More Important than Making a Profit
It's possible for a business to demonstrate profitability on paper without having positive cash flow, as profitability is defined as the difference between the cost of producing something and the price for which it's sold. A company can be profitable and not generate enough cash to cover its operating expenses and debt. While any business can experience a restricted period of time with a negative cash flow, cash flow needs to be consistently positive over the long run for a business to be considered financially healthy. Investors, shareholders, lenders, and even potential employees all have a stake in a company's long term financial stability.
Carefully Monitored
Cash flow is generally analyzed over specific, limited time increments, such as monthly, quarterly (over the course of a year) or yearly. Some businesses manage negative cash flow by requesting a short-term line of credit from the bank to tide them over during cash shortfalls, but this can be difficult to obtain for smaller businesses, particularly during economic downturns.
]]>The main advantage of borrowing from a 401k is you are essentially borrowing from yourself. This means you do not have to undergo the same screening process you receive when you are borrowing from another lender. Most people who consider borrowing from a 401k have bad credit, leading them to this option. You will be able to borrow up to 50% of the monies you have fully-vested. This can amount to a very large loan without any credit check, a down payment or collateral.
You can only borrow up to 50% of vested funds. This can be tricky for some people who do not understand the contribution process. When you contribute funds automatically in each paycheck, the funds hit the account very quickly. It is against the law for your employer to wait to deposit the contributions you have individually made. All contributions must be deposited within the 15th business day in the month following your contribution.
However, many people are confused by the fact the employer does not have to immediately match the contribution. Many employers have a quarterly deposit schedule for their matches. You may only borrow against the sum that is fully vested at the time your contract is complete.
First, it is necessary to understand most loans must be repaid within 5 years of the initial loan. If you fail to meet this requirement, you may be penalized for an unscheduled withdrawal from your 401k. This is a 10% penalty on the funds if they have been taken out prior to the time you are 59 1/2 years of age. These loans also cost more than just their interest rates. While the funds are on loan to you, they are not earning interest in the account. Further, you cannot make the withdraw for any type of purchase. The loans can only be taken to pay for a home purchase or student loans. You cannot simply pay off other debts with a 401k loan.
You will have to pay taxes on your loan amount when you receive it. Since your funds are not taxed when they are contributed, they have to be taxed on the back end. The tax rate is typically around 20% for most Americans. This means borrowing from your 401k can be exceedingly expensive in real dollars. It is a better option to consider a high risk personal loan rather than using this option. You may be tempted to use this option now, but you will pay for it in the future when you go to retire.
You can borrow fully vested funds only when you are borrowing against your 401k. If you have made deposits through your regularly occurring paycheck, the funds are immediately fully vested, and there is nothing to be concerned about. However, your employer's match may not be funded immediately. In this case, you can borrow those funds only once they do hit your account. At any given point, you may contact your 401k administrator to learn the amount you have fully vested in your account. You can then borrow up to 50 percent of this sum if your employer permits 401k loans.
If you are borrowing against your 401k, the loan is not reported to the credit bureaus. You are technically borrowing money from yourself, and no lending agency is extending the financing. On the one hand, this sounds like a great option, but on the other, there are many credit drawbacks to the loans as well. Since they are never reported, they do not help build your credit score. For example, you can borrow from your 401k to pay for college tuition for yourself and a dependent. However, if you qualify for a federal student loan, you will receive low interest rates, and you will build your credit in the process.
]]>Types of Retirement Funds
The type of retirement fund you have contributed to will affect the property laws it falls under. Nearly all forms of funds are considered communal, including IRAs, 401(k)s, ERISA funds, military and veteran’s benefits, and stock options. The few funds that do not go into communal property division include Social Security benefits, compensation for on-the-job or military injury, and railroad retirement benefits. Using this information, determine which of your accounts will be allocated to both parties in a divorce.
Options to Settle Property
There are two primary options to settle the division of communal retirement funds. The first is to offer a present-day valuation to one spouse. In this scenario, the spouse keeping the retirement plan offers a buy-out of the other spouse’s portion. The buy-out is calculated at the present-day value of the spouse’s share of the fund. The asset can be in any form, including cash, stocks or property. Both parties must agree to this option prior to settling the account in court. A second option is to divide the retirement fund into two accounts. In this case, the spouse holding the fund will see a reduction of his or her savings by a proportion equal to the state law, typically 50 percent. The spouse not on the plan will set up an individual account and receive 50 percent of the funds immediately. In this option, it is critical to assure you do not take on any penalties as a result of the split. For example, follow regulations to be forgiven any potential early distribution penalties from the account split. As the receiving party, you need to set up a tax deferred account equal to that you are receiving funds from in order to avoid immediate tax implications.
