June 2010
FLA Blog
Jim Oliver & Associates, P.C.
FB Bancorp Building
17300 Henderson Pass
Suite 240
San Antonio, TX 78232
p:210.344.0205
f:210.344.4362
cpa@teamoliver.com
www.teamoliver.com
Financial Life Advisors
FB Bancorp Building
17300 Henderson Pass
Suite 290
San Antonio, TX 78232
p:210.918.8998
f:210.344.4362
advisor@teamoliver.com
www.fladvisors.com
This firm is not a CPA firm.
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June Tip - Social Security Thoughts to Ponder
- If someone filed for Social Security benefits at age 62 or 65 it is possible to pay back benefits and receive the higher benefit for delaying to a later age like 70.
- Worker, Spousal and Survivor benefits are all calculated differently. It is not always required to file for each of these Social Security benefit types together.
- Couples can use their joint life expectancy to maximize the Social Security benefits they receive.
If you have any questions about how these strategies could affect you, contact your trusted advisor at Team Oliver today!
Articles in this Month's Issue
Cut Taxes on the Sale of Your Home
Despite the slumping real estate market, houses are still being sold and there is money to be made. Sellers need to take a close look at the exclusion rules and cost basis of their home to reduce taxable gain on their house.
First, The IRS home sale exclusion rule now allows an exclusion of a gain up to $250,000 for a single taxpayer or $500,000 for a married couple filing jointly. This exclusion can be used over and over during your lifetime, unlike the previous one-time exemption, as long as you meet the following Ownership and Use tests.
During the 5-year period ending on the date of the sale, you must have:
* Owned the house for at least two years - Ownership Test
* Lived in the house as your main home for at least two years - Use Test
Tip: The Ownership and Use periods need not be concurrent. Two years may consist of a full 24 months or 730 days within a 5-year period. Short absences, such as for a summer vacation, count in the period of use. Longer breaks, such as a 1-year sabbatical, do not.
If you own more than one home, you can exclude the gain only on your main home. The IRS uses several factors to determine which home is a principal residence: place of employment, location of family members' main home, mailing address on bills, correspondence, tax returns, driver's license, car registration, voter registration, location of banks you use, and location of recreational clubs and religious organizations you belong to.
Tip: The exclusion can be used over and over during your lifetime, every time you reestablish your primary residence. When you do change homes, let us know your new address so we can ensure the IRS has your current address on file.
Note: Only taxable gain on the sale of your home needs to be reported on your taxes. Further, loss on the sale of your main home cannot be deducted. Ask us for details.
Improvements Increase the Cost Basis
Additionally, when selling your home, consider all improvements made to the home over the years. Improvements will increase the cost basis of the home and thereby reduce the capital gain.
Additions and other improvements that have a useful life of more than one year can be added to the cost basis of your home.
Examples of Improvements
Examples of improvements include: building an addition; finishing a basement; putting in a new fence or swimming pool; paving the driveway; landscaping; or installing new wiring, new plumbing, central air, flooring, insulation, or security system.
Example: The Kellys purchased their primary residence in 1999 for $200,000. They paved the unpaved driveway and added a swimming pool, among other things, for $75,000. The adjusted cost basis of the house is $275,000. The house is then sold in 2008 for $550,000. It costs the Kellys $40,000 in commissions, advertising, and legal fees to sell the house.
These selling expenses are subtracted from the sales price to determine the amount realized. The amount realized in this example is $510,000. That amount is then reduced by the adjusted basis (cost plus improvements) to determine the gain. The gain in this case is $235,000. After considering the exclusion, there is no taxable gain on the sale of this primary residence and, therefore, no reporting of the sale on the Kelly's 2008 personal tax return.
Tip: Home Energy Credit. Homeowners will benefit from extended energy saving credits when making their homes more energy efficient in 2009 and 2010. Projects include energy-efficient windows, doors, heating, and air-conditioning systems. The existing 10% tax credit for energy saving home improvements has been increased to 30% of a cost up to $1,500 and extends through 2010.
Partial Use of the Exclusion Rules
If you do not meet the Ownership and Use tests, you may be allowed to exclude a portion of the gain realized on the sale of your home if you sold your home because of health reasons, a change in place of employment, or certain unforeseen circumstances. Unforeseen circumstances include, for example, divorce or legal separation, natural or man-made disasters resulting in a casualty to your home, or an involuntary conversion of your home.
