral bill. This payment is made only to eligible spouses or to a child entitled to survivors benefits.

Survivors Benefits for a Spouse or Children.

If the spouse is age 60 or older, he or she will be eligible for benefits. The amount of the benefit received before age 65 will be less than the benefit due at age 65 or over. Disabled widows age 50 or older are eligible for benefits. The spouse of the deceased who is under the age of 60 but who cares for dependent children under the age of 16 or cares for disabled children may be eligible for benefits. The children of the deceased who are under the age of 18 or are disabled may also be entitled to benefits.

What is probate?

Probate is the legal process of paying the deceased's debts and distributing the estate to the rightful heirs. This process usually entails:

The appointment of an individual by the court to act as "personal representative" or "executor" of the estate. This person is often named in the will. If there is no will, the court appoints a personal representative, usually the spouse.
Proving that the will is valid.
Informing creditors, heirs, and beneficiaries that the will is probated.
Disposing of the estate by the personal representative in accordance with the will or state law.

The spouse or personal representative named in the will must file a petition with the court after the death. There is a fee for the probate process.

Depending on the size and complexity of the probable assets, probating a will may require legal assistance.

Assets that are jointly owned by the deceased and someone else are not subject to probate. Proceeds from a life insurance policy or Individual Retirement Account (IRA) that are paid directly to a beneficiary are also not subject to probate.

What taxes are due upon the death of a family member?

Here is a summary of the various taxes that may have to be paid on the death of a family member:

Federal Estate Tax. Amounts passing to a surviving spouse, and amounts passing to charity, are generally exempt from estate tax. Estate tax is generally only due on estates which, after reduction for what goes to spouse and charity, exceed the unified credit exemption equivalent, which in 2023 is $12,920,000 ($12,060,000 in 2022).

Contact the IRS for a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, if you need to file an estate tax return. A federal estate tax return must be filed and taxes paid within nine months of the date of death absent extension.

State Estate and Inheritance Taxes. State laws vary. Many states impose estate taxes, which may apply in addition to federal estate taxes, or may apply even when federal estate taxes don't. Some states impose inheritance taxes on individuals who receive inheritances, rather than on the estate.

Income Taxes. The federal and state income taxes of the deceased are due for the year of death. The taxes are due on the normal filing date of the following year unless an extension is requested. The spouse of the deceased may file a joint federal income tax return for the year of death. A spouse with a dependent child may file jointly for two additional years. IRS Publication 559, Survivors, Executors, and Administrators, may be helpful.

Can I refuse to accept property bequeathed to me by a family member so as to cut taxes?

The disclaimer or generation-skipping transfer tax is a way for you to refuse all or part of property that would otherwise pass to you, via will, intestacy laws, or by operation of law. An effective disclaimer passes the property to the next beneficiary in line.

The fact that the property is treated as if it had passed directly from the decedent to the next-in-line beneficiary may save thousands of dollars in estate taxes. The provision for a disclaimer in a will and the wise use of a disclaimer allows intra-family asset shifting and income shifting for maximal use of the estate tax marital deduction, the unified credit, and the lower income tax brackets.

Disclaimers can also be used to provide for financial contingencies. For example, you can disclaim an interest if someone else is in need of the funds.

Can I file a joint return for the year my spouse dies?

Yes, the surviving spouse can elect to file a joint return provided they did not remarry prior to the end of the tax year.

Must I pay taxes on the proceeds of a life insurance policy payable to me?

Generally, no. Proceeds of life insurance policies are not taxable income unless the recipient paid for the right to receive them. For example, if you purchased a policy as an investment.

If I receive distributions from a retirement plan or an IRA of the deceased, must I pay income taxes on the distribution?

Generally, yes. This is known as income in respect of a decedent. Since the deceased has not paid income tax on the distribution, the tax is owed by the recipient. If the value of the account was included in the decedent's estate tax return, you may be entitled to a deduction for a portion of the estate taxes paid.

How will my spouse's assets be distributed if he/she dies without a will?

Assets held jointly with the right of survivorship will transfer by law to the joint holder. Insurance policies or retirement accounts with a designated beneficiary will go to that beneficiary. Assets owned solely by the decedent will transfer according to state law. This is known as intestacy. These laws vary by state, but generally, give preference to the spouse and children.

Postmortem Letter: How To Prepare It and What To Include

Tue, 10 Oct 2023 18:51:56 GMT

The postmortem letter, a simple and practical estate planning tool you can put together yourself, can protect your estate, maximize the amount available to heirs and save your spouse and executors a lot of trouble. This important letter tells your executor and survivors where to locate everything they need to carry out your instructions.

Does anyone other than yourself know where your tax records and supporting tax documents are located? How about deeds, titles, wills, and insurance papers? Does anyone know who your accountant is? Your lawyer? Your broker? Your financial planner? Your insurance agent? If you pass away without leaving your heirs this information, it will cause many headaches. Worse than that, part of your estate may have to be spent on needless taxes, claims, or expenses because the information is missing.

The postmortem letter is an often overlooked estate planning tool. Tell your executors and survivors what they need to know to maximize your estate, the location of assets, records, and contacts. Without the postmortem letter, you risk losing part of your estate's assets because necessary assets and documentation cannot be located.

What the Postmortem Letter Does

A postmortem letter provides executors and survivors with the location of assets, the identity of professionals consulted by you during life, and the location of important records. And while its inclusion in your estate plan is optional, it is often a very helpful document during an especially stressful time.

To represent you after your death, your executor must know almost everything you know. They must have all the facts, figures, and proof you have at your fingertips. This is where the postmortem letter is most helpful. Only with this information can the executor carry out your desires.

The postmortem letter also informs your loved ones of things you would like done in the event of your death and guides you on how you would like certain items handled. This includes many things which may not be appropriate to include in your will, or that need to be handled immediately after death and before a reading of your will.

What the Postmortem Letter Does Not Do

The postmortem letter cannot be used in place of a properly executed will and does not have the legal force of a will. Similarly, it does not take the place of a living will. The postmortem letter is designed to convey instructions after your death, unlike after a life-threatening injury. It is vital to have both a will, a living will, and a postmortem letter.

How To Get the Postmortem Letter to Your Executors

Write the postmortem letter now and leave several copies of it in places where it is certain to be found after your death. For example, attached to your will, in your desk, with your spouse, with your attorney, with your executor, or in a safe deposit box.

If you do not want the information in the letter revealed before your death, leave the letter sealed. Do not leave the only copy of your postmortem letter in your safe deposit box. It may never be found or may be inaccessible after death.

It is extremely important that instructions be left with the survivors that none of your papers are to be thrown away until the matter is discussed with your attorney, accountant, or executor. Otherwise, your efforts to provide information helpful to your estate may be thwarted.

It is critical to update the letter periodically to account for changes that occur after you write it.

What The Postmortem Letter Should Contain

The following items should be included in the postmortem letter.

To-Do List

Notify your employer (remember to include phone numbers).
Notify certain friends and relatives (provide a list with phone numbers).
If you have volunteered as an organ donor, provide the information necessary for your family to act on your wishes.
Notify the Social Security Administration (include your social security number for convenience).
List of names and contact numbers for an accountant, attorney, financial planner, and insurance agent(s).
List of club memberships.
Any instructions on the care of pets.

Location of Your Will

The location of your final executed will should be mentioned, along with any copies.

Do not leave a will in a safe deposit box. Safe deposit boxes are sealed on the death of the decedent in many states; this will cause headaches and delays.

Guardians of Children

The names and addresses of guardians for minor children in case they are orphaned should be mentioned in your will. These should also be included in the letter.

Funeral Arrangements and Cemetery Plot

If you have arranged funeral services or established a preneed funeral trust, provide details in the letter. The location of your cemetery plot and the location of the deed or certificate relating to the burial plot should be mentioned. The letter should mention any instructions for the executor relating to burial.

For the reasons mentioned above under "Location of Will," do not leave the cemetery plot deed or certificate in a safe deposit box.

Safe Deposit Boxes

The location of safe deposit boxes, and the contents, along with the location of keys, passwords, and combinations, should be mentioned. The letter should indicate whether anyone else has access to the boxes. If you have rented a post office box, include the number, location of the box, and location of the key.

If other people have access, ask the executor to take inventory of the box before anyone else is allowed to take items out of the box.

Bank, Checking, and Credit Card Accounts

All checking and savings accounts and their account numbers should be mentioned. Instruct the executor whether a stop should be placed on withdrawals from these accounts and whether anyone else has the right to withdraw from them, whether as a co-depositor or under a power of attorney.

Describe where your current and past checkbooks and canceled checks can be found. These may save the estate from having to pay a claim or expense that has already been paid and can establish the cost of an asset.

Be sure to mention any accounts that are not in your name, such as deposits in a Swiss numbered account. Otherwise, these accounts may be lost because no one knows about them.

Keep savings accounts active by periodically sending a request for the balance in writing or by making deposits. Inactive accounts left for a certain period may revert to the state.

A list of credit card accounts and numbers should be included. The executor should be instructed to cancel credit card accounts immediately and to change joint accounts to single accounts.

Loans

Provide information on any outstanding debts. Some loans, such as student loans and home mortgages, may have an insurance feature that cancels the debt in the event of your death. In the case of student loans, this was often paid for in the form of a fee at the amount the loan was disbursed, and many people are unaware of this feature. Examine your loan documents for any such features and detail them in your letter.

Tax-Related Matters

The location of copies of your income tax returns going back as far as possible should be mentioned, including any gift-tax returns filed at any time. If copies cannot be located, your memory of when and where the gift tax returns were filed and the gift to which they related should be mentioned. If any refund claims are pending, or if you feel a refund should be filed, mention these as well.

Attorneys and Other Professionals

Mention the names and addresses of any professionals associated with your affairs or who could assist the executor. Include accountants, attorneys, insurance agents, financial advisors, bank officers, realtors, and brokers. If you relied heavily on these people, they could save your estate plenty of money and trouble just by answering a few of the executor's questions.

Also, mention your physician since your executor may need help in proving you were mentally competent.

Insurance-Related Matters

Mention all life insurance policies owned, with the policy numbers. Give the location of the policies. Do not neglect to mention employer-provided group insurance.

All property, liability, malpractice, business continuation, and other types of insurance policies should be mentioned. These policies may save the estate from paying a claim and contain the location and description of properties. Further, access to these policies may allow the estate to obtain reimbursement for expenses incurred immediately before death.

Mention policies that have lapsed since they may still have some value.

Property Owned

List all assets you own and give the location of deeds and titles. Include personal and real property.

If you know of a market for some of your assets that might otherwise be difficult to sell (e.g., a special collection or unique asset), tell the executor about it.

Don't neglect to mention properties that will not be easy to locate, e.g., the property you have loaned out or sold on consignment.

If there is any reason why the executor should value a piece of property at less than its fair market value, explain why.

Investments

List all brokerage accounts and other investment vehicles, such as limited partnerships or interests in real estate. Give the location of brokers' confirmation slips for securities purchases going back as far as possible to establish the cost of securities. The cost is your tax basis, which will affect the amount of tax you pay on a sale for securities you may have sold before death.

The basis of securities held at the time of death will be determined based on their current value. If you cannot locate confirmation slips, note the transfer dates shown on stock certificates and registered bonds. These dates will allow you to look up the price of the stock.

Provide information on all retirement accounts, including IRAs. Indicate your designated beneficiary and describe where statements are located. In the case of IRAs, provide information on the account's tax status. In particular, if non-deductible contributions were made, a portion of the account may not be taxed to the beneficiary.

Employment

Provide a list of all prior employers, no matter how long ago you worked for them. You may be entitled to pension benefits or death benefits. Tell the executor where to find a description of any pension benefits you are entitled to.

Provide the executor with a record of any governmental employment, past or present. For the armed services, include the branch of service, serial number, and approximate dates. You may be entitled to veterans' benefits or survivors' benefits.

Personal Papers

Mention the location of your passport and birth certificate, which may be needed for Social Security benefits and employee retirement plans, and specify the location of your marriage certificate, which may be needed in connection with the marital deduction, joint gifts, and statutory spousal rights. A divorce decree will also be necessary and should be mentioned.

Inheritances

If you received an inheritance from someone, include that person's name and the date of death. The executor may be able to claim a state or federal estate tax credit for transfers within ten years of your death. Note the location of any letters from the person's executor, if any. If you have any future rights in someone else's property, whether by will or by trust, include those details as well.

Trusts

If you had ever set up a trust or been named as a trust beneficiary, where the trust instrument is located, and when the trust was set up.

Money Owed to You

Mention debts owed to you by others and any proof that the debt exists.

Funerals: What To Do At This Stressful Time

Tue, 10 Oct 2023 18:31:41 GMT

Americans arrange more than two million funerals each year, often costing $10,000 or more. What are your options? What is required by law? What information are you entitled to? This Guide provides the answers to these and other questions.

Most decisions about purchasing funeral goods and services are made by grieving people under time constraints. Thinking ahead may help you make informed and thoughtful decisions about funeral arrangements. Moreover, it will relieve some of the stress. If you plan, you can carefully choose the specific items you want and need and can compare prices offered by one or more funeral providers.

There are federal regulations aimed at protecting purchase vs. funeral arrangements and services. This Financial Guide explains how to take advantage of these regulations to arrange for a funeral in the most cost-effective way.

Arranging a Funeral

When the time comes to make funeral arrangements, first decide how much you want to spend for the funeral. Funerals cost an average of $7,600 and often much more, depending on location and style. Knowing how much you want to spend will help you to plan the funeral and to keep costs within reason.

A cost-saving alternative for some people is a memorial society (click here for a list of memorial societies). Members of these non-profit groups, located in 40 states, have access to less expensive funeral alternatives and may save you hundreds or even thousands of dollars on funeral arrangements.

If you decide to plan funeral arrangements, either for yourself or a loved one, you'll have choices of several types of dispositions and ceremonies. Unless a deceased person has indicated their desires, you must choose how the remains will be disposed of for burial, entombment, or cremation. You may wish to consult with your religious leader. The type of disposition you choose will affect the cost.

To help ensure that your wishes are fulfilled, you may want to write down your preferences. It also may be helpful to tell relatives and other responsible persons what you have decided.

When planning funeral arrangements, here are some of the services and options you should consider:

Bring a friend or relative with you, someone who is not emotionally involved, when making funeral arrangements, whether or not you are planning them. This can help you keep the proper perspective on costs and elaborateness.

Filing of the death certificate and provision of copies
Moving the deceased's remains to the funeral home
Embalming
Preparing the body
Whether the service is to be indoors, at the graveside, or both
Location of the service-at funeral home or at church or temple
Content of the service, who will conduct it, and other speakers
Music
Flowers
Pallbearers
The hearse to be used and limousines for family members
Transportation of the body to the cemetery
Whether casket will be open or closed
Viewing the body
Chairs and tents for guests at the cemetery
Guest book to be signed
Headstone
Obituaries

How the Funeral Rule Protects You

The Funeral Rule is the FTC's trade regulation rule concerning funeral industry practices and has been in effect since April 30, 1984. This rule, a trade regulation rule for the funeral industry, enables you to get cost and other information about funeral arrangements over the telephone and in person. It makes it easier to select only those goods and services you want or need and to pay for only those you select.

The Funeral Rule requires that the funeral provider gives you a Statement of Funerals and Services Selected after you select the funeral goods and services you would like. The statement shows the prices of the items you are considering for purchase and the total price. It also requires providers to give you the cost of individual items over the telephone or, when you inquire in person about funeral arrangements, the funeral home will give you a written price list of the goods and services available.

When arranging a funeral, you can purchase individual items or a package of goods and services. If you want to purchase a casket or vault, the funeral provider will supply lists that describe all the available selections and their prices. As described in detail in the following section, the Funeral Rule helps you obtain information about the cost and availability of individual funeral goods and services.

Telephone Inquiries

When you call a funeral provider and ask them about terms, conditions, or prices of funeral goods and services, the funeral provider will:

Give you prices and any other information from the price lists to reasonably answer your questions.
Let you know about any other information about prices or offerings that are readily available and reasonably answer your questions.

You can compare prices among funeral providers using the telephone. Getting price information over the telephone may help you select a funeral home and your desired arrangements.

In-Person Inquiries

If you inquire in person about funeral arrangements, the funeral provider will give you a general price list. This list, which you can keep, contains the cost of each funeral item and service offered. It also discloses important legal rights and requirements regarding funeral arrangements. It must include information about embalming, caskets for cremation, and required purchases.

Use this information to help select the funeral provider and items you want, need, and can afford.

Embalming Information

The Funeral Rule requires funeral providers to give you information about embalming that may help you decide whether to purchase this service. Under the Rule, a funeral provider:

May not falsely state that embalming is required by law.
Must disclose in writing that, except in certain special cases, embalming is not required by law.
May not charge a fee for unauthorized embalming unless it is required by state law.
Will disclose in writing that you usually have the right to choose a disposition, such as direct cremation or immediate burial, if you do not want to be embalmed.
Will disclose to you in writing that certain funeral arrangements, such as a funeral with viewing, may make embalming a practical necessity, and there would be a required purchase.

Cash Advance Sales

The Funeral Rule requires providers to disclose to you in writing if they charge a fee for buying cash advance items. Cash advance items are goods or services paid for by the funeral provider on your behalf. Some examples of cash advance items are flowers, obituary notices, pallbearers, and clergy honoraria. Some funeral providers charge you their cost for these items. Others add a service fee to their cost.

The Funeral Rule requires the funeral provider to inform you when a service fee is added to the price of cash advance items or if the provider gets a refund, discount, or rebate from the supplier of any cash advance item.

Direct Cremations

Some people may want to select direct cremation, which is the cremation of the deceased without a viewing or other ceremony at which the body is present. If you choose direct cremation, the funeral provider will offer you an inexpensive alternative container or an unfinished wood box. An alternative container is a non-metal enclosure used to hold the deceased. These containers may be of pressboard, cardboard, or canvas.

Because any container you buy will be destroyed during the cremation, you may wish to use an alternative container or an unfinished wood box for direct cremation. These could lower your funeral costs since they are less expensive than traditional burial caskets.

Under the Funeral Rule, funeral directors who offer direct cremations:

May not tell you state or local law requires a casket for direct cremation.
Must disclose in writing your right to buy an unfinished wood box (a type of casket) or an alternative container for a direct cremation
Must make an unfinished wood box or alternative container available for direct cremation.

Required Purchases

You do not have to purchase unwanted goods or services or pay any fees as a condition of obtaining those products and services you do want, other than one permitted fee for services of the funeral director and staff and fees for other goods and services selected by you or required by state law. Under the Funeral Rule:

You can choose only the funeral goods and services you want, with some exceptions.
The funeral provider must disclose this right in writing on the general price list.
The funeral provider must disclose on your itemized statement of goods and services selected the specific state law that requires you to purchase any particular item.
The funeral provider may not refuse, or charge a fee, to handle a casket you purchased elsewhere.

Preservative and Protective Claims

Under the Funeral Rule, funeral providers are prohibited from telling you a particular funeral item or service can indefinitely preserve the deceased's body in the grave. The information gathered during the FTC's investigation indicated these claims are not true. For example, funeral providers may not claim embalming, or a particular type of casket will indefinitely preserve the deceased's body.

The Rule also prohibits funeral providers from claiming that funeral goods, such as caskets or vaults, will keep out water, dirt, or other gravesite substances when not true.

Statement of Funeral Goods and Services Selected

The funeral provider will give you an itemized statement of the total cost of the funeral goods and services you select.

This statement also will disclose any legal, cemetery, or crematory requirements that require you to purchase any specific funeral goods or services.

The funeral provider must give you this statement after you select the funeral goods and services that you would like. The statement combines the prices of the individual items you are considering for purchase and the total price in one place. You can decide whether to add or subtract items to get what you want. If the cost of cash advance items is not known, the funeral provider must write down a good-faith estimate of their cost.

The Funeral Rule requires no specific form for this information. Therefore, this information might be included in any document they give you at the end of your discussion about funeral arrangements.

How to Make a Complaint

If you have a problem concerning funeral matters, you should, of course, first, attempt to resolve it with your funeral director. If dissatisfied, contact your federal, state, or local consumer protection agencies or one of the organizations in the "Useful Resources" section below.

While the Federal Trade Commission does not resolve individual consumer disputes, information about your experience may show a pattern of conduct or practices that the Commission may investigate to determine if any action is warranted.

Benefits for Widows/Widowers

Many people do not realize that widows and widowers can begin receiving Social Security benefits at age 60 (or age 50 if disabled) on the deceased spouse's account. If you are receiving widows/widowers (including divorced widows/widowers) benefits, you can switch to your retirement benefits (assuming you are eligible and your retirement rate is higher than your widow/widower's rate) as early as age 62.

In many cases, a widow or widower can begin receiving one benefit at a reduced rate and then switch to the other at an unreduced rate at age 65. Since the rules vary depending on the situation, talk to a Social Security representative about the options available to you.

Useful Resources

Most states have a licensing board that regulates the funeral industry. You may contact the licensing board in your state for information or help.
The International Conference of Funeral Service Examining Boards is a not-for-profit voluntary association providing examination services, information, and regulatory support to funeral service licensing boards and educators, governmental bodies, and other regulatory agencies.

The International Conference of Funeral Service Examining Boards

1885 Shelby Lane
Fayetteville, Arkansas 72704
479-442-7076

AARP publishes Smart Ways to Cover the Costs of a Funeral, as well as other helpful pamphlets and free guides.

American Association of Retired Persons (AARP)
AARP Fulfillment
601 E Street, N.W.
Washington, D.C. 20049

Funeral Consumers Alliance has a list of memorial societies and state funeral consumer alliances.

Funeral Consumers Alliance
33 Patchen Road
South Burlington, VT 05403
Tel. 802-865-8300

The Cremation Association of North America (CANA) is an association of crematories, cemeteries, and funeral homes that offer cremation. More than 750 members own and operate crematories and encourage advanced planning.

Cremation Association of North America
499 Northgate Parkway
Wheeling, Illinois 60090
312-245-1077

The International Order of the Golden Rule is an international association of independent funeral homes in which membership is by invitation only. Approximately 1,500 funeral homes are members of OGR.

International Order of the Golden Rule
3520 Executive Center Drive, Suite 300
Austin, TX 78731
800-637-8030

The National Funeral Directors Association is the largest educational and professional association of funeral directors. Established in 1882, it has 14,000 members throughout the United States.

National Funeral Directors Association
13625 Bishop's Drive
Brookfield, WI 53005
800-228-6332

The National Funeral Directors and Morticians Association is a national association of funeral firms in which membership is by invitation only and is conditioned upon the commitment of each firm to comply with the association's Code of Good Funeral Practice. Consumers may request a variety of publications through NSM's affiliate, the Consumer Information Bureau, Inc.

National Funeral Directors and Morticians Association
6290 Shannon Parkway
Union City, GA 30291
800-434-0958

If you have a complaint or question about funeral arrangements or funeral home practices:

Selected Independent Funeral Homes
500 Lake Cook Road, Su i te 205
Deerfield, IL 60015
800-323-4219

Death of a Spouse: Financial Steps You Should Take

Tue, 10 Oct 2023 18:21:35 GMT

The death of a spouse or loved one is a difficult time. Yet, during this period, important financial arrangements must be made. This Financial Guide will help you handle the many financial details that must be attended to on the death of a loved one.

Coping with the death of a spouse is difficult at best, but unfortunately, many decisions need to be made and actions must be taken in the first few months after the death occurs. This Financial Guide provides information that will help guide you through this difficult time.

Collecting the Papers

The first step is to collect the necessary paperwork so that you can finalize the estate and file for any benefits that you and your children are entitled to.

The Death Certificate

Many of the offices or agencies you contact will require you to provide a copy of the death certificate. You can buy certified copies of the death certificate through your funeral director or directly from the county health department for a small fee, typically a few dollars per certificate. It is worth paying the money for the certified copies, however, since many companies require it.

Whether you think you need them or not, try to get at least 10 certified copies of the death certificate.

Insurance Policies

You will probably find copies of life, health, home mortgage, accident, and other insurance policies in a safe deposit box or with your spouse's personal belongings. Any or all of these insurance policies could be sources of possible benefits to you and your children.

Social Security Numbers

You'll need the Social Security numbers of your spouse and any dependent children.

Your spouse's Social Security number can be found on the death certificate.

Military Discharge Papers

You will need a copy of a certificate of honorable (or other than dishonorable) discharge if your spouse was a veteran. If you cannot find a copy of the discharge, write to:

The Department of Defense
National Personnel Record Center
9700 Page Avenue
St. Louis, MO 63138
(314) 801-0800
website: www.archives.gov

Marriage Certificate

If you are going to apply for benefits based on your marital relationship, you will need copies of your marriage certificate. Copies are available at the office of the County Clerk where the marriage license was issued.

Children's Birth Certificates

You will need copies of birth certificates for dependent children. Copies are available at either the state or county public health offices where the child was born.

The Will

You will need a copy of the will. Your spouse's lawyer may have the will, or it may be in a safe, a safe deposit box, or with your spouse's personal belongings.

List of Assets

A complete list of all of your spouse's property, including real estate, stocks, bonds, savings accounts, and personal property will be needed. Land titles, stocks certificates, and other financial papers may be stored in a safe deposit box or another secure place.

Survivor Benefits

The next step is to determine whether you are eligible for any benefits.

Insurance

Contact any insurers that may have issued policies to your spouse. Your spouse may have had several types of insurance policies, including the following:

Life insurance,
Mortgage or loan insurance,
Accident insurance,
Auto insurance,
Credit card insurance, and
Various types of insurance provided by your spouse's employer.

The proceeds from an insurance policy can generally be paid directly to the named beneficiary. These claims can be processed quickly and are an important source of income for the survivors during this difficult time.

File claims for insurance policies as soon as possible, especially if finances are a concern.

You may be required to decide how you want the payments made. Options might include taking the money in a lump sum or having the insurance company make fixed payments over a period of time. Which payment option to choose depends on your financial situation. You may, for example, want smaller fixed payments in order to have a steady income. Or you may want the full amount immediately to pay bills or to invest.

It is highly recommended that you consult with a financial advisor about this decision. Do not succumb to pressure from an insurer to accept one plan or another. Take your time and make the right decision for you and your family.

Social Security

Your spouse is considered covered by Social Security if he or she paid into Social Security for at least 40 quarters. If you're not sure or need more information, contact your local Social Security Administration office or call 800-772-1213 to determine if he or she was eligible. To find the location of your local Social Security Office, visit the Social Security Administration Office Locator.

If the deceased was already receiving benefits, do not deposit any checks received after death before checking with Social Security.

If your spouse was eligible, there are two additional types of possible benefits: (1) a death benefit and (2) survivor's benefits.

One-Time Death Benefit. Social Security pays a one-time death benefit toward burial expenses. Complete the necessary form at your local Social Security office or ask the funeral director to complete the application and apply the payment directly to the funeral bill. This payment is made only to eligible spouses or to a child entitled to survivor's benefits.
Survivor's Benefits for a Spouse or Children. If you are age 60 or older, you may be eligible for survivor's benefits. The amount of any benefits for which you will be eligible before age 65 will be less than any benefits due at age 65 or over. If you are under age 60, you may also be eligible for benefits if you are a disabled widow, age 50 or older and you care for dependent children under age 16 or disabled children.

Children who are under age 18 or are disabled may also be entitled to benefits.

When applying for Social Security benefits, have available your spouse's birth and death certificates, your marriage certificate, birth certificates of any dependent children, Social Security numbers, and copies of your spouse's most recent federal income tax return.

Veterans' Benefits

If your spouse was a veteran who received a discharge other than dishonorable, you may be eligible to receive a non-service-related death benefit. For non-service-related deaths on or after October 1, 2019, VA will pay a $300 burial allowance (if not hospitalized by the VA at the time of death) and $796 for a plot. If the death happened while the Veteran was in a VA hospital or under VA contracted nursing home care, some or all of the costs for transporting the Veteran's remains may be reimbursed.

Burial in a national cemetery is free to a veteran, his or her spouse, and dependent children. Veterans are also eligible for a headstone or grave marker at no charge. The funeral director can help you apply for these benefits or you can contact the regional Department of Veterans' Affairs (VA) office.

If your spouse was receiving disability benefits, you and any dependent children may also be entitled to monthly payments. Check with your regional VA office.

Employee Benefits

If your spouse was employed at the time of death, ask his or her employer about any survivors' benefits. Your spouse may also be owed a paycheck for vacation or sick leave. If the employer-provided life, health, or accident insurance, you may be entitled to receive payments under these policies. If your spouse belonged to a union or professional organization, find out if this organization offers death benefits for members. If the death was work-related, you may be entitled to worker's compensation benefits.

You should also contact all past employers, including federal, state, or local governments, to determine whether you are entitled to any payments from a pension plan.

If your spouse was already retired and was receiving a pension, check with the employer to determine if you will continue to receive a pension payment, and in what amount. You should get professional guidance as to when and how to take any retirement plan distributions due your spouse or you.

The Will

If your spouse had a valid will, try to find a copy of it. Check with your lawyer, family and anyone who might know where the will is kept. It may be stored in a safe deposit box, which is sealed at the time of death in some states.

Wills should not be stored in safe deposit boxes.

If your spouse does not have a will, his or her estate will be distributed according to state intestacy law. However, the state intestacy law will not apply to property where the title is in the name of the deceased and another person who has a right of survivorship. This property automatically passes to the co-owner.

Probate

Probate is the legal process of paying the deceased's debts and distributing the estate to the rightful heirs. This process usually entails:

The appointment of an individual by the court to act as the personal representative or executor of the estate; this person is often named in the will. If there is no will, the court appoints a personal representative, usually the spouse.
Proving that the will is valid.
Informing creditors, heirs, and beneficiaries that the will is to be probated.
Disposing of the estate by the personal representative in accordance with the will or state law.

The personal representative named in the will must file a petition with the court after the death. There is a fee for the probate process. Depending on the size and complexity of the probable assets, probating a will may require legal assistance.

Assets jointly owned by the deceased and someone else are not subject to probate. Proceeds from a life insurance policy or Individual Retirement Account (IRA) that are paid directly to a beneficiary are also not subject to probate.

Taxes

There are various taxes that will have to be paid. Here is a summary:

Federal Estate Tax. Estate tax is generally only due on estates exceeding the unified credit exemption equivalent, which for 2023 is $12,920,000 ($12,060,000 in 2022). Estates over the threshold amount are subject to 40 percent tax.
State Death Taxes. State laws vary, but generally, any estate which pays a federal estate tax must also file a state estate or death tax form and pay the state death tax. This amount is paid by the estate to the state in which the deceased lived.
State Inheritance Taxes. Again, state requirements vary. Most states charge no inheritance tax.
Federal and State Income Taxes. The federal and state income taxes of the deceased are due for the year of death. The taxes are due on the normal filing date of the following year unless an extension is requested.

Professional guidance is strongly recommended in preparing the tax returns because the filing rules are quite complicated, and many tax-saving opportunities might be overlooked by an unqualified preparer.

Changing Ownership or Title

You may need to transfer ownership or change the title of property owned or revise documents after a death. Here are some items that should be checked:

Insurance Policies

If you hold any insurance policies, you may have to change beneficiaries. You may decide that you no longer need to have the same coverage if you do not have dependents, especially in the case of life insurance policies. Auto insurance and home insurance may also need revision.

Your spouse may have medical insurance coverage through work. Under a federal law called COBRA, you and any dependent children may be entitled to continue under your spouse's work-related medical insurance plan for up to 36 months, provided you pay the premiums. On the other hand, you may need to purchase your own medical.

Check with the employer to see if you can continue with its group health insurance plan, which may be less expensive. Contact the company issuing the policy to make any changes or for more information.

Automobiles

The title of the car owned by your spouse may need to be changed. Contact your state's Department of Motor Vehicles.

Will

If your will provides for property to pass to your spouse, it should be updated. You may want to contact your estate planner for assistance.

Bank Accounts, Stocks, Bonds

If you had a joint bank account with your spouse, it will automatically pass to you. Check with the bank about changing the title and signature card on the account. To change stocks or bond titles, check with your stockbroker.

If a bank account was held only in the name of your spouse, those assets will have to go through probate. An exception to this would be trust accounts.

Safe Deposit Box

In most states, if the box was rented only in the name of your spouse, it will require a court order to open the box. Only the will or any other materials pertaining to the death can be removed before the will has been probated.

Credit Cards

Credit cards held exclusively in the name of your spouse should be canceled. Any payments due on these credit cards should be paid by the estate.

Your spouse may have used credit cards in both your names or used credit cards listed only in your name. If so, make the payments due on these cards to keep your own good credit rating. Notify the credit card companies that your spouse is deceased and that the card should list your name only. Some people, particularly widows, may experience difficulties in getting a new card if they do not have their own credit rating.

When applying for a card, inform the lender about the credit cards you shared with your spouse, even if your name was not listed.

General Finances

Debts owed by your spouse will be the responsibility of the estate and should be forwarded to the personal representative or executor who is settling the estate. However, you should pay debts that are jointly owed (particularly mortgage payments and utility or phone bills) in order to keep a good credit rating.

Do not immediately make permanent significant financial decisions, such as selling your home, moving, or changing jobs. You will need some time to consider your situation before you can make these decisions responsibly. If at all possible, do not rush into a decision you might later regret.

Social Security Benefits: Frequently Asked Questions

Tue, 10 Oct 2023 18:21:34 GMT

Who is entitled to Social Security disability benefits?

An individual who is determined to be "disabled" by the Social Security Administration receives an Award Letter, which is a notice of decision that explains how much the disability benefit will be and when payments start. It also tells you when you can expect your condition to be reviewed to see if there has been any improvement.

If family members are eligible, they will receive a separate notice and a booklet about things they need to know.

Under the Social Security disability insurance program (Title II of the Act), there are three basic categories of individuals who can qualify for benefits on the basis of disability:

A disabled insured worker under full retirement age.
An individual disabled since childhood (before age 22) who is a dependent of a parent entitled to Title II disability or retirement benefits or was a dependent of a deceased insured parent.
Disabled widow or widower, age 50-60 if the deceased spouse was insured under Social Security.
Been disabled or expected to be disabled for at least 12 months
Has filed an application for benefits, and
Completed a five-month waiting period; however, the 5-month waiting period does not apply to individuals filing as children of workers. Under SSI, disability payments may begin as early as the first full month after the individual applied or became eligible for SSI. In addition, if you become disabled a second time within five years after your previous disability benefits stopped, there is no waiting period before benefits start.
Under Title XVI or SSI, there are two basic categories under which a financially needy person can get payments based on disability: An adult age 18 or over who is disabled.
Child (under age 18) who is disabled.

For all individuals applying for disability benefits under Title II and for adults applying under Title XVI, the definition of disability is the same. The law defines disability as the inability to engage in any substantial gainful activity (SGA) because of any medically determinable physical or mental impairment(s) which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.

Meeting this definition under Social Security is difficult. Insured means that you have accumulated sufficient credits in the Social Security system. Visit the Social Security Administration's Website to apply for an estimate.

