November 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.
 
How the Bush Tax Cuts Affect Tax-Saving Strategies

Each November, we like to look at the steps you can take to reduce your tax bill. This year, it's a little ambiguous, because the Bush tax cuts and credits are set to expire at the end of 2010. If they do expire, a lot of folks will experience a significant adjustment to their tax situation.

The "Bush tax cuts" refers to legislation enacted in 2001 and 2003. The cuts lowered tax rates on income, dividends, and capital gains; eliminated the estate tax; lowered burdens on married couples, parents, and the working poor; and increased tax credits for education and retirement savings.

Both Republicans and Democrats favor an extension of the tax cuts for the middle class. Where they differ is whether to extend the cuts for Americans in the top 2% of taxpayers.

With this in mind, we're looking at year-end measures separately for these two groups: the middle class - those making less than $200,000 for singles / $250,000 for married filers - and the higher income taxpayers - those making more than $200,000 / $250,000.

But first, let's take a quick look at what's at stake. If All the Bush Tax Cuts Expire...

Among other things, if the Bush tax cuts were allowed to expire, the following would take place:
  1. Tax brackets would change, from 10%, 15%, 25%, 28%, 33%, and 35% to 15%, 28%, 31%, 36%, and 39.6%.
  2. Long-term capital gain tax rates would rise from 15% to a maximum of 20%.
  3. The child tax credit would be lowered.
  4. The alternative minimum tax would cease to be indexed for inflation.
  5. The marriage penalty would be reinstated.
Middle-Income Taxpayers

We don't expect Congress to allow the tax cuts to expire for this group. That means middle-income taxpayers can take the same measures this year they have in previous years to reduce their tax burden for 2010.

We recommend the following steps to save on taxes this year: defer income, accelerate your deductions, and plan out your capital gains.

Defer Income
  • If you are planning to sell an investment on which you have a gain, it may be best to wait until the new year. This will defer payment of the taxes for another year (subject to estimated tax requirements).
  • If you are due a bonus at year-end, you may be able to defer receipt of these funds until January. Again, this can defer the payment of taxes (other than the portion withheld) for another year. (Note that deferral of tax generally won't work where the bonus is contractually due in 2010.)
  • If your company grants stock options, it may be wise to wait until next year to exercise the option or sell stock acquired by the exercise of an option. (Exercise of the option is often a taxable event; sale of the stock is almost always a taxable event.)
  • If you're self-employed, and you can afford the delay in cash inflow, defer sending invoices to clients until the end of December.
Accelerate Deductions
  • Pay a state estimated tax installment in December instead of at the January due date. Just make sure the payment is based on a reasonable estimate of your state tax.
  • Pay your entire property tax bill, including installments due in 2011, by year-end. (This is not applicable to mortgage escrow accounts.)
  • Try to bunch threshold expenses, such as medical expenses and miscellaneous itemized deductions. (Threshold expenses are deductible only to the extent they exceed a certain percentage of adjusted gross income.) By bunching these expenses into one year, rather than spreading them out over two years, you have a better chance of exceeding the thresholds, thereby maximizing your deduction. For example, you might pay medical bills and dues and subscriptions in whichever year they would do you the most tax good.

Caution: In most cases, credit card charges are considered paid in the year of the charge regardless of when you pay on the card. But this does not apply to store revolving credit cards. If you charge expenses on a Wal-Mart store credit card, for example, the deduction cannot be claimed until the bill is paid.

Caution: If you fall under the AMT (Alternative Minimum Tax), you need to consider its impact on these tactics, especially any State or local income taxes. With Congress yet to patch the AMT for 2010, an additional million taxpayers will be affected.

Some tax benefits are phased out if you have more than a certain level of adjusted gross income. In these cases, a strategy of deferring income and accelerating deductions may also allow you to claim larger deductions, credits, and other tax breaks for 2010.

Tip: Deferring income into 2011 is an especially good idea for taxpayers who anticipate being in a lower tax bracket next year, either because of much-reduced income or much-increased deductible expenses.

Minimize Taxes on Investments

Judiciously match your capital gains and losses to reduce your tax burden for 2010. Where appropriate, try to avoid short-term gains, which are usually taxed at a much higher tax rate (up to 35%) than long-term gains (15%). You might consider, where feasible, trying to reduce all capital gains and generate short-term capital losses of up to $3,000.

Tip: If you have a large capital gain this year, consider selling an investment on which you have an accumulated loss. Capital losses are deductible up to the amount of your capital gains plus $3,000.

High-Income Taxpayers

Depending on what Congress decides in this legislative session, individuals making more than $200,000 filing singly or $250,000 filing married in 2010 will owe more tax than they have since the 2001 Bush tax cuts were passed. What does this mean for end-of-year tax planning?

