Financers offer two types of leases: open-end and closed-end. An open-end lease requires you to pay any difference between the projected residual, or remaining, value of the vehicle and its actual market value at the end of the lease term. In other words, if the leased vehicle depreciates faster than anticipated, you’ll have to pay the difference between the expected value and the true market value at the end of the lease. The projected value of the vehicle is included in the lease agreement at inception. Open-end leases are still offered, but they have largely been replaced by closed-end leases.

Also known as a walkaway lease, the closed-end lease specifies the price at which you may, but are not compelled to, purchase the vehicle at the end of the lease. Since you don’t have to buy it, you can walk away from that vehicle and enter into another lease agreement for a new vehicle. A closed-end lease shifts the risk of overestimating the residual value of the vehicle onto the lessor, who agrees to absorb any losses that stem from rapid depreciation. You are, however, responsible for any above-normal mileage or wear. Some other facts that you should be aware of concerning leases are below.

You must normally have very good credit to qualify for a lease. A lease with a low down payment exposes the lessor to greater risk of substantial loss in the event of a default on the obligation.

Lease payments are established to provide a return on the lessor’s capital that’s invested in the leased vehicle. The lower the return that a lessor will accept, the more you’ll benefit from the lower lease payments.

Lessors normally charge a substantial penalty in the event that you decide to terminate the lease early. Therefore, only enter into a lease if you’re prepared to fulfill the terms completely.

Leases typically specify a maximum number of miles that the vehicle can be driven before excess-mileage charges begin to accrue. Generally, 15,000 annual miles are allowed. You can attempt to negotiate a higher limit if you expect to exceed the mileage allowance.

Although manufacturer defects and routine scheduled maintenance are normally covered, other costs of operating the vehicle (such as registration, insurance coverage and non-routine repairs) are yours to pay.

Most leases require a nonrefundable down payment, usually from $1,000 to $2,000, depending on the value of the vehicle. A security deposit, which is generally refundable, may also be required. Sales taxes, if applicable, are usually added to each lease payment.

 Bequests are a method for giving property to an individual or organization after your death. You can state your intention to bequeath property in your will, or you can bequeath the property while you are living. Most commonly, property is transferred in a will and is required to go through probate before it is distributed. The tax benefits are usually more favorable than other gifting options.

Charitable Bequests

Charitable bequests are popular because they offer flexibility and have few tax consequences. If you bequeath property to charity, you will receive a tax deduction. You can bequeath the property while you are alive, retain use of the property and hand it over upon your death.

Giver's Tax Liability

Anytime an individual gives a piece of property, there will be tax obligations applied to the transfer. There are two types of tax consequences. First, there is a possible estate tax on the property. The estate tax is constantly under reform. As of 2010, the estate tax remains at 35 percent, but it is only charged for very large estates. An individual leaving $5 million, or a couple leaving $10 million, will have an estate tax charged to their property. If the property is worth less than this amount, an estate tax will not be assessed.

However, there may be a capital gains tax on a property that is transferred, if the value has increased. For example, if you purchase a home for $200,000 and it is worth $300,000 when you transfer it, you are required to pay taxes on the $100,000 difference. Capital gains taxes are due and can be paid by the giver or the receiver. In either case, the cost basis is the original owner's cost basis.

Receiver's Tax Liability

A receiver does not pay income tax on any property received through bequest. Property acquired by inheritance does not count as income. Keep in mind, however, that you are required to pay estate or capital gains taxes as described above. There are a few steps you should take in order to determine your tax liability. First, determine if you owe an estate tax on the property based on its nominal value. Then, if you are receiving an asset that has changed in value, you may have to declare a capital gain or capital loss at the time of the asset's sale. You will not have to pay a capital gains tax until the gain is realized.

This means, for example, you can hold a property without paying taxes. However, you must pay the taxes in the year you sell that property for a profit. There are relatively low tax rules applied to bequests. For this reason, many individuals find that a bequest is the best option for a property transfer. You can use an attorney to help you draw up the proper forms and explain the specific rules of your tax consequences. Always cross check the information that you are given with a tax authority because attorneys are not always well versed in tax laws unless they specialize in that area of law.

What are charitable bequests?

Charitable bequests are one way to donate property to charity. When you bequest property, you are giving it as a gift. Both you,  and the recipient, receive favorable tax consequences as a result. You can donate property either while you are alive or through your will. If you decide to bequest while you are living, you can use the property for the remainder of your lifetime before turning it over to the charitable organization. This flexible structure makes bequests easy to manage. Many individuals prefer to use this method instead of allowing property to go into probate after death.

Charitable Contribution Deduction Rules

• You must donate cash or property. If you pledge funds, you do not receive a deduction until you have fulfilled that pledge. For example, pledging $20 a month to your public radio network does not mean you get a deduction of $480 that year. You have to provide information on what you have actually given.