When do Social Security disability benefits begin?

If you are getting disability benefits on your work record, or if you are a widow or widower getting benefits on a spouse's record, there is a five-month waiting period, and your payments will not begin until the sixth full month of disability. The 5-month waiting period does not apply to individuals filing as children of workers. Under SSI, disability payments may begin as early as the first full month after the individual applied or became eligible for SSI.

If the sixth month has passed, your first payment may include some back benefits. Your payment should arrive on the third day of every month. If the third falls on a Saturday, Sunday, or legal holiday, you will receive your payment on the last banking day before that day. The payment you receive is the benefit for the previous month. The payment you receive on July 3 (or dated July 3 if you get a paper check) is for June. Ninety-nine percent of recipients receive direct deposit; however, your benefit can be mailed or deposited directly into your bank account.

Are Social Security disability benefits taxable?

Some people who get Social Security must pay taxes on their benefits. The rules are the same regardless of whether Social Security benefits are received due to retirement or disability. You must pay taxes if you file a federal tax return as an "individual" and your combined income is more than $25,000. Combined income is defined as your adjusted gross income + Nontaxable interest + 1/2 of your Social Security benefits. If you file a joint return, you may have to pay taxes if you and your spouse have a combined income of more than $32,000. If you are married and file a separate return, you will probably pay taxes on your benefits. Social Security has no authority to withhold state or local taxes from your benefit. Many states and local authorities do not tax Social Security benefits. However, you should contact your state or local taxing authority for more information.

How long do Social Security disability payments continue?

Your disability benefits generally continue for as long as your impairment has not medically improved and you cannot work. They will not necessarily continue indefinitely, however.

Because of advances in medical science and rehabilitation techniques, an increasing number of people with disabilities recover from serious accidents and illnesses. Also, through determination and effort, many individuals overcome serious conditions and return to work in spite of them.

What happens to Social Security disability benefits when I reach retirement age?

If you are still getting disability benefits when you reach retirement age, your benefits will be automatically changed to retirement benefits, generally in the same amount. You will receive a new booklet explaining your rights and responsibilities as a retired person.

If you are a disabled widow or widower, your benefits will be changed to the regular widow or widower benefits (at the same rate) at 60. You will receive a new instruction booklet that explains the rights and responsibilities for people who get survivor benefits.

What happens if Social Security turns down my claim for disability benefits?

If you disagree with SSA's decision, you can appeal it. You have 60 days to file a written appeal (either by mail or in person) with any Social Security office. Generally, there are four levels to the appeals process. They are:

Reconsideration. Your claim is reviewed by someone who did not take part in the first decision.
Hearing before an Administrative Law Judge. You can appear before a judge to present your case.
Review by Appeals Council. If the Appeals Council decides your case should be reviewed, it will either decide your case or return it to the administrative law judge for further review.
Federal District Court. If the Appeals Council decides not to review your case or disagree with its decision, you may file a civil lawsuit in a Federal District Court and continue your appeal to the US Supreme Court if necessary.

If you disagree with the decision at one level, you have 60 days to appeal to the next level until you are satisfied with the decision or have completed the last level of appeal.

You have two special appeal rights when a decision is made that you are no longer disabled.

They are as follows:

Disability Hearing. As part of the reconsideration process, this hearing allows you to meet face-to-face with the person reconsidering your case to explain why you feel you are still disabled. You can submit new evidence or information and bring someone who knows about your disability. This special hearing does not replace your right to also have a formal hearing before an administrative law judge (the second appeal step) if your reconsideration is denied.
Continuation of Benefits. While appealing your case, you can have your disability benefits and Medicare coverage (if you have it) continue until an administrative law judge decides the outcome. However, you must request the continuation of your benefits during the first ten days of the 60 days mentioned earlier. If your appeal is unsuccessful, you may have to repay the benefits.

Will I receive Social Security when I retire?

Retirement benefit calculations are based on your average earnings during a lifetime of work under the Social Security system. For most current and future retirees, The Social Security Administration (SSA) averages your 35 highest years of earnings. Years in which you have low earnings or no earnings may be counted to bring the total years of earnings up to 35.

You can collect early retirement benefits at age 62, but keep in mind that for anyone born from 1943 to 1954, the full retirement age is 66, and it increases gradually until it reaches 67 for those born in 1960 and later. Then you can collect additional benefits for every year you delay your retirement until age 70. After you begin to collect Social Security benefits, you will continue to receive them for life.

How can I find out what Social Security will pay me when I retire?

You can create a my Social Security account with SSA and view your Social Security Statement online at any time.

Can I count on Social Security being around when I retire?

With retirement on the horizon for scores of baby boomers, Social Security will likely be in your future; however, the Social Security trust fund will be less and less able to pay benefit increases, which increase annually as the taxable wage base rises without some kind of reform.

Getting Divorced: Frequently Asked Questions

Tue, 10 Oct 2023 18:03:07 GMT

How do I prepare financially for divorce?

If you are considering divorce, it's vital to plan for the dissolution of the financial partnership in your marriage. This means dividing the financial assets and liabilities you have accumulated during the years of marriage. Further, if children are involved, the future support given to the custodial parent must be planned for. The time you take to prepare and plan for eventualities will pay off later on.

Here is what you can do:

1. Make a list of all of your assets, joint or separate, including:

The current balance in all bank accounts
The value of any brokerage accounts
The value of investments, including any IRAs
Your residence(s)
Your autos
Your valuable antiques, jewelry, luxury items, collections, and furnishings

2. Make sure you have copies of the past two or three years' tax returns. These will come in handy later.

3. Inventory your financial debts and obligations. This helps you to prepare in two ways:

It will provide you with preliminary information for an eventual division of the property.
It will help you to plan how the debts incurred in the marriage are to be paid off. Although the best way of dealing with joint debt, such as credit card debt, is to get it all paid off before the divorce, often this is not possible. Having a list of your debts will help you to come to some agreement as to how they will be paid off.

4. Make sure you know the exact amounts of salary and other income earned by both yourself and your spouse.

5. Find any papers relating to insurance-life, health, auto, and homeowner's, as well as pension and other retirement benefits.

6. List all debts you both owe, separately or jointly. Include auto loans, mortgage, credit card debt, and any other liabilities.

If you are a spouse who has not worked outside the home lately, be sure to open a separate bank account in your own name and apply for a credit card in your own name. This will help you to establish credit after the divorce.

How should we handle credit card accounts during a divorce?

It is important to immediately cancel all joint accounts once you know you are going to obtain a divorce. Creditors have the right to seek payment from either party on a joint credit card or other credit account, no matter which party actually incurred the bill. If you allow your name to remain on joint accounts with your ex-spouse, you are also responsible for the bills.

Your divorce agreement may specify which one of you pays the bills. As far as the creditor is concerned, however, both you and your spouse remain responsible if the joint accounts remain open. The creditor will try to collect the bill from whoever it thinks may be able to pay, and at the same time report the late payments to the credit bureaus under both names. Your credit history could be damaged because of the cosigner's irresponsibility.

Some credit contracts require that you immediately pay the outstanding balance in full if you close an account. If so, try to get the creditor to have the balance transferred to separate accounts.

What do I do if my current or former spouse's poor credit affects me?

If your spouse's poor credit hurts your credit record, you may be able to separate yourself from your spouse's information on your credit report. The Equal Credit Opportunity Act requires a creditor to take into account any information showing that the credit history being considered does not reflect your own.

If for instance, you can show that accounts you shared with your spouse were opened by him or her before your marriage and that he or she paid the bills, you may be able to convince the creditor that the harmful information relates to your spouse's credit record, not yours. In practice, it is difficult to prove that the credit history under consideration doesn't reflect your own, and you may have to be persistent.

What happens to my credit history after a divorce?

If a woman divorces and changes her name on an account, lenders may review her application or credit file to see whether her qualifications alone meet their credit standards. They may ask her to reapply, but generally, the account remains open.

Maintaining credit in your own name avoids this inconvenience. It can also make it easier to preserve your own, separate, credit history. Furthermore, should you need credit in an emergency, it will be available.

Do not use only your husband's name, for example, Mrs. John Wilson for credit purposes.

Check your credit report if you haven't done so recently. Make sure the accounts you share are being reported in your name as well as your spouse's. If not, and you want to use your spouse's credit history to build your own, write to the creditor and request the account be reported in both names. If there is any inaccurate or incomplete information in your file write to the credit bureau and ask them to correct it. The credit bureau must confirm the data within a reasonable time period, and let you know when they have corrected the mistake.

If you have been sharing your husband's accounts, building a credit history in your name should be fairly easy. Contact a major credit bureau and request a copy of your file, then contact the issuers of the cards you share with your husband and ask them to report the accounts in your name as well.

What are the legal issues that must be faced in most divorces?

The best way to plan for the legal issues that must be faced in a divorce such as child custody, division of property, and alimony or support payments, is to come to an agreement with your spouse. If you can do this, the time and money you will have to expend in coming up with a legal solution -- either one worked out between the two attorneys or one worked out by a court -- will be drastically reduced.

Here are some general tips for handling the legal aspects of a divorce:

Get your own attorney if there are significant issues dealing with assets, child custody, or alimony.
There are several ways to find a good matrimonial attorney including referrals from other professionals, referrals from trusted friends, or lists obtained from the American Academy of Matrimonial Lawyers .
Make sure the divorce decree or agreement covers all types of insurance coverage-life, health, and auto.
Be sure to change the beneficiaries on life insurance policies, IRA accounts, 401(k) plans, other retirement accounts, and pension plans.
Don't forget to update your will.

Those who have trouble arriving at an equitable agreement, but do not require the services of an attorney, might consider the use of a divorce mediator. This type of professional advertises in the section of the classifieds titled "Divorce Assistance", or "Lawyer Alternatives."

How does property get divided in a divorce?

The laws governing the division of property between ex-spouses vary from state to state. You should also be aware that matrimonial judges have a great deal of latitude in applying those laws as well.

Here is a list of items you should be sure to take care of, regardless of whether you are represented by an attorney:

Gain an understanding of how your state's laws on property division work.
If you owned property separately during the marriage, be sure you have the papers to prove that it's been kept separate.
Be ready to document any non-financial contributions to the marriage, e.g., your support of a spouse while he or she attended school or your non-financial contributions to his or her financial success.
If you need alimony or child support, be ready to document your need for it.

If you have not worked outside the home during the marriage consider having the divorce decree provide for money for you to be trained or educated.

What are the tax implications of divorce?

After divorce each individual will file their own tax return. However, there are several areas where transactions between former spouses can result in tax consequences. The most common areas are:

Child Support

Child support is not deductible by the payer and is not taxable to the recipient. A payment is considered to be child support if it is specifically designated as such in a divorce or separation agreement or if it is reduced by the occurrence of a contingency related to the child (such as attaining a certain age).

Alimony

Alimony is a payment made pursuant to a divorce decree other than child support or designated as something in the instrument as other than alimony. Similar treatment is accorded separate maintenance payments made pursuant to a separation agreement. In order to qualify, payments must also cease upon the death of the recipient and must not be front-loaded.

Starting in 2019, alimony as well as separate maintenance payments were repealed by the Tax Cuts and Jobs Act of 2017 and are no longer deductible by the payer spouse.

For tax year 2018 and those years preceding it, alimony is deductible by the payer and is taxable to the recipient.

Property Settlements

Property settlements are not taxable events when pursuant to divorce or separation. Transfers of assets between spouses in this event do not result in taxable income, deductions, gains or losses. The cost basis of the property carries over to the recipient spouse. Be careful in a divorce, your spouse may give you an equal share of property based upon fair market value, but with the lower basis. This can result in a higher taxable gain upon a sale of the asset.

What happens when retirement plans or IRAs are divided up in a divorce?

Generally, when these plans are split up there is no taxable event if pursuant to a qualified domestic relations order or other court order in the case of an IRA. This is true, however, only if the assets remain in a retirement account or IRA. Once funds are distributed they will be taxed to the recipient. At the time of division, the payer does not receive a deduction and the recipient does not have taxable income.

Can I deduct the cost of getting a divorce?

Generally, no; however, fees paid specifically for income or estate tax advice pursuant to a divorce may be deductible. Also, fees made to determine the amount of alimony or to collect alimony can be deducted. These deductions would be miscellaneous itemized deductions subject to the two percent limitation.

For tax years 2018 through 2025, miscellaneous itemized deductions (Form 1040, Schedule A) have been eliminated due to tax reform (Tax Cuts and Jobs Act of 2017).

Who is entitled to deduct the dependency exemption of a child after divorce?

Generally, the custodial parent is entitled to the deduction. However, this is often negotiated in the divorce settlement. If the parents agree in writing, the non-custodial parent can take the deduction.

For tax years 2018 through 2025, the personal exemption as well as dependent exemptions is eliminated due to tax reform (Tax Cuts and Jobs Act of 2017). However, the dependent exemption deduction for noncustodial parents still exists for 2018-2025 (that is, it was not repealed) but is reduced to $0.

Avoiding Scams: Frequently Asked Questions

Tue, 10 Oct 2023 17:44:52 GMT

How can I spot a rip-off?

By taking the following precautions, you can spot a scam and avoid being ripped off.

Don't allow yourself to be pushed into a hurried decision. At least 99 percent of everything that's a good deal today will still be a good deal a week from now.
Always request written information, by mail, about the product, service, investment or charity and about the organization that's offering it.
Don't make any investment or purchase you don't fully understand. Swindlers try to convince individuals that they are making an informed decision.
Ask what state or federal agencies the firm is regulated by, and contact the agency. If the firm says it's not subject to any regulation, you may want to act cautiously.
If an investment or major purchase is involved, request that information also be sent to your accountant, financial advisor, banker, or attorney for evaluation and an opinion.
Before you make a final financial commitment, ask for a copy of the refund policy and make sure it's in writing.
Beware of testimonials that you may have no way of checking out.
Never provide your credit card number and bank account information over the phone.
If necessary, hang up or walk away. If you hear your own better judgment whispering that you may be making a serious mistake, just say good-bye.

What should I know about Internet fraud?

Internet crime such as identity theft and online fraud exceeded $10.3 billion in losses in 2022 according to an Internet Crime Complaint Center (IC3) estimate. It only gets worse every year and underscores the fact that both legitimate businesses and scam artists alike have equal access to the Internet. Among the 2022 complaints received, ransomware, business e-mail compromise (BEC) schemes, and the criminal use of cryptocurrency are among the top incidents reported, according their 2022 annual report.

How can you avoid being snared by Internet fraud? Simple. If it sounds too good to be true, it is. Claims of "quick profits", "guaranteed returns", "double your investment", or "risk-free investment" probably indicate a fraudulent investment.

What are some of the Internet scams I should watch out for?

New scams appear every year, but usually with the same themes. Here are a few of them:

Refund Scam. This is the most frequent IRS-impersonation scam seen by the IRS. In this phishing scam, a bogus email claiming to come from the IRS tells the consumer that he or she is eligible to receive a tax refund for a specified amount. It may use the phrase "last annual calculations of your fiscal activity."

To claim the tax refund, the consumer must open an attachment or click on a link contained in the e-mail to access and complete a claim form. The form requires the entry of personal and financial information. Several variations on the refund scam have claimed to come from the Exempt Organizations area of the IRS or the name and signature of a genuine or made-up IRS executive. In reality, taxpayers do not complete a special form to obtain their federal tax refund because refunds are triggered by the tax return they submitted to the IRS.

Lottery winnings or cash consignment. These advance fee scam e-mails claim to come from the Treasury Department to notify recipients that they'll receive millions of dollars in recovered funds or lottery winnings or cash consignment if they provide certain personal information, including phone numbers, via return e-mail. The e-mail may be just the first step in a multi-step scheme, in which the victim is later contacted by telephone or further e-mail and instructed to deposit taxes on the funds or winnings before they can receive any of it.

Alternatively, they may be sent a phony check of the funds or winnings and told to deposit it but pay 10 percent in taxes or fees. Thinking that the check must have cleared the bank and is genuine, some people comply. However, the scammers, not the Treasury Department, will get the taxes or fees. In reality, the Treasury Department does not become involved in notification of inheritances or lottery or other winnings.

Romance Scams. Scammers sometimes use online dating and social networking sites to try to convince people to send money in the name of love. In a typical scenario, the scam artist creates a fake profile, gains the trust of an online love interest, and then asks that person to wire money, typically to a location outside the United States.

Warning signs of a romance or online dating scam include wanting to leave the dating site immediately and use personal e-mail or IM accounts, claiming feelings of instant love, planning to visit, but being unable to do so because of a tragic event, and asking for money to pay for travel, visas or other travel documents, medication, a child or other relative's hospital bills, recovery from a temporary financial setback, or expenses while a big business deal comes through.

How can I prevent the illegal use of my credit card or Social Security number?

Criminals and con artists use many scams to target unsuspecting people who have access to money. Consumer scams happen on the phone, through the mail, e-mail, or over the internet. They can occur in person, at home, or at a business.

The Consumer Financial Protection Bureau (CFPB) is a U.S. government agency that makes sure banks, lenders, and other financial companies treat you fairly, suggests these six tips for consumers to protect themselves from scams:

Don't share account numbers or passwords for bank accounts, credit cards, or Social Security.
Never pay upfront for a promised prize. It’s a scam if you are told that you must pay fees or taxes to receive a prize or other financial windfall.
After hearing a sales pitch, take time to compare prices. Ask for information in writing and read it carefully.
Too good to be true? Ask yourself why someone is trying so hard to give you a "great deal." If it sounds too good to be true, it probably is.
Watch out for deals that are only "good today" and that pressure you to act quickly. Walk away from high-pressure sales tactics that don't allow you time to read a contract or get legal advice before signing. Also, don't fall for the sales pitch that says you need to pay immediately, for example by wiring the money or sending it by courier.
Put your number on the National Do Not Call Registry. Go to Do Not Call Registry or call (888) 382-1222.

"Application fraud" occurs when a thief uses your name, Social Security number, address, and, perhaps, credit references to apply for credit. They can get much of this information from public sources (e.g., Who's Who Directories), from someone who has access to credit files (e.g., employees of car dealerships, department stores, or credit bureaus), from personal checks, or from stolen wallets.

Another form of application fraud involves the interception of the preapproved credit card offers in the mail. The thief fills out the application and either changes the address or steals the credit card out of your mailbox when it arrives at your address.

If you find a bill that you do not believe belongs to you on your credit report, check it out immediately. First, contact the creditor to find out if they have an account in your name. Ask to see a copy of the original application if they say you do.

How trustworthy are "credit clinics" and other organizations that claim to help me out of financial trouble?

Consumers with credit problems have paid millions of dollars to firms that claim they can "remove negative information," "clean up credit reports," and allow consumers to get credit no matter how bad the credit history. Consumers should beware of the following promises by credit clinics:

"Based on little-known loopholes in Federal credit laws, we can show you how to clean up your credit report!"

The loopholes are the provisions of the Fair Credit Reporting Act (FCRA), under which you have the right to challenge information in your credit report you believe incorrect.

"We can show you how to remove negative information from your file including judgments."

No matter how quickly you may pay off outstanding bills, creditors are under no obligation to remove negative information from your file.

"We can get you a major credit card even if you've been through bankruptcy!"

You will have to "secure" the card first by putting a deposit in the bank and getting a bank card with a credit limit based on a percentage of that deposit. Why should you pay the credit clinic just to provide an application and deposit slip?

Check with your state attorney general's office to determine if your state has laws that protect consumers against credit clinics and contact your state Attorney General, consumer protection agency, or Better Business Bureau to check an organization's reputation.

How honest are ads touting "federal government surplus" sales?

Advertisements touting access to little-known sources of federal government property are simply selling the names and addresses of the federal government agencies, which you can get from the federal government or by contacting the agency's local or regional office. Furthermore, the information sold by these businesses may not be accurate or up-to-date. Information about federal sales programs is available for free or at low cost from the federal government by visiting: Government Sales and Auctions .

How can I protect myself from penny stock scams?

Penny stocks are common shares of small public companies that trade at less than $1.00 per share. They are considered to be highly speculative and high risk and are traded over the counter and are prime targets for price manipulation. Here is how a penny stock scam might operate:

Mrs. G got a call from Mr. S, who told her he wanted to help her out with a "little-known" investment bonanza. These penny stocks' prices could rise by 25 percent in a few months. After she was told to act before the opportunity vanished, Mrs. G invested $5,000 in the penny stocks. Result: She is still trying to get back her $5,000.

Although she was told during the first few weeks that the stock was going up, within a month the seller was not returning her phone calls. She could not check the price of the stock because penny stocks are not traded on an exchange, but over-the-counter.

Further, the price of the penny stock was not published anywhere. Mr. S's company was the only seller of these particular penny stocks and had been engaging in price manipulation. Eventually, Mrs. G. turned the case over to her attorney. Half of her $5,000 went in the markup of the penny stock's actual price and hidden commissions.

Penny stocks can be a legitimate investment opportunity if you learn to be alert, but with the proliferation of the Internet, these stocks are often quite risky for the average investor. Learn the following warning signs and investigate before you invest.

Warning Sign #1: Unsolicited Telephone Calls

Beware of a salesperson who promises you quick profits with little or no risk.

Warning Sign #2: High-Pressure Sales Tactics

These tactics include the following statements by a salesperson:

The salesperson has "inside" information on a stock and that you should purchase now, before the information becomes public
For only for a short period of time, a stock sells at a special or below market price
Due to a series of increases in a stock's price, you should purchase immediately
You may buy a particular stock only if you agree to buy stock of another company

Warning Sign #3: Inability to Sell Your Stock and Receive Cash

Fraudulent penny stock brokers may become inaccessible when you want to sell, or they may refuse to sell your stock unless you buy another one.

How can I protect myself from a pyramid scheme?

The best way to protect yourself is to understand how pyramid schemes operate, as this example shows:

Frank L. was phoned by a friend and offered an opportunity to "get in on the ground floor" of a business involving selling products to the public. He was told he would get a 50 percent return on his money within a month and how his friend had made thousands of dollars on a $1,000 investment. Frank L. quickly accepted the offer and gave his friend $1,000 to buy a "distributorship" in this business.

What Frank didn't know was that his friend had fallen victim to a pyramid scheme. Such schemes work as follows: A promoter offers investors "distributorships" at $1,000 each. The distributorships give the investor the right to sell other distributorships to friends and neighbors for $1,000 each, and also a right to sell some sort of product. Whenever an investor sells a $1,000 distributorship, he or she must give a percentage, usually half, to the promoter, and can keep the rest.

The tricky thing about pyramid schemes is that, for the first ten or twenty investors, they work. But, the pyramid scheme could continue to provide returns only in a world where there are infinite numbers of investors willing to invest $1,000, and willing (and able) to sell distributorships to others. Returns depend totally on new investors making an investment rather than on any business venture.

Result: Because Frank had no sales ability, he was unable to unload even one distributorship, and thus the $1,000 was lost. He is currently trying to get his money back and has reported the investment to the SEC.

How can I protect myself from a Ponzi scheme?

Named for Charles A. Ponzi, who defrauded hundreds of investors in the 1920s, a Ponzi scheme pays off old "investors" with money coming in from new "investors."

Investor A gives Promoter ("P") $1,000 on P's promise to repay $1,000 plus $100 "interest" in 90 days. During the 90 days, P makes similar promises to Investors B and C, receiving $1,000 each from them. At the end of the first 90-day period, P may offer to pay A the $100 "interest" and to return the original $1,000.

More likely, he will invite A to "re-invest" the $1000 plus the $100 "interest" for a similar, or higher, return at the end of another 90 days. Thereafter, A, believing s/he can receive a good return on the investment, is likely to bring other investors to P.

P collects a pool of money that he pays out to those wishing a return on their invested money. Eventually, P. either disappears with all the "investments" or reveals that the investments went "sour."

A major factor in the eventual collapse of a Ponzi scheme is that there is no significant source of "income" other than from new investors.

How can I protect myself from travel scams?

Since travel services usually have to be paid for in advance, disreputable individuals and companies try to sell travel packages turn out to be different from what was presented. If you receive an offer by phone or mail for a free or extremely low-priced vacation trip to a popular destination (often Hawaii or Florida), there are a few things you should look for:

Does the price seem too good to be true? If so, it probably is.
Are you asked to give your credit card number over the phone?
Are you pressured to make an immediate decision?
Is the carrier simply identified as "a major airline", or does the representative offer a collection of airlines without being able to say which one you will be on?
Is the representative unable or unwilling to give you a street address for the company?
Finally, you are told you can't leave for at least two months? (The deadline for disputing a credit card charge is within 60 days of the charge appearing on your credit card statement and most scam artists know this.)

If you encounter any of these symptoms, ask for written information and time to think it over. If they say no, this probably isn't the trip for you. Furthermore, if you are told that you've won a free vacation, make sure you don't have to buy expensive hotel arrangements in order to get it.

If you are seriously considering the vacation offer, compare it to what you might obtain elsewhere. The appeal of free airfare or free accommodations often disguises the fact that the total price exceeds that of a regular package tour. Get written confirmation of the departure date. If the package involves standby or waitlist travel, or a reservation that can only be provided much later, ask if your payment is refundable if you want to cancel. If the destination is a beach resort, ask the seller how far the hotel is from the beach. Then ask the hotel.

Determine the complete cost of the trip in dollars, including all service charges, taxes, processing fees, etc. If you decide to buy the trip, paying by credit card gives you certain legal rights to pursue a chargeback (credit) if promised services aren't delivered.

When buying a used car, how can I avoid buying a "lemon?"

Laundered lemons-used cars with serious defects, sold to unsuspecting new buyers are still being sold in alarming numbers. To avoid buying a "laundered lemon", take these steps.

Do your research. Check Consumer Reports and Edmunds online. Both publish car reviews and are good sources for finding out whether a vehicle is reliable and has been trouble-free.

Check for defects, repairs, and recalls. Visit the federal government's databases to find out whether the vehicle (make and model) you're interested in has been recalled, as well as service bulletins, safety investigations, and owner complaints. Check with your local dealer's service department to verify that the problem (if there was one) was taken care of.

Inspect the Vehicle. Conduct a thorough visual inspection inside and out. Look for signs of rust, mildew on carpeting, fluid leaks, bodywork repairs such as mismatched paint, and wear on tires. With the engine running check the exhaust smoke color and smell. Verify that the horn and lights are all working properly. Finally, have a reliable mechanic look it over. While it might cost a few bucks, he will be able to spot things you can't.

Vehicle History Report. If you know the car's VIN (Vehicle Identification Number), visit CarFax and enter it into their database to obtain a vehicle history report. The report will show you whether there are title problems, what the ownership history of the vehicle is, service records, and whether the vehicle has been involved in any accidents. The VIN is located on the driver's side dashboard.

Also consider the following:

Beware of used cars with low mileage. These may be described as demo models or program cars, but may in fact be lemons.
Try to get in touch with the previous owner, via the car's title. In some states, the title will tell you whether the car was a lemon-law vehicle.
Beware of cars that come from another state.

How can I avoid being ripped off by auto mechanics?

It is estimated that anywhere from one-quarter to one-half of the $90 billion Americans spend every year on car repairs is wasted on the following scams:

Only dealerships can perform maintenance. This is not true. As long as you keep thorough records and the mechanic uses the correct fluids for your make and model, car maintenance can be performed by any mechanic without affecting your warranty. The only dealership-required service is warranty-related repairs and recalls.
XYZ part will cost you $900. If a mechanic tells you that you need an extensive repair or any large component, get a second opinion or two.
Being charged to replace different parts to fix the same problem. This usually indicates that the mechanic is having trouble diagnosing the problem. That may be the case, but you shouldn't be charged for it.
The Secret Warranty. Always ask a dealership service department whether a problem is covered by a manufacturer's warranty. (A manufacturer that discovers a widespread defect will often notify a dealership that repairs of the defect will be covered by the manufacturer.) There are only five states - California, Connecticut, Maryland, Virginia, and Wisconsin - in which it is illegal for a dealership not to tell you a repair is covered by a warranty.

If the defect is safety-related, you can call 800-424-9393 for a list of warranties and recalls or visit SaferCar.gov

Flushing the engine. In general, the engine doesn't need to be flushed except for routine coolant replacement associated with normal maintenance.
The $9.95 Tune-Up. A common scam is to lure customers with an extremely low-priced oil-change or other service deal, and then to discover nonexistent problems while the car is on the lift.
Double Billing. You might be told, for example, that you need repairs done on your brakes, and then discover that you have been billed for several extra items, which are actually part of the brake repair job.

How can I avoid being pick-pocketed?

These tips on how to avoid becoming the victim of a con artist or pickpocket are provided by the New York City Police Department's Special Frauds Squad.

Use handbags that have a zipper and locking flap and carry them securely with the flap side close to your body.
Carry wallets inside your coat or side trouser pockets, never in your back pants pocket.
Beware of loud arguments or commotions in crowded areas. Thieves working together may stage these incidents to distract you while your pocket is picked.
Be aware that a pickpocket may bump or crowd you on public transportation.
If your pocket is picked, call out immediately to warn the driver or conductor. Alert everyone that there's a pickpocket on board, and don't be afraid to shout.
Avoid crowding in the area of the subway car doors when entering or exiting.
Be on guard if a stranger directs your attention to a substance or stain on your clothes.
Be on guard while doing your banking at an automatic teller machine.
Be suspicious if you are approached by a stranger who claims to have just found an envelope full of money or tells you he has a winning lottery ticket with him. This could be the first step in a confidence crime, with you as the victim. Never discuss your personal finances with strangers, and don't draw money out of the bank at a stranger's suggestion in order to build trust in such a situation

Being aware of the most current scams is the best way to prevent falling prey to them. If you or someone you know has been a victim of a con artist, call your local police precinct immediately.

Con Artists: How To Spot and Stop Them

Tue, 10 Oct 2023 17:37:12 GMT

Make sure you and your family never fall prey to the schemes and cons that pervade all aspects of American life. Learn to recognize con artists and send them on their way before parting with any of your hard-earned money.

The successful con artist approaches victims with a nice guy approach. Behind this friendly exterior is a shrewd psychologist who can break down his victims' resistance to his proposals. The typical con artist has a good sense of timing and sincerely believes his victims deserve to be taken advantage of.

Being well-informed and skeptical are your best means of protection. This Financial Guide tells you how to spot a scam. It provides lists of "buzzwords" used by con artists, strategies for knowing which sales pitches are legitimate, and ways to fight back.

Who Are The Victims?

Anyone can fall victim to a con game, even someone who thinks they are too intelligent or sophisticated to be conned.

Many victims share certain characteristics. Often, but certainly not always, they are older, female, and live alone. They trust others and either need or want more income. Loneliness, willingness to help, and a sense of charity are characteristics a con artist will exploit to gain a victim's cooperation.

The con artist exploits his victim's life insurance benefits, pensions or annuities, retirement nest eggs, home equity, or other assets. And he will usually have the willing cooperation of his victim.

Buzz Words and Tip-Offs

It is difficult to spot a con artist by his looks alone. But his words or expressions often give him away. These buzzwords include the following. A red flag should go up immediately when you hear these:

It's free! Few things are really free. If you are told it's a free vacation, free cellular phone, or free gift, investigate it. What else do you have to do to get the "freebie?" Pay shipping and handling charges? A gift tax or redemption fee? Get yourself to some distant destination? Sign up for a month or two of service. Buy three and get the fourth free?

It's 50 percent off. Off of exactly what? The regular retail price or the manufacturer's suggested price? The bulk price? The sticker price? Ask for written verification of the original price.

It's a going-out-of-business sale. Stores along parts of Fifth Avenue in Manhattan have been going out of business for years...and are still in business. Be particularly cautious in the crowded tourist and shopping sections of any major city or resort. Even when a company is honorably closing its doors, it could be posting artificially high prices and then marking them down. Their incentive to unload merchandise is strong. If you find what you believe is a good deal, read the warranty carefully -- if something goes wrong with your CD player or refrigerator, you cannot take it back if the store is closed. But can you take the item to a service center or other designated repair place?

It's a factory to you. We match lower prices. It's the lowest price in town. You have been specially chosen. These are more often than not just come-ons to get you into the store. Will you really shop around to make certain it is the lowest price in town? Will you really ask management to lower the price because another store has a better deal? You need time and assertiveness to make these deals really work.

You've just won! Sweepstakes and vacation prizes cram everyone's mailbox. Some are real, but many are not. If you are asked to pay a fee in advance in order to be a possible winner, don't grab the bait. This practice is known as an illegal lottery. And those low-cost vacation trips generally come with extra charges or difficult-to-meet conditions; the Federal Trade Commission is constantly issuing warnings about them. You may be asked to join a travel club, be charged extra for in-season rates, or get airfare only one way. Be sure to inquire.

Work at home and make a fortune. Some of these offers are legitimate, but there are also hundreds that are pyramid schemes requiring you to make a high initial investment that you are unlikely to ever get back or requiring you to bring a number of other people into the business. A recent deal that swept the country involved sending $5 for information about stuffing envelopes at home. Once you did that, you were asked for $200 to $500 for supplies, and then another $25 or $50 for something else. . .the pyramid, made up of your money, simply grew higher and higher.

We'll get you money for your down payment. New home buyers are ripe for this one. The caller promises you money for a pre-paid fee, which is often an outrageous amount -- $1,000 or more. Later on, he gets back to you with the surprising news that he just couldn't get you credit. Now you're out the $1,000 and no closer to buying the house.

These coins will put your child through college. One year the Pennsylvania Attorney General's office received over 300 complaints from people who had lost money on phony coin deals; the average loss per person was $10,000. The coins were never delivered. We do not wish to discourage you from buying legitimate coins; just make sure to use a reputable dealer.

We have an IRS-endorsed retirement plan. Phony telemarketers have promised people a retirement with an IRS-approved, IRS-endorsed plan. To set the record straight, the IRS does not endorse anything. Don't put your money anywhere but the bank, mutual fund, or brokerage firm where you have an established IRA.

Cash only. Why is cash necessary for a proposed transaction? Why not a check?

Secret plans. Why are you being asked not to tell anyone?

Get rich quick. Any scheme should be carefully investigated.

Something for nothing. A "retired" swindler once said that any time you are promised something for nothing, you usually get nothing.

Contests. Make sure they are not "come-ons" to draw you into a money-losing scheme.

Haste. Be wary of any pressure that you must act immediately or lose out.

Today only. If something is worthwhile today, it is likely to be available tomorrow.

Too good to be true. Such a scheme is probably neither good nor true.

Last chance. If it is a chance worth taking, why is it offered on such short notice?

Left-over material. Left-over materials might also be stolen or defective.

In fact, any cold call trying to sell you a half-acre ranch in some faraway state, aluminum siding, a new chimney flue, or even tax shelters, cattle, or anything else you know nothing about, should set off alarms

We can clean up your credit card debt. The latest version of this scam claims to give you a new credit report within 30 days for a flat fee. However, after paying for the service, the scam artists call back, informing you that they couldn't get the job done. Only you can repair your credit report. Also, watch out for those who tell you that by obtaining a new Taxpayer Identification Number or TIN, you get a new credit report. The TIN is your Social Security number.