Example: If you get divorced after living in your home for approximately 1 1/2 years or 438 days and have a gain of $120,000 on the sale of your home, you can take 60% of the capital gain exclusion, as you lived in the house for 60% of the 2-year exclusion period (438 days divided by 730 days or 60%). Therefore, you would be allowed to deduct $150,000 of the capital gain (60% of $250,000 exclusion). No gain would be reported on this sale.
Recordkeeping
Good recordkeeping is essential for determining the adjusted cost basis of your home. Ordinarily, you must keep records for 3 years after the filing due date. However, keep records proving your home's cost basis for as long as you own your house.
The records you should keep include:
* Proof of the home's purchase price and purchase expenses
* Receipts and other records for all improvements, additions, and other items that affect the home's adjusted cost basis
* Any worksheets or forms you filed to postpone the gain from the sale of a previous home before May 7, 1997
Questions?
Tax considerations can be confusing. If you have any questions on taxes related to the sale of your home, give us a call.
Feel Like Un-Retiring? How to Prepare
Last October, the MetLife Mature Market Institute released a study that said the over-55 workforce will account for almost 93 percent of the net increase in the U.S. civilian labor force between 2006 and 2016. At the same time, MetLife reported that many American workers plan to stay on the job “at least” until age 69.
The Pew Research Center’s Social & Demographic Trends Project echoed those findings in May 2009, saying that just over half of all working adults aged 50-65 plan to delay their retirement, with 16 percent saying they never plan to stop working. The issue, says the Pew study, is not about what these Americans earn, but how much they lost during the investment meltdown and the worst economic downturn in more than 70 years.
Add all these factors together and you have one of the most interesting labor situations for older Americans ever. That’s why that for every retiree or potential retiree who feels they need to return or stay on the job, it’s particularly important to review investment, insurance and tax issues. It makes sense to meet with a financial advisor such as a CERTIFIED FINANCIAL PLANNER™ professional.
Here are some critical points to address:
How are your skills? This is a valid point for current and potential retirees. The best job candidates are those with current skills in technology and procedures specific to an industry, so staying in the workforce may mean retraining. If there’s a way to get an employer to pay, do it. But if you have to pay for your own education, you really need to weigh whether your earnings will justify it.
Be realistic about your demographic in the workplace: While age discrimination is illegal, there are some workplace cultures where older workers frankly seem out of place. You have to ask whether you are going to be happy staying in a field that’s populated by younger workers with different interests or whether you might try another line of work.
Consider how a return to the workplace will affect you personally and socially: If you’re 40, 50 or 60, working right now probably feels like breathing – when have you not worked? But it may not be the best option after a year or two out of the workplace.
Consider health insurance issues: If a retiree returning to the workforce is already receiving Medicare or is covered by a “Medigap” policy, they may be able to lower their costs or improve their coverage by accepting group coverage as primary underwriter of their medical expenses. Since people over age 55 are generally the greatest users of the healthcare system, coverage issues are particularly important to run by a financial planner.
Know your tax picture: Tax issues shouldn’t determine your ambitions and goals, but it’s important to consider the impact full or part-time income will have on your finances. Most retirees realize that it doesn’t take much income to knock them into a higher bracket. Look for ways to control the taxes you’ll ultimately pay, including continued participation in qualified plans, IRAs, and other tax-favored accumulation vehicles and using annuity income to fill the gap between the beginning of the “post-retirement” period and the age when full Social Security benefits can be drawn without an offset for employment income.
Consider what earnings will do to all your retirement payments: If you are planning to continue working or returning to work, consider not only the tax impact, but also how that might change the way you plan to draw on your retirement savings and investments as well as Social Security. If you are planning to work, it’s important you consider suspending or delaying receipt of those benefits for as long as you can.
Look for work-related incentives: Particularly for public sector workers, there are opportunities to return to state employment and actually augment existing pensions. Keep an eye out for these programs and see if they work for you.
Keep saving: If you return to the workplace, see what you can do to take advantage of your new employer’s 401(k) plan or any other tax-advantaged retirement savings benefit, particularly if an employer matches your contribution. Don’t miss a chance to enhance your retirement savings.
June 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Jim Oliver, a local member of FPA.
Summer Travel Tax Deductions
The summer travel season is almost upon us. Keep in mind that if your summertime travel is primarily for business or career-related education, then a portion of the trip may be tax-deductible. As long as most of your travel days are for business purposes, you can deduct the cost of travel (airfare, trains, car), hotel, parking, taxi service, meals, and so on.