Non-Division of Assets
If you feel your spouse has no legal claim on your retirement benefits, you will have to fight to secure non-division of the assets. The most prevalent reason for this type of case would be the presence of a pre or post-nuptial agreement. If you have an agreement, you may have agreed to keep retirement accounts separate in the case of divorce. You may also be able to keep the account if your contributions occurred prior to marriage. In this case, they may not be considered communal property, depending on the laws of your state. In the absence of an agreement, however, this exception can be difficult to obtain. It is preferable to enter an agreement early in your marriage if you determine your retirement plan is worth significantly more than your spouse’s at the time of marriage.
Retirement funds transferred due to a qualified domestic relation order (QDRO) are not subject to penalties as long as the transfer is done according to IRS regulation. This generally means the transfer must occur within a short period, typically 30 days, through a legal rollover procedure. A judge may issue a QDRO on a portion of your retirement benefits if you are involved in a divorce. The recipient of the funds must set up his or her own retirement account for the transfer. If the account is not a qualified retirement account or is not the same type of account as yours, the recipient may have to pay taxes or penalties on the funds.
]]>
If money market checking accounts are originated at a bank, they are insured by the FDIC. This means that the FDIC will step in and pay for the money in your account up to $100,000 if the bank goes out of business. However, some people get this type of account confused with another option. Mutual fund companies offer a money market mutual fund that is very similar to a money market account with a bank. If you invest in a money market mutual fund, it is not going to be insured by the FDIC, and your money will be at risk.
]]>The federal income tax table reports marginal tax rates on taxable income. Federal taxes are not average tax rates. Every income level, even if it is within a one dollar difference, is taxed at a different average rate. The table below shows the marginal tax rates for 2010 income.
|
Marginal Tax Rate |
Filing as Single |
Filing as Married Filing Jointly or Qualified Widow(er) |
Filing as Married Filing Separately |
Filing as Head of Household |
|
10% |
$0 to $8,375 |
$0 to $16,750 |
$0 to $8,375 |
$0 to $11,950 |
|
15% |
$8,376 to $34,000 |
$16,751 to $68,000 |
$8,376 to $34,000 |
$11,951 to $45,550 |
|
25% |
$34,001 to $82,400 |
$68,001 to $137,300 |
$34,001 to $68,650 |
$45,551 to $117,650 |
|
28% |
$82,401 to $171,850 |
$137,301 to $209,250 |
$68,651 to $104,625 |
$117,651 to $190,550 |
|
33% |
$171,851 to $373,650 |
$209,251 to $373,650 |
$104,626 to $186,825 |
$190,551 to $373,650 |
|
35% |
$373,651 and higher |
$373,651 and higher |
$186,826 and higher |
$373,651 and higher |
Suppose an individual files as single and makes $38,000 in taxable income. Their taxes will be calculated by using:
Since each tax bracket applies only for the level of income listed. This individual falls into the 25 percent tax bracket. The highest marginal tax rate is 25 percent. The average tax rate can be calculated by dividing the taxable income: $5,681.25 / $38,000 = 14.95 percent.
Average tax rates will be lower than marginal tax rates. Because of this, there is no need to try to hit a “target” income level that will have a tax benefit.
Consider another example, in this case we will review the tax rate of a married couple that files jointly with a combined taxable income of $76,000. The couple’s taxes owed are calculated by using:
It is important to remember that a higher tax bracket will only come into effect with the income that falls within that range. In other words, if there is only a $100. difference of the income, only that portion of the income will be taxed in the higher bracket.
]]>Step 1: Get a Secured Credit Card
A secured credit card uses your cash as collateral. For example, they will lend $500 at the start and they require that the borrower deposit the money with the cardholder. Then they will provide you with a $500 line of credit and you can charge your card and pay it down over time.
The biggest benefit of a secured card is that they will report your payments to the three major credit bureaus. This can help to improve your overall history and provide you with good credit, but you will need to make sure that the payments are always made on time.
Step 2: Retail Credit Cards and Gas Cards
Even if you have no credit history, credit cards issued by major retailers and gas companies can be easy to obtain. They carry high interest rates and low credit lines, however, they can be a simple and easy way for you to build credit. Again, be sure to pay the bill on time each month.
Step 3: Responsible Credit Management in College
If you are a full-time college student, there are credit card companies that can help you. You must be conservative and learn how to manage your debt, especially when you are new to it. Many college students spend more than they can and end up with a lot of debt. Be responsible and limit your cards and payments to a comfortable monthly payment.
Step 4: Pay All Your Bills On Time
Paying your bills on time will help your credit report rating. If you are building credit from scratch, be sure to make your payments your first priority. Your payment history will impact your credit rating, whether it's a utility bill or college loan. If you miss a payment, it can blemish your credit report for years. A good way to avoid forgetting about payments is to paying your bills electronically. Many banks use the auto-payment option. The biggest drawback is that you can forget how much money you have in your account, so be sure to keep track of all your payments.