Areas in Which Con Artists Operate

The possibilities are infinite, but some of the more common con games you should be aware of involve the following (some of which are described in more detail below):

Home improvement: Home repair or improvements you don't need that are recommended by a phony city inspector, or termites or pests you don't have.
Bank: A false bank examiner, or a pigeon drop (false bank employee who takes your deposit or "tests the honesty of bank employees" and thereby gets his or her hands on your cash).
Investment: Franchises, vending machines, land frauds, theft of inventions, securities investments, work-at-home.
Postal frauds: Chain letters, magazine subscriptions, unordered merchandise, correspondence courses.
Others: Bait and switch, charity rackets, computer dating, debt consolidation, contracts, dance lessons, freezer plans, psychic fraud, fortune tellers, health clubs, job placement, lonely hearts, medical quackery, missing heirs, referral sales, talent scouts, pyramid schemes, fake officials.

Some Successful Con Games Described

Most successful cons are modern versions of old schemes. For example, the old "salting the gold mine" scheme is still being practiced, but today's salting occurs in living rooms rather than abandoned mines.

In the old ruse, mine owners would place a few gold nuggets in used-up mines so they could sell them for inflated profits. In one recent scheme, a con artist bought six color television sets at the regular price from a retail store, and then sold them, still in their cartons, to six prominent local persons for one-fifth of their original price. Later, he hired several high school students as telephone solicitors to sell carloads of TV sets purchased new from a bankrupt retail chain. When potential customers balked, the con artist used as references the original six customers who had been salted. Before the police were alerted, he collected almost $60,000.

The old "bank examiner" scheme still exists, and it is working well, particularly among older widows. In this scheme, the con artist, posing as a bank examiner, asks the victim to help him test the honesty of bank employees by withdrawing substantial funds. When the funds are handed over to the con artist for "examination," he issues the victim a worthless receipt and disappears.

Postal authorities warn against mail-order swindles, such as phony work-at-home schemes requiring cash deposits or payments. Among all con-game activities, these are probably the most active and productive for the con artist.

The most insidious scam involves the perpetrator offering you false legal assistance after he has already swindled you. For instance, you have already lost money in an illegitimate deal and you get a call from someone posing as a federal official or lawyer who claims he can get your money back, for a fee or a percentage of the total amount.

Five Questions That Will Reveal a Securities Con

Here are five simple questions that will expose even the most clever of con artists.

How did you get my name? If you fail to get a believable answer, you can assume it was from the phone book, which suggests a randomness in the selection of your name that should make you suspicious.
What risk is involved? You know that every investment carries some risk and a 100% fully guaranteed deal does not exist.
Can you send me written information? Scamsters would rather hang up and risk losing you than put something in writing. They often try to get around this question by saying there isn't time.
Will you explain your offering to my lawyer? You will either be told there isn't time, or the caller will ask for your lawyer's address and never send anything. You can, of course, check this out by asking your lawyer if he or she has been contacted by this person.
Can you give me references? Follow up on any you are given.

Tip: Write down the answers you receive; they may amaze you.

Tip: If by some miracle you are satisfied with the answer to all five questions, then make two phone calls, to: The Fraud.org, a project of the National Consumers League (800-822-0416) and the North American Securities Administrators Association (202-737-0900). They will run the person's name through their systems to see if any complaints have been filed against him or if any SEC violations are on record. Details on both groups are given at the end of this article.

Ten Steps for Avoiding Scams

Here are 10 steps you can take to avoid becoming the victim of a con artist:

Don't let yourself be hurried. No matter what you are told, almost every good deal will remain a good deal for at least a week. The small percentage of good deals that will not be available tomorrow is not worth the risk needed to find out. There may be times when you will want to make a prompt decision, but not when it is an irrevocable financial commitment to buy a product or invest in something you are not familiar with from a caller you don't know. Purchase decisions should never be made under pressure.
Always ask for information by mail about the product, service, investment or charity and about the organization selling it. For legitimate firms, providing written information should not be a problem. But con artists will not want to give you time to consider the legitimacy of their offer, may not have written material available, or may not want to risk a run-in with legal or regulatory authorities by putting fraudulent statements in writing. Always insist on having enough time to study any information provided before being contacted again or agreeing to meet with anyone. Certain high-pressure telephone calls are solely for the purpose of convincing you to meet with an even higher-pressure salesperson in your home.
Do not make any investment or purchase you don't fully understand. Unless you fully understand what you are buying or investing in, you can be burned. Swindlers seek out individuals who do not know what they are doing; often attempting to flatter them into thinking they are making an informed decision.
Ask what state or federal agencies the firm is regulated by and/or is required to be registered with. If you get an answer, ask for a phone number or address to verify it. If the firm says it is not subject to any regulation, increase your level of caution.
Check out the organization. Swindlers want you to assume the information they provide is accurate. They know most people never bother to follow check references. It is far better to contact the relevant agency and obtain the information while you still have your money.
If an investment or major purchase is involved, request that information also be sent to your accountant, financial advisor, banker, or attorney for evaluation. Swindlers do not want you to seek a second opinion. Their reluctance or evasiveness could be your tip-off.
Ask what recourse you would have if you make a purchase and are not satisfied. If there is a guarantee or refund provision, be sure to get it in writing, and be satisfied that the business will stand behind its guarantee before you make a final financial commitment.
Beware of testimonials that you may have no way of investigating. They may involve nothing more than someone being paid a fee to speak well of a product or service.
Don't provide personal financial information over the phone unless you are absolutely certain the caller has a bona fide need to know. That goes especially for your credit card number and bank account information. The only time you should give anyone your credit card number is when you have decided to make a purchase and want to charge it. If someone says they will send a bill later, but they need your credit card number in the meantime, be cautious; first, make certain you are dealing with a reputable company.
If necessary, hang up or walk away. If you are simply not interested, if you become subject to high-pressure sales tactics, if you cannot obtain the information you want or get evasive answers, or if you hear your own better judgment whispering that you may be making a serious mistake, just say goodbye.

The FTC (Federal Trade Commission) offers these tips to avoid fraudulent vacation offers:

Be wary of "great deals" and low-priced offers. Few legitimate businesses can afford to give away products of real value.
Don't be pressured into buying. A good offer today should be available tomorrow.
Ask detailed questions.
Get all the information in writing before you buy anything.
Don't give your credit card number over the phone unless you know the company.

The FTC has published a free brochure, Telemarketing Travel Fraud, to help you avoid these scams. For a copy, contact the agency at 1-877-FTC-HELP, or see its Website at http://www.ftc.gov , and click on "Consumer Protection."

Some Specific Suggestions for Telemarketing Fraud

Most telephone sales calls are from legitimate businesses. But wherever honest firms search for new customers, so do swindlers. Phone fraud is a multi-billion dollar business that involves selling everything from bad or non-existent investments to the peddling of misrepresented products and services.

Everyone who has a phone is a prospect; whether you become a victim is largely up to you.

There is no way to determine whether a sales call is on the up and up simply by talking on the phone. No matter what questions you ask or how many you ask, skilled swindlers have ready answers. For this reason, sales calls from persons or organizations that are unknown to you should always be checked out before you actually buy or invest. Legitimate callers have nothing to hide.

Phone swindlers are likely to know more about you than you know about them. Depending on where they got your name in the first place, they may know your age and income, health and hobbies, occupation and marital status, education, the home you live in, what magazines you read, and whether you've bought by phone in the past.

Even if your name came from the phone book, telephone con men and women assume that you would be interested in having more income, that you are receptive to a bargain, that you are basically sympathetic to people in need, and that you are reluctant to be rude. As admirable as such characteristics may be, they help make the swindler's job easier. Swindlers also exploit less admirable characteristics, such as greed.

Fraudulent sales callers have one thing in common: They are skilled liars and experts at verbal camouflage, and their success depends on it. Many are coached to say whatever it takes by operators of the boiler rooms where they work at rows of phone desks, making hundreds of calls. Indeed, most victims of phone fraud think the caller sounded so believable.

Perpetrators of phone fraud are good at sounding as though they represent legitimate businesses. They offer investments, sell subscriptions, provide products for homes and offices, promote travel and vacation plans, describe employment opportunities, solicit donations, and the list goes on. Never assume you will know a phone scam when you hear one. Even if you have read lists of the kinds of schemes most commonly practiced, innovative swindlers constantly devise new ones.

Sadly, some families part with savings they worked years to accumulate on the basis of little more than a 15-minute phone conversation, less time than they would spend considering the purchase of a household appliance.

Be aware that the initiator of the phone call maybe you. It is not uncommon for phone crooks to use mailings and advertise in reputable publications to encourage prospects to make the initial contact. So just because you may have written or phoned for additional information about an investment, product, or service does not mean you should be any less cautious about buying by phone from someone you do know.

Victims of phone fraud seldom get their money back or, at best, no more than a few cents on the dollar. Swindlers generally do the same thing other people do when they get money; they spend it.

Tip-Offs That a Caller Could Be a Crook

High-pressure sales tactics.
Insistence on an immediate decision.
The offer sounds too good to be true.
A request for your credit card number for any purpose other than to make a purchase.
An offer to send someone to your home or office to pick up your payment, or some other way of getting your funds more quickly.
A statement that something is free, followed by a requirement that you pay for something.
An investment that is without risk. Except for obligations of the U.S. Government, all investments have some degree of risk.
Unwillingness to provide written information or references (such as a bank or name of satisfied customers in your area) that you can contact.
A suggestion that you should make a purchase or investment on the basis of trust.

Government and Non-Profit Agencies

Federal Trade Commission Tel. 1-877-FTC-HELP

The FTC has published a free brochure, Telemarketing Travel Fraud, to help you avoid these scams. For a copy, contact the agency at 1-877-FTC-HELP.

National Highway Traffic Safety Administration : Tel. 800-424-9393

This agency has recall and safety information on new and used cars, child safety seats, tires, seat belts, bags, etc.

U.S. Tour Operators Association

Members of the U.S. Tour Operators Association are required to post a $1 million bond to protect consumer funds. For information and a list of members, write:

USTOA
211 East 51st Street, Suite 12B
New York, NY 10022
Tel. 212-750-7371

Fraud.org

Sponsored by the National Consumers League.

North American Securities Administrators Association
75 0 First Street, N.E., Suite 1140
Washington, DC 20002
Tel. 202-737-0900

Visit NASAA to find the phone number of your state's Securities Division; then, use it to check out any promoter or salesperson trying to sell you an investment.

The National Futures Association
300 S. Riverside Plaza, #1800
Chicago, IL 60606
Tel. 321-781-1300

Charitable Deductions: Frequently Asked Questions

Tue, 10 Oct 2023 17:04:36 GMT

How can I find out if contributions to a particular charity are tax-deductible?

When the IRS rules positively on an application, the organization is eligible to receive contributions deductible as charitable donations for federal income tax purposes. The charity receives a "Determination Letter" formally notifying it of its charitable status. Older charities may have a "101(6) ruling," which corresponds to Section 501(c)(3) of the current IRC. Churches and small charities with less than $5,000 of annual gross receipts (subject to the Gross Receipts test) do not have to apply to the IRS for exemption.

You can search the IRS database for a list of tax-exempt organization eligible to receive deductible contributions .

What information can I obtain from the IRS about a charity?

You can obtain three documents on a specific charity by sending a written request to the attention of the Disclosure Officer at your nearest IRS District Office. The IRS will charge a per-page copying fee for these items. To speed your request, have the full, official name of the charity, as well as the city and state location.

These three publicly available documents are:

Form 1023 - the application filed by the charity to obtain tax-exempt status.
IRS Letter of Determination - the two-page IRS letter that notifies the organization of its tax-exempt status.
Form 990 - the financial/income tax form filed with the IRS annually by the charity. Charities with a gross income of less than $25,000 and churches are not required to file this form. Among other things, Form 990 includes information on the charity's income, expenses, assets, liabilities and net assets in the past fiscal year. Form 990 also identifies the salaries of the charity's five highest-paid employees. When contacting the IRS for copies, specify the fiscal year.

If your request for information involves only Form 990, you can get a faster response by writing directly to the IRS Service Center where the charity files its return. Contact your nearest IRS office for the address of the appropriate Service Center.

The charity registration office in your state (usually a division of the state attorney general's office) may also have a copy of the charity's latest Form 990, along with other publicly available information on charities soliciting in your state.

A charity's application for tax-exempt status and its annual Form 990 must be made available for public inspection during regular business hours at the principal office of the charity and at each of its regional or district offices containing three or more employees. The charity is not required to provide photocopies of the return but must have a copy on hand for public inspection.

What types of deductible contributions can be made to charity?

Generally, you can donate money or property to charity. A deduction is usually available for the fair market value of the money or property. However, for certain property the deduction is limited to your cost basis; inventory (some exceptions), certain creative works, stocks held short term and certain business-use property. You can also donate your services to charity, however, you may not deduct the value of your services. You can deduct your travel expenses and some out of pocket expenses.

What types of organizations generally qualify for a charitable deduction?

The following types of organizations generally qualify for a deduction. Before making a donation, make sure to verify the organization's status. You can do this by asking for evidence in writing or contacting the Internal Revenue Service.

Churches, synagogues, temples, mosques, and other religious organizations.
Federal, state and local governments if the proceeds are used for public purposes.
Nonprofit schools, hospitals and volunteer fire companies.
Public parks and recreation facilities.
Salvation Army, United Way, Red Cross, Goodwill, Boy Scouts and Girl Scouts.
War veterans' groups.

What types of organizations generally do not qualify for a charitable deduction?

The following types of organizations generally do not qualify for a charitable deduction:

Social and sports clubs.
For-profit organizations.
Lottery, bingo or raffle tickets.
Dues to social or recreational clubs.
Homeowners' associations.
Individuals.
Political organizations.

What is the limit on the deductibility of charitable contributions?

The amount of your deduction for charitable contributions is limited to 50 percent of your adjusted gross income and may be limited to 20 or 30 percent of your adjusted gross income, depending on the type of property you give and the type of organization you give it to. Before you make a donation, verify with your tax advisor which limit applies.

Can I deduct contributions to tax-exempt organizations?

Not necessarily. Tax-exempt means that the organization does not have to pay federal income taxes while tax-deductible means the donor can deduct contributions to the organization. There are more than 20 different categories of tax-exempt organizations, but only a few of these offer tax-deductibility for donations.

What should I look out for in my charitable giving?

Not everything the charity gets from you qualifies for deduction:

If you go to a charity affair or buy something to benefit a charity (e.g., a magazine subscription or show tickets), you cannot deduct the full amount you pay. Only the part above the fair market value of the item you purchase is fully deductible. For example, if you pay $500 for a charity luncheon worth $200, only $300 can be deducted.
Since contributions are deductible only for the year in which they are actually paid or delivered, pledges are not deductible until they are paid.
No cash or non-cash donation is deductible unless the taxpayer has a receipt from the charity substantiating the donation.
Since contributions must be made to qualified organizations to be tax-deductible, donations made to needy individuals are not deductible.

Is federal gift or estate tax due on my charitable gift?

Charitable gifts made pursuant to your will reduce the amount of your estate that is subject to estate tax. Lifetime gifts have the same estate tax effect (by removing the assets from your estate), along with the current income tax deduction.

Some charities talk about planned or deferred giving. What is that?

Usually they are ways whereby both you (or your family) and charity enjoy your property or its income. The most popular are:

Life Insurance

You name a charity as a beneficiary of a life insurance policy. With some limitations, both the contribution of the policy itself and the continued payment of premiums may be income-tax deductible

Charitable Remainder Trust

You transfer assets to a trust that pays an amount each year to non-charitable beneficiaries (for example, to yourself or your children) for a fixed term or for the life or lives of the beneficiaries, after which time the remaining assets are distributed to one or more charitable organizations. You get an immediate income tax deduction for the value of the remainder interest that goes to the charity on the trust's termination, even though you keep a life-income interest. In effect, you or your beneficiaries get current income for a specified period and the remainder goes to the charity.

Charitable Lead Trust

You transfer assets to a trust that pays an amount each year to charitable organizations for a fixed term or for the life of a named individual. At the termination of the trust, the remaining assets will be distributed to one or more non-charitable beneficiaries (for example, you or your children).

You get a deduction for the value of the annual payments to the charity. You keep the ability to pass on most of your assets to your heirs. Unlike the charitable remainder trusts above, the charity gets the current income for a specified period and your heirs get the remainder.

Charitable Gift Annuity

You and a charity have a contract in which you make a present gift to the charity and the charity pays a fixed amount each year for life to you or any other specified person. Your charitable deduction is the value of your gift minus the present value of your annuity.

Pooled Income Fund

You put funds into a pool that operates like a mutual fund but is controlled by a charity. You, or a designated beneficiary, get a share of the actual net income generated by the entire fund for life, after which your share of the assets is removed from the pooled fund and distributed to the charity. You get an immediate income tax deduction when you contribute the funds to the pool. The deduction is based on the value of the remainder interest.

Charitable Contributions: Frequently Asked Questions

Tue, 10 Oct 2023 16:48:59 GMT

How can I spot a charity scam?

These are some common-sense suggestions for avoiding rip-offs:

Try to avoid making a cash contribution. If possible make your donation using a check or money order made out to the charity-never to the individual soliciting the donation. If you do pay cash always get a receipt. Cash donations are not tax deductible without a receipt.
Ask for written descriptions of the charity's programs and/or finances.
Don't allow yourself to be pressured to donate immediately. Wait until you are sure that the charity is legitimate and deserving of a donation.
Don't forget to keep receipts, canceled checks and bank statements so you will have records of your charitable giving at tax time.
Don't be misled by a charity that resembles or mimics the name of a well-known organization--all charities should be checked out.

Before giving, check on all charities with the local charity registration office (usually a division of the state attorney's general office) and with the Better Business Bureau (BBB).

What should I watch out for with mail solicitations?

Many charities use direct mail to raise funds. While the overwhelming majority of these appeals are accurate and truthful, be aware of the following:

The mailing piece should clearly identify the charity and describe its programs in specifics. If a fund-raising appeal brings tears to your eyes but tells you nothing about the charity's functions, check it out carefully before responding.
Beware of fund-raising appeals that are disguised as bills or invoices. It is illegal to mail a bill, invoice or statement of account that is, in fact, an appeal for funds unless it has a clear and noticeable disclaimer stating that it is an appeal and that you are under no obligation to pay unless you accept the offer.
Deceptive-invoice appeals are most often aimed at businesses, not individuals. If you receive one of these, contact your local Better Business Bureau.
It is against the law to demand payment for unsolicited merchandise-e.g., address labels, stamps, bumper stickers, greeting cards, calendars, and pens. If such items are sent to you with an appeal letter, you are under no obligation to pay for or return them.
Appeals that include sweepstakes promotions should disclose that you do not have to contribute to be eligible for the prizes offered. To require a contribution would make the sweepstakes illegal as a lottery operated by mail.
Appeals that include surveys should not imply that you are obligated to return the survey.

What should I watch out for with door-to-door solicitations?

When you are approached for a contribution of time or money, ask questions -- and don't give until you're satisfied with the answers. Charities with nothing to hide will encourage your interest. Be wary of any reluctance to answer reasonable questions.

Ask for the charity's full name and address. Demand identification from the solicitor.
Ask if the contribution is tax-deductible. Contributions to tax-exempt organizations are not always tax-deductible.
Ask if the charity is licensed by state and local authorities. Registration or licensing is required by most states and some local governments.
Registration, by itself, does not mean that the state or local government endorses the charity.
Don't give in to pressure to make an immediate donation or allow a "runner" to pick up a contribution.
Statements such as "all proceeds will go to charity" may mean money left after expense-- such as the cost of fund-raising efforts-- will go to the charity. These expenses can be big ones, so check carefully.
When asked to buy candy, magazines, or tickets to benefit a charity, be sure to ask what the charity's share will be. Sometimes the organization will receive less than 20 percent of the amount you pay.

If a fundraiser uses pressure tactics-- intimidation, threats, or repeated and harassing calls or visits-call your local Better Business Bureau to report the actions.

How can I maximize my tax benefit from charitable contributions?

Many donors are not aware that their contributions may not be deductible, or that deductions may be limited. Here are the general rules:

When an organization claims to be tax-exempt, it does not necessarily mean contributions are deductible. "Tax-exempt" means that the organization does not have to pay federal income taxes, while "tax-deductible" means the donor can deduct contributions to the organization. The Internal Revenue Code defines more than 20 different categories of tax-exempt organizations, but only a few of these are eligible to receive contributions deductible as charitable donations.

When in doubt, call us or the IRS (800-829-1040) about the deductibility of a contribution.

If you go to a charity affair or buy something to benefit a charity (e.g., a magazine subscription or show tickets), you cannot deduct the full amount you pay. Only the part above the fair market value of the item you purchase is fully deductible.

You pay $50 for a charity luncheon worth $30. Only $20 can be deducted.

Donations made directly to needy individuals are not deductible. Contributions must be made to qualified organizations to be tax-deductible.

Contributions are deductible for the year in which they are actually paid or delivered. Pledges are not deductible they are paid.

Regardless of the amount, to deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution.

For text message donations, a telephone bill will meet the record-keeping requirement if it shows the name of the receiving organization, the date of the contribution, and the amount given.

To claim a deduction for contributions of cash or property equaling $250 or more you must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift. One document may satisfy both the written communication requirement for monetary gifts and the written acknowledgment requirement for all contributions of $250 or more.

What are the most tax-effective ways of donating?

There are many ways to give money to charity. In fact, much of many charities' revenues come from the "planned or deferred giving" techniques. A planned or deferred gift is a present commitment to make a gift in the future, either during your life or via your will. Aside from assuring your favorite charities of a contribution, planned or deferred giving brings with it tax benefits.

Charitable gifts by will reduce the amount of your estate that is subject to estate tax. Lifetime gifts have the same estate tax effect (by removing the assets from your estate), but might also offer a current income tax deduction.

If you have property that has significantly appreciated in value but does not bring in current income, you may be able to use one of these techniques to convert it into an income-producing asset. Further, you will be able to avoid or defer the capital gains tax that would be due on its sale -- all the while helping a charity.

Many variables affect the type of planned or deferred giving arrangement you choose, such as the amount of your income, the size of your estate and the type of asset transferred (e.g., cash, investments, real estate, retirement plan) and its appreciated value. Not all charities have the resources to be able to offer more sophisticated arrangements.

These gifts are complex, so be sure to consult with both the charity and your financial advisor to determine how to best structure your deferred gift.

Here are some examples of planned and deferred charitable gifts:

Life Insurance

You name a charity as a beneficiary of a life insurance policy. With some limitations, both the contribution of the policy itself and the continued payment of premiums may be income-tax deductible

Charitable Remainder Annuity

You transfer assets to a trust that pays a set amount each year to non-charitable beneficiaries (for example, to yourself or to your children) for a fixed term or for the life or lives of the beneficiaries, after which time the remaining assets are distributed to one or more charitable organizations. You get an immediate income tax deduction for the value of the remainder interest that goes to the charity on the trust's termination -- even though you keep a life-income interest. In effect, you or your beneficiaries get current income for a specified period, and the remainder goes to the charity.

Charitable Remainder Unitrust

This is the same as the charitable remainder annuity trust, except the trust pays the actual income or a set percentage of the current value (rather than a set amount) of the trust's assets each year to the non-charitable beneficiaries. Here, too, you or your beneficiaries get current income for a specified period, and the remainder goes to the charity.

Charitable Lead Annuity Trust

You transfer assets to a trust that pays a set amount each year to charitable organizations for a fixed term or for the life of a named individual. At the termination of the trust, the remaining assets will be distributed to one or more non-charitable beneficiaries (for example, you or your children).

You get a deduction for the value of the annual payments to the charity. You may still be liable for tax on the income earned by the trust. You keep the ability to pass on most of your assets to your heirs. Unlike the two trusts above, the charity gets the current income for a specified period, and your heirs get the remainder.

Charitable Lead Unitrust

This is the same as the lead annuity trust, except the trust pays the actual income or a set percentage of the current value (rather than a set amount) of the trust's assets each year to the charities.

Here, too, the charity gets the current income for a specified period, and your heirs get the remainder.

Charitable Gift Annuity

You and a charity have a contract in which you make a present gift to the charity, and the charity pays a fixed amount each year for life to you or any other specified person.

Pooled Income Fund

You get an immediate income tax deduction when you contribute the funds to the pool. The deduction is based on the value of the remainder interest.

Should I make a planned or deferred gift?

When determining whether to make a planned or deferred gift to a charity, ask whether you are ready to make a commitment to invest in a charitable organization; despite the tax benefits, you will still be "out-of-pocket" after the deduction.

Some questions you should consider are:

Is the charity viable, reputable, creditable, and reliable?
Do you wish to support its programs?
Does the gift fit into your estate and family plan?

Is it wise to give my time to charity?

Volunteering your time can be personally rewarding, but it is important to consider the following factors before committing yourself.

First, make sure you are familiar with the charity's activities. Ask for written information about the charity's programs and finances.

Be aware that volunteer work may require special training devotion of a scheduled number of hours each week to the charity.

If you are considering assisting with door-to-door fund-raising, be sure to find out whether the charity has financial checks and balances in place to help ensure control over collected funds.

Although the value of your time as a volunteer is not deductible, out-of-pocket expenses (including transportation costs) are generally deductible.

How do charity thrift stores work?

There are three major types of thrift store operations:

Conduit-type shops are run by volunteer church and civic groups. These thrift stores generally distribute most of their proceeds to various charitable organizations, often community-based.
The second category of thrift operations is represented by service organizations such as The Salvation Army and Goodwill Industries. Here, the thrift stores are operated as part of their program activities through the goal of "rehabilitation through employment."
The third category involves charities that collect and sell used merchandise to raise funds for their own use. This arrangement is popular for a number of veterans organizations and other charities. Such arrangements generally work one of two ways: (1) the charity owns and operates the store, or, (2) more commonly, variously charities solicit and collect used items, which are then sold to independently managed store(s) for an agreed-upon amount.

The "fair market value" of goods donated to a thrift store is deductible as a charitable donation, as long as the store is operated by a charity. To determine the fair market value, visit a thrift store and check the "going rate" for comparable items. If you are donating directly to a "for-profit" thrift store or if your merchandise is sold on a consignment basis whereby you get a percentage of the sale, the thrift contribution is not deductible.

Remember to ask for a receipt that is properly authorized by the charity. It is up to the donor to set a value on the donated item.

If you plan to donate a large or unusual item, check with the charity first to determine if it is acceptable.

If you are approached to donate goods for thrift purposes, ask how the charity will benefit financially. If the goods will be sold by the charity to a third party, an independently managed thrift store, ask what the charity's share will be.

Sometimes the charity receives a small percentage, e.g., 5 to 20 percent of the gross, or a flat fee per bag of goods collected.

How are tickets to charitable events treated?

Dinners, luncheons, galas, tournaments, circuses, and other events are often put on by charities to raise funds. Here are some points to consider before deciding to participate in such events.

Check out the charity. The fact that you are receiving a meal or theater tickets should not justify less scrutiny.
Remember, your purchase of tickets to such events is generally not fully deductible. Only the portion of your gift above the "fair market value" of the benefit received (i.e., the meal, show, etc.) is deductible as a charitable donation. This rule holds true even if you decide to give your tickets away for someone else to use.
If you decide not to use the tickets, give them back to the charity. In order to be able to deduct the full amount paid, you must either refuse to accept the tickets or return them to the charitable organization. In this way, you will not have received value for your payment.

Make donations by check or money order out to the full name of the charity and not to the sponsoring show company or to an individual who may be collecting donations in person.

Watch out for statements such as "all proceeds will go to the charity." This can mean the amount after expenses have been taken out, such as the cost of the production, the fees for the fund-raising company hired to conduct the event, and other related expenses. These expenses can make a big difference and sometimes result in the charity receiving 20 percent or less of the price paid.

Ask the charity what anticipated portion of the purchase price will benefit the organization.

Solicitors for some fund-raising events such as circuses, variety shows, and ice skating shows may suggest that if you are not interested in attending the event, you can purchase tickets that will be given to handicapped or underprivileged children. If such statements are made, ask the solicitor how many children will attend the event, how they will be chosen, how many tickets have been already distributed to these children, and if transportation to the event will be provided for them.

Fraudulent Charities: How To Protect Yourself

Tue, 10 Oct 2023 16:35:06 GMT

By knowing the many ways that charities are regulated, both by the states and the IRS, you can better protect yourself against fraudulent charities and know that your charitable contribution will be properly used for the intended purpose. And if you do fall prey, you should know how to complain most effectively.

Giving to a charity is a worthy objective. However, for you and society to get the maximum benefit from your contribution, you need to give wisely and make sure that your contribution serves the intended purpose.

If you aren't completely knowledgeable about your intended charities, you should review their operations and practices before giving. Even if the charity is a household name, its practices may be wasteful. For example, a major part of its receipts from contributors may be used not for charitable purposes but to pay an outside fundraiser.

Unfortunately, many charities go beyond wasteful practices and are outright frauds. This Financial Guide will discuss how the various states and the IRS regulate charities to minimize the abuses in this area and explains how to files a complaint against a phony charity.

How the States Regulate Charities

Most state governments regulate charitable organizations. To obtain information on these regulations, which vary from state to state, contact the appropriate government agency (usually a division of the Attorney General or the Secretary of State). State government agencies do not approve charities. However, they do require charities to follow certain regulations.

Most states have registration and licensing rules requiring charities to file certain basic information, such as the official name, principal address, and purpose of the organization. This requirement generally applies to most charities, whether national or local, that solicit in the state.

Annual reporting is also a common state requirement and generally involves the filing of the charity's financial statements. In many cases, a copy of the charity's federal tax return (IRS Form 990) is accepted by the state as fulfilling its annual reporting requirements.

Planning Aid: For more information on general businesses and their practices, see Better Business Bureau .

Churches and other religious organizations, as well as small charities that receive contributions below certain levels, are frequently exempt from state registration and annual reporting requirements.

Some states have specific regulations for professional fund-raisers used by charities. They may require the fund-raiser to register with the state and put up a bond ranging from $2,500 to $50,000 to reimburse the state for any fines and/or penalties imposed on the fundraiser.

Contact the appropriate state government agency to verify a charity's registration and to obtain financial information on a soliciting charity.

How the IRS Regulates Charities

To obtain tax-exempt status under Section 501(c)(3) of the Internal Revenue Code, an organization has to file certain documents with the IRS that prove it is organized and operated for specified charitable purposes. The IRS looks at these documents in terms of whether they meet the Code's requirements; it does not judge charities' worthiness.

Organizations with 501(c)(3) status are those that the IRS considers charitable, educational, religious, scientific or literary, those that prevent cruelty to animals, and those that foster national or international sports competition. When the IRS rules positively on an application, the organization is eligible to receive contributions deductible as charitable donations for federal income tax purposes. The charity receives a Determination Letter formally notifying it of its charitable status. Older charities may have a 101(6) ruling, which corresponds to Section 501(c)(3) of the current IRC. Churches and small charities with less than $5,000 of annual income do not have to apply to the IRS for exemption.

Use the Tax Exempt Organization Search Tool on the IRS.gov website to find information about a tax-exempt organization’s federal tax status and filings.

Form 1023: the application filed by the charity to obtain tax-exempt status.
IRS Letter of Determination: the two-page IRS letter that notifies the organization of its tax-exempt status.
Form 990: the financial/income tax form filed with the IRS annually by the charity. (Charities with a gross income of less than $25,000 and churches are not required to file this form). Among other things, Form 990 includes information on the charity's income, expenses, assets, liabilities and net assets in the past fiscal year. Form 990 also identifies the salaries of the charity's five highest-paid employees. When contacting the IRS for copies, specify the fiscal year.

If your request for information involves only Forms 990, you can get a faster response by writing directly to the IRS Service Center where the charity files its return. Contact your nearest IRS office for the address of the appropriate Service Center.

A charity's application for tax-exempt status and its annual Form 990 must be made available for public inspection during regular business hours at the principal office of the charity and at each of its regional or district offices containing three or more employees. Although the charity is not required to provide photocopies of the return, it must have a copy on hand for public inspection.

How to File a Complaint

Complaints about charities are uncommon. However, if sweepstakes prizes, membership benefits, the charity's magazine, or ordered merchandise is not received, donors may need to file complaints. Donors may also be concerned about duplicate mailings from the same charity or may wish to remove their names from the charity's mailing list.

Here is how to file a complaint:

Put your complaint in writing. Clearly explain the problem and what specific action you want taken by the charity to resolve it.
Include copies of all applicable documents with your complaint (for example, copies of canceled checks for merchandise ordered, copies of mailing labels in case of duplicate mailings, or copies of problem appeals).
File your complaint with the Better Business Bureau online or by mail: BBB Wise Giving Alliance, 3033 Wilson Blvd, Suite 710, Arlington, VA 22201. Complaints can also be filed with government agencies, such as your state attorney general's office. Many states have consumer protection agencies and special offices to regulate charities.
If your complaint involves activities, not in accordance with the organization's tax-exempt purposes (for example, misappropriation of funds) contact the IRS, as well as your state attorney general's office. In addition, the U.S. Postal Inspection Service investigates charges of false representation and violations of the mail fraud statutes.

Government and Non-Profit Agencies

Most state governments regulate charitable organizations. To obtain information on these regulations, which vary from state to state, contact the appropriate government agency (usually a division of the Attorney General or the Secretary of State).
Contact the appropriate state government agency to verify a charity's registration and to obtain financial information on a soliciting charity.
Contact your local Better Business Bureau to find out whether a complaint has been lodged against a charity.

Advanced Charity Techniques: Maximizing Your Deduction

Tue, 10 Oct 2023 16:27:55 GMT

There are a number of tax vehicles for turning charitable desires into tax deductions. While these techniques are quite complex, they can with the proper guidance provide substantial tax deductions. This Financial Guide provides an introductory view of the ways to maximize your tax deduction while satisfying your charitable goals.

When an organization claims to be tax-exempt, it does not necessarily mean that contributions are deductible. Tax-exempt means that the organization does not have to pay federal income taxes while tax-deductible means the donor can deduct contributions to the organization. The Internal Revenue Code defines more than 20 different categories of tax-exempt organizations, but only a few of these offer tax deductibility for donations.

The well-known mainstream charities generally provide deductibility for donations. But, surprisingly, some well-known organizations do not. If deductibility is a factor in your decision to make a contribution to a tax-exempt organization, especially if the amount is substantial, you might want to determine whether the organization qualifies for deductibility. IRS Publication 78, the Cumulative List of Organizations, is an annual list of those charities eligible for deductibility. You can also call the IRS (800-829-1040) about the deductibility of a contribution if you're in doubt.

Form 1023: the application filed by the charity to obtain tax-exempt status.
IRS Letter of Determination: the two-page IRS letter that notifies the organization of its tax-exempt status.
Form 990: the financial/income tax form filed with the IRS annually by the charity. (Charities with a gross income of less than $25,000 and churches are not required to file this form). Among other things, Form 990 includes information on the charity's income, expenses, assets, liabilities and net assets in the past fiscal year. Form 990 also identifies the salaries of the charity's five highest-paid employees. When contacting the IRS for copies, specify the fiscal year.