• You must be giving the funds to a tax-exempt organization. Tax deductible charity organizations must have 501(c)(3) status.

• You must be able to itemize your deductions. If you do not plan on itemizing your deductions this year, then you cannot capitalize on the deductions you have made through charitable contributions.

• You have to keep your records. For example, if you have received a charitable donation appraisal on property you donated, you need to have this appraisal on-hand come tax time.

Record Keeping

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:

• The name of the organization - if you have the organization's tax payer identification, keep this as well
• The date of your contribution
• The amount of your contribution

Property Contributions

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:

• An appraisal form stating the fair market value of your item - If you are not having the item appraised, you may not need this form, but the IRS can question your determined fair market amount if it is unsubstantiated with an appraisal. If your donation is more than $5,000, you need an appraisal or it will not stand up to the scrutiny of the IRS.

• IRS Form 8283 is required for a single non-cash contribution of over $500.

• If you are donating a vehicle, and the vehicle is worth more than $500, you need a written statement from the organization you donated the vehicle to and an appraisal of value.

Charitable Donation Limits

There is what is called a 50/30/20 deduction limit on all charitable donations. This means the following:

• The limit for cash contributions to charity is 50% of your adjusted gross income
• The limit for property contributions is 30% of your adjusted gross income
• You can deduct contributions of capital gains assets up to 20% of your adjusted gross income.

Can you get tax back for charity work?

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.

What's the charitable contribution cap on donated autos?

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 provide a statement showing you did not receive a good or service in return
• you did receive a service in return and provide a statement showing that service was made up entirely of intangible religious benefits, if that was the case

You can then deduct a value up to the amount the charity sold the vehicle for.

Employee Eligibility

All eligible employees must be at least 21 years old, have three years of service in the past five years and have earned at least $450 in compensation from the employer. In general, these rules are in place to exclude one-time independent contractors or temporary employees from receiving benefits in the plan. However, part-time employees are eligible as long as they meet the $450 minimum and have worked at least 3 years in the past 5 years. To determine employee eligibility, an employer fills out an IRS Form 5305.

Spousal and Family Eligibility

The SEP IRA program can benefit companies employing family members. The employer must immediately vest the same percentage of income as he or she is receiving as the business owner into an IRA account for all participants, including family members. Since the rules are extremely equal, there is no favoritism for family members employed in the company. This can be expensive for an employer since the employer is the only contributor. When the recipient of the funds is a spouse or child, however, the tax deductible expense may be easier to stomach.

Benefits of SEP IRA Rules

The SEP IRA is most beneficial to an individual with a very small business since it is costly per employee. The business owner should have a desire to contribute to his or her own IRA as well as those of his or her partners and direct employees. Since the owner must contribute the same amount to his or her account as to the employees’ accounts, it is important the employer is prepared to take on this expense. For this reason, the SEP IRA is popular in partnerships, family-owned businesses and sole proprietorships. The low level of forms required makes the plan cheap to administer even if it requires high annual contributions from the employer.

Downsides of SEP IRA Rules

The main drawback of the SEP IRA is the fact that an employer must compensate all employees equally. If one employee is outperforming another or has been more loyal to the company, no additional IRA funds can be contributed on that employee’s behalf. This removes the ability for an employer to offer retirement funds as an incentive for employee performance or loyalty. Further, the SEP IRA is not a good option for a growing business. The unique circumstances provided by an SEP IRA are truly best for a very small operation, and the business will quickly incur too much expense if it continues to grow beyond a low number of current employees.

Will a new employee be eligible for an SEP IRA?

A new employee will not immediately be eligible for an SEP IRA. SEP IRA requirements clearly state that an employee must have at least three years of service to the organization in the past five years. In addition, the employee must earn at least $450 from the employer in the given year to be eligible. These restrictions make it impossible to extend an SEP IRA immediately to a new hire. However, the individual may set up his or her own IRA account and roll the plan over into the company's IRA plan in the future.

Can I open an SEP IRA for myself if I am the only employee of my business?

If you run a sole proprietorship, you are eligible to open an SEP IRA. In fact, the SEP IRA plan is most beneficial for extremely small businesses. Under this plan, the owner of the business must contribute the same amount to an employee's IRA plan as he or she does to the owner's account. This means all employees, regardless of level of management or time with the company, will receive the same contribution amount annually. This makes the SEP IRA most feasible for a single-employee company or a partnership. Individuals who employ family members may also favor this plan.

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.

Advantages

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.

Loan Limits

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.

Loan Terms

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.

Tax Penalties

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.

Are you allowed to borrow from your 401k if you are not fully vested?

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 borrow against your 401k, does that show on a credit report?