]]>1. High Deductions
One of the biggest triggers to an IRS audit is unusually high deductions. This does not necessarily refer to a high dollar amount of deductions but a percentage of deductions compared to your income. For example, if you make $200,000, the IRS will probably not be surprised if you have $40,000 worth of deductions. However, if you only make $60,000, they will throw up a red flag if you deduct $40,000. While there is not a specific percentage of income that they will allow you to deduct, this is just a general rule to be aware of.
2. High Income
If you have a high income, you are also more likely to be audited than someone with a low income. This does not mean that just because you have a high income, you are going to be audited. However, with individuals that have high incomes, there is more opportunity for them to hide income and use questionable deductions. The IRS wants to make sure that they are getting their fair share of your high income.
3. Cash Income
Another common trigger for an IRS audit is if you have cash income. For example, if you are a waiter or you work at a casino, there is a good chance that you are going to be bringing in a substantial amount of your income in the form of cash. Because of this, the IRS knows that there is a greater likelihood that you are not reporting all of the income that you bring in. In order to avoid any problems, you want to make sure that you keep detailed records of every dollar that you receive in the form of cash. This way, you will be able to easily provide records to the IRS if you are audited and avoid paying extra taxes.
4. Self-Employment
If you are self-employed, the odds of getting audited increase exponentially. As a self-employed individual, there are multiple ways for you to hide your income and take extra deductions. Because of this, the IRS pays very close attention to individuals that file their taxes as a self-employed person. For example, if you claim a very large home office deduction, the IRS might want to check it out to make sure that it is legitimate. You will also want to make sure you keep receipts for any business expenses that you plan on deducting.
5. Income Discrepancies
If there are any discrepancies between the income statements that the IRS receives from your employers and from what you report on your taxes, this is a sure way to get audited. You need to report the accurate amounts of income that you bring in.
The earned income credit is a tax credit offered by the United States government to help low-income families. If you take this credit, there is a higher likelihood that you will be audited by the IRS. The reason behind this is that there have been a number of fraudulent claims recently with this particular credit. Many people know that you can get more money with this credit if you say that you have a larger household than you actually do. This leads some people to claim children that are not theirs and increase the tax refund.
In most cases, the fact that you take money out of a retirement account early will not necessarily trigger IRS audit proceedings. However, when you take money out of your retirement account early, this could make your annual income much higher than it was in the past. When you have high income, you are more likely to trigger an audit than if you had a lower income. The IRS looks for large discrepancies between your current annual income and your annual incomes of the past. If your income is much higher this year, the IRS will be more likely to take a look at your situation.
]]>The biggest benefit to these retirement plans is that you may use tax free dollars to invest in them. You contribute directly to your 401k each paycheck, and the monies are not taxed until you withdraw. For example, if your gross income is $3000. and you invest 10%; your contribution will be $30. even if your take home is $2500. This tax savings can add up to provide you with a nice retirement account.
Your employer may offer to match your contribution up to a certain level. This amounts to an additional thousands of dollars in compensation each year you will not claim if you are not making maximum contributions. Essentially, employer matches are free money and a perk of the company.
Once you reach the age of 59 1/2, you will be eligible to receive payments from your 401k to assist you in retiring or planning for retirement. With life expectancy increasing, you may have to provide for yourself for 30 or more years after you reach the age of 60. These savings can be instrumental in allowing you to retire and not work during those golden years.
Any time you take 401k withdrawals from your retirement account, you will owe income taxes on the withdrawal. The only exception is with certain Roth 401k plans where taxes were already paid on the front end rather than deferred to the back end. On traditional 401k's, however, the income tax is applied on the back end, even if you have reached qualified age or are taking a mandatory withdrawal. If you take a withdrawal before minimum qualified age, you will face a 10 percent penalty in addition to the income tax charged on the amount withdrawn.
The amount of tax you pay on 401k withdrawals depends on your income level at the time you take money from your account. Your federal income tax rate is set based on your total income for a given year, including your 401k withdrawals. You do not pay taxes at the time you withdraw the money. Instead, you report the income on your year-end statement and pay taxes at this point. As a result, it is wise to make estimated tax payments to the IRS anytime you withdraw money from your 401k. For allowable distributions, estimate taxes at your current tax rate. Add a 10 percent penalty payment for any early withdrawal.
]]>You must keep written records of all donations to charity, including tax donations. If you are giving a sum larger than $250 on one donation, then you will need supporting documentation in order to receive the benefits. You should even keep records of any cash donations. To ensure your records qualify, keep the following:
If you are not donating money, you may be able to receive a charitable deduction for donation of property. You must be able to prove the market value of the property you donated if you intend on itemizing the deduction. You need the following in this case:
There is what is called a 50/30/20 deduction limit on all charitable donations. This means the following:
You cannot deduct the value of time spent on a project as a charitable donation tax deduction. For example, if you are a carpenter, you may devote a weekend to building for Habitat for Humanity. The time you spend on the project cannot be deducted at your normal hourly rate. However, any out-of-pocket expenses you incur during that period can be deducted. This includes wear and tear on your machinery, nails and supplies, and even lunches or the gas for driving time to and from the location. Any expense made during the time you are working can be deducted if it is directly related to the charity activity or event.