Tip: If your request for information involves only Forms 990, you can get a faster response by writing directly to the IRS Service Center where the charity files its return. Contact your nearest IRS office for the address of the appropriate Service Center.

Tip: The charity registration office in your state (usually a division of the state attorney general's office) may also have a copy of the charity's latest Form 990, along with other publicly available information on charities soliciting in your state.

Even though the charity qualifies for deductibility, taxpayers are often disappointed to learn that their expected deductions are not allowed. Here are some of the common misconceptions about the deductibility of charitable contributions:

If you go to a charity affair or buy something to benefit a charity (e.g., a magazine subscription or show tickets), you cannot deduct the full amount you pay. Only the part above the fair market value of the item you purchase is fully deductible. For example, if you pay $500 for a charity luncheon worth $200, only $300 can be deducted. An exception allows you to deduct the full amount if what you get in return is insubstantial in value (e.g., 2 percent of the value of your contribution) and the charity tells you the deductible amount.
Since contributions are deductible only for the year in which they are actually paid or delivered, pledges are not deductible until they are paid.
It's a mistake to believe you can deduct estimated cash contributions. This was widely done though IRS required you to make a record of some kind at or around the time of the gift. But cash contributions in 2007 and after aren't deductible at all unless substantiated by a receipt from the charity, a canceled check, a credit card statement or other supporting documentation from the charity.
No donation of $250 or more is deductible unless the taxpayer has a receipt from the charity substantiating the donation.
Since contributions must be made to qualified organizations to be tax-deductible, donations made directly to needy individuals are not deductible.

Note: The amount of the deduction you can get for the garden-variety charitable contribution (we'll talk about more sophisticated techniques in a moment) depends on the type of charity and the type of contribution, as well as on the specific tax situation of the donor (since there are percentage-of-income limitations). For these reasons, tax planning for charitable contributions requires the assistance of your tax advisor.

Planned or Deferred Giving

There are a number of sophisticated techniques for giving money to a charity that differs substantially from the usual method of just writing a check. You've probably been approached by a number of charitable organizations suggesting ways you can save tax dollars through the use of planned or deferred giving techniques. Indeed, much of the revenue of many charities comes from the use of such techniques. However, not all charities have the resources to be able to offer sophisticated arrangements. Briefly stated, these various techniques, discussed below, work as follows:

A planned or deferred gift is a present commitment to make a gift in the future, either during your lifetime or pursuant to your will. Aside from assuring your favorite charities of a contribution, planned or deferred giving brings with it certain tax benefits. Charitable gifts made pursuant to your will reduce the amount of your estate that is subject to estate tax. Lifetime gifts have the same estate tax effect (by removing the assets from your estate), but also might offer a current income tax deduction. If you have property that has significantly appreciated in value but does not bring in current income, you may be able to use one of these techniques to convert it into an income-producing asset. Further, you will be able to avoid or defer the capital gains tax that would be due on its sale - all the while helping a charity.

Tip: Many variables affect the type of planned or deferred giving arrangement you choose, such as the amount of your income, the size of your estate, and the type of asset transferred (e.g., cash, investments, business interests, real estate, retirement plan) and its appreciated value. Professional guidance is even more important here than in the garden-variety type of contribution program because of these of the complexity of these gifts.

Types of Planned and Deferred Gifts

There are several types of planned and deferred gifts: (1) life insurance, (2) charitable remainder annuity trust, (3) charitable remainder unitrust, (4) charitable lead annuity trust, (5) charitable lead unitrust, (6) charitable gift annuity, (7) pooled income fund. These are discussed briefly below:

Life Insurance

You name a charity as a beneficiary of a life insurance policy. With some limitations, both the contribution of the policy itself and the continued payment of premiums may be income-tax deductible.

Charitable Remainder Annuity Trust

You transfer assets to a trust that pays a set amount each year to non-charitable beneficiaries (for example, to yourself or your children) for a fixed term or for the life or lives of the beneficiaries, after which time the remaining assets are distributed to one or more charitable organizations. You get an immediate income tax deduction for the value of the remainder interest that goes to the charity on the trust's termination, even though you keep a life-income interest. In effect, you or your beneficiaries get current income for a specified period and the remainder goes to the charity.

Charitable Remainder Unitrust

Charitable Lead Annuity Trust

Charitable Lead Unitrust

Here, too, the charity gets the current income for a specified period and your heirs get the remainder.

Charitable Gift Annuity

Pooled Income Fund

Should You Make a Planned or Deferred Gift?

When determining whether to make a planned or deferred gift to a charity, ask whether you are ready to make a commitment to invest in a charitable organization. Keep in mind that despite the tax benefits, you will still be out-of-pockeout of pocketeduction.

Some questions you should consider are:

Does the gift fit into your estate and family plan?
Is the charity viable, reputable, credible, and reliable?
Do you wish to support its programs?

Government and Non-Profit Agencies

Most state governments regulate charitable organizations. To obtain information on these regulations, which vary from state to state, contact the appropriate government agency (usually a division of the Attorney General or the Secretary of State).
Contact the appropriate state government agency to verify a charity's registration and to obtain financial information on a soliciting charity.
Contact your local Better Business Bureau to find out whether a complaint has been lodged against a charity.

What Records You Must Keep Relating To Your Charitable Contributions

Tue, 10 Oct 2023 16:07:23 GMT

You must keep records to prove the amount of the cash and noncash contributions you make during the year. Which records you must keep depends on the amount of your contributions and whether they are cash or property contributions. New recordkeeping requirements were established for all contributions made after January 1, 2007. You cannot deduct a cash contribution, regardless of the amount, unless you keep as a record of the contribution, bank records (such as a canceled check or bank statement containing the name of the charity, date, and the amount) or a written communication from the charity.

This Financial Guide discusses which records you must keep.

Cash Contributions

Cash contributions include those paid by cash, check, electronic funds transfer, debit card, credit card, or payroll deduction. You cannot deduct a cash contribution, regardless of the amount, unless it is substantiated by one of the following:

A bank record that shows the name of the qualified organization, the date of the contribution, and the amount of the contribution. Bank records may include: a canceled check, a bank or credit union statement or a credit card statement.
A receipt (or letter or other written communication) from the qualified organization showing the name of the organization, the date of the contribution, and the amount of the contribution.
Payroll deduction records. The payroll records must include a pay stub, Form W-2 or other document furnished by the employer that shows the date and the amount of the contribution, and a pledge card or other document prepared by or for the qualified organization that shows the name of the organization.

Cash Contributions of $250 or More: You can claim a deduction for a contribution of $250 or more only if you have an acknowledgment of your contribution from the qualified organization or certain payroll deduction records. If you made more than one contribution of $250 or more, you must have either a separate acknowledgment for each or one acknowledgment that lists each contribution and the date of each contribution and shows your total contributions.

To determine whether a contribution is $250 or more, do not combine separate contributions. For example, if you gave to the church $25 each week, your weekly payments do not need to be combined. Each payment is a separate contribution. The acknowledgment must be written and state whether you received any goods or services in return. If something was received in return, a description and good faith estimate of the value of the goods or services must be included.

For payroll deductions, the payroll records must include a pay stub, Form W-2 or other document furnished by the employer that shows the date and the amount of the contribution, and a pledge card or other document prepared by or for the qualified organization that shows the name of the organization. If the pay stub, Form W-2, pledge card, or other document does not show the date of the contribution, you must also have another document that does show the date of the contribution.

Noncash Contributions

For a contribution not made in cash, these general rules apply:

The records you must keep depends on whether your deduction for the contribution is:

Less Than $250
At least $250 but not more than $500,
Over $500 but not more than $5,000, or
Over $5,000.

Amount of contribution. In figuring out whether your contribution is $500 or more, combine separate contributions of similar items during the year. If you received goods or services in return, reduce your contribution by the value of those goods or services. If you figure your deduction by reducing the fair market value of the donated property by its appreciation, your contribution is the reduced amount.

Deductions of Less Than $250

If you make any noncash contribution, you must get and keep a receipt from the charitable organization showing:

The name of the charitable organization,
The date and location of the charitable contribution, and
A reasonably detailed description of the property.

A letter or other written communication from the charitable organization acknowledging receipt of the contribution and containing the information in (1), (2), and (3) will serve as a receipt. You are not required to have a receipt where it is impractical to get one (for example, if you leave property at a charity's unattended drop site).

Additional records. You must also keep reliable written records for each item of donated property. Your written records must include the following information.

The name and address of the organization to which you contributed.
The date and location of the contribution.
A description of the property in detail reasonable under the circumstances. For a security, keep the name of the issuer, the type of security, and whether it is regularly traded on a stock exchange or in an over-the-counter market.
The fair market value of the property at the time of the contribution and how you figured the fair market value. If it was determined by appraisal, you should also keep a signed copy of the appraisal.
The cost or other basis of the property if you must reduce its fair market value by appreciation.
The amount you claim as a deduction for the tax year as a result of the contribution if you contribute less than your entire interest in the property during the tax year. Your records must include the amount you claimed as a deduction in any earlier years for contributions of other interests in this property. They must also include the name and address of each organization to which you contributed the other interests, the place where any such tangible property is located or kept, and the name of any person in possession of the property, other than the organization to which you contributed.
Any conditions attached to the gift of property.

Deductions of At Least $250 But Not More Than $500

If you claim a deduction of at least $250 but not more than $500 for a noncash charitable contribution, you must get and keep an acknowledgment of your contribution from the qualified organization. If you made more than one contribution of $250 or more, you can have either a separate acknowledgment for each or one acknowledgment that shows your total contributions.

The acknowledgment must contain the information in items (1) through (3) listed under Deductions of Less Than $250, earlier, and your written records must include the information listed in that discussion under Additional Records.

1. It must be written.

2. It must include:

A description (but not necessarily the value) of any property you contributed,
Whether the qualified organization gave you any goods or services as a result of your contribution (other than certain token items and membership benefits), and
A description and good faith estimate of the value of any goods or services described above. If the only benefit you received was an intangible religious benefit (such as admission to a religious ceremony) that generally is not sold in a commercial transaction outside the donative context, the acknowledgment must say so and does not need to describe or estimate the value of the benefit.

3. You must get the acknowledgment on or before the earlier of:

The date you file your return for the year you make the contribution, or
The due date, including extensions, for filing the return.

Deductions Over $500 But Not Over $5,000

If you claim a deduction over $500 but not over $5,000 for a noncash charitable contribution, you must have the acknowledgment and written records described under Deductions of At Least $250 But Not More Than $500. Your records must also include:

How you got the property, for example, by purchase, gift, bequest, inheritance, or exchange.
The approximate date you got the property or, if created, produced, or manufactured by or for you, the approximate date the property was substantially completed.
The cost or other basis, and any adjustments to the basis, of property held less than 12 months and, if available, the cost or other basis of property held 12 months or more. This requirement, however, does not apply to publicly traded securities.

If you are not able to provide information on either the date you got the property or the cost basis of the property and you have a reasonable cause for not being able to provide this information, attach a statement of explanation to your return.

Deductions Over $5,000

If you claim a deduction of over $5,000 for a charitable contribution of one property item or a group of similar property items, you must have the acknowledgment and the written records described under Deductions Over $500 But Not Over $5,000. In figuring out whether your deduction is over $5,000, combine your claimed deductions for all similar items donated to any charitable organization during the year.

Generally, you must also obtain a qualified written appraisal of the donated property from a qualified appraiser.

Qualified conservation contribution. If the gift was a "qualified conservation contribution," your records must also include the fair market value of the underlying property before and after the gift and the conservation purpose furthered by the gift.

Out of Pocket Expenses

If you render services to a qualified organization and have unreimbursed out of pocket expenses related to those services, the following three rules apply.

You must have adequate records to prove the amount of the expenses.
You must get an acknowledgment from the qualified organization that contains a description of the services you provided and a statement of whether or not the organization provided you any goods and services to reimburse you for the expenses incurred. If so, the statement must include a description and good faith estimate of the value of any goods or services (other than intangible religious benefits). If the only benefit you received was an intangible religious benefit, you must receive a statement stating this; however, the acknowledgment does not need to describe or estimate the value of an intangible religious benefit.
You must get the acknowledgment on or before the earlier of (a) The date you file your return for the year you made the contribution, or the due date, including extensions, for filing your return.

Car Expenses. If you claim expenses directly related to the use of your car in giving services to a qualified organization, you must keep reliable written records of your expenses. Whether your records are considered reliable depends on all the facts and circumstances. Generally, they are reliable if you made them regularly and at the time you incurred the expense.

Your records must show the name of the organization you were serving and the date each time you used your car for a charitable purpose. If you use the standard mileage rate, your records must show the miles you drove. If you use actual expenses to complete the deduction, your records must show the costs of operating the car for charitable purposes only.

Charitable Contributions of Property: Maximizing the Deduction

Tue, 10 Oct 2023 16:00:55 GMT

This Financial Guide discusses the rules that apply when you contribute property - as opposed to money - to charity and is meant to provide general information. Contact your tax advisor if you need tax planning assistance.

The rules in this area are extremely complex. We urge you not to act on any transaction without seeking the proper advice.

If you contribute property to a qualified organization, the amount of your charitable contribution is generally the fair market value of the property at the time of the contribution. However, if the property fits into one of the categories discussed here, the amount of your deduction must be decreased.

After discussing how to determine the fair market value of something you donate, we'll discuss the following categories of charitable gifts of property:

Contributions subject to special rules
Property that has decreased in value;
Property that has increased in value;
Food Inventory.
Bargain Sales.

Determining Fair Market Value

Fair market value is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all of the relevant facts.

Used Clothing and Household Items.

The fair market value of used clothing and used household goods, such as furniture and furnishings, electronics, appliances, linens, and other similar items is usually much lower than the price paid when new. These items may have little or no market value because they are in a worn condition, out of style, or no longer useful. Claim as the value of used clothing the price that buyers of used items actually pay clothing stores, such as consignment or thrift shops.

Be prepared to support your valuation of other household items with photographs, canceled checks, receipts from your purchase of the items, or other evidence. Magazine or newspaper articles and photographs that describe the items and statements by the recipients of the items may be useful. This documentation does not get filed with your return; it is kept on hand as proof.

No deduction is allowed after August 17, 2006 for household items in less than "good used condition." However, deduction is allowed where the amount claimed for the item in less than good condition is more than $500 and a qualified appraisal supporting the valuation is filed with the return.

Cars, Boats, and Aircraft

If you donate a car, a boat, or an aircraft to a charitable organization, you must determine the FMV.

The FMV of a donated car, boat, or airplane is generally the amount listed in a used vehicle pricing guide for a private party sale, not the dealer retail value, of a similar vehicle. The FMV may be less than that, however if the vehicle has engine trouble, body damage, high mileage, or any type of excessive wear.

Similar is defined as the same make, model, and year, sold in the same area, in the same condition, with the same or similar options or accessories, and with the same or similar warranties as the donated vehicle.

Boats. Except for inexpensive small boats, the valuation of boats should be based on an appraisal by a marine surveyor because the physical condition is so critical to the value.

If you donate a qualified vehicle to a qualified organization and you claim a deduction of more than $500, you can deduct the smaller of the gross proceeds from the sale of the vehicle by the organization or the vehicle's fair market value on the date of the contribution. If the vehicle's fair market value was more than your cost or other basis, you may have to reduce the fair market value to figure the deductible amount.

Paintings, Antiques, and Other Objects of Art.

Deductions for contributions of paintings, antiques, and other objects of art should be supported by a written appraisal from a qualified and reputable source unless the deduction is $5,000 or less.

Art valued at $20,000 or more. If you claim a deduction of $20,000 or more for donations of art, you must attach a complete copy of the signed appraisal to your return. For individual objects valued at $20,000 or more, a photograph of a size and quality fully showing the object, preferably an 8 x 10-inch color photograph or a color transparency no smaller than 4 x 5 inches, must be provided upon request.
Art valued at $50,000 or more. If you donate an item of art that has been appraised at $50,000 or more, you can request a Statement of Value for that item from the IRS. You must request the statement before filing the tax return that reports the donation.

Large quantities. If you contribute a large number of the same item, fair market value is the price at which comparable numbers of the item are being sold.

Example: You purchase 20 rare books for $1,000. The person who sells them to you says the retail value of these books is $3,000. If you contribute these rare books to a qualified organization, you can claim a deduction only for the price at which similar numbers of the same book are currently being sold. Your charitable contribution is $1,000 unless you can show that similar numbers of that book were selling at a different price at the time of the contribution.

Contributions Subject to Special Rules

Special rules apply if you contribute:

Clothing or household items,
A car, boat, or airplane,
Taxidermy property,
Property subject to a debt,
A partial interest in property,
A fractional interest in tangible personal property,
A qualified conservation contribution,
A future interest in tangible personal property,
Inventory from your business, or
A patent or other intellectual property.

These special rules are described here briefly.

Used clothing or household items. You cannot take a deduction for clothing or household items you donate unless the clothing or household items are in good used condition or better. However, there is an exception. You can take a deduction for a contribution of an item of clothing or a household item that is not in good used condition or better if you deduct more than $500 for it and include a qualified appraisal of it with your return.

Car, boat, or airplane. A qualified vehicle is defined as a car or any motor vehicle manufactured mainly for use on public streets, roads, and highways, a boat, or an airplane. If you donate a qualified vehicle to a qualified organization and you claim a deduction of more than $500, you can deduct the smaller of:

The gross proceeds from the sale of the vehicle by the organization, or
The vehicle's fair market value on the date of the contribution. If the vehicle's fair market value was more than your cost or other basis, you may have to reduce the fair market value to figure the deductible amount

Taxidermy property. If you donate taxidermy property to a qualified organization, your deduction is limited to your basis in the property or its fair market value, whichever is less. This applies if you prepared, stuffed, or mounted the property or paid or incurred the cost of preparing, stuffing, or mounting the property.

Your basis for this purpose includes only the cost of preparing, stuffing, and mounting the property. Your basis does not include transportation or travel costs. It also does not include direct or indirect costs for hunting or killing an animal, such as equipment costs. In addition, it does not include the value of your time.

Taxidermy property means any work of art that:

Is the reproduction or preservation of an animal, in whole or in part,
Is prepared, stuffed, or mounted to recreate one or more characteristics of the animal, and
Contains a part of the body of the dead animal.

Property subject to a debt. If you contribute property subject to a debt (such as a mortgage), there are two possible ways your deduction might be reduced. First, special rules require you to reduce your deduction by certain interest payments you make. These rules prevent a double deduction of the same amount as both investment interest and a charitable contribution.

Second, if the debt is assumed by the recipient (or another person), you must reduce the fair market value of the property by the amount of the outstanding debt.

If you sold the property to a qualified organization at a bargain price (discussed later), the amount of the debt is also treated as an amount realized on the sale or exchange of property.

Partial interest in property. Generally, you cannot deduct a charitable contribution (not made by a transfer in trust) of less than your entire interest in property. A contribution of the right to use property is a contribution of less than your entire interest in that property, and is not deductible.

There are important exceptions to this rule. You can deduct a charitable contribution of a partial interest in property if that interest fits one of the following categories:

1. A remainder interest in your personal home or farm. A remainder interest is one that passes to a beneficiary after the end of an earlier interest in the property.

Example : You keep the right to live in your home during your lifetime and give your church a remainder interest that begins upon your death.

2. An undivided part of your entire interest. This must consist of a part of every substantial interest or right you own in the property and must last as long as your interest in the property lasts.

Example : You contribute voting stock to a qualified organization but keep the right to vote the stock. The right to vote is a substantial right in the stock. You have not contributed an undivided part of your entire interest and cannot deduct your contribution.

Where it's an undivided interest in tangible personal property (defined below) the donee must have possession of the property for a part of the year consistent with its interest in the property. Special rules apply for contributions after August 17, 2006, of further undivided interests in the same property by the same donor. And, for contributions after August 17, 2006, of undivided interests in tangible personal property, the deduction is "recaptured" if the donee doesn't get all of the donor's interest in the property by the earlier of 10 years from the first gift or the donor's death. "Recapture" means the deduction is added back to the donor's income (say, in the 11th year), with interest due from the year of contribution and a tax penalty of 10 percent of the recaptured income.

3. A partial interest that would be deductible if transferred in trust.

4. A qualified conservation contribution (as specifically defined in the tax law).

Fractional Interest in Tangible Personal Property. A fractional interest in property is an undivided portion of your entire interest in the property. You cannot deduct a charitable contribution of a fractional interest in tangible personal property unless all interests in the property are held immediately before the contribution by you or you and the qualifying organization receiving the contribution.

Qualified Conservation Contribution. A qualified conservation contribution is a contribution of a qualified real property interest to a qualified organization such as a governmental unit or publicly supported charitable, religious, scientific, literary or educational organization that is to be used only for conservation purposes.

The organization also must have a commitment to protect the conservation purposes of the donation and must have the resources to enforce the restrictions. Conservation purposes are defined as:

Preserving land areas for outdoor recreation by, or for the education of, the general public.
Protecting a relatively natural habitat of fish, wildlife, or plants, or a similar ecosystem.
Preserving open space, including farmland and forest land, if it yields a significant public benefit. It must be either for the scenic enjoyment of the general public or under a clearly defined federal, state, or local governmental conservation policy.
Preserving a historically important land area or a certified historic structure.

If a building in a registered historic district is a certified historic structure, a contribution of a qualified real property interest that is an easement or other restriction on the exterior of the building is deductible only if it meets all of the following three conditions:

Future interest in tangible personal property. You can deduct the value of a charitable contribution of a future interest in tangible personal property only after all intervening interests in and rights to the actual possession or enjoyment of the property have either expired or been turned over to someone other than yourself, a related person, or a related organization.

Related persons include your spouse, children, grandchildren, brothers, sisters, and parents. Related organizations may include a partnership or corporation that you have an interest in, or an estate or trust that you have a connection with.

Tangible personal property. This is any property, other than land or buildings, that can be seen or touched. It includes furniture, books, jewelry, paintings, and cars.

Future interest. This is any interest that is to begin at some future time, regardless of whether it is designated as a future interest under state law.

Example : You own an antique car that you contribute to a museum. You give up ownership, but retain the right to keep the car in your garage with your personal collection. Since you keep an interest in the property, you cannot deduct the contribution. If you turn the car over to the museum in a later year, giving up all rights to its use, possession, and enjoyment, you can take a deduction for the contribution in that later year.

Inventory . If you contribute inventory (property that you sell in the course of your business), the amount you can claim as a contribution deduction is the smaller of its fair market value on the day you contributed it or its basis. The basis of donated inventory is any cost incurred for the inventory in an earlier year that you would otherwise include in your opening inventory for the year of the contribution. You must remove the amount of your contribution deduction from your opening inventory. It is not part of the cost of goods sold.

If the cost of donated inventory is not included in your opening inventory, the inventory's basis is zero and you cannot claim a charitable contribution deduction. Treat the inventory's cost as you would ordinarily treat it under your method of accounting. For example, include the purchase price of inventory bought and donated in the same year in the cost of goods sold for that year.

A special rule applies to donations of food inventory (see Food Inventory below)

Patents and Other Intellectual Property. If you donate a patent or other intellectual property to a qualified organization, your deduction is limited to the basis of the property or the fair market value of the property, whichever is less. After the legal life of the patent or other intellectual property ends, or after the 10th anniversary of the donation, no additional deduction is allowed. Also, additional deductions cannot be taken for patents or other intellectual property donated to certain private foundations. Intellectual property means any of the following:

Patents.
Copyrights (other than a copyright described in Internal Revenue Code sections 1221(a)(3) or 1231(b)(1)(C)).
Trademarks.
Trade names.
Trade secrets.
Know-how.
Software (other than software described in Internal Revenue Code section 197(e)(3)(A)(i)).
Other similar property or applications or registrations of such property.

Donating Property That Has Decreased in Value

If you contribute property with a fair market value that is less than your basis in it (generally, less than what you paid for it), your deduction is limited to its fair market value. You cannot claim a deduction for the difference between the property's basis and its fair market value.

Common examples of property that decreases in value include clothing, furniture, appliances, and cars.

Donating Property That Has Increased in Value

If you contribute property with a fair market value that is more than your basis in it, you may have to reduce the fair market value by the amount of appreciation (increase in value) when you figure your deduction.

Again, your basis in property is generally what you paid for it. Different rules apply to figuring your deduction, depending on whether the property is:

1. Ordinary income property, or

2. Capital gain property.

Ordinary Income Property

Property is ordinary income property if its sale at fair market value on the date it was contributed would have resulted in ordinary income or in short-term capital gain. Examples of ordinary income property are inventory, works of art created by the donor, manuscripts prepared by the donor, and capital assets held 1 year or less.

Equipment or other property used in a trade or business is considered ordinary income property to the extent of any gain that would have been treated as ordinary income under the tax law, had the property been sold at its fair market value at the time of contribution.

Amount of deduction. The amount you can deduct for a contribution of ordinary income property is its fair market value less the amount that would be ordinary income or short-term capital gain if you sold the property for its fair market value. Generally, this rule limits the deduction to your basis in the property.

Example : You donate stock that you held for 5 months to your church. The fair market value of the stock on the day you donate it is $1,000, but you paid only $800 (your basis). Because the $200 of appreciation would be short-term capital gain if you sold the stock, your deduction is limited to $800 (fair market value less the appreciation).

Exception . Do not reduce your charitable contribution if you include the ordinary or capital gain income in your gross income in the same year as the contribution.

Capital Gain Property

Property is capital gain property if its sale at fair market value on the date of the contribution would have resulted in long-term capital gain. Capital gain property includes capital assets held more than 1 year.

Capital assets. Capital assets include most items of property that you own and use for personal purposes or investment. Examples of capital assets are stocks, bonds, jewelry, coin or stamp collections, and cars or furniture used for personal purposes.

For purposes of figuring your charitable contribution, capital assets also include certain real property and depreciable property used in your trade or business and, generally, held more than 1 year.

Real property. Real property is land and generally, anything that is built on, growing on, or attached to land.

Depreciable property. Depreciable property is property used in business or held for the production of income and for which a depreciation deduction is allowed.

Amount of deduction - general rule . When figuring your deduction for a gift of capital gain property, you usually can use the fair market value of the gift.

However, in certain situations, you must reduce the fair market value by any amount that would have been long-term capital gain if you had sold the property for its fair market value. Generally, this means reducing the fair market value to the property's cost or other basis.

This can happen where the charity's use of tangible personal property is not in connection with its exempt purpose. For contributions after September 1, 2006, of more than $5,000, the deduction is generally reduced to basis if the charity disposes of the property within 3 years of the donation. If disposition takes place after the donation, the appreciation (fair market value less basis) is recaptured as ordinary income in the year of the disposition (absent certification from the charity that use for its exempt purpose occurred or was intended). The charity must notify IRS and the donor of the disposition ( and the certification, if applicable).

Ordinary or capital gain income included in gross income. You do not reduce your charitable contribution if you include the ordinary or capital gain income in your gross income in the same year as the contribution. This may happen when you transfer installment or discount obligations or when you assign income to a charitable organization.

Example : You donate an installment note to a qualified organization. The note has a fair market value of $10,000 and a basis to you of $7,000. As a result of the donation, you have a short-term capital gain of $3,000 ($10,000 - $7,000), which you include in your income for the year. Your charitable contribution is $10,000.

Food Inventory

Special rules apply to certain donations of food inventory to a qualified organization. These rules apply if all of the following conditions are met.

You made a contribution of apparently wholesome food from your trade or business. Apparently wholesome food is food intended for human consumption that meets all quality and labeling standards imposed by federal, state, and local laws and regulations even though the food may not be readily marketable due to appearance, age, freshness, grade, size, surplus, or other conditions.
The food is to be used only for the care of the ill, the needy, or infants.
The use of the food is related to the organization's exempt purpose or function.
The organization does not transfer the food for money, other property, or services.
You receive a written statement from the organization stating it will comply with requirements (2), (3), and (4).
The organization is not a private non-operating foundation.
The food satisfies any applicable requirements of the Federal Food, Drug, and Cosmetic Act and regulations on the date of transfer and for the previous 180 days.

Bargain Sales

A bargain sale of property to a qualified organization (a sale or exchange for less than the property's fair market value) is partly a charitable contribution and partly a sale or exchange.

The part of the bargain sale that is a sale or exchange may result in a taxable gain.

Penalty

The IRS may impose a penalty if you overstate the value or adjusted basis of donated property.

Charitable Contributions: How To Give Wisely

Tue, 10 Oct 2023 15:48:16 GMT

Since charities ask for larger and more frequent donations from the public these days, soliciting by mail, telephone, television, and radio, for example, they should be checked out before you donate money or time. Here are some tips on how to maximize your charity dollar and avoid scams.

Here are some basic, common-sense suggestions for avoiding rip-offs in making charitable contributions:

Do not contribute cash. All contributions should be in the form of a check or money order made out to the charity never to the individual soliciting the donation.
Do not be misled by a charity that resembles or mimics the name of a well-known organization--all charities should be checked out.
Ignore pressure to donate immediately. Wait until you are sure that the charity is legitimate and deserving of a donation.
When appropriate, ask for written descriptions of the charity's programs and/or finances, especially if the intended contribution is substantial.
If you have any doubt about the legitimacy of a charity, check it out with the local charity registration office (usually a division of the state attorney's general office) and with the Better Business Bureau (BBB).

You should, of course, keep receipts, canceled checks and bank statements so you will have records of your charitable giving at tax time.

Giving Your Time

Volunteering your time can be personally rewarding, but it is important to consider the following factors before committing yourself:

Make sure you are familiar with the charity's activities. Ask for written information about the charity's programs and finances.
Be aware that volunteer work may require special training and the devotion of a scheduled number of hours each week to the charity.
If you are considering assisting with door-to-door fund-raising, be sure to find out whether the charity has financial checks and balances in place to help ensure control over collected funds.

Although the value of your time as a volunteer is not deductible, out-of-pocket expenses (including transportation costs) are generally deductible.

Mail Solicitations

Many charities use direct mail to raise funds. While the overwhelming majority of these appeals are accurate and truthful, be aware of the following:

The mailing piece should clearly identify the charity and describe its programs in specifics. If a fund-raising appeal brings tears to your eyes but tells you nothing about the charity's functions, investigate it carefully before responding.
It is against the law to demand payment for unsolicited merchandise-e.g., address labels, stamps, bumper stickers, greeting cards, calendars, and pens. If such items are sent to you with an appeal letter, you are under no obligation to pay for or return them.
Appeals that include sweepstakes promotions should disclose that you do not have to contribute to be eligible for the prizes offered. To require a contribution would make the sweepstakes illegal as a lottery operated by mail.
Appeals that include surveys should not imply that you are obligated to return the survey.
Beware of fund-raising appeals that are disguised as bills or invoices. It is illegal to mail a bill, invoice or statement of account that is, in fact, an appeal for funds unless it has a clear and noticeable disclaimer stating that it is an appeal and that you are under no obligation to pay unless you accept the offer.

Deceptive-invoice appeals are most often aimed at businesses, not individuals. If you receive one of these, contact your local Better Business Bureau.

Public Education Solicitations

If you respond to mail appeals, you should be aware that certain charities consider this to be a significant part of their educational budgets. In a recent survey, half of 150 well-known national charities included their direct mail and other fund-raising appeals in their public education programs. This practice makes fund-raising drives look like a smaller part of a charity's expenses than they are. These 75 charities allocated $160 million of their direct mail and other appeal costs to public education programs.

A charity whose purpose is to combat cruelty to animals uses direct mail to raise funds. The cost of a nationwide direct mail campaign is $1 million much more than the $200,000 the charity has budgeted for its program of research grants. This embarrassingly high allotment for fund-raising costs can be significantly reduced if the direct mail pieces include some information about cruelty to animals. Since the information is considered educational, the charity calls it a program expense and allots half the cost of the mailing to public education, thus reducing fund-raising expenses from $1 million to only $500,000, and bumping up program spending from $200,000 to $700,000.

The line between pure fund-raising and genuine public education activities is not always clear. However, if the charity is confident that the fund-raising appeal truly serves its educational purposes, it should be willing to disclose this fact in the appeal. This disclosure allows donors to make an informed decision about whether to support the activity.

Telephone, Door-To-Door, And Street Solicitations

When you are approached for a contribution of time or money, ask questions - and do not give until you are satisfied with the answers. Charities with nothing to hide will encourage your interest. Be wary of any reluctance to answer reasonable questions.

Ask for the charity's full name and address. Demand identification from the solicitor.
Ask if the contribution is tax-deductible.
Ask if the charity is licensed by state and local authorities. Registration or licensing is required by most states and some local governments.

Contributions to tax-exempt organizations are not always tax-deductible.

Registration, by itself, does not mean that the state or local government endorses the charity.

Do not give in to pressure to make an immediate donation or allow a runner to pick up a contribution.
Statements such as "all proceeds will go to charity" may mean money left after expenses, such as the cost of fund-raising efforts, will go to the charity. These expenses can be big ones, so check carefully.
When asked to buy candy, magazines, or tickets to benefit a charity, be sure to ask what the charity's share will be. Sometimes the organization will receive less than 20 percent of the amount you pay.
If a fund raiser uses pressure tactics- intimidation, threats, or repeated and harassing calls or visits-call your local Better Business Bureau to report the actions.

Sweepstakes Appeals

Sweepstakes mailings, used by businesses for many years to promote their products, have recently become popular with charities. Here are some points to consider when reviewing a sweepstakes appeal.

The sweepstakes mailing should clearly disclose that no contribution is necessary to participate.
* If you wish to participate, read the sweepstakes promotion and direct mail contents carefully. Your entry may be discarded if the rules are not followed to the letter.
If the charity sweepstakes promotion says you are a pre-selected winner, you will usually receive a prize only if you respond to the sweepstakes. Most "pre-selected winners" receive just pennies per person.
Both donor and non-donor sweepstakes participants must have an equal chance of winning a prize.

For a national campaign, the probability of winning the big prize may be quite low. Some campaigns involve mailings of a half-million to ten million or more letters.

If you are considering a donation, check out the appeal as you would any other request for funds. Does it clearly specify the programs your gift would be supporting? Do not hesitate to ask for more information on the charity's finances and activities.

Charity Thrift Stores

Since all charity thrift stores do not necessarily operate the same way, it is important to find out if the charity is benefiting from thrift sales. There are three major types of thrift store operations:

Conduit-type shops run by volunteer church and civic groups. These thrift stores generally distribute most of their proceeds to various charitable organizations, often community-based.
Thrift operations are represented by service organizations such as The Salvation Army and Goodwill Industries. Here, the thrift stores are operated as part of their program activities through the goal of "rehabilitation through employment."
Charities that collect and sell used merchandise to raise funds for their own use. This arrangement is popular for a number of veterans organizations and other charities. Such arrangements generally work one of two ways: (1) the charity owns and operates the store or (2) more commonly, variously charities solicit and collect used items, which are then sold to independently managed stores for an agreed-upon amount.