As defined by the IRS, travel expenses are the Ordinary and Necessary expenses of traveling away from home for your business, profession, or job. An Ordinary expense is one that is common and accepted in your field of trade, business, or profession. A Necessary expense is one that is helpful and appropriate for your business. An expense does not have to be required to be considered necessary.
The key factor is that your trip must be primarily for business. Days of leisure can be added to a trip and still be considered primarily for business. The more days and time per day spent on business will help substantiate the trip. There are no set rules on how many days and how much time per day need to be spent on business for your trip to be considered business related.
Keep all the documentation for business-related travel, including confirmations of appointments, emails, phone records, registration to conferences, etc. The days spent traveling to and from a business trip are considered part of the trip. This includes the weekend if it is impractical to come home between weekday business meetings. Planning ahead can make this happen.
Traveling with Your Spouse
If a spouse goes with you on a business trip or to a business convention, his or her travel expenses can only be deducted if your spouse
1. is your employee,
2. has a bona fide business purpose for the travel, and
3. would otherwise be allowed to deduct the travel expenses.
To be an employee, your spouse must be on the payroll and payroll taxes must be paid. If your spouse is not an employee and travels with you on vacation, you can still deduct the cost of your room at the single-occupancy-per-day rate, rather than half the rate. Meals could also be deductible. If you are paying for lunch or dinner for a customer or business associate and that person's spouse, the full cost of the meals might qualify under the 50% meal deduction. Let us know if you're unclear on this deduction; we can give you the details.
Example: Bill drives to Boston on business and takes his wife, Joan, with him. Joan is not Bill's employee. Joan occasionally types notes, performs similar services, and accompanies Bill to luncheons and dinners. The performance of these services does not establish that her presence on the trip is necessary for Bill's business. Her expenses are not deductible.
Bill pays $199 a day for a double room. A single room costs $149 a day. He can deduct the total cost of driving his car to and from Boston, but only $149 a day for his hotel room. If he uses public transportation, he can deduct only his fare. Further, if Bill has dinner with a customer and spouse, the meal may be deducted under the 50% meal deduction.
With travel outside of the United States, the transportation for business trips of one week or less may be deducted. However, only a portion of transportation costs for longer trips are deductible.
Example: You live in New York. On May 4 you flew to Paris to attend a business conference that began on May 5. The conference ended at noon on May 14. That evening you flew to Dublin where you visited with friends until the afternoon of May 21, when you flew directly home to New York. The primary purpose for the trip was to attend the conference.
If you had not stopped in Dublin, you would have arrived home the evening of May 14. You did not meet any of the exceptions that would allow you to consider your travel entirely for business. May 4 through May 14 (11 days) are business days and May 15 through May 21 (7 days) are non-business days.
You can deduct the cost of your meals (subject to the 50% limit), lodging, and other business-related travel expenses while in Paris.
You cannot deduct your expenses while in Dublin. You also cannot deduct 7/18 of what it would have cost you to travel round-trip between New York and Dublin.
You paid $450 to fly from New York to Paris, $200 to fly from Paris to Dublin, and $500 to fly from Dublin back to New York. Round-trip airfare from New York to Dublin would have been $850.
You figure the deductible part of your air travel expenses by subtracting 7/18 of the round-trip fare and other expenses you would have had in traveling directly between New York and Dublin ($850 - 7/18 = $331) from your total expenses in traveling from New York to Paris to Dublin and back to New York ($450 + $200 + $500 = $1,150). Your deductible air travel expense is $819 ($1,150 - $331).
What Expenses Are Deductible?
Here's what you can deduct when you travel away from home for business.
Transportation Expenses
You can deduct Transportation Expenses when you travel by airplane, train, bus, or car between your home and your business destination. If you were provided with a ticket or you are riding free as a result of a frequent traveler or similar program, your cost is zero. If you travel by ship, additional rules and limits apply.
Taxi, Commuter Bus, Subway, and Airport Limousine Fares
You can deduct the fares for these and other types of transportation that take you between
* the airport or station and your hotel, and
* the hotel and the work location of your customers or clients, your business meeting place, or your temporary work location.
Baggage and Shipping Expenses
You can deduct the cost of sending baggage and sample or display material between your regular and temporary work locations.
Car Expenses
You can deduct the cost of operating and maintaining your car when traveling away from home on business. You can deduct actual expenses or the standard mileage rate, as well as business-related tolls and parking. If you rent a car while away from home on business, you can deduct only the business-use portion of the expenses.
Lodging and Meals
You can deduct your lodging and meals if your business trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties. Meals include amounts spent for food, beverages, taxes, and related tips. Additional rules and limits may apply.