If you donate a vehicle, you are eligible for a charitable donation tax deduction. You cannot deduct more than 50 percent of your taxable income, regardless of the type of donation. There is a standard $500 deduction for the donation of a vehicle. You may be eligible to deduct more if
You can then deduct a value up to the amount the charity sold the vehicle for.
]]>Coverdell
The biggest advantage of a Coverdell plan is flexibility. It is often called the Education IRA because you have more control over the process just like you do with an IRA. You can choose what you invest in and you have more investment options. You can reallocate the funds in the account as often as you like and oversee the entire process. There are a few details tied into the plan that are important:
529 Plan
The 529 plan can only be used for college, there is no provision to fund primary education costs. There are a few key features of this plan:
A Coverdell education savings account has rules associated with it that prevent certain people from contributing. If you make over a certain amount of money, you will not be able to make any contributions to an account for your children. As of 2010, if you are single, you can make a full contribution if you make less than $95,000. You can make a partial contribution if you earn up to $110,000. If you are married and you file your taxes jointly, you can make a full contribution if your income is no more than $190,000. You can then make a partial contribution if you earn up to $220,000.
]]>Tax Planning for 2011
Individually, it is important to know your tax bracket and any changes to tax law that may affect you. This year, the Bush-era tax cuts have been extended, so your tax bracket will remain the same if you are earning the same as in years past or a similar amount. Further, a new tax break will appear in your FICA tax. It has been reduced by just over 2 percent across the board. This means you will see a bigger paycheck each month even if you are earning the same. The increase will be substantial for many individuals. To plan effectively, look to the following ways to reduce your individual taxes even further:
Manage Your Debt and Credit
Your credit follows you for years, but it does not follow you forever. You can make smart choices to improve your credit this year, and you may find some of your past negative reports have even passed their statute of limitations. This means that the creditors can no longer attempt to collect or that, in some cases, the information may be removed from your credit score. Take advantage of this fresh start to make a plan to pay down debts and monitor your credit in the new year. Set a "year end" credit goal and work to achieve it by making regular payments on each of your debts. Further, set a debt goal, maintaining no more than 30 percent of your annual income in annual debt.
Save for the Future
Saving for the future involves both short-term and long-term saving goals. First, start by saving an emergency fund. This should equal three months of your salary in case you are ever unable to work or lose your job. Only once you have put this emergency cash aside can you truly be free to plan long term. Speak with a financial advisor about the future you are envisioning. Do you need to save an education fund for your future children? Or are you past this point in your life and looking more toward retirement? A financial advisor will be able to direct you to an actual figure of how much you will need to save in order to make your financial goals a reality.
If you are dealing with debt from your past as you head into the New Year, consider this a fresh start to clean your credit report. The goal is not only to improve your score on paper but also to reduce the amount of debt burden you carry day to day. This will leave you feeling far less financially stressed in the coming year. It will also help you better plan for the other financial burdens you may face.
Improve Your Score
Start by reviewing your credit history. Everyone is entitled to one free credit report each year from the service Annual Credit Report. The website https://www.annualcreditreport.com is your source to access this report. Look over your personal credit score and seek out any areas that may be holding you back. Have you missed payments in the past? Do you have too much debt? Do you have a short credit history? Once you know what is causing your low score, you will have a better plan for improving the score. Here are some factors to consider:
Consider Debt Reduction
For most Americans, the number one factor leading to bad credit is too much debt. While smart spending and saving habits will improve this area tremendously, sometimes you need a little more help. Consider debt consolidation if you cannot deal with the payments on your own. Through debt consolidation, a credit counseling or consolidation company will pay off your debts. In turn, you pay the consolidation company monthly installments. In many cases, the consolidation company will be able to negotiate your debt down to a smaller amount than you originally owed, saving you money in the long run. Further, your debts will appear as "paid" on your credit report, improving your score.
Risks of Debt Reduction
Enter into any debt reduction or credit counseling service with great care. First, while there are many good companies, there are several scams or overly costly options. Always do your research into the agency you select. Further, consider the total cost of the option instead of just the immediate relief. If you determine paying off the debts through an agency will ultimately be more expensive, through interest and delays, than paying off the loan yourself, do not use the agency. This can be a hard thing to determine. To do so, always look at details such as financing fees, early payoff fees with your existing lender, interest rates and penalties.
After the lavish holiday season, you may be wondering how to budget and save money in the new year. Even if you overdid it on holiday spending, you can get on track by starting a budget in 2011. Consider this a new start regardless of whether you have practiced good saving habits in the past. Stick with the basics, and you will have your finances on track come this time next year.
The new year is the perfect opportunity to decide your small business and individual tax planning strategies for the year ahead. Even if you've never taken time to consider your tax strategy in the past, sitting down and starting anew this year will provide you distinct financial advantages next year. First, set a plan based on your needs and goals at this point in your life. Next, consider which new tax rules and regulations can make those goals more achievable.