The fair market value of goods donated to a thrift store is deductible as a charitable donation, as long as the store is operated by a charity. To determine the fair market value, visit a thrift store and check the going rate for comparable items. If you are donating directly to a for-profit thrift store or if your merchandise is sold on a consignment basis whereby you get a percentage of the sale, the thrift contribution is not deductible.

Remember to ask for a receipt that is properly authorized by the charity. It is up to the donor to set a value on the donated item.

If you plan to donate a large or unusual item, check with the charity first to determine if it is acceptable.

If you are approached to donate goods for thrift purposes, ask how the charity will benefit financially. If the goods will be sold by the charity to a third party such as an independently managed thrift store, then ask what the charity's share will be.

Sometimes the charity receives a small percentage, e.g., 5 to 20 percent of the gross or a flat fee per bag of goods collected.

Fund-Raising Dinners, Variety Shows, And Other Events

Dinners, luncheons, galas, tournaments, circuses, and other events are often put on by charities to raise funds. Here are some points to consider before deciding to participate in such events.

Check out the charity. The fact that you are receiving a meal or theater tickets should not justify less scrutiny.
Your purchase of tickets to such events is generally not fully deductible. Only the portion of your gift above the fair market value of the benefit received (i.e., the meal, show, etc.) is deductible as a charitable donation. This rule holds true even if you decide to give your tickets away for someone else to use.

If you decide not to use the tickets, give them back to the charity. In order to be able to deduct the full amount paid, you must either refuse to accept the tickets or return them to the charitable organization. In this way, you will not have received value for your payment.

Make donations by check or money order out to the full name of the charity and not to the sponsoring show company or to an individual who may be collecting donations in person.

Watch out for statements such as "all proceeds will go to the charity." This can mean the amount after expenses have been taken out, such as the cost of the production, the fees for the fund-raising company hired to conduct the event, and other related expenses. These expenses can make a big difference and sometimes result in the charity receiving 20 percent or less of the price paid.

Ask the charity what anticipated portion of the purchase price will benefit the organization.

Solicitors for some fund-raising events such as circuses, variety shows, and ice skating shows may suggest that if you are not interested in attending the event you can purchase tickets that will be given to handicapped or underprivileged children. If such statements are made, ask the solicitor how many children will attend the event, how they will be chosen, how many tickets have been already distributed to these children, and if transportation to the event will be provided for them.

It has happened that the number of children eligible to receive free tickets has been limited or transportation has not been arranged. So, in effect, free tickets given to the few needy children who attend the event are paid for many times over by businesses and individuals who purchase tickets.

Charity-Affinity Credit Cards

You may receive an offer to apply for an affinity credit card bearing the name and logo of a particular charity. Sometimes offered exclusively to an organization's donors or members, these cards are issued by banks and credit card companies under agreements worked out with individual charities. These cards are just like other credit cards, but the specified charity gets some kind of financial benefit.

All affinity credit cards are not created equal. Offers vary in terms of how the charity benefits as well as the terms of the credit agreement with consumers. So check the terms carefully!

Consider the specific terms as you would any credit card offer: the amount of the interest rate/finance charges, the amount of the annual fee, if any, the amount of late fees and over-the-limit fees, if any, and the length of the grace period, or amount of time after which finance charges begin to accrue on any unpaid balance.

The charity usually receives a benefit in one or more of the following ways:

The charity receives a certain percentage of each purchase or a specified amount every time the consumer makes a purchase with the card,
The charity receives a certain dollar amount every time a new customer signs up for a card, or
The charity receives a portion of the annual renewal fee for the card.

Make sure the promotional literature states exactly how the charity benefits. For example, one affinity card offer declared that a specified national charity would receive half of one percent of all transactions made with the card (that works out to 5 cents for every $10 worth of purchases). If the financial benefit for the charity is not spelled out, then ask.

Contributions made by a bank and/or credit card company through the use of an affinity credit card are not deductible to consumers as charitable donations for federal income tax purposes.

Remember also to consider your interest in the charity and not to hesitate to seek out more information on the charity's programs and finances.

If saving money is your bottom line, make a direct donation to the charity and seek a credit card with the best terms and lowest interest rates, regardless of affinity.

Charity/Business Marketing

The following points should be kept in mind when considering promotions that partner charities and businesses:

Charity/business marketing campaigns should clearly disclose the actual or estimated portion of the purchase price that will benefit the specified cause. Without such information, you cannot know how much of your purchase will aid a charity participating in such a campaign.
Read the disclosure carefully. Some charity/business marketing campaigns have an expiration period (for example, ten cents goes to the charity for all purchases made until October 31.) If there is no disclosure, be aware that the amount that goes to the charity is usually between one and ten percent of the retail price.
In schemes during the Gulf War, businesses made no arrangements with the named charity and no contributions were given. Various items and services were sold with the false promise that a donation would be made to the USO or other organizations helping members of the armed services or their families. Similar advertising abuses commonly occur in the wake of hurricanes, floods and other natural disasters.
Some advertisements falsely imply the existence of a direct connection between the consumers' purchase and the charity when, in fact, the charity was guaranteed a "flat" contribution regardless of the level of the resulting purchases.

Disaster Appeals

The tragedy of a flood, massive fire, hurricane, earthquake, or another disaster always triggers an outpouring of public support and concern. During such crises, watch out for fraudulent appeals by some who see disasters as an opportunity to take advantage of American concern and generosity.

Examine your options instead of giving to the first charity from which you receive an appeal. There will be a variety of relief efforts responding to the diverse needs of disaster victims. Be wary of appeals that are long on emotion and short on what the charity will do to address the specific disaster.

Ask how much of your gift will be used for the crisis and how much will go towards other programs and to administrative and fund-raising costs. And find out what the charity intends to do with any excess contributions remaining after the crisis has ended.

Check with organizations before donating goods for overseas disaster relief. Most groups involved in overseas relief will not accept donated goods since purchasing goods overseas is often less expensive and more efficient. If a charity accepts donated items, ask about their arrangements for shipping and distribution.

Some charities change their program focus during a crisis in order to respond to the changing needs of disaster victims. Do not assume the charity will carry out the same activities throughout a crisis situation.

Police And Firefighter Appeals

In reviewing such appeals, potential donors should be aware of the following points.

Many different types of police and firefighter organizations exist. Some are charities that operate educational or youth programs. Others are labor organizations, fraternities, or benevolent associations that provide benefits to members.
Your gift may not be deductible. Police and firefighter organizations can be tax exempt under different sections of the Internal Revenue Code. Only some of them are eligible to receive deductible charitable donations.
Do not make assumptions based on the name alone. The words "police" and "firefighter" in the organization's name do not necessarily mean that representatives from your local and/or state police or fire departments are members. In fact, the organization may not have any police or firefighter members.
Ask about any affiliations the group might have with other organizations. Some groups operate as a lodge or chapter of a larger organization. Others are independent associations of local, state, and/or federal law enforcement officers.
Do not believe promises that your donation will "give you special treatment" from your police or firefighters. If such suggestions of threats are used, contact your state attorney general's office and your Better Business Bureau.
Ask how your contribution will be used and what programs and activities it will support. Do not hesitate to ask for written materials on the police or firefighter group's programs and finances.
Groups offering legitimate help to your police, firefighters, and community will welcome your questions and encourage your interest.

Child Sponsorship Groups

Not all sponsorship programs are alike. Sponsored donations usually benefit a project for an entire community (for example, medical care, education, food) and not the sponsored child exclusively. Some groups believe this is the most effective way to make significant and lasting changes in a child's living conditions. Other organizations do give a certain amount of the contribution directly to the sponsored child. Before deciding to participate in a sponsorship program, you may want to consider the following:

Do you know how children are assisted (i.e., through a community development project operated by the charity or through an affiliated project that the group funds)?
Can you commit at least several years to a program in the form of financial assistance and letter-writing?
The child will not be your adopted child in any legal sense, and you will not be able to make any demands on him or her.
Do you agree with the overall philosophy of the organization (e.g., any religious focus a program might have)?

Contact other child sponsors to get a sense of their overall satisfaction with the organization.

A Charity's National Office and Its Affiliates

While some organizations are a single entity under one name, others may be a network of local affiliates or chapters. If you give to a local chapter or affiliate, do not assume your donation will be spent locally. Nor should you assume that a chapter's operations are fully controlled by the national office.

Many different types of relationships can exist between a charity's national office and its chapters. Here are three possible relationships chapters:

The national office performs certain functions, such as developing educational or fund-raising materials but does not supervise affiliates. In this case, the local chapters are incorporated separately from the national office and each applies for its own tax-exempt status from the IRS. Each local chapter's programs and fund-raising is under the control of the chapter's local board of directors. To support the national office, the local affiliates purchase materials produced by it or send it a small percentage of their locally collected funds.
The organization's national office and affiliates function as one centralized unit under the control of a national board of directors. All income and expenses are channeled through the national office. In this case, the chapters are not separate legal entities and have only limited authority, as stated in their charter agreements with the national office.
Most national/chapter relationships fall somewhere between the two extremes in the preceding two paragraphs. In such a case, both the national office and the local affiliates share some level of authority. Local chapters may or may not be separately incorporated, but all have their own governing boards, some of which share control with the national office. The charity may have statewide affiliates that perform functions at the state level. With this structure, there is usually a fund sharing or dues formula between the local affiliates and the national office.

The bottom line for you is that, depending on the organization's structure, the local affiliate may carry out different activities from those of the national office. It is important to inquire about this difference. In addition, donors may want to identify how much of a local affiliate's contributions are spent on local programs.

When considering a donation to a local chapter, it is wise to check out the chapter separately.

Government and Non-Profit Agencies

Most state governments regulate charitable organizations. To obtain information on these regulations, which vary from state to state, contact the appropriate government agency (usually a division of the Attorney General or the Secretary of State).
Contact the appropriate state government agency to verify a charity's registration and to obtain financial information on a soliciting charity.
Contact your local Better Business Bureau to find out whether a complaint has been lodged against a charity.

Your Estate and Taxes: Frequently Asked Questions

Tue, 10 Oct 2023 15:47:47 GMT

Will my estate have to pay taxes after I die?

It depends. The federal government imposes estate taxes at your death only if your property is worth more than a certain amount based on the year of death. By some estimates, more than 99 percent of estates do not pay any estate tax. In 2023, the exemption limit is $12.92 million ($12.06 million in 2022).

Estates worth more than $12.92 million are taxed at 40 percent. For married couples, the exemption is $25.84 million. There are a couple of important exceptions to the general rule, however. All property left to a spouse is exempt from the tax as long as the spouse is a U.S. citizen, and estate taxes won't be assessed on any property you leave to a tax-exempt charity.

Do states also impose estate taxes?

Most states impose estate taxes of some kind. In many cases, there's a state inheritance tax only where a federal estate tax would apply. However some states have estate taxes that are "uncoupled" from the federal tax, and some have inheritance taxes.

Your inheritors, not your estate, pay inheritance taxes. Typically, how much they pay depends on their relationship with you.

Twelve states and the District of Columbia impose an estate tax, while six states have an inheritance tax. Maryland is the only state with both an estate tax and an inheritance tax.

Estate Tax

Connecticut
District of Columbia
Hawaii
Illinois
Maine
Maryland
Massachusetts
Minnesota
New York
Oregon
Rhode Island
Vermont
Washington

Inheritance Tax

Iowa
Kentucky
Maryland
Nebraska
New Jersey
Pennsylvania

How can I minimize federal estate taxes?

There are several ways. One common way to do this is to leave your children, directly or in trust, an amount up to the estate tax exemption amount ($12.92 million in 2023) and the balance to your spouse.

Can I avoid paying state estate taxes?

In most states that base inheritance taxes on the federal estate tax, steps that avoid federal tax also avoid state tax. If your state imposes some other kind of estate tax, your professional advisor can help you minimize state tax by taking actions specifically adapted to that tax.

If you live in two states, for instance, Florida in winter and summer in New Jersey, your inheritors may be able to save on estate taxes if you make your legal residence in the state with lower inheritance taxes.

Can I just give all my property away before I die and avoid estate taxes?

You can give up to $17,000 in 2023 ($16,000 in 2022) per person per year with no gift tax liability. Gifts exceeding that amount are counted against a gift tax exemption of $12,920,000. Gifts exceeding that exemption are subject to the gift tax. At your death, these gifts could become your taxable estate (with credit for gift tax paid).

There are, however, a few exceptions to this rule. You can give an unlimited amount of property to your spouse unless your spouse is not a U.S. citizen, in which case you can give away up to $100,000 indexed for inflation; the 2023 amount is $175,000 ($164,000 in 2022) per year free of gift tax. Any property given to a tax-exempt charity avoids federal gift taxes. Money spent directly on someone's medical bills or school tuition is exempt as well.

Wills: Frequently Asked Questions

Tue, 10 Oct 2023 15:31:58 GMT

What happens if I die without a will?

If you don't make a will or use some other legal method to transfer your property when you die, state law will determine what happens to your property. (This process is called "intestate succession.") Your property will be distributed to your spouse and children or, if you have neither, to other relatives such as siblings or parents according to a statutory formula.

If no relatives are found to inherit your property, it will go into your state's coffers. More importantly however is that if you have minor children, in the absence of a will, a court will determine who will care for your young children and their property if the other parent is unavailable, unfit, or has died as well.

Can I just make a handwritten will if I don't have much property?

Handwritten wills, called "holographic" wills, are legal in 26 states. To be valid, a holographic will must be written, dated, and signed in the handwriting of the person making the will. Some states allow will writers to use a fill-in-the-blanks form if the rest of the will is handwritten and the will is properly dated and signed.

If you have very little property, and you want to make just a few specific bequests, a holographic will is better than nothing, provided it's valid in your state. In general however, they're not recommended. Unlike regular wills, holographic wills are not usually witnessed, so if your will goes before a probate court, the court may be unusually strict when examining it to be sure it's legitimate. It's better to take a little extra time to write a will that will easily pass muster when the time comes.

Do I need to file my will with a court or in public records somewhere?

No. A will doesn't need to be recorded or filed with any government agency. Just keep your will in a safe, accessible place and be sure the person in charge of winding up your affairs (your executor) knows where it is.

Can I use my will to name somebody to care for my young children in case my spouse and I both die suddenly?

Yes. If both parents of a child die while the child is still a minor, another adult - that is, a "personal guardian" - must step in. You and the child's other parent (if there is one) can use your wills to name someone to be your child(ren)'s, guardian. To avert conflicts, each parent should name the same person. If a guardian is needed, a judge will appoint the person you named as guardian as long as he or she agrees that it is in the best interest of your children.

The personal guardian will be responsible for raising your children until they become legal adults, and you should have complete confidence in the person you name. Of course, you should ask the person if they are willing to accept the responsibility of raising your children should the need arise before you name them as a guardian in your will.

What happens to my will when I die?

After you die, your executor (the person you appointed in your will) is responsible for seeing that your wishes are carried out as directed by your will. He or she may hire an attorney to help wind up your affairs, especially if probate court proceedings are required.

What if someone challenges my will after I die?

Very few wills are ever challenged in court. When they are, it's usually by a close relative who feels somehow cheated out of his or her rightful share of the deceased person's property.

Generally speaking, only spouses are legally entitled to a share of your property. Your children aren't entitled to anything unless you unintentionally overlooked them in your will.

To get an entire will invalidate, someone must go to court and prove that it suffers from a fatal flaw: the signature was forged; you weren't of sound mind when you made the will or you were unduly influenced by someone.

What instructions should I give my survivors about funeral ceremonies and the disposition of my body?

Letting your survivors know your wishes saves them the difficulties of making these decisions at a painful time. Many family members and friends find that discussing these matters ahead of time provides great relief, especially if a person is elderly or in poor health and death is expected soon.

Planning some of these details in advance also helps save money. For many people, dead goods and services cost more than anything they bought during their lives except homes and cars. Some wise comparison shopping in advance can help ensure that costs will be controlled or kept to a minimum.

If you die without leaving written instructions about your preferences, state law will determine who has the right to decide how your remains will be handled. In most states, the right - and the responsibility - to pay for the reasonable costs of disposing of remains rests with the following people (in the order shown):

Spouse
Children
Parents
The next of kin, or
A public administrator (who is appointed by a court).

Some states have laws that permit you to name a designated agent to carry out your wishes for disposing of your remains. These laws are especially useful for people who have never married, yet wish their significant other to carry out their wishes, or for those who are estranged from family members or know that one child, in particular, is more likely to carry out their wishes.

Disputes may arise if two or more people, the deceased person's children for example, share responsibility for a fundamental decision, such as whether the body of a parent should be buried or cremated. Such disputes can be avoided if you are willing to do some planning and put your wishes in writing. In most cases, the courts will respect your wishes.

What you choose to include is a personal matter, likely to be dictated by custom, religious preference or simply your own whims. A typical final arrangements document might include:

The name of the mortuary or other institution that will handle burial or cremation
Whether or not you wish to be embalmed
The type of casket or container in which your remains will be buried or cremated, including whether you want it present at any after-death ceremony
The details of any ceremony you want before the burial or cremation
Who your pallbearers will be if you wish to have some
How your remains will be transported to the cemetery and gravesite
Where your remains will be buried, stored or scattered
The details of any ceremony you want to accompany your burial, interment or scattering
The details of any marker you want to show where your remains are buried or interred

Living Trusts: Frequently Asked Questions

Tue, 10 Oct 2023 15:22:26 GMT

What is a living trust?

A living trust is an entity that exists only on paper (similar to a corporation) but is legally capable of owning property. However, a live person called the trustee must be in charge of the property. Furthermore, you can be the trustee of your own living trust, keeping full control over all property legally owned by the trust.

There are many kinds of trusts. A living trust (also called a revocable trust, revocable living trust, or inter vivos trust) is simply one you create while you're alive rather than one created upon your death under the terms of your will.

Property held in trust that is actually "owned" by the trustees, subject to the rights of the beneficiaries. The trust itself doesn't own anything. All living trusts are designed to avoid probate. Some also help you save on estate taxes, while others let you set up long-term property management.

What is probate?

Probate is the legal process of paying the deceased's debts and distributing the estate to the rightful heirs. This process usually entails:

The appointment of an individual by the court to act as executor of the estate. Executors are sometimes referred to as "personal representatives." Most people name an executor as part of their will. If there is no will, the court appoints an executor, most often a spouse if the deceased is married.
Proving that the will is valid.
Informing creditors, heirs, and beneficiaries that the will is probated.
Disposing of the estate by the executor in accordance with the will or state law.

The executor named in the will must file a petition with the court after the death. There is a fee for the probate process. Probating a will may require legal assistance depending on the size and complexity of the probable assets.

Assets jointly owned by the deceased and others are not subject to probate. Proceeds from a life insurance policy or Individual Retirement Account (IRA) paid directly to a beneficiary are also not subject to probate.

Do I need a living trust?

A living trust is a useful estate and tax planning document that keeps your estate out of probate court. While some people may not need one, there are several reasons why it makes sense, such as having a beneficiary who is disabled, owning property in another state, or making it easier for your heirs to administer your estate after death.

How does a living trust avoid probate?

Property you transfer into a living trust before your death doesn't go through probate. The successor trustee - the person you appointed to handle the trust after your death - simply transfers ownership to the beneficiaries you named in the trust. In many cases, the whole process takes only a few weeks, and there are no lawyer or court fees to pay. The living trust ceases to exist when the property has all been transferred to the beneficiaries.

Is it expensive to create a living trust?

The cost of creating a living trust depends on what you want to achieve. The more complicated a living trust is, the more expensive it will be. Also important to note is that while the fees associated with creating a living will are paid upfront, a living trust saves you money and time by avoiding probate court.

Is a trust document ever made public, like a will?

A will becomes a matter of public record when submitted to a probate court, as do all the other documents associated with probate - inventories of the deceased person's assets and debts, for example. However, the terms of a living trust need not be made public.

Does a trust protect property from creditors?

Holding assets in a revocable trust does not shelter those assets from creditors. A creditor who wins a lawsuit against you can go after the trust property as if you still owned it in your name.

After your death, however, property in a living trust can be quickly and quietly distributed to the beneficiaries (unlike property that must go through probate). That complicates matters for creditors; by the time they find out about your death, your property may already be dispersed, and the creditors have no way of knowing exactly what you own (except for real estate, which is always a matter of public record). It may not be worth the creditor's time and effort to track down the property and demand that the new owners use it to pay your debts.

On the other hand, probate can offer protection from creditors. During probate, known creditors must be notified of the death and given a chance to file claims. If they miss the deadline to file, they're out of luck forever.

Do I need trust if I'm young and healthy?

Probably not. At this stage in your life, your main estate planning goals are probably making sure that in the unlikely event of your premature death, your property is distributed how you want it to be and, if you have young children, that they are cared for. You don't need trust to accomplish those ends; writing a will and perhaps buying some life insurance is sufficient.

Can a living trust save taxes?

A simple probate-avoidance living trust does not affect either income or estate taxes. More complicated living trusts, however, can greatly reduce your federal estate tax bill if you expect your estate to owe estate tax at your death.

Estate Planning: How To Get Started

Tue, 10 Oct 2023 14:56:23 GMT

Proper estate planning can help to increase the size of your estate, whether large or small. Its basic purposes are to (1) choose how your property will be distributed after your death, (2) help assure that your property will be distributed in an orderly and efficient way and (3) minimize taxes.

This Financial Guide gives you a road map to the estate planning process. It will help you to get started: to provide for your heirs, to lessen the administrative burden on your survivors, and to understand what you'll have to do to minimize estate and income taxes. It will enable you to approach your attorney and other professional advisors with a clearer idea of what the process should entail.

The Overall Picture

What is your "estate?" Simply stated, it includes everything you own at your death minus your debts. However, some rather tricky rules apply, which may bring back into the estate assets you've given away, or thought you'd given away.

Most estates do not need to pay the federal estate tax, in many cases because you can leave an unlimited amount to a surviving spouse without having it being subjected to federal estate tax (i.e., the bequest provides a marital deduction). In 2023, there is an exemption of $12,920,000 (up from $12,060,000 in 2022) per individual before the federal estate tax kicks in. The nearly doubling of the exemption amount is due to tax reform legislation passed in December 2017. In 2026, however, the estate tax exemption amount reverts to the 5 million exemption amount (indexed for inflation) that that went into effect in 2011. State inheritance taxes, which vary from state to state, must also be considered in addition to federal estate tax.

In November 2019, the Department of Treasury and Internal Revenue Service (IRS) issued final regulations regarding increased gift and estate tax exclusion amounts in effect from tax years 2018 through 2025. The final regulations state that individuals who take advantage of the increased gift and estate tax exclusion amounts will not be impacted adversely after tax year 2025 when exclusion levels are scheduled to revert to pre-2018 TCJA levels.

In addition to the two primary estate planning tools, wills, and trusts, there are other essential tools you should consider such as:

The postmortem letter to your spouse and survivors,
Living wills,
Life insurance,
Disclaimers,
Lifetime gifts, and
Powers of attorney.

State estate taxes. States had death taxes (i.e. estate and/or inheritance taxes) long before there was a federal estate tax. Today, twelve states and the District of Columbia impose an estate tax while six states have an inheritance tax:

Estate Tax

Connecticut
District of Columbia
Hawaii
Illinois
Maine
Maryland
Massachusetts
Minnesota
New York
Oregon
Rhode Island
Vermont
Washington

Inheritance Tax

Iowa
Kentucky
Maryland
Nebraska
New Jersey
Pennsylvania

Many state death taxes are loosely based on the federal estate tax model. In some cases, the amount subject to the state death tax is the same dollar amount that is also subject to federal estate tax. In other states, estate taxes at death are independent of the federal estate tax and apply whether or not a federal estate tax applies. While the federal estate tax rate was made permanent (indexed for inflation), state death taxes are often subject to change.

Gift tax. The lifetime gift tax exemption is $12.92 million ($25.84 million joint) in 2023.

Gifts (apart from the annual exclusion of $17,000 per donee in 2023 ($16,000 in 2022) are applied against the $12.92 million exemption so that gift tax is due when their total exceeds that exemption amount. If the estate tax is still in existence when the donor dies, the estate will include prior taxed gifts and prior untaxed gifts counted against the $12.92 million exemption. If an estate tax results because the estate at death plus these prior gifts exceeds the estate tax exclusion amount applicable in the year of death, that tax is reduced by prior gift tax payments.

Some states impose gift taxes.

Under the estate/gift tax scheme now applicable, gift tax can result in situations where there would be no estate tax if assets of the same value had been held at death. Gifts that bring the gift total above the lifetime exemption should be made only on the specific advice of a tax professional.

Gift tax is continued after estate tax repeal as a device to limit asset transfers designed to avoid income tax.

Income tax after estate tax repeal. Assets acquired upon another person's death usually take a tax basis to the heir equal to the asset's fair market value on the date of death. Thus, for example, if a person bought 1,000 shares of stock at $10 a share and died when the shares were worth $50 a share (a $40,000 unrealized gain), his or her heir takes the shares at a total basis of $50,000. The heir can sell the shares for $50,000, free of income (capital gains) tax.

Fair market value basis at death is usually a step up in basis although the basis is stepped down at death where value has fallen below cost. Basis step-up by which most inherited assets escape most capital gains tax has been justified as a kind of compensation for the possible exposure of the entire asset (not just the unrealized gain) to the estate tax, whether or not estate tax was actually imposed. The theoretical reason for step-up in basis is reduced if there is no estate tax. The step-up in basis was retained by the Tax Cuts and Jobs Act of 2017.

Complex estate planning for making use of this surviving step-up in basis is possible, but your professional tax adviser's view of the prospects for estate tax repeal should govern whether such planning should be done now.

Wills

A will is the foundation of good estate planning and it's critical to obtain competent legal help when drafting a will. A will that is poorly drafted or does not dot every legal "i" and cross every legal "t" can be the cause of endless trouble for your survivors.

Do not keep original copies of your will in a safe deposit box. Instead, keep them in a fireproof safe at home and give copies to your attorney and your executor as well.

Many people believe they do not need a will, but there are many good reasons, other than saving estate taxes, for having a valid and updated will.

Why You Need a Will

There are five basic reasons to prepare a will:

1. To Choose Beneficiaries. The laws of the state in which you live determine how your property will be distributed if you die without a valid will. For example, in most states, the property of a married person with children who dies intestate (i.e., without a will) generally will be distributed one-third to his or her spouse and two-thirds to the children, while the property of an unmarried, childless person who dies intestate generally will be distributed to his or her parents (or siblings if there are no parents). These distributions may be contrary to what you want. In effect, by not having a will, you are allowing the state to choose your beneficiaries. Further, a will allows you to specify not only who will receive the property, but how much each beneficiary will receive. You may also wish to leave property to a charity after your death, and a will may be needed to accomplish this goal.

2. To Minimize Taxes. Many people feel they do not need a will because they believe their taxable estate is below that taxable amount for federal estate tax purposes. However, your taxable estate may be larger than you think. For example, life insurance, qualified retirement plan benefits, and IRAs typically pass outside of a will or of estate administration. But these assets are still part of your federal estate and can cause your estate to go over the threshold amount. Also, in some states, an estate becomes subject to state death taxes at a point well below the federal threshold. A properly prepared will is necessary to implement estate tax reduction strategies.

Periodically reviewing your estate plan is advisable to take into account the changes in estate and gift tax rules, as well as rules on items that affect the size of your estate including retirement and education funding plans. Amounts subject to estate tax, and estate and gift tax rates, are scheduled to change periodically in future years.

3. To Appoint a Guardian. Your will should name a guardian for your minor children in the event of your death and/or the death of your spouse. While naming a guardian does not bind either the named guardian or the court, it does indicate your wishes, which courts generally try to accommodate.

4. To Name an Executor. Without a will, you cannot appoint someone you trust to carry out the administration of your estate. If you do not specifically name an executor in a will, a court will appoint someone to handle your estate, perhaps someone you would not have chosen. Obviously, there is an advantage, as well as peace of mind, in selecting an executor you trust.

5. To Establish Domicile. You may wish to firmly establish domicile (permanent legal residence) in a particular state, for tax or other reasons. If you move frequently or own homes in more than one state, each state in which you reside could try to impose death or inheritance taxes at the time of death, possibly subjecting your estate to multiple probate proceedings. To lessen the risk of this, you should execute a will that clearly indicates your intended state of domicile.

You should review your will every two or three years, or whenever your circumstances change. Changes that warrant revising your estate plan might include:

Divorce,
Having a child,
Having children move out of the house,
Acquiring a large asset,
Selling a large asset, or
A change in the tax laws.

Trusts

Today, trusts are not just used by the very wealthy, people with a wide range of income levels use them as estate planning tools too, despite the fact that trusts are complex and costly to set up and run, and require a higher level of services from an attorney than a will does.

What is a Trust?

A trust owns its own property (holds the title). When it is set up, the trust appears on official papers and records as the legal owner of any property that is placed into it. The trust's principal is the property that the trust owns, as distinguished from the interest or dividends earned by that property. The terms of the trust dictate who will get the benefit of the income from the trust property, how long the trust will last, and so on.

The trustee is the person or entity whose job it is to administer and manage the trust: make investment decisions, pay taxes, make sure the terms of the trust are carried out, and take care of the trust's property. Generally speaking, the trust must pay income tax on any of its undistributed interest or other income.

There are basically two types of trusts:

An irrevocable trust is a separate entity, for both legal and tax purposes, and pays its own taxes. The irrevocable trust cannot be revoked or changed.
A revocable trust is not considered a separate entity for tax purposes, although it may be considered a separate legal entity. The revocable trust can be changed or revoked (taken back) by the creator of the trust.

Another way to categorize trusts is the living (or inter vivos) trust, which is set up by a living person, or a testamentary trust, which is created by a will.

What is a Trust Used For?

A trust can be used for many worthwhile purposes:

Giving property to children.
Reducing estate taxes.
Leaving assets to a spouse.
Providing for life insurance used to pay estate tax.

Giving property to children. People generally do not want to give property to a minor child outright because of the financial risks involved (e.g., the child could squander it). Many people give property to a minor through a trust. The trust's terms can be written so that the child does not get outright ownership until he or she has achieved a certain age so that the child receives only the income from the trust property until that time. Another way to give property to a minor is via the Uniform Gifts to Minors Act or Uniform Transfers to Minors Act. These provisions, which apply in most states, provide for a custodianship over property given to a minor.

Reducing estate taxes. As noted earlier, if you leave everything to your spouse, it passes free of federal estate tax. However, when your surviving spouse dies, anything in his or her estate over the exclusion amount (also called "exemption amount") would be subject to estate tax. The exclusion amount for 2023 is $12,920,000. The credit shelter trust or bypass trust is used to shelter up to the exclusion amount from the estate tax.

Wills may be drafted to leave a bypass trust an amount equal to the exclusion amount in the year of death, rather than a specific dollar amount. However, because amounts change, review of the estate plan may be needed to keep the desired balance between what the spouse is to get and what trust beneficiaries are to get.

Leaving an asset to a spouse. The marital deduction trust allows the first spouse to die to place estate assets in a trust for the surviving spouse, instead of leaving them to him or her outright. If the legal requirements are met, the estate gets the marital deduction, but can still preserve assets for heirs other than the surviving spouse. Typically, the income of such trusts will go to the surviving spouse for life and the principal will go to children. All of the income must go to the surviving spouse for the trust to qualify for the marital deduction. It must be paid out at least once a year. The spouse may have some access to the principal. When the second spouse dies, the property is included in his or her estate for estate tax purposes.

Pay estate tax. Complex and expensive arrangements, life insurance trusts are usually used to finance future estate taxes on an estate that contains a business interest or real estate.

Postmortem Letters

Does anyone but you know where your tax records and supporting tax documents are located? How about deeds, titles, wills, insurance papers? Does anyone know who your accountant is? Your lawyer? Your broker? If you pass away without leaving your heirs this information, it will cause a lot of headaches. Worse than that, part of your estate may have to be spent in needless taxes, claims, or expenses because the information is missing.

The postmortem letter is an often overlooked estate planning tool. It tells your executors and survivors what they need to know to maximize your estate such as the location of assets, records, and contacts. Without the postmortem letter, you risk losing part of your estate's assets because necessary documentation cannot be located.

Livings Wills

A living will, which is sometimes called a health care proxy, makes known your wishes as to what medical treatment or measures you want to have if you become incapacitated and unable to make the decision yourself. It tells family and physicians whether you want to be kept alive through mechanical means or whether you would prefer not to have such means used. If there is no living will, this decision is left up to the family, or the physicians, to decide. Stating your preference in a living will take some of the burden off of family members and decreases the stress in an emergency.

Life Insurance

The main purpose of life insurance is to provide for the welfare of survivors. But life insurance can also serve as an estate planning tool. For example, it can be used to finance the payment of future estate taxes or to finance a buy-out of a deceased's interest in a business. It can also be used to pay funeral and final expenses and debts.

If the decedent owns the policy, the proceeds will be included in the estate and subject to estate tax. However, if the decedent gives away all incidents of ownership in the policy, and names a beneficiary other than the estate, the proceeds will not be included in the estate.

Disclaimers

The disclaimer is a way for an heir to refuse all or part of the property that would otherwise pass to him or her, via a will, intestacy laws, or by operation of law. An effective disclaimer passes the property to the next beneficiary in line.

With a properly drawn disclaimer, the property is treated as if it had passed directly from the decedent to the next-in-line beneficiary. This may save thousands of dollars in estate taxes. The provision for a disclaimer in a will and the wise use of a disclaimer allows intrafamily income shifting for maximum use of the estate tax marital deduction, the unified credit, and the lower income tax brackets.

Disclaimers can also be used to provide for financial contingencies. For example, a beneficiary can disclaim an interest if someone else is in need of funds.

Lifetime Gifts

The annual gift tax exclusion provides a simple, effective way of cutting estate taxes and shifting income. You can make annual gifts in 2023 of up to $17,000 ($34,000 for a married couple) to as many donees as you desire. The $17,000 is excluded from the federal gift tax so that you will not incur gift tax liability. Further, each $17,000 you give away during your lifetime reduces your estate for federal estate tax purposes.

Government and Nonprofit Agencies

Army and Air Force Mutual Aid Association ( www.aafmaa.com )
An organization that provides information on officers' benefits and estate planning
Tel. 800-336-4538
Navy Mutual Aid Association ( www.navymutual.org )
This veterans' benefit organization provides information for Navy, Marine Corps, Coast Guard, Public Health, and NOAA personnel
Tel. 800-628-6011

Planning Your Move: Frequently Asked Questions

Tue, 10 Oct 2023 14:48:46 GMT

How can I get the best deal when hiring a moving company?

Even though your moving date may be months away, as soon as soon as the contracts are signed you should start getting recommendations for moving companies from friends or colleagues.

Start calling movers for estimates.

Once you have a list of recommendations, call each one to get an estimate of how much your move will cost. You'll have to provide them with the number of miles involved in the move and the approximate weight of your belongings. The mover will help you in making this estimate.