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.

Are retirement funds transferred due to a QDRO subject to taxes and penalties?

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. 

Are money market checking accounts FDIC-insured?

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 Tax Table

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.

A Few Examples

Suppose an individual files as single and makes $38,000 in taxable income. Their taxes will be calculated by using:

• 10 % x $8,375 + 15 percent * ($34,000 - $8,375) + 25 % x ($38,000 - $34,000) = $5,681.2

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:

• 10 % x $16,750 + 15 % x ($68,000 - $16,750) + 25 %x ($76,000 - $68,000) = $11,362.50.

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.

If you take the earned income credit, are you more likely to be audited?

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.

Will early withdrawal on a retirement account trigger an IRS audit?

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. 

Tax Free Contributions

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.

Employer Matching

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.

Retirement Payout

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.

Do you have to claim income from your 401k withdrawals on your tax return?

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.

How much are your 401k withdrawals taxed?

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.  

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:

• Not just for college- With a Coverdell plan, you can use the funds on any qualified education expense. This means that you can use the funds for preschool, elementary, middle and high school if you wish. They do not have to be used on college funds. This allows you to fund your child's entire education with the plan.

• Annual maximums- With a Coverdell plan you can contribute an annual maximum of $2000. The money goes into the account after-tax and is allowed to grow tax-free. 

• Contributor restrictions- Any adult can contribute to the plan as long as they meet the income requirements. If you are a single adult you cannot make more than $95,000 and if you are couple you cannot make more than $190,000, combined income. 

• Child takes over- With this type of account, the child can gain control of the account once they reach the age of college. If they do not use the money by the time they are 30, they can withdraw the money with penalties. If they do not wish to do this, they can pass the money onto another child to use.

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:

• Higher contribution limits- The limits for contribution in a 529 plan are much higher than a Coverdell plan. Depending on which state you live, you can put anywhere from $100,000 to $350,000 into the plan. 

• No income restrictions- Unlike the Coverdell plan, anyone making any amount of money can put money into a 529 college savings plan. Therefore, if you make more than $190,000 as a couple, this will be your only option.

• Parent controls account- Unlike the Coverdell, you can control the 529 account money when they reach the age of college. If you feel like your child should not be in control of such a large sum of money all at once, you can allocate the funds where they need to go and let your child focus on school. 

How do you qualify for a Coverdell education savings account?

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:

• Deposit money into a qualified retirement plan. If your employer does not offer one, consider setting up an IRA.
• Withhold money for a Health Savings or Flexible Spending Account. Your employer may provide this option; if not, all taxpayers are still eligible to open one individually. This allows you to use pre-tax dollars for health-related expenses.

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.

Dealing with Debt in 2011

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:

• Your credit history (i.e., whether you have repaid debts in the past) is the number one factor in your credit score.
• The length of your credit history is important. There is nothing you can do to improve this except continue to build your credit.
• The amount of total debt you carry when compared to your income will matter. To achieve or maintain good credit, it is best to keep your debt under 30 percent of your income.
• The balance on your open credit lines is an important factor. Aim to keep this balance below 10 percent.
• Credit companies consider the types of loans you have carried in the past. It is best to mix this up between installment and revolving loans.
• Credit report mistakes could be hurting your score. If you notice errors in the report, take steps to have them removed.

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.

How to Budget and Save Money in 2011

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.

Tax Planning for 2011

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:

• The IRS allows you to make a one-time withdrawal from a qualified retirement plan without paying a standard 10 percent penalty if you are using the money for a down payment on your first home or for secondary education expenses for yourself or a dependent. This means a retirement plan is a great tax-deferred backup plan for saving for your future.
• Healthcare Savings Accounts (HSAs) are tax-free options to put money aside for health expenses. This can greatly reduce the total cost you incur in paying for healthcare for yourself and your family. All tax payers are eligible for HSAs in 2011.
• College savings plans can provide you with tax-deferred options to set aside income to pay for secondary education. Each state typically has its own plans.
• When saving for retirement becomes your primary concern, setting aside the highest possible amount of income to your qualified retirement plan is critical. Build an IRA contribution into your monthly or annual budget. You can choose between a traditional or Roth option based on whether you need the savings today or in the future. 

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:

• When filing a tax return, a small business owner can now write off the entire cost spent to open a business in the first year. Capitalizing certain expenses is not required.
• Small business owners hiring individuals out of unemployment situations may be eligible for a reduction or elimination of payroll taxes for those individuals for a limited period.
• Homeowners facing foreclosure have new options to avoid tax penalties on the forgiven loan amount. To determine if you qualify, talk to your mortgage holder or accountant about the Mortgage Forgiveness Debt Act.

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 for Individuals

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 for Retirement Funds

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

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.