Establish Your Financial Needs
At different points in your life, you will have different types of financial needs. For a young professional, saving for a home or a family is important. When you have a family, providing health care and education takes top priority. As you age, saving for retirement becomes more critical. Where are you right now in your life? For tax help, consider how these tax laws relate to your needs:
Consider Tax Law Changes
Congress extended the Bush-era tax cuts through 2011. This means you will remain in the same tax bracket as you have been in for the past several years as long as your income has not changed. Also reducing the tax imposed on you, Congress approved a 2.5 percent reduction in FICA taxes this year. This reduction can amount to high levels of savings on each paycheck, increasing your realized salary each month.
Consider Stimulus Tax Options
Your tax preparation should always involve becoming aware of tax savings available to you. Take note of recent stimulus initiatives, such as these:
Extension of Tax Cuts
Bush-era tax cuts represent a decrease of approximately 3 percent for each individual filing. This tax break was enforced unilaterally, despite income. Initially, Democrats wanted to remove this break for individuals earning more than $200,000 ($250,000 for joint filers) as of January 1. However, with the breaks extended, all Americans will still receive the break benefit.
In addition to extending the cuts, the new tax program will extend unemployment benefits through 2011 for individuals currently facing an end to this government insurance program. The need for long-term unemployment insurance, according to President Obama, is the main reason Democrats were willing to compromise on other tax break issues. For example, the legislation will not extend the "Making Work Pay" benefit that was introduced in the stimulus bill. This means you cannot count on a $400 refund if your income is under $75,000. Instead, the legislation does include a 2 percent payroll tax holiday. This means individual tax payers will see about a 30 percent reduction in the total figure they must contribute to payroll tax on each paycheck.
Individual Tax Credits
You will be able to declare tax breaks and credits for energy efficiency improvements to your home or vehicle throughout 2010. These credits include improvements to make your home more energy efficient, credits for purchasing hybrid vehicles between 2006 and December 2010, credits for purchasing plug-in vehicles or hybrid vehicle conversion options. The amount of the credit varies based on your cost basis. The marriage tax refund will still be available. This means that if you are married filing jointly and this results in a higher tax bracket for one member of the couple--what is called the "marriage penalty"--you may be eligible for a refund. Further, the extension of cuts exempts estates valued at $5 million for singles and $10 million for couples from the standard 35 percent estate tax.
Planning Considerations
As you approach your year-end tax planning, it is critical to take a long look at how the legislation will affect individuals, retirement funds, estates and small businesses. Since tax cuts have been extended, you may find you are eligible for critical savings you were not expecting. However, the date when your qualifying events occurred will be critical in determining if you are eligible. For example, the date you purchased a hybrid, the date you were married, the date you hired a new employee, and other such factors will affect whether you can file for credits and tax cuts. For this reason, it is important to keep sales documents and certificates to be entered into your tax filing.
Year end tax planning can become complicated based on the number and types of income you have over the course of the year. Individuals earning no more than $200,000 (no more than $250,000 for married filing jointly) will see your Bush-era tax cuts extended through 2011. This means you are still eligible for a 3 percent reduction in your income tax, and you may also find key credits thanks to stimulus bill incentives. Applying these incentives at the right time can lead to a much lower tax liability in the future.
Energy Efficiency Tax Credit
You may be eligible for an energy tax credit up to 30 percent or $1,500, whichever is lower, for improvements to your home designed to increase its energy efficiency. The changes must fall into the energy efficient tax credit legislation introduced in the stimulus bill, but if so you will still be eligible for the credit in the coming tax season. You may also receive credits for purchasing a hybrid vehicle prior to December 30, for purchasing a plug-in vehicle or converting your current car to an electric vehicle. The credit you receive is based on your personal cost.
Retirement Plan Deductions
If you contribute to a tax deductible retirement plan, such as a 401k or IRA, you will still receive the same deductions in the coming year. Married individuals filing jointly can deduct up to $10,000 in contributions to an IRA if they are younger than 50 and up to $12,000 if they are between 50 and 60. The maximum deductible contribution to a 401k is $16,500 for 2010. If you earn more than $200,000 as a couple, your modified adjusted gross income will be phased out for catch-up contributions.
College Saving Plan Deductions
If you contribute to a 529 college savings plan for your children or a Coverdell account, you can deduct a portion of contributions. For a 529 plan, the maximum amount you can put into the account is between $100,000 and $350,000 depending on your state of residence. This drops to a much lower $2,000 if you elect to use the more flexible Coverdell account.
Estate Tax Reductions
Estate tax will be eliminated for individual estates valued under $5 million and joint estates valued under $10 million. This means the standard 35 percent estate tax will not apply to an inheritance smaller than this amount. This legislation has not yet gone into effect, so it will not change your inheritance if you received an estate in 2010. However, it will certainly affect the way you choose to save for your beneficiaries.