Ask about extra charges that apply.

Movers typically charge extra for flights of stairs, heavy items, pianos and other special items. Be aware of the fact that having the movers pack for you increases your moving bill by about 30 percent. You may also have to pay a premium if you schedule your move during busy moving times, generally after the 25th of the month or before the 2nd.

Do not use a mover whose estimate seems too low.

The services provided may be second-rate. If it seems too good to be true it probably is.

How can I minimize problems when I move?

As soon as you schedule your move:

Tag any items you are leaving behind for the new owners.
If your move is job-related, find out whether your employer will reimburse you for part of the cost.
Save any receipts relating to the move since part of the cost will be deductible on your taxes when you file.
Start shopping around for a new bank in your new neighborhood.
Get a change of address kit from the post office and begin notifying people of your impending change of address. You will need to notify credit card companies, banks, and other financial institutions directly.
Call schools in your new location and enroll your children.
Get copies of your medical and dental records (and veterinary records if you have pets). Be sure your move is covered by insurance--either the moving company's insurance or your homeowner's insurance.
Call your insurance agent and take care of transferring homeowner's insurance to your new home.

As you get closer to the date of your move:

Call utility companies and give them a date to turn on service at your new home and terminate service at your old home.
Switch your direct payroll deposit, and any automatic payments, to your new checking account.
Two or three days before you move, take money out of your old bank account and transfer it to your new bank account. Be sure to leave your new address with the old bank.
Shop for auto insurance in the new area (if moving out of state).
Transfer your brokerage account to your new area if you use a local broker.
Defrost your refrigerator.
On moving day, check your contract with the mover. Be sure the total cost of the move is clearly detailed and that the moving date, location, and insurance information are all correct.

Whom should I notify of a new address?

Here is a list of people you should notify when you change your address and phone number. Although the list is not all-inclusive, it can be used as a starting point.

The IRS-use Form 8822-and state and local taxing authorities
The U.S. Post Office
Insurance agents (home, auto, and life)
Debtors and creditors-mortgage holders, car lien holders, other lenders
Credit card companies
Publications
Clubs and services to which you subscribe
The Social Security Administration
Any organization that periodically mails you a check
Banks
Employers
Doctors, dentists, veterinarians
Motor vehicle departments
Places of worship and non-profit organizations you are involved with
The registrar of voters
Utilities, telephone service, answering service, and trash collectors
Your CPA, attorney, and broker

Selling Your Home: Frequently Asked Questions

Tue, 10 Oct 2023 14:39:49 GMT

How do I find a good real estate agent when I sell my home?

First, ask friends, family, and colleagues for recommendations of real estate agents. You can also look for names listed on posted "for sale" signs, especially for houses that have been sold. Once you have at least three names, schedule a telephone or in-person interview with the agent.

Ask the real estate agent what problems she or he sees in marketing your home. The broker should be honest about potential problems and be able to think creatively about solutions. Ask for a plan for marketing the home and what you as a homeowner can do to help implement the plan. Listen to the answers. Does the agent exhibit a willingness to think creatively in approaching whatever problems might exist with the selling process? Does she seem cooperative or receptive to your input? Other things to consider are whether the broker knows the good and bad points about your neighborhood or town. Last but not least, don't forget to ask the broker for a list of comparable homes, which is essential in helping you arrive at an asking price for your home.

Which type of listing agreement should I enter into with the real estate agent?

A listing agreement is a contract between the homeowner and the agent. It states how much the agent will be paid and what services are provided. You will generally have to enter into an exclusive listing, which gives the agent the exclusive right to sell your house for a limited period of time. The listing agent gets 100 percent of the commission if he or she sells the house and a percentage of the commission if another broker sells the house.

Establish a time limit of three months for an exclusive right-to-sell agreement. This will give the broker an incentive to sell the home quickly and still give you an out if you feel the broker isn't doing enough for you. If you have a lot of confidence in the broker, and you have seen and approved of his or her plans for marketing the home, you may wish to sign for six months.

If at any time during the marketing process, you feel that your broker is not as effective as he or she could be, switch brokers. Do not waste time with a broker you have doubts about.

How can I speed up the sale of my home?

Make cosmetic improvements to make the house looking as good as possible. For instance, patch damaged plaster and drywall, repaint, and re-wallpaper. Spruce up the exterior by replacing broken shingles or shutters or doing some minor landscaping to give your home more "curb appeal."

Increase your home's appeal to a wider range of potential buyers. Repair or replace any part of your home that's been modified that might not appeal to the general population.

Make your home cozy and inviting when potentials buyers come by. Make sure the interior and exterior are clean, neat, and well maintained. Have a fire burning in the fireplace, bake some cookies or an apple pie, or have a pot of coffee brewing. Put away toys and tools. Keep pets out of sight. Not everyone is as enamored of Fido as your family is. Try not to cook foods like fish with lingering odors.

You can also work with your broker to speed up the sale of your home using the following techniques:

Offer a warranty. Sometimes offering a warranty on the roof, electrical system, or appliances can speed up a sale or smooth the negotiating process, particularly if it's causing buyers to balk at the asking price.

Create a home sale kit with your broker. A home sale kit consists of flyers that are distributed to potential home buyers and contain photos of your home's exterior, interior, and surroundings. The flyer should also list major selling points and include information about utility costs, taxes, and a floor plan.

Let the broker show your home. Allow the broker to do his or her job. Make yourself available for questions, but do not try to help sell to potential buyers who are looking at your home.

Offer a bonus to your broker. A bonus shouldn't be obvious to the buyer because the buyer will wonder if the house price has been bumped up to accommodate the real estate broker's bonus. Instead, offer the bonus in the form of an increased commission, say 3 1/2 percent instead of 3 percent.

Take it off the market and re-list it later. If your house has been on the market for a long time, it may be perceived as undesirable. Taking it off the market and re-listing it at a later time sometimes helps.

How do I get the best price for my home?

Use one of these successful methods for negotiating with buyers, once they've made their first offer:

Find out as much as possible about the potential buyer. Try to find out, for example, whether the buyer needs to buy a home quickly or is in a position to take plenty of time to negotiate. This will help you to decide what type of negotiating stance to take.

Knowing details about the buyer's family will help you point out how your home accommodates their needs. And, if you know that a buyer lives in an apartment and will need to buy appliances for their new home, then you can throw in deal sweeteners such as refrigerators, washers and dryers, and furnishings.

Avoid being confrontational. The offers you receive will likely be 10 to 15 percent below your asking price. Do not be offended by this or by any "low-balling" techniques engaged in by buyers. Be willing to make some concessions. Make counter-offers to try to bring the offer closer to your asking price. If you feel that an offer is unreasonable, however, you can always reject it outright and wait for another buyer.

Reveal as little as possible about your own situation.

Mortgages: Frequently Asked Questions

Tue, 10 Oct 2023 14:33:31 GMT

How can I minimize problems when getting a mortgage?

Much of the information required by your lender can be brought with you when you apply for a loan. To avoid delays, try to find out in advance exactly what documentation the lender will require from you. In general, however, most lenders will ask for the following documents:

The purchase contract for the house
Bank account numbers, name and address of your bank branch and your latest bank statement, pay stubs, W-2 forms, or other proof of employment and salary.
If you are self-employed, balance sheets and tax returns for 2-3 previous years.
Information about debts, including loan and credit card account numbers and the names and addresses of your creditors.
Evidence (such as canceled checks) of mortgage or rental payments you currently pay.
Certificate of Eligibility from the Veterans Administration if you want a VA-guaranteed loan.

Ask the lender what is the average time for processing loans and what time frame you can reasonably expect your loan to be approved in.

People who are rejected for a mortgage loan often find that it is due to problems with their credit score. To circumvent potential problems, several months before applying for a mortgage try to pay down your credit cards, but do not close them. Although it may seem counterintuitive, closing them can negatively affect your credit score. Obtain a copy of your credit report so you can dispute any errors you find. Do not apply for credit unless you really need it and start paying bills on time if you do not already do so. Your recent history is counted heavily. If your credit history is sparse, take out a small loan or obtain a bank credit card or store charge card and make timely payments. Try not to change jobs.

How can I lock in a mortgage rate most effectively?

A lock-in, also called a rate-lock or rate commitment is a lender's promise to hold a specific interest rate and number of points for you while your loan application is processed. A lock-in is typically held for a specific amount of time as well. A lock-in that is quoted when you apply for a loan may be useful because during that time the mortgage rates may change and it's likely to take your lender several weeks or longer to prepare, document, and evaluate your loan application.

But if your interest rate and points are locked in and rates increase you will be protected while your application is processed. Remember, however, that a locked-in rate could also prevent you from taking advantage of decreases in the interest rate unless your lender is willing to lock in a lower rate that becomes available during this period.

When considering a lock-in, ask the following questions:

Does the lender offer a lock-in of the interest rate and points?
When will the lender let you lock in the interest rate and points?
Will the lock-in be in writing?
Does the lender charge a fee to lock in the interest rate?
Does the fee increase for longer lock-in periods?
If so, how much? If you have locked in a rate, and the lender's rate drops, can you lock in at the lower rate?
Does the lender charge an additional fee to lock in the lower rate?
Can you float your interest rate and points for now and lock them in later?
What rate will be charged if the lock-in expires before settlement? Will it be the rate in effect when the lock-in expires?
If you don't settle within the lock-in period, will the lender refund some or all of your application or lock-in fees if you decide to cancel the loan application?
If your lock-in expires and you want to get another lock-in at the rate in effect at the time of the expiration, will the lender charge an additional fee for the second lock-in?

Disclosures and the Right of Rescission. The lender is obligated by the Truth in Lending Act to provide you with a written statement with a list of all of the costs associated with the loan and the terms of financing. This statement must be delivered to you before the settlement. You will want to carefully review the disclosure that you are given before you sign. This disclosure will have all of the pertinent information about your loan, the finance charge, the amount financed, the payment schedule and the APR.

If you are buying a home with a mortgage, you do not have a right to cancel the loan once the closing documents are signed. If you are refinancing a mortgage, you have until midnight of the third business day after the transaction to rescind (cancel) the mortgage contract.

How are escrow payments calculated?

An escrow account is a fund that your lender establishes in order to pay property taxes and hazard insurance as they become due on your home during the year. The lender uses the escrow account to safeguard its investment, which is your home. Similarly, if you neglected to pay the hazard insurance premium, then a fire or flood that destroyed your home also would destroy the lender's security for the loan.

The goal of the escrow account is to have enough money to pay taxes and insurance when they become due. To achieve this, the lender adds one-twelfth of the tax and insurance amount to your mortgage payment each month. For example, if your taxes and insurance are $1,200 per year, the lender would collect $1,200 in twelve installments of $100 per month.

To cover possible tax or insurance increases, the federal Real Estate Settlement Procedures Act (RESPA) permits the lender to add to the yearly amount two months of extra payments prorated monthly. So, the lender would collect an additional $200 divided by 12, or $16.67 per month, for a total escrow payment of $116.67 per month.

Mortgage services are required by federal law to make payments for taxes, insurance, and any other escrowed items on time. Within 45 days of establishing the account, the servicer must give you a statement that clearly itemizes the estimated taxes, insurance premiums and other anticipated amounts to be paid over the next 12 months, and the expected dates and totals of those payments.

You should also receive a free annual statement from the mortgage services that outlines activity in your escrow account such as account balances and when payments were made for property taxes, homeowners insurance, and other escrowed items.

To determine if you are being charged correctly, compare your escrow payments with what you owe annually on your hazard insurance and property taxes. You can get this information from your local tax authority and your insurance company. If the lender charges you substantially less than the required amount, you will need to pay an additional lump sum at the end of the year. If the lender charges you substantially more, it may tie up your money unfairly, as well as violate the RESPA regulations.

What should I do if my bank or other mortgage lender sells my mortgage?

To protect borrowers, the National Affordable Housing Act requires lenders or mortgage servicers (the company that borrowers pay their mortgage loan payments to) to do the following.

They must provide a disclosure statement that says whether the lender intends to sell the mortgage servicing immediately; whether the mortgage servicing can be sold at any time during the life of the loan; and the percentage of loans the lender has sold previously.
The lender also must provide information about servicing procedures, transfer practices, and complaint resolution.

They must notify you at least 15 days before they sell your loan unless you received a written transfer notice at settlement. If your loan servicing is going to be sold, you should receive two notices, one from the current mortgage servicer and one from the new mortgage servicer. The new servicer must notify you not more than 15 days after the transfer has occurred.

The notices must include the following information:

The name and address of the new servicer
The date the current servicer will stop accepting mortgage payments, and the date the new servicer will begin accepting them
Toll-free or collect call telephone numbers for both the current servicer and the new servicer that you can call for information about the transfer of service
Information about whether you can continue any optional insurance, such as credit life or disability insurance; what action you must take to maintain coverage; and whether the insurance terms will change
A statement that the transfer will not affect any terms or conditions of the contract you signed with the original mortgage company, other than terms directly related to the servicing of such loan

For example, if your old lender did not require an escrow account, but allowed you to pay property taxes and insurance premiums on your own, the new servicer cannot demand that you establish such an account. They must grant a 60-day grace period, in which you cannot be charged a late fee if you mistakenly send your mortgage payment to the old mortgage servicer instead of the new one.

If you believe you have been improperly charged a penalty or late fee, or there are other problems with the servicing of your loan, contact your servicer in writing. Include your account number and explain why you believe your account is incorrect.

Within 20 business days of receiving your inquiry, the servicer must send you a written response acknowledging your inquiry. Within 60 business days, the servicer must either correct your account or determine that it is accurate. The servicer must send you a written notice of what action it took and why.

If you believe the servicer has not responded appropriately to your written inquiry, contact your local or state consumer protection office. You can also file a complaint with the FTC . Or, you may want to contact an attorney to advise you of your legal rights. Under the National Affordable Housing Act, consumers can initiate class-action suits and obtain actual damages, plus additional damages, for a pattern or practice of noncompliance.

When can I stop paying Private Mortgage Insurance (PMI)?

Generally, if you make a down payment of less than 20 percent when buying a home, the lender will require you to buy private mortgage insurance (PMI). You can usually drop the PMI when your home equity is more than 20 percent. Making extra payments, home improvements, and appreciation can all help increase equity and reduce the length of time that you have to pay PMI. Thanks to new regulations, it's now easier for people to cancel PMI when their home equity reaches 20 percent; however, some government-insured loans such as FHA and VA loans require that homeowners pay PMI for the life of the loan.

To find out whether you can cancel PMI, call your lender or mortgage servicing company (the company to which you send your mortgage payments) and ask what steps you need to take to cancel it. You will be required to request it in writing, but by calling first you can make sure you have included all of the necessary information when you submit your request.

In most cases, you will be required to pay for a formal appraisal. When you call the lender ask whether you can set up the appraisal or if it's something the lender needs to do. Lenders also take a close look at your payment history, so it's important to have made your payments on time. One other thing to keep in mind is that if you rent your home out, most lenders will require a higher equity percentage before dropping PMI.

If your request is approved, you will receive any prepaid premiums that are in your escrow account.

How can I avoid paying Private Mortgage Insurance (PMI)?

Lenders usually require private mortgage insurance if the loan is more than 80 percent of the home's purchase price, but even if you don't have the standard 20 percent down-payment, you can avoid paying private mortgage insurance in other ways. Some buyers go for 80-10-10 financing, which means that they put 10 percent down and take out a first mortgage for 80 percent of the purchase price.

Sellers sometimes will carry a 10 percent second mortgage. Otherwise, you can finance the remainder through institutional lenders, which often charge a point above the first mortgage's rate.

If you only have 5 percent to put down, you may still be able to do the deal. You will pay a much higher interest rate on a 15 percent second mortgage, however.

Should I prepay my mortgage?

As a general rule, if you are able to prepay your mortgage (and if there is no penalty for prepayment), it makes good financial sense to prepay as much as you can every month, but there are some exceptions. For example:

You do not have an emergency fund stashed away. Once you've put away three to six months' worth of living expenses, then you can begin paying down your mortgage.
You have a large amount of credit card debt. In such a case, all of your extra funds should be used to pay down those debts.
There are a few individuals who might be better off not paying down their mortgages since they will achieve a better return by investing that money elsewhere. Whether an investor fits into this category depends on his or her marginal tax rate, mortgage interest rate, return achievable on investments, and long-term investment goals.

When should I refinance my home?

Refinancing becomes worth your while if the current interest rate on your mortgage is at least two percentage points higher than the prevailing market rate. Talk to several lenders to find out the current refinancing rates and what costs are associated with refinancing. Costs can include items such as appraisals, attorney's fees, and points.

Once you have an estimate of what the costs might be, figure out what your new payment would be if you were to refinance. You can estimate how long it will take to recover the costs of refinancing by dividing your closing costs by the difference between your new and old payments (your monthly savings). Be aware, however, that the amount you ultimately save depends on many factors, including your total refinancing costs, whether you sell your home in the near future, and the effects of refinancing on your taxes.

Refinancing can be a good idea for homeowners who want to get out of a high-interest rate loan to take advantage of lower rates or those who have an adjustable-rate mortgage (ARM) and want a fixed-rate loan in order to know exactly what the mortgage payment will be for the life of the loan. It is also a good idea for those who want to convert to an ARM with a lower interest rate or more protective features than the ARM they currently have. Finally, refinancing is recommended for those who want to build up equity more quickly by converting to a loan with a shorter term or want to draw on the equity built up in their house to get cash for a major purchase or for their children's education.

Should I pay off my mortgage?

The rule of thumb is to pay off your mortgage if there aren't any better uses for your money. As far as loans go, mortgages have moderate interest rates, and interest payments are tax-deductible. However, any investment that yields substantially more than the interest rate on your mortgage (such as tax-deferred retirement plans) is probably a good alternative. Paying off credit card balances is also a better use of your money than paying off a mortgage, but if you know you will just spend the money otherwise, paying off your mortgage is a good idea.

Before you make any extra payments, make sure that your loan has no prepayment penalty. If so, then you can make an extra payment once a year, pay every two weeks instead of every month, or just send in whatever you can afford above your normal monthly mortgage payment. The larger the extra payment and the sooner you make it, the faster your mortgage will be paid off--and the more you will save in interest. Contact your lender to make sure your payments will be credited toward principal rather than future payments. There is no need to pay a third party to arrange extra mortgage payments.

What are the different options for mortgages?

There are two basic kinds of mortgages: fixed-rate and adjustable. Fixed-rate mortgages carry the lowest risk and are an especially good deal when interest rates are low. Adjustable-rate mortgages typically cost less, but they can become expensive if interest rates rise substantially. Some of them also amortize negatively, which means that your payment does not cover all of the loan's interest for the month. Your balance will increase, and you will owe interest on the interest. You can get either loan for different terms, typically 15 or 30 years.

There are now many different kinds of mortgages that combine aspects of both fixed-rate and adjustable loans. A mortgage may start as a fixed-rate loan, for example, and then convert to an adjustable after several years. One loan that has been around a long time is a balloon mortgage. It has low, fixed payments for a period of years, and then the entire loan comes due. Considered very risky, it is sometimes used by a seller to help a buyer with the down payment. Banks now offer balloon mortgages that can convert to fixed-rate or adjustable mortgages.

How do I choose between low rates and low points on a mortgage?

Get a lower interest rate and pay more points if you intend to live in your house for a long time. Points are an up-front interest fee that generally increases as the mortgage interest rate decreases. Trading this fee for a higher interest rate will cost more over the life of the loan.

If you plan to be in your house for less than five years, however, it is less expensive in the long run to avoid paying points by taking a higher interest rate. You also might want to take the higher interest rate if it means you can then put enough cash down to avoid private mortgage insurance.

Which mortgage is best for me?

It may depend on how much risk you can tolerate. A traditional 30-year, fixed-rate mortgage is still the safest way to go. Your monthly payment stays the same for the life of the loan. You are protected from increases in interest rates, and if rates go lower, you can always refinance.

An adjustable-rate mortgage, or ARM, is riskier but often less costly. ARMs typically offer below-market teaser rates and then adjust according to current interest rates as often as every few months. These loans set caps on the interest rate and the amount it can ratchet up each period. Be careful of loans that have payment caps because they can leave you owing more money on your mortgage each time you make a payment if interest rates rise quickly. ARMs are best for people who need initially lower monthly payments, who expect their income to rise, or who expect to live in their home for five years or less.

Mortgages with 30-year terms are still the most popular although 15-year mortgages are gaining favor among people who want to build equity faster at a lower cost. Many homeowners with 30-year mortgages, however, can also lower their costs and shorten the term of their loans by paying extra each month.

Buying a Home: Frequently Asked Questions

Tue, 10 Oct 2023 14:32:54 GMT

How much should I spend on my next home?

The first step is to think about how much you can afford to pay out each month for a mortgage payment. Keep in mind that a mortgage payment typically includes property taxes and mortgage insurance as well as the mortgage payment itself. The general rule of thumb is that no more than 30 percent of your gross monthly income should be spent on housing expenses.

If you plan to borrow money from a lender then you might want to consider getting pre-qualified. Pre-qualification is helpful to the buyer for planning purposes because it gives you an estimate of the maximum mortgage amount you can afford based on your current financial situation. Unlike a pre-approval, pre-qualification is not a commitment on the part of the lender, but it does give you an idea of the mortgage amount you probably qualify for. Knowing this information in advance can help you figure out a price range for your new home.

When you're figuring out a price range, don't forget to take into account any amount you apply as part of a down payment. You will want to save as possible for a down payment. The reasons for this are two-fold: first, lenders will not require you to pay for private mortgage insurance if you can come up with a 20 percent down payment; second, the sooner you pay off your mortgage, the better off you are financially.

Once you've figured out a price range let your real estate agent know what it is, but don't be afraid to look at homes that are 15 percent to 20 percent over your price range. In many cases, you will be able to negotiate the price down.

How can I find a good real estate agent when buying a home?

As a home buyer you pay a commission to the agent, so you want to make sure you are getting your money's worth. What you need is an agent who is competent and experienced, and whose way of working is compatible with your own. If you're working with a real estate agent that you feel is not doing his or her best to find you the home you want, then don't hesitate to find a new one.

When looking for a real estate agent ask yourself the following:

Is the Agent Full-Time? Is the Agent Experienced?

Look for an agent with at least a few years of full-time experience. As with many professions, real estate agents acquire most of their skills on the job.

Does the Agent Listen, and Communicate Clearly?

The agent must understand what's important to you in your home purchase and be able to tell you what you need to know about a home.

Is the Agent Willing to Negotiate For You?

To get the best home for the best price you'll have to negotiate with the seller. If the agent is not willing to show you houses that are 20 percent over your price range or to go to bat for you when negotiating with the seller, you should find a new agent.

Is the Agent Careful In His or Her Work?

You need an agent who will cover all the details that go into buying a home.

Can I save money by buying a home without a real estate agent?

You can shop for and buy a home without a real estate agent, but keep in mind that it will be more time-consuming. Homebuyers who already have a property in mind that they want to buy are the best candidates to forgo an agent, but if you're willing to do the extra legwork such as searching for properties, scheduling appointments to see them, coordinating inspections, and negotiating, then it's probably worth a try.

How can I negotiate the lowest price when buying a home?

Here are some negotiating tips:

Be willing to walk away from a deal. If you decide you must have a certain house, you have already lost negotiating power. There are other good properties out there.
Learn everything you can about the property before making your offer. For instance, how long has it been on the market? Has the buyer dropped the asking price? Why is the owner selling? The answers to these questions will help you to negotiate.
Know what comparable homes are selling for.
When the seller won't budge on price try to negotiate something else. For instance, try to get the seller to pay for repairs or improvements you would have done yourself.
Don't forget the real estate agent's commission. This is negotiable, too.

Should I have the home I want to buy inspected?

The purchase of a home is probably the largest single investment you will ever make. You should learn as much as you can about the condition of the property and the need for any major repairs before you buy.

The standard home inspector's report will include an evaluation of the condition of the home's heating system, central air conditioning system (temperature permitting), interior plumbing and electrical systems; the roof, attic, and visible insulation; walls, ceilings, floors, windows and doors; the foundation, basement, and visible structure.

The inspection fee for a typical one-family house varies by region and may also vary depending upon the size of the house, particular features of the house, its age, and whether additional services are required such as septic, well, or radon testing. The knowledge gained from an inspection is well worth the cost, however.

Not all states require home inspectors to be licensed or certified. When hiring a house inspector, qualifications, including experience, training, and professional affiliations, should be the most important considerations. One organization that can help you find a qualified home inspector is the American Society of Home Inspectors (ASHI). You can contact them through their website: www.ashi.org

What should I watch out for when dealing with home contractors?

Once you find a home you may want to do some remodeling or updating. Before you get started, however, make sure that the remodeling you're doing is something that the average home buyer wants such as a modern kitchen, larger closets, and modernized or additional bathrooms. Improvements in electrical wiring are also a plus, and when redecorating, keep future buyers in mind and use neutral colors.

Do not pay the contractor too much money upfront.

Before you sign a contract, work out a detailed plan that includes a target date for finishing various portions of the job, and a payment schedule as well. The contract should detail the costs of materials and labor so that you know what the contractor's profit will be. The final payment should be due on completion and should be the largest payment.

Don't contract with someone who's not bonded, licensed, and insured.

To find out whether a contractor is licensed, you can contact either a state licensing agency or check with a consumer protection agency to find out whether complaints have been filed against that contractor. Always ask to see copies of insurance policies.

Ask for as much detail as possible from the contractor about what the job will entail.

You never know what you'll find when you rip open that 30-year-old wall or start replacing that electrical wiring. On a big project, hire an independent engineer to inspect the work. If you don't, you could regret it later if the work has to be redone at your expense because it's not up to code.

How much should I expect to pay in closing costs?

Closing costs vary by state and by lender so it pays to shop around if possible. In addition, many of the fees associated with closing costs are negotiable such as credit checks, application fees, title searches, broker fees, appraisals, and other processing fees.

Property taxes, homeowners' insurance (usually paid one year in advance), and private mortgage insurance (PMI) are not negotiable. One of the largest closing costs is likely to be the origination fee, which is typically 1 percent of the mortgage. You may also pay from 1 to 3 points or 1 percent to 3 percent in up-front interest. If you put less than 20 percent down, you will also need private mortgage insurance, which includes a one-time fee of up to 1 point plus a specific dollar amount that is included in your monthly mortgage payment.

Your lender must send you an estimate of your closing costs, referred to as a GFE or Good Faith Estimate (required by law), within three days of receiving your application and your realtor, lawyer, or escrow agent will give you the exact amount of your closing costs before closing. If you have only enough cash for a down payment, you can fold closing costs into your mortgage, but you will have to pay a higher interest rate. You can also ask the seller to pay some of the closing costs when you are negotiating your price.

Should I buy or rent?

Depending on your particular situation, owning a home might make more economic sense than renting one. With home prices dropping and mortgage rates at historically low rates, people who are planning to stay in their homes long-term can build equity over time and reap the benefits of writing off mortgage interest on their taxes. A modest increase in value represents an even greater gain for people who make a typical down payment of 20 percent or less. The higher your income tax bracket, the better your return.

You may want to rent however if you can find cheap housing, such as a rent-controlled apartment or the cost of renting is substantially less than owning. If you are young and single, newly divorced, move often with your job, or just don't want the responsibility of home ownership, then renting probably makes more sense. It's tough to recover the costs of buying a home within the first five to seven years, so if you're planning on moving before then renting is a better option. Retirees also may want to sell the family homestead and invest the proceeds. If you live in an area where housing prices are falling, then wait until the market bottoms out before you buy.

The Deduction For Real Estate Taxes

Tue, 10 Oct 2023 14:13:04 GMT

There are two primary deductions for homeowners: real estate taxes and home mortgage interest. This Financial Guide explains which expenses you can and cannot deduct as a homeowner, and explains useful aspects of the real estate tax deduction. The mortgage interest deduction is discussed in a separate Financial Guide.

Preliminary Note: Nondeductible Items

If you took out a mortgage to finance the purchase of your home, you are probably making monthly house payments. This house payment may include various costs of owning a home. The only costs you can deduct are real estate taxes actually paid to the taxing authority and interest that qualifies as home mortgage interest.

Nondeductible items that may be included in your house payment:

Fire or homeowner's insurance premiums.
FHA mortgage insurance premiums.
Any amount applied to reduce the principal of the mortgage.

Members of the clergy or of the uniformed services who receive a nontaxable housing allowance can still deduct real estate taxes and home mortgage interest. They need not reduce their deductions by the non-taxable allowance.

What Is Meant by "Real Estate Taxes"?

Most state and local governments charge an annual tax on the value of real property. This is called a real estate tax. You can deduct the tax if it is based on the assessed value of the real property and the taxing authority charges a uniform rate on all property in its jurisdiction. The tax must be for the welfare of the general public and not be a payment for a special privilege or service you receive.

Deductible Taxes

You can deduct real estate taxes imposed on you. You must have paid them either at settlement or closing or to a taxing authority (either directly or through an escrow account) during the year. If you own a cooperative apartment, special rules apply to the deduction, which is generally available to you.

Under tax reform (Tax Cuts and Jobs Act of 2017), for taxable years 2018 through 2025, the aggregate deduction for real estate property taxes, state, local, and foreign income taxes, or sales taxes is limited to $10,000 a year ($5,000 married filing separately).

Purchase or Sale of Realty: How the Deduction Is Divided Up

Real estate taxes are generally divided so that you and the seller each pay taxes for the part of the property tax year you owned the home. Your share of these taxes is fully deductible, as long as you itemize your deductions.

For tax purposes, the seller is treated as paying the property taxes up to, but not including, the date of sale. You (the buyer) are treated as paying the taxes beginning with the date of sale. This applies regardless of the lien dates under local law. Generally, this information is included on the settlement statement you get at closing.

You and the seller are each considered to have paid your own share of the taxes, even if one or the other paid the entire amount. You can each deduct your own share, if you itemize deductions, for the year the property is sold.

Delinquent taxes. Delinquent taxes are unpaid taxes imposed on the seller for an earlier tax year. If you agree to pay delinquent taxes when you buy your home, you cannot deduct them. You treat them as part of the cost of your home.

Many monthly house payments include an amount placed in escrow (put in the care of a third party) for real estate taxes. You may not be able to deduct the total you pay into the escrow account. You can deduct only the real estate taxes that the lender actually paid from escrow to the taxing authority. Your real estate tax bill will show this amount.

Refund or rebate of real estate taxes. If you receive a refund or rebate of real estate taxes this year for amounts you paid this year, you must reduce your real estate tax deduction by the amount refunded to you. If the refund or rebate was for real estate taxes paid for a prior year, you may have to include some or all of the refund in your income.

Items Not Considered Real Estate Taxes

The following items are not deductible as real estate taxes.

Charges for services. An itemized charge for services to specific property or people is not a tax, even if the charge is paid to the taxing authority. You cannot deduct the charge as a real estate tax if it is:

A unit fee for the delivery of a service (such as a $5 fee charged for every 1,000 gallons of water you use),
A periodic charge for a residential service (such as a $20 per month or $240 annual fee charged for trash collection), or
A flat fee charged for a single service provided by your local government (such as a $30 charge for mowing your lawn because it had grown higher than permitted under a local ordinance).

You must look at your real estate tax bill to decide if any nondeductible itemized charges, such as those just listed, are included in the bill. If your taxing authority (or lender) does not furnish you a copy of your real estate tax bill, ask for it.

Assessments for local benefits. You cannot deduct amounts you pay for local benefits that tend to increase the value of your property. Local benefits include the construction of streets, sidewalks, or water and sewer systems. You must add these amounts to the basis of your property.

You can, however, deduct assessments (or taxes) for local benefits if they are for maintenance, repair, or interest charges related to those benefits. An example is a charge to repair an existing sidewalk and any interest included in that charge.

If only a part of the assessment is for maintenance, repair, or interest charges, you must be able to show the amount of that part to claim the deduction. If you cannot show what part of the assessment is for maintenance, repair, or interest charges, you cannot deduct any of it.

An assessment for a local benefit may be listed as an item in your real estate tax bill. If so, use the rules in this section to find out how much of it, if any, you can deduct.

Transfer taxes (or stamp taxes). You cannot deduct transfer taxes and similar taxes and charges on the sale of a personal home. If you are the buyer and you pay them, include them in the cost basis of the property. If you are the seller and you pay them, they are expenses of the sale and reduce the amount realized on the sale.

Homeowners association assessments. You cannot deduct these assessments because the homeowners association imposes them rather than a state or local government.

Special Rules for Cooperatives

If you own a cooperative apartment, some special rules apply to you, though you generally receive the same tax treatment as other homeowners. As an owner of a cooperative apartment, you own shares of stock in a corporation that owns or leases housing facilities. You can deduct your share of the corporation's real estate taxes if the cooperative housing corporation meets certain conditions.

Which Moving Expenses Are Deductible?

Tue, 10 Oct 2023 14:13:03 GMT

Under the Tax Cuts and Jobs Act of 2017, starting January 1, 2018, the moving expense deduction has been repealed through December 31, 2025, except for members of the armed forces on active duty who move pursuant to a military order and incident to a permanent change of station.

For most individuals, the following applies only to tax years prior to 2018.

Moving expenses are deducted as an adjustment to income on Form 1040, but you cannot deduct any moving expenses covered by reimbursements from your employer that are excluded from income. If you meet the requirements of the tax law for the deduction of moving expenses, you can deduct the following types of moving expenses, as long as they are "reasonable":

Moving your household goods and personal effects (including in-transit or foreign-move storage expenses) and
Traveling (including lodging but not meals) to your new home.

Qualifying for Moving Expenses

If you moved due to a change in your job or business location, or because you started a new job or business, you may be able to deduct your reasonable moving expenses; however, you may not deduct any expenses for meals. If you meet the requirements of the tax law for the deduction of moving expenses, you can deduct allowable expenses for a move to the area of a new main job location within the United States or its possessions. Your move may be from one United States location to another or from a foreign country to the United States.

The rules applicable to moving within or to the United States are different from the rules that apply to moves outside the United States. These rules are discussed separately.

To qualify for the moving expense deduction, you must satisfy three requirements.

Under the first requirement, your move must closely relate to the start of work. Generally, you can consider moving expenses within one year of the date you first report to work at a new job location. Additional rules apply to this requirement. Please contact us if you need assistance understanding this requirement.

The second requirement is the "distance test;" your new workplace must be at least 50 miles farther from your old home than your old job location was from your old home. For example, if your old main job location was 12 miles from your former home, your new main job location must be at least 62 miles from that former home. If you had no previous workplace, your new job location must be at least 50 miles from your old home.

The third requirement is the "time test." If you are an employee, you must work full-time for at least 39 weeks during the first 12 months immediately following your arrival in the general area of your new job location. If you are self-employed, you must work full-time for at least 39 weeks during the first 12 months and for a total of at least 78 weeks during the first 24 months immediately following your arrival in the general area of your new work location. There are exceptions to the time test in case of death, disability, and involuntary separation, among other things. And, if your income tax return is due before you have satisfied this requirement, you can still deduct your allowable moving expenses if you expect to meet the time test.