Cleaning Clothes
You can deduct the dry cleaning and laundry expenses you incur while away on business.
Telephone
All business calls while on your business trip are deductible. This includes business communication by fax machine or other communication devices.
Tips
You may deduct the tips you pay for any expense listed above.
Other Expenses
You can deduct other similar ordinary and necessary expenses related to your business travel. These expenses might include transportation to or from a business meal, public stenographer's fees, computer rental fees, or Internet access fees.
If you have any questions about business travel this summer, just give us a call or send us an email.
A Family Mission Statement Can Help Any Family Manage Assets, Philanthropy and Direction
A family doesn’t need a surname like Vanderbilt to benefit from a family mission statement. A mission statement is a collaborative document created by one or more generations of family so standards and goals can be set for the handling of all family assets, including businesses and philanthropy in particular.
While mission statements aren’t legal documents – in fact, many are done both in written form and on videotape as a companion to legal wills and directives -- their purpose is to make a record of the family’s values, goals and aspirations and how those sentiments should drive future decisions about family wealth management, business succession plans and charitable pursuits. Multi-national companies have mission statements. Non-profit corporations have mission statements. A mission statement for your family, helps identify and clarify specific values and goals, facilitates group decisions, instills confidence and encourages unity.
It should also identify family leadership who will work with other relatives in implementing those goals.
While the end product should produce a document built from discussion, argument and consensus, it’s not so much about the piece of paper as the process. Many families start the process as a way to build consensus about long-term financial, business, estate and philanthropic goals, but the conversation can take twists and turns that don’t directly involve the family money. In this process, a family can identify the strengths, weaknesses and unearthed priorities of all family members and might reveal leadership few had expected.
Trained financial advisors including financial planners, tax experts and estate attorneys, can help explain the process and set an agenda for families to follow in creating the mission statement. While some extended families may elect to bring in a facilitator to guide their process, there are generally four components to a family mission statement – estate issues, philanthropy, business planning and family dynamics in general.
It also helps to start with some questions that can guide the discussion. Many experts start with questions that first get family members talking about their relationships and how their dynamics work, and then move into business and money matters.
• What’s most important about our family?
• What do you think our goals should be?
• When do you feel most connected to the rest of us?
• How should we relate to one another?
• What are our strengths as a family?
• Where do you think we’ll be as individuals in 5, 10 and 15 years?
• In order, what are the five things you value most in life?
• How should we behave toward each other?
• How should we take care of relatives who are or become sick or disabled?
• How should we resolve our disputes?
• How important is the family business to you?
• What should we be doing differently with our family money as well as our assets inside the business?
• What professionals or structures should we bring in to help us manage our wealth?
• What’s the best way for us to be building our wealth?
• What do you think the role of our family should be in helping the community?
• What should we be doing individually and as a family with regard to philanthropy?
Structurally, the written mission statement can be whatever you agree it should be – most experts say it should be no more than a paragraph long, but that’s a guideline, not a rule. It is also very important to focus on the positive, meaning what you want to accomplish and achieve as a family, as opposed to want you want to avoid. And it needn’t be set in stone – a family should have a meeting every year or two to revise or approve its mission. The family mission statement helps a family establish its identity and the variety of voices within, and those voices may be subject to change over time. The family mission statement is a living, breathing document that can evolve over time. In today’s fast paced world, it is easy to get caught up in the here and now, a family mission statement can help you stay true to your family’s values. As a result, families may not feel the pressure to keep up with the Joneses because their mission statement helps achieve balance. It is also very important to focus on the positive, meaning what we want to accomplish and achieve as a family, as opposed to want we want to avoid.
The right mission statement can help reset goals and diffuse tensions later. It can also be used to moderate discussions that inevitably happen after major changes within the family – death, divorce or happily, an increase in the number of heirs and participants.
As for the age of the participants, it can start in very basic form with younger children and the process can mature as they age. It’s actually a good idea to bring young members into a customized version of the process for youngsters so they can comfortably adjust to working as adults with the older members of the family.
For additional resources on how to create a family mission statement, please consider utilizing any of these websites
http://www.nightingale.com/mission_select.aspx?from=homepage&element=missiontitle
http://www.ehow.com/how_2043790_write-family-mission-statement.html
http://www.franklincovey.com/msb/
June 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Jim Oliver, a local member of FPA.
This newsletter is intended to provide generalized information that is appropriate in certain situations. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer. The contents of this newsletter should not be acted upon without specific professional guidance. Please call us if you have questions.
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