Payroll Tax Holiday
There is no payroll tax holiday for 2010. However, starting in 2011, there will be a 2 percent temporary payroll tax holiday. This may reduce the amount you contribute to taxes on each of your paychecks without compromising your Social Security benefits in the future. This holiday will go into effect unilaterally, so it will not depend on your income level. Regardless, if you earn no more than $200,000, or $250,000 married filing jointly, you should be well-under the limit for "wealthy" Americans whose tax breaks may be threatened if Bush-era cuts do end in the future.
Year end tax planning is a time to get your retirement accounts in line in order to maximize your deductions. Regardless of your income, retirement planning is essential and can result in a much higher income both this year and in the future. Consider these final tips to ensure you are not penalized for your savings behavior and to further assure you are getting the most benefit possible from your account.
Avoid Excess Contributions
It is essential to know your contribution limits annually. Your limits will vary depending on your income, the type of account you are using and the options your employer offers, if any. For the year 2010, maximum contributions to a traditional 401k or IRA were topped at $16,500, and maximum contributions to a Roth IRA were topped at $5,000. These limits go up if you are married filing jointly or over the age of 50. You may also be permitted a certain amount of catch-up contributions from a previous year. However, you cannot exceed these figures without penalty. If you have deposited too much money into your tax deductible or tax deferred account, you should receive a notice from your plan administrator. You have until December 30 to take the money out of the account. Do not rely wholly on your administrator; keep track personally and know your limits.
Assure Funds Are Fully Vested
If you want to get a deduction for funds placed into a deductible account this year, you actually have until April 15 of 2011 to place the funds into the account. This gives you several months of wiggle room after your 2010 income has been earned and vested into your account. You may find you have a little extra income to place into your fund, or you may find your tax liability can be reduced by depositing more. In either case, make sure the funds are fully vested by April to gain the benefits.
Finalize Rollovers
Rollovers to a different type of account can be very beneficial if they are done under the right conditions. For example, you can roll over funds from a traditional account to a Roth account to gain tax benefits in the future. Any rollover must be completed by the Roth IRA deadline of April 15, 2011 to count for the 2010 tax year. You may have increased tax liability when rolling over from a deductible account to a nondeductible account, but this liability applies only in the current year and can save you money in the future.
Meet Required Distribution Deadlines
Once you reach the maximum retirement age of 72-1/2, you must begin taking withdrawals from your retirement account. These withdrawals are called required minimum distributions. You must take the money out of your accounts by December 30, 2010 in order to meet the IRS's deadlines. If you fail to withdraw the money, it will be withdrawn for you at an additional penalty of 6 percent. Avoid this scenario by making a final review of your accounts to leave no account untouched. In some scenarios, if you have two accounts of the same form, you can take the money out of one and have it apply to both. Otherwise, you will need to take money out of each retirement account.
Year-end tax planning for small businesses provides them with opportunities to maximize profit and minimize tax liability in the future. This is particularly critical if your business opened its doors this year, meaning this is the inaugural tax filing and will set the standard for the future. You will have important decisions to make regarding which expenses to capitalize and which to deduct. You will also have to determine how to distribute earnings to shareholders, where applicable, to avoid double taxation in the future.
Capitalizing Assets
As a business owner, you can deduct or capitalize each of your capital assets. In some cases, you will not have a choice in which strategy you pursue; however, in many cases, the choice will be yours. Capitalizing assets is the process of declaring them as a part of the business's capital expenses. They are not deducted in the given year. Instead, the amount of depreciation in the future is deducted each year. For example, if you purchase a large piece of machinery for $50,000 and anticipate it will last you 10 years, it depreciates at a rate of $5,000 per year. You could choose to deduct the $50,000 expense this year, but by capitalizing the asset instead, you can spread out the deductions and potentially recognize a greater deduction overall.
Deducting Assets
If you do choose to deduct an asset, it counts as a dollar-for-dollar deduction against your business's income this year. You can deduct a number of one-time expenses, such as advertising costs, shipping costs and insurance costs. These expenses affect your profitability in this year, and they will not continue to serve you in future years. As a result, deduction is a better method than capitalization. In fact, you are not legally allowed to capitalize an expense that does not fit the narrow definition of a depreciating capital asset.
Special Deduction Consideration in the First Year
New business owners have a unique choice to make in their first year of operation. During this year, all rules about which expenses can be capitalized or deducted go out the window. Every single expense can be deducted. This includes the expense you went to in determining whether to go into business, the loan application process, meetings, and the purchases of start-up equipment for your office. In the future, the types of expenses you can deduct rather than capitalize will be determined for you. In the first year, though, you will set a pace for your tax filings in the future by making the decision on your own.