If you are a member of the armed forces and your move was due to a military order and permanent change of station, you do not have to satisfy the "distance or time tests."

What Are "Reasonable" Expenses?

You can deduct only those expenses that are reasonable under the circumstances of your move. For example, the cost of traveling from your former home to your new one should be by the shortest, most direct route available by conventional transportation. If during your trip to your new home, you make side trips for sightseeing, the additional expenses for your side trips are not deductible as moving expenses.

Nondeductible expenses. You cannot deduct as moving expenses any part of the purchase price of your new home, the costs of buying or selling a home, or the cost of entering into or breaking a lease. Don't hesitate to call if you have any questions about which expenses are deductible.

Reimbursed expenses. If your employer reimburses you for the costs of a move for which you took a deduction, you may have to include the reimbursement as income on your tax return.

Travel by Car - How to Calculate the Deduction

If you use your car to take yourself, members of your household or your personal effects to your new home, you can figure your expenses by deducting either:

Your actual expenses, such as gas and oil for your car, if you keep an accurate record of each expense, or
The standard mileage rate is 18 cents per mile for miles driven during 2018 (17 cents per mile in 2017).

If you choose the standard mileage rate you can deduct parking fees and tolls you pay in moving. You cannot deduct any general repairs, general maintenance, insurance, or depreciation for your car.

Member of Your Household

You can deduct moving expenses you pay for yourself and members of your household. A member of your household is anyone who has both your former and new home as his or her home. It does not include a tenant or employee unless you can claim that person as a dependent.

Moves Within or to the United States

If you meet the requirements of the tax law for the deduction of moving expenses, you can deduct allowable expenses for a move to the area of a new main job location within the United States or its possessions. Your move may be from one United States location to another or from a foreign country to the United States.

Household goods and personal effects. You can deduct the cost of packing, crating, and transporting your household goods and personal effects and those of the members of your household from your former home to your new home. If you use your own car to move your things, compute the deduction under the rule discussed above under "Travel by Car."

You can include the cost of storing and insuring household goods and personal effects within any period of 30 consecutive days after the day your things are moved from your former home and before they are delivered to your new home.

You can deduct any costs of connecting or disconnecting utilities due to the moving your household goods, appliances, or personal effects.

You can deduct the cost of shipping your car and your pets to your new home.

You can deduct the cost of moving your household goods and personal effects from a place other than your former home. Your deduction is limited to the amount it would have cost to move them from your former home.

Paul Brown is a resident of North Carolina and has been working there for the last four years. Because of the small size of his apartment, he stored some of his furniture in Georgia with his parents. Paul got a job in Washington, DC.

It cost him $300 to move his furniture from North Carolina to Washington and $1,100 to move his furniture from Georgia to Washington; however, if Paul had shipped his furniture in Georgia from North Carolina (his former home), it would have cost him $600. He can deduct only $600 of the $1,100 he paid. He can deduct $900 ($300 + $600).

You cannot deduct the cost of moving furniture you buy on the way to your new home.

Travel expenses. You can deduct the cost of transportation and lodging for yourself and members of your household while traveling from your former home to your new home. This includes expenses for the day you arrive.

You can include any lodging expenses you had in the area of your former home within one day after you could not live in your former home because your furniture had been moved. You can deduct expenses for only one trip to your new home for yourself and members of your household. However, all of you do not have to travel together. If you use your own car, calculate your deduction as explained under Travel by Car, earlier.

Moves Outside the United States

To deduct allowable expenses for a move outside the United States, you must be a United States citizen or resident alien who moves to the area of a new place of work outside the United States or its possessions. You must meet the requirements of the tax law for deducting moving expenses.

In addition to the expenses discussed earlier, the following may be deductible for moves outside the United States.

Storage expenses. You can deduct the reasonable expenses of moving your personal effects to and from storage. You can also deduct the reasonable expenses of storing your personal effects for all or part of the time the new job location remains your main job location. The new job location must be outside the United States.

Moving expenses allocable to excluded foreign income. If you live and work outside the United States, you may be able to exclude from income part of the income you earn in the foreign country. You may also be able to claim a foreign housing exclusion or deduction. If you claim the foreign earned income or foreign housing exclusions, you cannot deduct the part of your allowable moving expenses that relates to the excluded income.

Selling Your Home: How To Minimize the Tax On the Gain

Tue, 10 Oct 2023 13:58:58 GMT

Many tax benefits are available to you when you sell your principal residence. However, the rules are complex and personal guidance is necessary to take full advantage of these benefits so that you and your tax advisor can best work together to minimize the tax on the gain. This financial guide discusses the key rules so that you and your tax advisor can best work together to minimize the tax on the gain.

The IRS allows an exclusion of up to $250,000 of the gain on the sale of your main home ($500,000 if you are married and file a joint return. Most taxpayers can take advantage of the exclusion and will not have to pay any tax on the sale of a main home as long as they meet the IRS ownership and use tests (see below).

If you do have a loss from the sale, it is a personal loss. You cannot deduct the loss.

If you don't qualify for the exclusion, your gain exceeds the exclusion, or you used part of the property in business or for rent, you have a taxable gain and must report the sale of your main home on your tax return on IRS Form 8949, Sales and Other Dispositions of Capital Assets and Schedule D, Capital Gains and Losse.

Principal Residence

Usually, the home you live in most of the time is your main home. In addition to a standard dwelling unit, your home can also be a houseboat, mobile home, cooperative apartment, or condominium.

Example 1: You own and live in a house in town. You also own beach property, which you use in the summer months. The town property is your main home; the beach property is not.

Example 2: You own a house, but you live in another house that you rent. The rented home is your main home.

Where a second residence has soared in value and you want to sell, some tax advisors have suggested moving to the second residence for the required period to qualify for exclusion on its sale. If this is your situation, please consult with a tax professional.

How to Figure Gain or Loss

Key information for determining gain or loss is the selling price, the amount realized, and the adjusted basis.

The selling price is the total amount you receive for your home. It includes money, all notes, mortgages, or other debts assumed by the buyer as part of the sale, and the fair market value of any other property or any services you receive. Next, you deduct the selling expenses such as commissions, advertising, legal fees, and loan charges paid by the seller from the selling price.

The difference is the "amount realized." If the amount realized is more than your home's "adjusted basis," discussed later, the difference is your gain. If the amount realized is less than the adjusted basis, the difference is your loss.

However, it does not include amounts you received for personal property sold with your home. Personal property is property that is not a permanent part of the home, such as furniture, draperies, and lawn equipment.

Non-Traditional Sales

The following discussion covers how to determine your gain or loss if you trade one home for another, if your home is foreclosed on or repossessed or if you transfer a jointly owned home.

Jointly owned home. If you and your spouse sell your jointly owned home and file a joint return, you figure and report your gain or loss as one taxpayer. If you file separate returns, each of you must figure and report your own gain or loss according to your ownership interest in the home. Your ownership interest is determined by state law.

If you and a joint owner other than your spouse sell your jointly owned home, each of you must figure and report your own gain or loss according to your ownership interest in the home. Each of you applies the exclusion rules individual basis.

Trading homes. If you trade your old home for another home, treat the trade as a sale and a purchase.

Foreclosure or repossession. If your home was foreclosed on or repossessed, you have what the IRS calls a disposition and will need to determine if you have ordinary income, gain, or loss. The amount of your gain or loss depends on whether you were personally liable for repaying the debt secured by the home and whether the outstanding loan balance is more than the fair market value (FMV) of the property.

If you were not personally liable for repaying the debt secured by the home, the amount you realize includes the full amount of the outstanding debt immediately before the transfer. This is true even if the FMV of the property is less than the outstanding debt immediately before the transfer.

If you were personally liable for repaying the debt secured by the home and the debt is canceled, the amount realized on the foreclosure or repossession includes the smaller of the outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or the Fair Market Value (FMV) of the transferred property.

In addition to any gain or loss, if you were personally liable for the debt you may have ordinary income. If the canceled debt is more than the home's fair market value, you have ordinary income equal to the difference. However, the income from the cancellation of debt is not taxed to you if the cancellation is intended as a gift, or if you are insolvent or bankrupt.

You owned and lived in a home with an adjusted basis of $41,000. A real estate dealer accepted your old home as a trade-in and allowed you $50,000 toward a new house priced at $80,000 (its fair market value). You are considered to have sold your old home for $50,000 and to have had a gain of $9,000 ($50,000 minus $41,000). If the dealer had allowed you $27,000 and assumed your unpaid mortgage of $23,000 on your old home, $50,000 would still be considered the sales price of the old home (the trade-in allowed plus the mortgage assumed).

Transfer to spouse. If you transfer your home to your spouse, or to your former spouse incident to your divorce, you generally have no gain or loss, even if you receive cash or other consideration for the home. Therefore, the rules explained in this Guide do not apply.

If you owned your home jointly with your spouse and transfer your interest in the home to your spouse, or to your former spouse incident to your divorce, the same rule applies. You have no gain or loss.

If you buy or build a new home, its basis will not be affected by the transfer of your old home to your spouse, or to your former spouse incident to divorce. The basis of the home you transferred will not affect the basis of your new home.

Basis

You will need to know your basis in your home as a starting point for determining any gain or loss when you sell it. Your basis in your home is determined by how you got the home. Your basis is its cost if you bought it or built it. If you acquired it in some other way, its basis is either its fair market value when you received it or the adjusted basis of the person you received it from.

While you owned your home, you may have made adjustments (increases or decreases) to the basis. This adjusted basis is used to figure gain or loss on the sale of your home.

Cost as Basis

The cost of property is the amount you pay for it in cash or other property.

Purchase. If you buy your home, your basis is its cost to you. This includes the purchase price and certain settlement or closing costs. Your cost includes your down payment and any debt, such as a first or second mortgage or notes you gave the seller in payment for the home.

Seller-paid points. If you bought your home after April 3, 1994, you must reduce the basis of your home by any points the seller paid, whether or not you deducted them. If you bought your home after 1990 but before April 4, 1994, you must reduce your basis by the amount of seller-paid points only if you chose to deduct them as home mortgage interest in the year paid.

Settlement fees or closing costs. When buying your home, you may have to pay settlement fees or closing costs in addition to the contract price of the property. You can include in your basis the settlement fees and closing costs that are for buying the home. You cannot include in your basis the fees and costs that are for getting a mortgage loan. A fee is for buying the home if you would have had to pay it even if you paid cash for the home.

Settlement fees do not include amounts placed in escrow for the future payment of items such as taxes and insurance.

Some of the settlement fees or closing costs that you can include in the basis of your property are:

Abstract fees (sometimes called abstract of title fees),
Charges for installing utility services,
Legal fees (including fees for the title search and preparing the sales contract and deed),
Recording fees,
Surveys,
Transfer taxes,
Owner's title insurance, and
Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions.

Some settlement fees and closing costs not included in your basis are:

Fire insurance premiums.
Rent for occupancy of the house before closing.
Charges for utilities or other services relating to occupancy of the house before closing.
Any item that you deducted as a moving expense (settlement fees and closing costs incurred after 1993 cannot be deducted as moving expenses).
Fees for refinancing a mortgage.
Charges connected with getting a mortgage loan, such as mortgage insurance premiums (including VA funding fees), loan assumption fees, cost of a credit report, and fee for an appraisal required by a lender.

Real estate taxes. Real estate taxes for the year you bought your home may affect your basis, as follows:

If you pay taxes that the seller owed on the home up to the date of sale and the seller does not reimburse you, then the taxes are added to the basis of your home.

If you pay taxes that the seller owed on the home up to the date of sale and the seller does reimburse you, then the taxes do not affect the basis of your home.

If the seller pays taxes for you (taxes owed beginning on the date of sale) and you do not reimburse the seller, then the taxes are subtracted from the basis of your home.

If the seller pays taxes for you (taxes owed beginning on the date of sale) and you reimburse the seller, then the taxes do not affect the basis of your home.

Construction. If you contracted to have your house built on land you own; your basis is the cost of the land plus the amount it cost you to complete the house. This amount includes the cost of labor and materials, or the amounts paid to the contractor, and any architect's fees, building permit charges, utility meter, and connection charges, and legal fees directly connected with building your home.

Your cost includes your down payment and any debt, such as a first or second mortgage or notes you gave the seller or builder. It also includes certain settlement or closing costs. You may have to reduce the basis by points the seller paid for you. If you built all or part of your house yourself, its basis is the total amount it cost you to complete it. Do not include the value of your own labor or any other labor you did not pay for, in the cost of the house.

Cooperative apartment. Your basis in the apartment is usually the cost of your stock in the co-op housing corporation, which may include your share of a mortgage on the apartment building.

Condominium. Your basis is generally its cost to you. The same rules apply as for any other home.

Basis Other Than Cost

If your home was acquired in a transaction other than a traditional purchase (such as gift, inheritance, trade, or from a spouse), you may have to use a basis other than cost, such as fair market value.

Fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell and both having reasonable knowledge of the relevant facts. Sales of similar property, on or about the same date, may be helpful in figuring the fair market value of the property.

Home received as gift. If your home was a gift, its basis to you is the same as the donor's adjusted basis when the gift was made. However, if the donor's adjusted basis was more than the fair market value of the home when it was given to you, you must use that fair market value as your basis for measuring any loss on its sale.

If you use the donor's adjusted basis to figure a gain and get a loss, and then use the fair market value to figure a loss and get a gain, you have neither a gain nor a loss on the sale or disposition.

If you received your home as a gift and its fair market value was more than the donor's adjusted basis at the time of the gift, you may be able to add to your basis any federal gift tax paid on the gift. If the gift was before 1977, the basis cannot be increased to more than the fair market value of the home when it was given to you. On the other hand, if you received your home as a gift after 1976, you would add to your basis the part of the federal gift tax paid that is due to the home's "net increase" in value (value less donor's adjusted basis).

Home received from spouse. You may have received your home from your spouse or from your former spouse incident to your divorce.

If you received the home after July 18, 1984, you had no gain or loss on the transfer. Your basis in this home is generally the same as your spouse's (or former spouse's) adjusted basis just before you received it. This rule applies even if you received the home in exchange for cash, the release of marital rights, the assumption of liabilities, or other consideration.

If you owned a home jointly with your spouse and your spouse transferred his or her interest in the home to you, your basis in the half interest received from your spouse is generally the same as your spouse's adjusted basis just before the transfer. This rule also applies if your former spouse transferred his or her interest in the home to you incident to your divorce. Your basis in the half interest you already owned does not change. Your new basis in the home is the total of these two amounts.

If you received your home before July 19, 1984, in exchange for your release of marital rights, your basis in the home is generally its fair market value at the time you received it.

Home acquired from a decedent who died before or after 2010. If you inherited your home from a decedent who died before or after 2010, your basis is the fair market value of the property on the date of the decedent's death (or the later alternate valuation date chosen by the personal representative of the estate). If an estate tax return was filed or required to be filed, the value of the property listed on the estate tax return is your basis. If a federal estate tax return did not have to be filed, your basis in the home is the same as its appraised value at the date of death, for purposes of state inheritance or transmission taxes.

Surviving spouse. If you are a surviving spouse and you owned your home jointly, your basis in the home will change. The new basis for the interest your spouse owned will be its fair market value on the date of death (or alternate valuation date). The basis of your interest will remain the same. Your new basis in the home is the total of these two amounts.

Your jointly owned home had an adjusted basis of $50,000 on the date of your spouse's death, and the fair market value on that date was $100,000. Your new basis in the home is $75,000 ($25,000 for one-half of the adjusted basis plus $50,000 for one-half of the fair market value).

In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), each spouse is usually considered to own half of the community property. When either spouse dies, the fair market value of the community property becomes the basis of the entire property, including the portion belonging to the surviving spouse. For this to apply, at least, half of the community interest must be included in the decedent's gross estate, whether or not the estate must file a return.

The home received in trade. If you acquired your home in a trade for other property, the basis of your home is generally its fair market value at the time of the trade. If you traded one home for another, you have made a sale and purchase. In that case, you may have realized a capital gain.

Adjusted Basis

Adjusted basis is your cost or other basis increased or decreased by certain amounts.

Increases to basis include:

Additions and other improvements that have a useful life of more than 1 year.
Special assessments for local improvements.
Amounts spent after a casualty to restore damaged property.

Decreases to basis include:

Discharge of qualified principal residence indebtedness that was excluded from income (but not below zero).
Gain from the sale of your old home before May 7, 1997 on which tax was postponed.
Insurance payments for casualty losses.
Deductible casualty losses not covered by insurance.
Payments received for granting an easement or right-of-way.
Depreciation allowed or allowable if you used your home for business or rental purposes.
Residential energy credit (generally allowed from 1977 through 1987) claimed for the cost of energy improvements that you added to the basis of your home.
Adoption credit you claimed for improvements that you added to the basis of your home.
Nontaxable payments from an employer's adoption assistance program that you used for improvements you added to the basis of your home.
Nonbusiness energy property credit (allowed beginning in 2006 but not for 2008) claimed for making certain energy-saving improvements you added to the basis of your home.
Residential energy efficient property credit (allowed beginning in 2006) claimed for making certain energy-saving improvements you added to the basis of your home.
First-time home buyer's credit (allowed to certain first-time buyers in the District of Columbia--beginning on August 5, 1997).
Energy conservation subsidy excluded from your gross income because you received it (directly or indirectly) from a public utility after December 31, 1992, to buy or install any energy conservation measure. An energy conservation measure includes an installation or modification that is primarily designed either to reduce consumption of electricity or natural gas or to improve the management of energy demand for a home.

Discharges of qualified principal residence indebtedness. You may be able to exclude from gross income a discharge of qualified principal residence indebtedness.

This exclusion applies to discharges made after 2006 through the end of 2025 (Consolidated Appropriations Act, 2021) and also applies to debts forgiven as the result of a written agreement entered into before January 1, 2026, even if the actual discharge happens later. If you choose to exclude this income, you must reduce (but not below zero) the basis of your principal residence by the amount excluded from gross income.

Amount eligible for the exclusion. The exclusion applies only to debt discharged after 2006 and before 2025. The maximum amount you can treat as qualified principal residence indebtedness is $750,000 ($375,000 if married and filing separately).

Prior to December 31, 2020, this amount was $2 million ($1 million if married filing separately). You cannot exclude from gross income discharge of qualified principal residence indebtedness if the discharge was for services performed for the lender or on account of any other factor not directly related to a decline in the value of your residence or to your financial condition.

Improvements. These add to the value of your home, prolong its useful life, or adapt it to new uses. You add the cost of improvements to the basis of your property.

Putting a recreation room in your unfinished basement, adding another bathroom or bedroom, putting up a fence, putting in new plumbing or wiring, installing a new roof, or paving your driveway are improvements.

Here are some other examples:

Additions: Bedroom, bathroom, deck, garage, porch, patio
Lawn and grounds: Landscaping, driveway, walkway, fence, retaining wall, sprinkler system, swimming pool
Miscellaneous: Storm windows or doors, new roof, central vacuum, wiring upgrades, satellite dish, security system
Heating and air conditioning: Heating system, central air, furnace, duct work, central humidifier, filtration system
Plumbing: Septic system, water heater, soft water system, filtration system
Interior: Built-in appliances, kitchen modernization, flooring, wall-to-wall carpet
Insulation: attic, walls, floor, pipes, duct work
Improvements no longer part of home. Your home's adjusted basis does not include the cost of any improvements that are no longer part of the home.

You put wall-to-wall carpeting in your home 15 years ago. Later, you replaced that carpeting with new wall-to-wall carpeting. The cost of the old carpeting you replaced is no longer part of your home's adjusted basis.

Repairs. These maintain the good condition of your home. They do not add to its value or prolong its life, and you do not add their costs to the basis of your property.

Repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes are examples of repairs.

The entire job is considered an improvement, however, if items that would otherwise be considered repairs are done as part of an extensive remodeling or restoration of your home.

Recordkeeping. You should keep records of your home's purchase price and purchase expenses. Furthermore, you should also save receipts and other records for all improvements, additions, and other items that affect the basis of your home.

You must keep records for 3 years after the due date for filing your return for the tax year in which you sold, or otherwise disposed of, your home. But if the basis of your old home affects the basis of your new one, such as when you sold your old home before May 7, 1997, and postponed tax on any gain, you should keep those records forever.

The records you should keep include:

Proof of the home's purchase price and purchase expenses;
Receipts and other records for all improvements, additions, and other items that affect the home's adjusted basis;
Any worksheets or other computations you used to figure the adjusted basis of the home you sold, the gain or loss on the sale, the exclusion, and the taxable gain;
Any Form 982 you filed to exclude any discharge of qualified principal residence indebtedness;
Any Form 2119, Sale of Your Home, you filed to postpone gain from the sale of a previous home before May 7, 1997;
Any worksheets you used to prepare Form 2119

Exclusion for Sales After May 6, 1997

If you sell your main home after May 6, 1997, you may qualify to exclude up to $250,000 of the gain ($500,000 if married filing jointly) on the sale of your main home; however, to claim the exclusion, you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must have:

Owned the home for at least 2 years (the ownership test)
Lived in the home as your main home for at least 2 years (the use test)
During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home.
Exception. If you owned and lived in the property as your main home for less than 2 years, you can still claim an exclusion in some cases. However, the maximum amount you may be able to exclude will be reduced.
If you sell the land on which your main home is located, but not the house itself, you cannot exclude any gain you have from the sale of the land.
If you have more than one home, only the sale of your main home qualifies for excluding the gain. If you have two homes and live in both of them, your main home is the one you live in most of the time.

If you owned and used the property as your main home for less than 2 years, you may be able to claim a reduced exclusion.

The two years of ownership and use during the five-year period don't have to be continuous. You meet the tests if you can show that you owned and lived in the property as your main home for either 24 full months or 730 days during the five-year period. Short temporary absences, e.g., for vacations, are counted as periods of use, even if you rent out the property during that time.

From 1994 through August 2007, Anne lived with her parents in a house that her parents owned. On September 29, 2007, she bought this house from her parents. She continued to live there until December 15 of 2007 when she sold it at a gain. Although Anne lived in the property as her main home for more than 2 years, she did not own it for the required 2 years. Therefore, she cannot exclude any part of her gain on the sale, unless she sold the property due to a change in health or place of employment.

Professor Moore bought and moved into a house on January 4, 2005. He lived in it as his main home continuously until October 1, 2006, when he went abroad for a one-year sabbatical. During part of the leave, the house was unoccupied, and during the rest of the time, he rented it out. On October 1, 2007, he sold the house. Because his leave was not a short temporary absence, he cannot include the period of leave to meet the 2-year use test.

Ownership and Use Tests Met at Different Times. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale.

In 1996, Harry was 60 years old and lived in a rental apartment. When the apartment building went co-op, he bought his apartment on December 1, 1999. Harry then went to live with his daughter on April 14, 2001, because he became ill. On July 10, 2003, he sold his co-op while still living with his daughter. Harry can exclude gain on the sale of his co-op because he met the ownership and use tests. His 5-year period runs from July 11, 1998, to July 10, 2003, the date he sold the co-op. Even though he only owned the co-op from December 1, 1999, to July 10, 2003--over two years, he lived in the apartment from July 11, 1997 (the beginning of the five-year period) to April 14, 2001 (over two years).

Special Situations. There are a number of special situations that may result in exceptions to the general rules.

Individuals with Disabilities. There is an exception to the 2-out-of-5-year use test if you become physically or mentally unable to care for yourself at any time during the 5-year period. You qualify for this exception to the use test if, during the 5-year period before the sale of your home:
You become physically or mentally unable to care for yourself, and
You owned and lived in your home as a main home for a total of at least one year during the 5-year period before the sale of your home.
Under this exception, you are considered to live in your home during any time that you live in a facility (including a nursing home) that is licensed by a state or political subdivision to care for persons in your condition.

If you meet this exception to the use test, you still have to meet the 2-out-of-5-year ownership test to claim the exclusion.

Gain postponed on sale of previous home. For the ownership and use tests, you may be able to add the time you owned and lived in a previous home to the time you lived in the home on which you wish to exclude gain. You can do this if you postponed all or part of the gain on the sale of the previous home because of buying the home on which you wish to exclude gain.

Also, if buying the previous home enabled you to postpone all or part of the gain on the sale of a home you owned earlier, you can also include the time you owned and lived in that earlier home.

Previous home destroyed or condemned. For the ownership and use test, you add the time you owned and lived in a previous home that was destroyed or condemned to the time you owned and lived in the home on which you wish to exclude gain. This rule applies if any part of the basis of the home you sold depended on the basis of the destroyed or condemned home. Otherwise, you must have owned and lived in the same home for 2 of the 5 years before the sale to qualify for the exclusion.
Members of the uniformed services or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps. You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve on qualified official extended duty (defined later) as a member of the uniformed services or Foreign Service of the United States, or as an employee of the intelligence community.
You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve outside the United States either as an employee of the Peace Corps on qualified official extended duty (defined later) or as an enrolled volunteer or volunteer leader of the Peace Corps. This means that you may be able to meet the 2-year use test even if, because of your service, you did not actually live in your home for at least the required 2 years during the 5-year period ending on the date of sale.

The period of suspension cannot last more than 10 years. Together, the 10-year suspension period and the 5-year test period can be as long as, but no more than, 15 years. You cannot suspend the 5-year period for more than one property at a time. You can revoke your choice to suspend the 5-year period at any time.

Married Persons
If you and your spouse file a joint return for the year of sale, you can exclude gain (up to $500,000) if either spouse meets the ownership and use tests.

Mary sells her home in June of this year and marries John later in the year. She meets the ownership and use tests, but John does not. Emily can exclude up to $250,000 of gain on a separate or joint return for this year.

Now assume that John also sells a home. He meets the ownership and use tests on his home. Mary and John can each exclude $250,000 of gain.

Death of spouse before sale. If your spouse died before the date of sale, you are considered to have owned and used the property as your main home during any period of time when your spouse owned and used it as his or her main home.
Home transferred from spouse. If your home was transferred to you by your spouse (or former spouse if the transfer was incident to divorce), you are considered to have owned it during any period of time when your spouse owned it.
Use of home after divorce. You are considered to have used property as your main home during any period when you owned it and your spouse or former spouse is allowed to use it under a divorce or separation instrument. Such use is added to your own use before or after divorce.
Special Exceptions Affecting Exclusions
Home destroyed or condemned. If your home is destroyed or condemned after May 6, 1997, any gain (e.g., due to insurance proceeds) qualifies for the exclusion.
Expatriates. You cannot claim the exclusion if the expatriate tax applies to you because you have renounced their citizenship and one of the primary purposes was to avoid U.S. taxes.
More Than One Home Sold During the Two-Year Period. You cannot exclude gain on the sale of your home if, during the two-year period ending on the date of the sale, you sold another home at a gain and are excluding all or part of that gain. If you cannot exclude the gain, you must include it in your income.
However, you can claim a reduced exclusion if you sold the home due to a change in health or place of employment or experienced unforeseen circumstances such as natural disasters, death, or unemployment (eligible unemployment compensation). When counting the number of sales during a two-year period, do not count sales before May 7, 1997.
The $250,000 (or $500,000) exclusion is reduced according to a formula whose numerator is the number of days of qualified ownership or use (or between sales of the homes) and the denominator is 730 days (for 2 years). If married filing jointly, duplicate the same calculation for your spouse's ownership and use (or days between sales).

You owned and used your main home for 400 days before selling it at a $150,000 gain following your move to a new job location. Your exclusion is $136,986, that is, 400/730 x $250,000.

Change in Place of Employment. You may qualify for a reduced exclusion if the primary reason for the sale of your main home is a change in the location of employment of a qualified individual.
Health. You may qualify for a reduced exclusion if the sale of your main home is because of health if your primary reason for the sale is to obtain, provide, or facilitate the diagnosis, cure, mitigation, or treatment of disease, illness, or injury of a qualified individual, or to obtain or provide medical or personal care for a qualified individual suffering from a disease, illness, or injury.
Unforeseen Circumstances. You may qualify for a reduced exclusion if the sale of your main home is because of an unforeseen circumstance if your primary reason for the sale is the occurrence of an event that you could not reasonably have anticipated before buying and occupying that home. You are not considered to have an unforeseen circumstance if the primary reason you sold your home was that you preferred to get a different home or because your finances improved.
Home used in business. So long as the business use takes place in the same dwelling unit as your main home, the exclusion is not affected by business use, with this exception: You cannot exclude the part of your gain that is equal to any depreciation allowed or allowable for the business use of your home after May 6, 1997. The 2 out of 5-year use-as-the-main-home test is not applied to deny exclusion for gain allocable to business use in the same dwelling unit, except for allowable depreciation.

You bought a home in 1997 and used it throughout 3/4 as your residence and 1/4 as your home office. On December 30, 2002, you sold it. The gain qualifies for exclusion except that you cannot exclude the part of your gain that is equal to any depreciation allowed or allowable for the business use of your home after May 6, 1997.

Recapture of Federal Subsidy
If you financed your home under a federally subsidized program (loans from tax-exempt qualified mortgage bonds or loans with mortgage credit certificates), you may have to recapture all or part of the benefit you received from that program when you sell or otherwise dispose of your home. You recapture the benefit by increasing your federal income tax for the year of the sale. You may have to pay this recapture tax even if you can exclude your gain from income under the rules discussed earlier; that exclusion does not affect the recapture tax.
Glossary
Adjusted basis: This is your basis in the property increased or decreased by certain amounts. See Adjusted Basis, earlier in this Guide, for a list of items that increase or decrease your basis in the property.
Amount realized: This is the selling price of your old home minus your selling expenses.
Basis: Your basis in the property is determined by how you got it. If you bought or built the property, your basis is what it cost you. If you got the property in some other way, your basis will be determined differently. See Cost as Basis and Basis Other Than Cost earlier in this Guide for more information.
Date of sale: If you received a Form 1099-S, Proceeds From Real Estate Transactions, the date should be shown in box 1. If you did not receive this form, the date of sale is the earlier of (a) the date title transferred or (b) the date the economic burdens and benefits of ownership shifted to the buyer. In most cases, these dates are the same.
Fair market value: Fair market value is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell and both having reasonable knowledge of the relevant facts. Sales of similar property, on or about the same date, may be helpful in figuring the fair market value of the property.
Fixing-up expenses: These are costs you pay for decorating or repairing your home to make it easier to sell. You may be able to deduct fixing-up expenses from the amount realized on the sale of your old home.
Gain: Your gain on the sale of your home is the amount realized minus the adjusted basis of the home you sold.
Improvements: These add to the value of your home, prolong the life of the property or allow the property to be used for new purposes. The cost of improvements increases your basis in the property.
Main home: This is the home you live in most of the time. It can be a house, houseboat, cooperative apartment, condominium, etc.
Repairs: These maintain your property in good condition. They differ from Improvements in that they do not add much to the value or life of the property and their cost does not increase your basis in the property.
Seller-financed mortgage: This is a mortgage from the buyer of your home. The buyer makes mortgage payments to you.
Selling expenses: Selling expenses include items such as sales commissions and advertising and legal fees you pay to sell your home. Selling expenses also usually include loan charges you pay on the buyer's behalf as an aid in selling your home, such as loan placement fees or "points."
Settlement fees (or closing costs): These are amounts paid in purchasing your property in addition to the contract price. Some of these amounts are added to the basis of the property and some are deductible as itemized deductions. Certain amounts are neither deductible nor added to the basis of the property. See Settlement fees or closing costs under Basis, earlier in this Guide, for more details.

Selling Your Home: How To Do It Effectively

Tue, 10 Oct 2023 13:47:37 GMT

This Financial Guide gives you suggestions that can increase the sales price and reduce the frustrations involved in selling a home. It discusses how to find a good agent, how to make your home more attractive to buyers, how to negotiate effectively, and how to handle the moving process.

Here are some tips for getting the best possible price for your home and making the process as smooth as possible. By putting some time into choosing a real estate agent, for instance, you can avoid wasting unnecessary time on the market due to an ineffective or haphazard sales strategy. Further, there are actions you can take to make your home more saleable.

Finding A Good Real Estate Agent

To find a good real estate agent, gather a list of names of candidates you will interview. You may want to consider recommendations from colleagues, friends, and professionals, as well as names listed on posted "for sale" signs, especially for houses that have been sold. Once you have at least three names, schedule a telephone or in-person interview with the agent. You may encounter some resistance; if you run into a broker who refuses to take the time to answer your questions, just move to the next one.

Tip: Although a popular practice in recent times (due to the savings on commissions paid to a broker), selling your own home without a broker is often more difficult unless you have a buyer in mind.

Be sure to ask potential agents the following:

What problems do you see in marketing our home? (The broker should be honest about potential problems in selling the home and able to think creatively about solutions.)
What would your plan be for marketing our home? What can we do to help you implement your plan? Listen carefully to the answer to find out whether the agent exhibits a willingness to think creatively in approaching whatever problems might exist with the selling process and whether he or she has a cooperative attitude.
Will you include any ideas you have for selling the home in a listing agreement if we decide to sign with you?
Where do you live? (You want a broker who lives nearby, who knows the good and bad points about your area.)
How much is your commission? (The average commission is 6 or 7 percent. Although brokers sometimes take a cut in their commissions during the negotiation process in order to move a sale along there is no point in trying to bargain down a broker's commission at this point.)
Do you have a list of comparable homes? (Such a list is essential in helping you arrive at an asking price for your home.)

Reviewing The Listing Agreement

The listing agreement is a contract between the homeowners and the agent. It states how much the agent will be paid and what services will be provided.

An exclusive right-to-sell type of agreement gives the broker the exclusive right to sell your house for a limited period of time. Other types of listing agreements vary either the exclusivity or time period of the listing. No matter which of these agreements are signed, the listing agent gets 100 percent of the commission if he or she sells the house and part of the commission if another broker sells the house.

Tip: Generally, try to limit an exclusive-right-to-sell agreement to a period of three months. This agreement will give the broker an incentive to sell the home, and it will still give you an out if you feel the broker is not doing enough for you. If you have substantial confidence in the broker, and you have seen and approved his or her plans for marketing the home, you may wish to sign a six month contract.Tip: If, at any time during the marketing process, you feel that your broker is not as effective as he or she could be, switch brokers. Do not waste time with a broker you have doubts about.