Distributing Earnings to Shareholders
If you have shareholders, you will have a whole new set of considerations to make in your year-end tax planning. For example, you can choose to accelerate your distribution of accumulated earnings and profits to 2010. Rather than allowing shareholders to consent to dividends, consider paying out cash distributions this year and allowing shareholders to loan the money back to you. This can allow you to avoid double taxation. You may also consider distributing real estate from a C or S corporation to accelerate capital gains. This is also a good time to consider converting to an LLC in a statutory conversion. Taking advantage of liquidation laws would allow you to avoid double taxation in the future.
]]>Which Assets can be Shared?
Joint tenancy is possible for any property, including personal property and financial property. For example, brokerage accounts and bank accounts can all be owned through joint tenancy. Retirement accounts are an exception because of their unique tax status; if you would like to add a second beneficiary to a retirement account, the process is separated from a standard joint tenancy.
Why elect Joint Tenancy?
When you have an effective joint tenancy in place, each individual in a partnership can access assets without any hinderance. This means either a husband or a wife, for example, could execute a trade. Joint tenancy also helps avoid the process of probate when an individual dies. Since another party already has legal control of accounts or property, there is no need to go about the process of restructuring ownership.
Joint tenancy allows two individuals to share ownership of assets. For example, business partners or spouses could both own bank accounts, brokerage accounts and real property. There are many reasons to enter a joint tenancy, but all of these advantages come with a few risks.
Advantages
The primary advantage of a joint tenancy occurs when one individual dies. Ownership of the asset passes seamlessly to the other tenant, and no probate or legal process will be involved. While both parties are living, joint tenancy allows them equal access and control to assets. For example, if one owner is traveling and cannot access a bank account, the other owner can carry out essential functions.
Disadvantages
Joint tenancy is literally sharing ownership. Once it occurs, it is difficult to divide the assets should a separation occur in the future. You must trust your partner in order to share ownership as well. If your business partner carries out a transaction without your approval, you have no authority to change the event. Further, if you pass away, the surviving tenant has complete control over the assets. They can sell, bequeath or do what they decide is individually beneficial.
Joint tenancy occurs outside of a will or trust. Once you establish joint tenancy over an asset, you do not have authority to change ownership of that asset in the future without the other tenant's approval. For example, if you own a brokerage account with joint tenancy, it will pass to the other tenant after your death, even if you give other instructions in your will. However, if you and the other tenant have a joint will and are both deceased, then the instructions in your will can take precedence. In this case, both tenants have given their permission.
Assets owned under joint tenancy are subject to capital gains if they appreciate in value. Capital gains tax is charged on income earned through investments, and though the rate is different from other income taxes, it is still party based and based on an individual's income level. When an asset is owned by more than one party in a joint tenancy, the incomes of those two parties may be different. The capital gain is divided up based on a percentage of ownership in the property, and each party pays his or her respective capital gains tax. This can be favorable or unfavorable based on your individual circumstances.
]]>If you decide to take an insolvent estate through probate, you will have the protection of the court each step of the way. This is the main reason beneficiaries decide to take the probate route to resolve an insolvent estate. However, the protection comes at a cost. You will likely find yourself deep in debt to attorneys and the court at the end of an insolvent estate probate process because the costs are only exacerbated by the insolvency.
No Nonintervention Powers
When you enter probate on a solvent estate, you have the power to ask for nonintervention of the court on certain issues. This allows you to resolve some debts on your own simply by repaying creditors out of the estate. You will save money by handling issues on your own. When an estate is insolvent, most jurisdictions will not permit nonintervention.
This means every single transaction must be run through the court. Similar to a bankruptcy proceeding, a probate on an insolvent estate freezes the assets and lets the court decide how to spend the money left behind. You will find yourself at the mercy of the court in even the smallest transaction, which can consume your time and money.
Insufficient Assets to Pay for Attorney
In probate, the attorney and court fees to resolve an insolvent estate are paid out of the estate. The attorney is paid first, and the remainder of the estate goes to pay off creditors. The creditors’ shares of the pot shrink as attorney fees go up. In some cases, the attorney fees may climb so high that nothing is left for the creditors.
Insufficient funds can be a problem in small estates where only a few thousand dollars are left to repay debts, even if the debts are small. Attorney fees will quickly eat up those few thousand dollars. You will be left with few options. One is to handle the probate and try to handle the debts on your own. The other is to enter probate and pay attorney fees out of pocket.
Time to Resolve Disputes
When you handle dispute resolution on an insolvent estate yourself, you can move at your own pace. You decide which creditors to engage first, and you decide which assets to liquidate immediately. You hand all of this over to the court when you enter probate. The court will then establish it’s timeline. This may, or may not, work with your goals to end the process quickly. Probate can take years to resolve an insolvent estate. While this time is daunting and the cost can be high, you should also keep in mind the alternative. If you decide to “go it alone” on resolving the issue, you lose the protection of the court. It can take just as long for you to personally verify and repay all debts as it would take the court. Do not let time be the reason to avoid probate, instead keep in mind it can be a serious disadvantage to go through the court system.