Speeding Up The Selling Process

There are various things you can do before and during the selling process to move it along and make it less onerous. A good real estate agent may suggest the following:

Make cosmetic improvements to get the house looking as good as possible. For instance, patch damaged plaster and drywall, repaint, and re-wallpaper. Spruce up the exterior by replacing broken shingles or shutters or doing some minor landscaping to give your home more "curb appeal".
Increase your home's appeal to a wider range of potential buyers. Repair or replace any part of your home that's been modified that might not appeal to the general population.
Make your home cozy and inviting when potentials buyers come by. Make sure the interior and exterior are clean, neat, and well maintained. Have a fire burning in the fireplace, bake some cookies or an apple pie, or have a pot of coffee brewing. Put away toys and tools. Keep pets out of sight. Not everyone is as enamored of Fido as your family is. Try not to cook foods like fish with lingering odors.
Here are some ideas for working with your broker to speed up the sale of your home.
Offer a warranty. Sometimes offering a warranty on the roof, electrical system or appliances can speed up a sale or smooth the negotiating process, particularly if it's causing buyers to balk at the asking price.
Create a home sale kit with your broker. A home sale kit consists of flyers that are distributed to potential home buyers and contain photos of your home's exterior, interior, and surroundings. The sales flyer should also list major selling points and include information about utility costs, taxes, and a floor plan.
Do not help the broker show the home. Allow the broker to do his or her job. Make yourself available for questions, but do not try to help sell to potential buyers who are looking at your home.
Offer a bonus to your broker. A bonus shouldn't be obvious to the buyer because the buyer will wonder if the house price has been bumped up to accommodate the real estate broker's bonus. Instead, offer the bonus in the form of an increased commission, say 3.5 percent instead of 3 percent.
Take it off the market and re-list it later. If your house has been on the market for a long time, it may be perceived as undesirable. Taking it off the market and re-listing it at a later time sometimes helps.

Negotiating Effectively

Although it is the broker's job to do the actual negotiating, the homeowners should stay involved in the process. Here are some tips for negotiating with buyers, once they have made their first offer.

Find out as much as possible about the potential buyer. Try to find out, for example, whether the buyer needs to buy a home quickly or is in a position to take plenty of time to negotiate. This will help you to decide what type of negotiating stance to take. Knowing details about the buyer's family will help you point out how your home accommodates their needs. And, if you know that a buyer lives in an apartment and will need to buy appliances for their new home, then you can throw in deal sweeteners such as refrigerators, washer and dryers, and furnishings.
On the flip side, try to reveal as little as possible about your own situation.

One final piece of advice is to avoid being confrontational, which can kill a potential deal during the negotiation process. The offers you receive will likely be 10 to 15 percent below your asking price. Do not be offended by this or by any "low-balling" techniques engaged in by buyers. Be willing to make some concessions. Make counter-offers and try to bring the offer closer to your asking price. If you feel that an offer is unreasonable, however, you can always reject it outright and wait for another buyer.

Planning Your Move

Once you have signed the contracts, it is time to start planning the move. The closing date, which is generally your moving date, will fall about two months after the contracts are signed.

Hiring A Moving Company

One thing you should do immediately after the contracts are signed even though your moving date may be months away is to begin calling moving companies. Try to get recommendations from friends or colleagues. Call a number of movers for estimates. You will have to provide them with the number of miles involved in the move and the approximate weight of your belongings. The mover will help you in making this estimate. Do not use a mover whose estimate seems too low. The services provided may be second-rate. You get what you pay for!

Ask in advance about extra charges for heavy items, stairways, or pianos. Be aware that having the movers pack for you will increase your moving bill by about 30 percent. Also, you may pay a premium if you schedule your move during busy moving times, generally after the 25th of the month or before the 2nd.

Getting Ready For the Move

Right after you have scheduled your move, start taking care of the following items:

Start throwing away things you don't want to bring with you.
Decide which items you are leaving behind for the new owners, and tag them appropriately.
If your move is job-related, ask whether your employer will reimburse you for part of the cost. Save any receipts relating to the move, since part of the cost will be deductible.
Start shopping for a new bank in your new neighborhood. Open a checking account once you have found one with competitive fees and convenient branches.
Get a change of address kit from the post office, and start notifying everyone of your impending change. Note that you will need to follow any instructions given by credit card companies, banks, and other institutions that are affected by a change of address; sending them a change-of-address card will generally not be effective.
Call the schools in the new area to enroll your children.
Obtain enough packing supplies from your mover, and begin packing, unless the mover will be doing the packing for you.
Get copies of your medical and dental records (and veterinary records), so you can hand these to your new doctors after you move.
Be sure your move is covered by insurance: either the moving company's insurance or your homeowner's insurance. Call your insurance company to determine whether the move is covered. Also, take care of transferring your homeowner's insurance to the new home.

Then, as you get closer to the date of your move, take care of the following:

Call the utility companies and tell them to turn on service in the new place. Schedule a date when they will terminate service in the old place.
Pack your belongings in boxes. Mark each box with its intended location in the new home, and with a summary of its contents. When you are close to moving day, pack a separate bag with items you will need right away, such as medications, toiletries, and clothing.
Switch your direct payroll deposit, and any automatic payments, to your new checking account. You will have to fill out a form to accomplish this. Two or three days before you move, take the money out of your old account and transfer it to your new account.

Tip: Leave the old account open until all outstanding checks have cleared. To avoid fees, you may need to leave in any minimum balance required. Be sure to leave your new address with the old bank.

If you are moving into an apartment building, discuss your moving plans with the landlord and make any necessary arrangements.
Shop for auto insurance in the new area (if moving out of state).
Confirm with the moving company. Write down directions to your new home.
Transfer your brokerage account to your new area.
Take valuables out of a safe deposit box and return the keys to the bank.
Obtain travelers' checks to cover the expenses of your move, and a cashier's check to pay the mover (unless they will accept a personal check).
Defrost your refrigerator.
Leave a mail-forwarding order with the Post Office.
On moving day, check your contract with the mover. Be sure the total cost of the move is clearly detailed. Make sure the moving date, location, and insurance information are correct.

Notifying People Of Your Move

Here is a list of people you should notify when you change your address and phone number. Although the list is not all-inclusive, it can be used as a starting point. You may need to notify these parties at both your old and new locations. Bear in mind that you may need to follow the instructions provided by banks, utilities, and credit card companies in order to effectively change your address. For instance, a phoned-in address change may not become effective with a lender if the lender's policy is to require written address changes.

The IRS (use Form 8822) and state and local taxing authorities
The U.S. Post Office
Home, auto, and life Insurance agents
Debtors and creditors, such as mortgage holders, car lien holders, other lenders, and people who owe you money
Credit card companies
Publications
Clubs and services to which you subscribe such as auto clubs, lawn mowing services, cleaning services, and book clubs
The Social Security Administration
Any organization that periodically mails you a check, such as a pension check or veterans' benefits
Banks
Employers
Doctors, dentists, veterinarians
Motor vehicle departments
Places of worship and non-profit agencies you are involved with
The registrar of voters
Utilities, telephone service, answering service, and trash collectors
Your professional advisors

Figuring The Tax

Your responsibilities do not end with the sale of the old home and the move to the new one. There are tax consequences, often complex, that need to be considered. How much is the gain? How much of it is taxable? How can you minimize the tax impact? Here, professional guidance is important.

Agents' Titles and What They Mean

When looking for a real estate agent, you may come across the following commonly used titles. Here is a basic definition of each:

Principal broker: This is a person who is licensed to operate a real estate office. He or she may either work alone or employ other agents. Several years of experience are required to obtain this licensure. Anyone selling real estate must work under the supervision of a principal broker.
Realtor: A realtor is a member of the National Association of Realtors, along with a state realtors' association and a local board of realtors. Realtors are bound by a code of ethics. They are able to access a local computerized database of homes for sale known as the multiple listing service (MLS).
Agent: This is the general term for any licensed professional in the real estate sales business.
Listing agent: A type of agent who signs up the home seller and lists the home with the multiple listing service.
Selling agent: An agent who finds a home for sale (through the multiple listing service) and finds a buyer for it.
Buyer's agent: The buyer's agent is employed by the broker selected by the buyer.

Note: On a home sale, the listing agent and the selling agent split the commission with each other and with their principal brokers.

Improvements That Help The Most

The following improvements and additions may increase the resale value of your home. Of course, bear in mind that the value home buyers place on various improvements will vary regionally, and even from neighborhood to neighborhood. But the list might serve to give you some ideas.

Family room
Fireplace
Dining room
Linen closet
Garbage disposal
Wall-to-wall carpeting
Smoke detector
Two-sink vanity (bathroom)
Double-glass windows
Range hood and fan
Bathroom dressing area
Patio
New, stronger locks
Central air
Guest room
Bathroom exhaust fan

Refinancing Your Mortgage: When and How

Tue, 10 Oct 2023 13:27:04 GMT

If you bought your home when mortgage rates were higher than today's rates are, or have an adjustable-rate loan and would like to change it to a fixed rate, then you are probably a candidate for refinancing your mortgage. Here are some factors to consider when deciding whether to refinance and how to get the best deal.

If you decide to refinance your mortgage, you can expect the process to be similar to what you went through in obtaining the original mortgage because in reality, refinancing a mortgage is simply taking out a new mortgage. You will encounter many of the same procedures and the same types of costs the second time around. In this Financial Guide, we will give you some pointers on how to get the best possible deal.

Who Can Benefit From Refinancing?

Refinancing does not make good financial sense for everyone. A general rule of thumb is that refinancing is worthwhile if the current interest rate on your mortgage is, at least, two percentage points higher than the prevailing market rate. This figure is generally accepted as the safe margin when balancing the costs of refinancing a mortgage against the savings. However, a rule of thumb is not ironclad: every individual's circumstances need to be analyzed. If your loan amount and the particular circumstances warrant it, you might choose to refinance a loan that is only 1-1/2 percentage points higher than the current rate.

Tip: Lenders may be offering zero point loans and low-cost refinancing. Therefore, even if your rate change is less than one percentage point, you may be able to save some money by refinancing.

Most experts say that it takes at least three years to fully realize the savings from a lower interest rate, given the costs of refinancing. You may find, however, that you could recoup the refinancing costs in a shorter time than three years. Again, every homeowner's circumstances should be analyzed individually. Generally, refinancing is a good idea if you:

Want to get out of a high-interest rate loan to take advantage of lower rates. (This is a good idea only if you intend to stay in the house long enough to make the additional fees worthwhile.)
Want to convert to an ARM with a lower interest rate or more protective features (such as a better rate and payment caps) than the ARM you currently have.
Want to build up equity more quickly by converting to a loan with a shorter term.
Want to draw on the equity built up in your home to get cash for a major purchase or for your children's education.
Have an adjustable-rate mortgage (ARM) and want a fixed-rate loan in order to know exactly what the mortgage payment will be for the life of the loan.

Tip: If you decide that refinancing is not worth the costs, ask your lender whether you may be able to obtain all or some of the new terms you want by agreeing to a modification of your existing loan instead of a refinancing.

How to Go About Making the Decision

Talk to several lenders to find out what the current rates are and what costs are associated with refinancing. These costs (explained in more detail below) include appraisals, attorney's fees, and points. Once you know what the costs will be, determine what your new payment would be if you refinanced. You can then estimate how long it will take to recover the costs of refinancing by dividing your closing costs by the difference between your new and old payments.

Be aware that the amount of money that you ultimately save depends on many factors, including your total refinancing costs, whether you sell your home in the near future, and the effects of refinancing on your taxes.

If you are thinking of refinancing an adjustable rate mortgage (ARM), you should also consider these questions:

Is the next interest rate adjustment on your existing loan likely to increase your monthly payments substantially? Will the new interest rate be two or three percentage points higher than the prevailing rates being offered for either fixed-rate loans or other ARMs?
If the current mortgage sets a cap on your monthly payments, are those payments large enough to pay off your loan by the end of the original term? Will refinancing to a new ARM or a fixed-rate loan enable you to pay your loan in full by the end of the term?

You also might want to consider refinancing if you have an adjustable rate mortgage with high or no limits on interest rate increases. You might want to switch to a fixed-rate mortgage or to an adjustable-rate mortgage that limits changes in the rate at each adjustment date as well as over the life of the loan.

How to Determine Your Refinancing Costs

When you refinance your mortgage, you usually pay off your original mortgage and sign a new loan. With the new loan, you again pay most of the same costs you paid to get your original mortgage, including settlement costs, discount points, and other fees. You may also be charged a penalty for paying off your original loan early, called a prepayment penalty if such a practice is not prohibited by your state.

The total expense for refinancing a mortgage depends on the interest rate, number of points, and other costs required to obtain a loan. You should plan on paying an average of 3 to 6 percent of the outstanding principal in refinancing costs, plus any prepayment penalties and the costs of paying off any second mortgages that may exist.

Tip: When shopping for a lender, ask each one for a list of charges and costs you must pay at closing. Some lenders may require that some of these costs be paid at the time of application.

The fees described below are the ones that you are most likely to encounter in a refinancing. (Some of the costs are expanded on in the paragraphs that follow.) Because costs may vary significantly from area to area and from lender to lender, the following chart should be regarded only as an estimate. Your actual closing costs may be higher or lower than the ranges indicated below.

Application Fee $ 75 to $300
Appraisal Fee $300 to $700
Survey Costs $150 to $400
Homeowners Hazard Insurance $300 to $1,000
Lenders Attorney's Review Fees $500 to $1,000
Title Search & Title Insurance $700 to $900
Home Inspection Fees $175 to $350
Loan Origination Fees 1% - 2% of loan
Mortgage Insurance 0.5% to 1.0%
Points 1% to 3%

Tip: To save on some of these costs, check with the lender who holds your current mortgage. The lender may be willing to waive some of them, especially if the work relating to the mortgage closing is still current (such as the fees for the title search, surveys, inspections, and so on).

Let's look at some of these costs in greater detail:

Application Fee. This charge imposed by your lender covers the initial costs of processing your loan request and checking your credit report.

Title Search and Title Insurance. This charge will cover the cost of examining the public record to confirm ownership of the real estate. It also covers the cost of a policy, usually issued by a title insurance company that insures the policyholder in a specific amount for any loss caused by discrepancies in the title to the property.

Tip: Be sure to ask the title insurance company carrying the present policy if it can re-issue your policy at a re-issue rate. You could save up to 70 percent of what it would cost you for a new policy.

Lender's Attorney's Review Fees. The lender will usually charge you for fees paid to the lawyer or company that conducts the closing for the lender. Settlements are conducted by lending institutions, title insurance companies, escrow companies, real estate brokers, and attorneys for the buyer and seller.

In most situations, the person conducting the settlement is providing a service to the lender. You may also be required to pay for other legal services relating to your loan which are provided to the lender.

Tip: You may want to retain your own attorney to represent you at all stages of the transaction, including settlement.

Loan Origination Fees. The origination fee is charged for the lender's work in evaluating and preparing your mortgage loan.

Points. Points are prepaid finance charges imposed by the lender at closing to increase the lender's yield beyond the stated interest rate on the mortgage note. One point equals one percent of the loan amount. For example, one point on a $75,000 loan would be $750.

The total number of points a lender charges will depend on market conditions and the interest rate to be charged. To give you the lowest rate offered, most lenders will charge several points, and the total cost can run between three and six percent of the total amount you borrow. For example, on a $100,000 mortgage, the lender might charge you between $3,000 and $6,000. However, some lenders may offer zero points at a higher interest rate, which may significantly reduce your initial costs although your payments may be somewhat higher.

Tip: In some cases, the points you pay can be financed by adding them to the loan amount. This means that the points will be added to your loan balance, and you will pay a finance charge on them. Although this may enable you to get the financing, it also will increase the amount of your monthly payments.

Tip: To decide what combination of rate and points is best for you, balance the amount you can pay up front with the amount you can pay monthly. The less time you keep the loan, the more expensive points become. If you plan to stay in your house for a long time, then it may be worthwhile to pay additional points to obtain a lower interest rate.

Appraisal Fee. This fee pays for an appraisal which is a supportable and defensible estimate or opinion of the value of the property.

Prepayment Penalty. A prepayment penalty on your present mortgage could be the greatest deterrent to refinancing. The practice of charging money for an early payoff of the existing mortgage loan varies by state, type of lender, and type of loan. Prepayment penalties are forbidden on various loans including loans from federally chartered credit unions, FHA and VA loans, and some other home-purchase loans. The mortgage documents for your existing loan will state if there is a penalty for prepayment. In some loans, you may be charged interest for the full month in which you prepay your loan.

Miscellaneous. Depending on the type of loan you have and other factors, another major expense you might face is the fee for a VA loan guarantee, FHA mortgage insurance, or private mortgage insurance. There are a few other closing costs in addition to these.

How Does Refinancing Affect Your Tax Situation?

With a lower interest rate on your home loan, you will have less interest to deduct on your income tax return. That, of course, may increase your tax payments and decrease the total savings you might obtain from a new, lower-interest mortgage.

Interest (points) paid up front for refinancing must be deducted over the life of the loan, not in the year you refinance unless the loan is for home improvements. This means that if you paid a certain number of points, you would have to spread the tax deduction for those points over the life of the loan. If, however, the refinancing is for home improvements (or a portion of the loan is for this purpose) you may be able to deduct the points (or a portion of the points) under certain circumstances.

If you are thinking about refinancing your mortgage, you might want to consider other types of mortgages. For example, you might want to look into a 15-year, fixed-rate mortgage. In this plan, your mortgage payments are somewhat higher than a longer-term loan, but you pay substantially less interest over the life of the loan and build equity more quickly. Of course, this also means you have less interest to deduct on your income tax return.

Tips for Getting the Best Deal

Here are some tips for getting the best deal when refinancing of your mortgage:

1. Shop Around

If you decide to refinance your mortgage, it pays to shop around by calling several lending institutions to find out what interest and fees they charge. This helps you get the best deal available. Also, ask each about their "annual percentage rate" (APR) and compare them. The APR will tell you the total credit costs of the refinancing, including interest, points, and other charges.

Tip: You do not have to refinance your mortgage with the same lender that provided your original mortgage. However, to keep your business, some lenders will offer their original mortgage customers the incentive of lower mortgage interest rates, sometimes with reduced closing costs.

2. Obtain a "Lock-In" or Guarantee

If you decide to apply for refinancing with a particular lender, and if you do not want to let the interest rate float until closing, then get a written statement guaranteeing the interest rate and the number of discount points that you will pay at closing. This binding commitment, or lock-in, ensures that the lender will not raise these costs even if rates increase before you settle on the new loan.

You might also consider requesting an agreement where the interest rate can decrease but not increase before closing. If you cannot get the lender to put this information in writing, you may want to choose one that will.

Most lenders place a limit on the length of time (60 days for example) that they will guarantee the interest rate. You must sign the loan during that time or lose the benefit of that particular rate. Because many people are refinancing their mortgages, there may be a delay in processing the papers. Therefore, contact your loan officer periodically to check on the progress of your loan approval and to see if additional information is needed.

3. Review the Disclosure Form

When refinancing, the lender must give you a written statement of the costs and terms of the financing before you become legally obligated for the loan. This is required under the Truth in Lending Act. Typically, you receive this information around the time of settlement, although some lenders provide it earlier. Review this statement carefully before you sign the loan. The disclosure tells you the APR, finance charge, amount financed, payment schedule, and other important credit terms.

4. Be Aware Of Your Right to Rescind

If you refinance with a different lender, or if you borrow beyond your unpaid balance with your current lender, you also must be given the right to rescind the loan. In these loans, you have the right to rescind or cancel the transaction within three business days following settlement, receipt of your Truth in Lending disclosures, or receipt of your cancelation notice, whichever occurs last.

5. Find Out If the Application Fee Is Refundable

When you apply for a mortgage, some lenders require you to pay a special charge to cover the costs of processing your application. The amount of this fee varies but generally is in the range of $75 to $300. Usually, you must pay this charge at the time you file the application. Some lenders do not refund this application fee if you are not approved for the loan or if you decide not to take it.

If you elect to cancel the transaction within three business days after you close the loan, as discussed above, you are entitled to a refund of all costs and charges imposed for the credit transaction.

Tip: Before you apply for a mortgage, ask lenders whether they charge an application fee. If they do, find out how much it is under what circumstances and to what extent it is refundable.

* * * *

As you can see, there are many financial factors to consider when refinancing a mortgage, so you may want to think about getting professional guidance if you're considering your refinancing options.

The Deductibility of Points

Tue, 10 Oct 2023 13:20:21 GMT

This Financial Guide explains when and to what extent points paid on the purchase of a home or refinancing are deductible. It explains the rules for deducting points and discusses special circumstances and situations.

What Are Points?

The term "points" is used to describe certain charges paid or treated as paid, by a borrower to obtain a home mortgage. Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points.

Points are prepaid interest and may be deductible as home mortgage interest if you itemize deductions on Form 1040, Schedule A. Generally, if you can deduct all of the interest on your mortgage, you may be able to deduct all of the points paid on the mortgage. If your acquisition debt exceeds $750,000 for tax years 2018-2025 or your home equity debt exceeds $100,000, you cannot deduct all the interest on your mortgage, and you cannot deduct all your points.

A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. See "Points Paid by Seller," later.

Tests for Deductibility

Generally, you cannot deduct the full amount of points in the year paid. Because they are prepaid interest, you generally must deduct them over the life (term) of the mortgage.

However, you can fully deduct points in the year paid if you meet all of the following tests.

Your loan is secured by your main home (the one you live in most of the time).
Paying points is an established business practice in the area where the loan was made.
The points paid were not more than the points generally charged in that area.
You use the cash method of accounting (the method used by most individual taxpayers).
The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes.
You use your loan to buy or build your main home.
The points were computed as a percentage of the principal amount of the mortgage.
The amount is clearly shown on the settlement statement (such as the Uniform Settlement Statement, Form HUD-1) as points charged for the mortgage. The points may be shown as paid from either your funds or the seller's.
The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. The funds you provided do not have to have been applied to the points. They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. You cannot have borrowed these funds from your lender or mortgage broker.

Home improvement loan. You can also fully deduct in the year-paid points paid on a loan to improve your main home if statements (1) through (5) above are true.

Non-Deductible Amounts

Amounts charged by the lender for specific services connected to the loan are not considered interest. Examples of these charges are:

Appraisal fees
Notary fees
Preparation costs for the mortgage note or deed of trust
Mortgage insurance premiums
VA funding fees.

You cannot deduct these amounts as points either in the year paid or over the life of the mortgage.

Points Paid by Seller

The term "points" includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. The seller cannot deduct these fees as interest. But they are a selling expense that reduces the seller's amount realized. The buyer reduces the basis of the home by the amount of the seller-paid points and treats the points as if he or she had paid them. If all the tests explained earlier are met, the buyer can deduct the points in the year paid. If any of those tests are not met, the buyer deducts the points over the life of the loan.

Funds Provided Are Less than Points

If you meet all the tests referred to earlier; except that the funds you provided were less than the points charged to you (test 9), you can deduct the points in the year paid, up to the amount of funds you provided. You can also deduct any points paid by the seller.

Example 1: When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). You meet all the nine tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. Of the $1,000 charged for points, you can deduct $750 in the year paid. You spread the remaining $250 over the life of the mortgage.

Example 2: The facts are the same as in the example above except that the person who sold you your home also paid one point ($1,000) to help you get your mortgage. In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). You must reduce the basis of your home by the $1,000 paid by the seller.

Excess Points

If you meet all the tests except that the points paid were more than generally paid in your area (test 3), you deduct in the year paid only the points that are generally charged. You must spread any additional points over the life of the mortgage.

Points Paid on Second Home

The general rule of instant deductibility does not apply to points you pay on loans secured by your second home. You can deduct these points only over the life of the loan.

Mortgage Ends Early

If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. Instead, deduct the remaining balance over the term of the new loan.

A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event.

Example: Dan paid $3,000 in points in 2008 that he had to spread out over the 15-year life of the mortgage. He deducts $200 points per year. Through 2019, Dan has deducted $2,200 of the points. Dan prepaid his mortgage in full in 2019. He can deduct the remaining $800 of points in 2019.

Points Paid on Refinancing

Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. This is true even if the new mortgage is secured by your main home.

However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first five tests listed earlier; you can fully deduct the part of the points related to the improvement in the year paid. You can deduct the rest of the points over the life of the loan.

Example 1: In 1999, Bill Fields got a mortgage to buy a home. In 2019, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. The mortgage is secured by his home. To get the new loan, he had to pay three points ($3,000). Two points ($2,000) were for prepaid interest, and one point ($1,000) was charged for services, in place of amounts that ordinarily are stated separately on the settlement statement.

Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. The payment of points is an established practice in the area and the points charged are not more than the amount generally charged there. Bill's first payment on the new loan was due July 1. He made six payments on the loan in 2019 and is a cash basis taxpayer.

Bill used the funds from the new mortgage to repay his existing mortgage. Although the new mortgage loan was for Bill's continued ownership of his main home, it was not for the purchase or improvement of that home. For that reason, Bill does not meet all the tests, and he cannot deduct all of the points in 2019. He can deduct two points ($2,000) ratable over the life of the loan. He deducts $67 [($2,000 ÷ 180 months) x 6 payments] of the points in 2019. The other point ($1,000) was a fee for services and is not deductible.

Example 2: The facts are the same as in Example 1, except that Bill used $25,000 of the loan proceeds to improve his home and $75,000 to repay his existing mortgage. Bill deducts 25 percent ($25,000 ÷ $100,000) of the points ($2,000) in 2019. Therefore, his deduction is $500 ($2,000 x 0.25).

Bill also deducts the ratable part of the remaining $1,500 ($2,000 - $500) prepaid interest that must be spread over the life of the loan. This is $50 [($1,500 ÷ 180 months) x 6 payments] in 2018. The total amount Bill deducts in 2019 is $550 ($500 + $50).

Limits on Home Mortgage Interest Affect Points

You cannot fully deduct points paid on a mortgage that exceeds the limits on home mortgages for purposes of the home mortgage interest deduction.

Form 1098

The mortgage interest statement (Form 1098) you receive should show not only the total interest paid during the year but also your deductible points.

The statement will show the total interest you paid during the year. If you purchased a main home during the year, it also will show the deductible points paid during the year, including seller-paid points. However, it should not show any interest that was paid for you by a government agency.

As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan. See the earlier discussion of Points to determine whether you can deduct points not shown on Form 1098.

Home Mortgage Interest Deductions

Tue, 10 Oct 2023 13:06:04 GMT

This Financial Guide discusses the home mortgage interest deduction. It explains what tests must be met for interest on a home mortgage to be deductible and discusses the rules that apply in hybrid situations such as the business use of a home.

Deductibility of Home Mortgage Interest, in General

Generally, home mortgage interest is any interest you pay on a loan that is secured by your main home or by a second home. The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan.

You can deduct home mortgage interest as an itemized deduction only if you are legally liable for the loan. In other words, you cannot deduct payments you make for someone else if you are not legally liable to make them. Further, there must be a true debtor-creditor relationship between you and the lender.

And, finally, the mortgage must be a "secured debt" on a "qualified home." These two terms are explained later.

When Is Mortgage Interest Fully Deductible?

In most cases, you can deduct all of your home mortgage interest. Whether it is all deductible depends on the date you took out the mortgage, the amount of the mortgage, and your use of the mortgage proceeds.

If all of your mortgages fit into at least one of the following three categories at all times during the year, you can deduct all of the interest on those mortgages. If one or more of your mortgages does not fit into any of these categories, you may be able to deduct part of the interest. The three categories are:

A mortgage you took out on or before October 13, 1987 (grandfathered debt).
A mortgage taken out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt) but only if throughout the year these mortgages plus any grandfathered debt totaled $1 million or less. The limit is $500,000 if you're married filing separately. Starting in 2018 (and extending through tax year 2025), the interest deduction is allowed for amounts up to $750,000 (previously $1 million) for married filers ($375,000 for married filing separate) in mortgage principal on homes. Existing mortgages are grandfathered in and homes entered into contract before December 15, 2017, and that are closed on by April 1, 2018, are able to use the prior limit of $1 million.
Home equity debt other than home acquisition debt taken out after October 13, 1987, up to a total of $100,000. The limit is $50,000 if you're married filing separately. Home equity debt other than home acquisition debt is further limited to your home's fair market value reduced by the grandfathered debt and home acquisition debt.

Under the TCJA of 2017, to take the interest deduction, the loan must be used to buy, build or substantially improve the taxpayer's home that secures the loan.

The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home.

What is "Secured Debt?"

You can deduct home mortgage interest only if your mortgage is a secured debt. A secured debt is one in which you sign an instrument (such as a mortgage, deed of trust, or land contract) that:

Makes your ownership in a "qualified home" security for payment of the debt,
Provides, in case of default, that your home can be used to satisfy the debt, and
Is recorded or is otherwise perfected under any state or local law that applies.

In other words, your mortgage is a secured debt if you put your home up as collateral to protect the interests of the lender. If you cannot pay the debt, your home can then serve as payment to the lender to satisfy the debt.

A debt is not secured by your home if it is secured solely because of a lien on your general assets or if it is a security interest that attaches to the property without your consent (such as a mechanic's lien or judgment lien).

A debt is not secured by your home if it once was, but is no longer secured by your home.

A wraparound mortgage is not a secured debt unless it is recorded or otherwise perfected under state law.

Beth owns a home subject to a mortgage of $40,000. She sells the home for $100,000 to John, who takes it subject to the $40,000 mortgage. Beth continues to make the payments on the $40,000 note. John pays $10,000 down and gives Beth a $90,000 note secured by a wraparound mortgage on the home. Beth does not record or otherwise perfect the $90,000 mortgage under the state law that applies. Therefore, that mortgage is not a secured debt, and the interest John pays on it is not deductible as home mortgage interest.

What is a "Qualified Home?"

To deduct home mortgage interest, the debt must be secured by a qualified home. This means your main home or your second home, but not a third home except as described below under "More than one second home." A home is defined as a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities.

The interest you pay on a mortgage on a home other than your main or second home may be deductible if the proceeds of the loan were used for business, investment, or other deductible purposes. Otherwise, it is considered personal interest and is not deductible.

Main home. You can have only one main home at any one time. Generally, this is the home where you spend most of your time.

Second home. A second home is a home that you choose to treat as your second home.

Second home not rented out. If you have a second home that you do not hold out for rent or resale to others at any time during the year, you can treat it as a qualified home. You do not have to use the home during the year.

Second home rented out. If you have a second home and rent it out part of the year, you also must use it as a home during the year for it to be a qualified home. You must use this home more than 14 days or more than 10 percent of the number of days during the year that the home is rented at a fair rental, whichever is longer. If you do not use the home long enough, it is considered rental property and not a second home.

More than one second home. If you have more than one second home, you can treat only one as the qualified second home during any year. However, you can change the home you treat as a second home in the following three situations.

If you get a new home during the year, you can choose to treat the new home as your second home as of the day you buy it.
If your main home no longer qualifies as your main home, you can choose to treat it as your second home as of the day you stop using it as your main home.
If your second home is sold during the year or becomes your main home, you can choose a new second home as of the day you sell the old one or begin using it as your main home.

Hybrid Situations

The only part of your home that is considered a qualified home is the part of your home that you use for residential living. If you use part of your home for other than residential living, such as for a home office, you must allocate the use of your home. You must then divide both the cost and fair market value of your home between the part that is a qualified home and the part that is not. These calculations may reduce or even negate your deduction.

Renting out part of home. If you rent out part of a qualified home to another person (tenant), you can treat the rented part as being used by you for residential living only if all three of the following conditions apply.

The rented part of your home is used by the tenant primarily for residential living.
The rented part of your home is not a self-contained residential unit having separate sleeping, cooking, and toilet facilities.
You do not rent (directly or by sublease) the same or different parts of your home to more than two tenants at any time during the tax year. If two persons (and dependents of either) share the same sleeping quarters, they are treated as one tenant.

Office in home. If you have an office in your home that you use in your business, you may be entitled to deductions for the business use of your home, including the business part of your home mortgage interest.

Other Situations

You can treat a home under construction as a qualified home for up to 24 months, but only if it becomes your qualified home at the time it is ready for occupancy.

The 24-month period can start at any time on or after the day construction begins.

You may be able to continue treating your home as a qualified home even after it is destroyed in a fire, storm, tornado, earthquake, or other casualty. This means you can continue to deduct the interest you pay on your home mortgage, subject to the limits described in this guide.

You can continue treating a destroyed home as a qualified home if, within a reasonable period of time after the home is destroyed, you:

Rebuild the destroyed home and move into it, or
Sell the land on which the home was located.

This rule applies to your main home and to a second home that you treat as a qualified home. It also applies whether or not your home is in a federal disaster area.

You can treat a home you own under a time-sharing plan as a qualified home if it meets all the tests for a qualified home. If you rent out your timeshare, it qualifies as a second home only if you also use it as a home. To know whether you meet that requirement, count your days of use and rental of the home only during the time you have a right to use it or to receive any benefits from the rental of it.

Married Taxpayers

If you are married and file a joint return, your qualified home(s) can be owned either jointly or by only one spouse.

If you are married filing separately and you and your spouse own more than one home, you can each take into account only one home as a qualified home. However, if you both consent in writing, then one spouse can take both the main home and a second home into account.

If a divorce or separation agreement requires you or your spouse or former spouse to pay home mortgage interest on a home owned by both of you, the payment of interest may be alimony.

Special Rules

This section describes certain items that can be included as home mortgage interest and others that cannot. It also describes certain special situations that may affect your deduction.

Late payment charge on mortgage payment. You can deduct as home mortgage interest a late payment charge if it was not for a specific service in connection with your mortgage loan.

Mortgage prepayment penalty. If you pay off your home mortgage early, you may have to pay a penalty. You can deduct that penalty as home mortgage interest provided the penalty is not for a specific service performed or cost incurred in connection with your mortgage loan.

Sale of home. If you sell your home, you can deduct your home mortgage interest (subject to any limits that apply) paid up to, but not including, the date of the sale.

John and Peggy Harris sold their home on May 7. Through April 30, they made home mortgage interest payments of $1,220. The settlement sheet for the sale of the home showed $50 interest for a 6-day period in May up to, but not including, the date of sale. Their mortgage interest deduction is $1,270 ($1,220 + $50).

Prepaid interest. If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. You can deduct in each year only the interest that qualifies as home mortgage interest for that year. However, there is an exception for points.

Mortgage interest credit. You may be able to claim a mortgage interest credit if you were issued a mortgage credit certificate (MCC) by a state or local government. If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit.

Ministers' and military housing allowance. If you are a minister or a member of the uniformed services and receive a housing allowance that is not taxable, you can still deduct your home mortgage interest.

Mortgage assistance payments. If you qualify for mortgage assistance payments under section 235 of the National Housing Act, part or all of the interest on your mortgage may be paid for you. You cannot deduct the interest that is paid for you.

Rental payments before real estate closing occurs. If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest, and therefore not deductible. This is true even if the settlement papers call them interest.

Mortgage proceeds invested in tax-exempt securities. You cannot deduct the home mortgage interest on debt used to buy securities or certificates that produce tax-free income.

Refunds of interest. If you receive a refund of interest in the same year you paid it, you must reduce your interest expense by the amount refunded to you. If you receive a refund of interest deducted in an earlier year, you generally must include the refund in income in the year you receive it. However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage.

Mortgage Interest Statement (Form 1098)

If you paid $600 or more of mortgage interest (including certain points) during the year, you will usually receive IRS Form 1098, Mortgage Interest Statement (Info Copy Only) from the mortgage holder, showing the amount of interest you paid.

You should receive the statement for each year by January 31 of the following year. A copy of this form is also sent to the IRS.