An insolvent estate does not have enough assets to cover liabilities at the time of the decedent’s death. As a result, the beneficiaries of the estate will inherent nothing. It is up to the beneficiaries to determine how the insolvency will be resolved. There is no correct way to handle the process, and each individual will have to choose based on the circumstances of the individual estate in question. The size of the estate, the types of debts remaining and the resources of the beneficiary will all come into play.
Choose Based on the Estate Size
For a relatively small estate, with only a few thousand dollars in assets at the time of death, the best method will be to either ignore the liabilities or to close them personally. As a beneficiary, you have no actual obligation to ensure debts are paid. You are not named on the debts, and the credit of the decedent will have no impact on you. This will not stop creditors from contacting you, however, so it may be best to resolve the estate personally.
You can liquidate the assets in the estate and repay the creditors a portion of the remaining cash equivalent to the portion of debt the decedent owed the creditor. If you were to move through probate, it is unlikely the estate would have enough cash to pay an attorney and still repay creditors, and you may be stuck with the bill. For a larger estate, probate may be a better option. By putting the estate in probate, you can remove yourself from personally making any decisions. The assets of the estate are liquidated, and attorney and court fees are paid out of this sum. Then, the remaining cash is used to repay creditors.
Choose Based on Types of Debts
If the debts in an insolvent estate are largely secured, it may be easy to resolve the debts by surrendering the collateral. You can carry out the process of voluntarily surrendering the assets, resolving the debts one by one. However, if the debts are largely unsecured, it will be harder to pay them off by surrendering collateral. Instead, you would have to liquidate each asset yourself, collecting the cash earned and repaying creditors personally. In this instance, entering probate may be a better option. The court can handle the liquidation process for you, and the court will determine how to negotiate repayment.
Choose Based on Personal Resources
If you have limited resources to handle the dissolution of an estate, it is best to avoid probate. Probate always runs the risk of resulting in legal fees. Without the cash to pay, probate is not a good option to you. However, if you have the cash on hand to cover this expense, probate can save you a lot of time and hassle. In the end, you may owe nothing at all.
Insolvent estates are those where the decedent’s assets are not sufficient to cover debts after death. As a result, there will be no inheritance left to the beneficiaries of the estate, and those beneficiaries may further have a legal obligation to help resolve the debts. Thankfully, less than 10 percent of all estates are insolvent, so it is not likely you will have to face the problem. If you do, however, there are three main ways to handle debts in an insolvent estate.
Ignore the Problem
While creditors may try to convince you otherwise, in most states you have no obligation to meet the debts incurred by a decedent’s estate. The creditors can try to recover by contacting you or the court, but you have inherited none of the estate if it is insolvent, so you are not legally obligated to any of the property or the debts. The effectiveness of this strategy may partly depend on your state of residence and whether you inherited any property while the decedent was living. You may want to consult an attorney to learn if the creditors could attempt to contact you in any way and what rights you have if they do.
Handle the Debts Personally
If you have received the entire estate and found it to be insolvent, you may personally attempt to resolve debts. You can contact each creditor to verify debts owed and offer to surrender assets, to resolve those debts. This strategy can be time consuming. Furthermore, many creditors will attempt to take advantage of you in this situation. They are aware you are not the original debtor, so they may attempt to assess fees and charges against the estate and claim these charges were part of the original contract.
If you are not careful to follow the contracts and verify all debts, then you can end up paying more than is legally necessary for each debt. Always start by verifying all debts, assuring none are past the statute of limitations and knowing the legal obligation the estate has to repay any of the debts prior to negotiating with creditors.
Use Probate for the Debts
You may want to enter probate in order to resolve the debts. The main advantage of this is you have a court system to assure all debts are lawful and you are not overpaying. The court will work to reduce the total debts owed so the estate can cover it’s liabilities. Unfortunately, however, the court does not recognize your legal rights. As the beneficiary, you will not have the ability to handle any debts personally. Every single debt must go through the court, which can drive up court costs and probate expenses. Probate can be a very expensive process and this can add to the overall expenses of the estate itself.
]]>For example, John wants to pass his home onto John, Jr. He wants to avoid probate and lawsuits in doing this after his death. As such, he passes the home onto John, Jr., today. However, John needs to live in the home for the time being. He establishes a life estate deed. This allows him to live in the home and gain all the benefits, and costs, of home ownership until the day of his death. At that point, John's life estate expires. John, Jr., does not have to inherit the house through an estate. Instead, he is already the named owner of the home, and he can begin receiving ownership benefits immediately.
Once a contract for a life estate deed has been signed, it is difficult to revoke it. The parties listed in the contract would have to initiate the revocation because they are the lawful owners of the property. Another withdrawal option is to determine the parties were not in a sound legal mind or committed fraud when the contract was signed. This is very difficult to prove. Most cases involve a lengthy lawsuit and very expensive legal costs because life estate deeds are carefully drawn and executed.
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