Don't Defer Income

If tax cuts for the richest Americans are allowed to expire at the end of the year, then many in the current 33% tax bracket will find themselves in the 36% bracket, and those currently taxed at the 36% rate will be taxed at 39.6%.

For these taxpayers, it makes sense to bump up 2010 income, to take advantage of the current lower rates. Grab that year-end bonus; sell stock acquired by the exercise of a company stock option; bill clients for as much work as possible if you're self-employed.

Take Capital Gains Now

Capital gains and qualified dividends for those in the higher tax brackets would be affected if the tax cuts are allowed to expire for the richest Americans. The capital gains rate would revert to a maximum of 20% for higher income filers (from 15% currently), and qualified dividends would resume being taxed at the regular tax rate of the filer, or as high as 39.6%.

This indicates that now is a good time to take any capital gains or qualified dividends. Selling assets now as opposed to 2011 could have positive tax consequences for higher income filers.

Let Us Help You

As you can see, this is a complicated year for tax planning. Please don't hesitate to come in and meet with us about your situation. There's still a lot we can do to minimize your tax burden for 2010. We can run multi-year projections to allow you better perspective in making tax planning decisions.


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Financial Issues for Long-Distance Caregivers

As older friends and relatives increasingly need our help, it’s not always possible for us to move back to personally oversee their care. The same goes for younger loved ones who face sudden illness or injury that robs them of their ability to care for themselves.

How can we best be in charge when we can’t be onsite?

It takes a plan, one best made well ahead of the time when there’s a real need. In reality, caregiving issues should be part of any person’s long-term financial plan if there’s even the remotest chance that a spouse, partner, parent, child aunt or uncle, sibling or friend may end up needing our care.

However, statistics suggest that possibility may not be all that remote, particularly as Americans live longer. In a 2009 report, The National Alliance for Caregivers, in collaboration with AARP and the MetLife Foundation, reported that currently 29 percent of the U.S. adult population, or 65.7 million people, are caregivers, including 31 percent of all households. Those numbers are expected to grow due largely to the aging Baby Boomer demographic.

Where to start? A good first stop is a qualified financial planner who can look at your overall financial picture and the financial picture for your loved one. Then you can determine how much help you can offer from a money perspective, either in direct care, travel expenses or expenses for third parties offering direct assistance onsite.   It’s important to get one-to-one advice on these matters because a caregiving plan needs to fit you and the person you’re trying to help.   Here are some questions that can help you focus your thinking:  

Do you know your loved one’s care preferences? Before you even get to money issues, understand what your loved one wants. The best-case scenario is to have a conversation with that person long before they need care, but even in a transitional situation, addressing their care preferences and overall dignity is paramount. You need to make sure your loved one understands your situation too, particularly if your work, your family situation or other issues prevent you from caring for them personally. Before making a plan, understand each other. A family meeting might be a good idea so everyone understands these needs and wants.

Are their legal documents in place? Does this parent, relative or friend have a will and necessary health directives in place? Health directives name a single individual to manage all key health decisions if a patient cannot make them; a will depending on their assets and lifestyle situation – if they have kids to raise or a business to run, for example – check to see what detailed legal instructions they have in place to manage their finances or run their business if they are incapacitated. And if those plans have not been made, they need to be made immediately with the help of financial planning, tax and estate experts to fit those documents to your loved one’s needs. An individual who is ill or disabled needs to designate people whom they trust to handle health and personal finance decisions. But if they have not planned for the future of their business, that is a third and very detailed step that needs to be addressed in collaboration with other family members as well as key co-workers or executives.

Do you know their financial situation? It’s rarely easy to talk about money even in the closest relationships. But once care preferences are known, then it’s time to discuss the loved one’s own financial preparations because one of the biggest misperceptions about long-term care is that the government provides financial support for nursing or home-based care. (Outside of medical care for those who qualify under Medicare or Medicaid, it doesn’t.) A qualified financial planner can be an important mediator in this very detailed discussion, asking both sides critical questions to illuminate what financial resources are available and which ones might be needed. And keep in mind that the questions go well beyond what’s necessary to provide care – loved ones may need to address omnibus issues like real estate and estate planning but even minute lifestyle issues like making sure monthly bills get paid. Expect a very wide-ranging and detailed conversation that could take weeks, not hours.

Who should handle what? Bigger families and groups can share responsibilities, and that can make the caregiving job easier. But if you are soloing as the financial and health power of attorney, it’s important to devise ways to do remote tasks efficiently and bring in help when necessary so you can supervise effectively from afar:

•        Consider a geriatric care manager: The National Association of Professional Geriatric Care Managers [www.caremanager.org] is an organization of on-the-ground caregivers and caregiving coordinators with skills that include nursing, gerontology, social work and psychology. For caregivers with limited time to address their loved one’s day-to-day issues but who have the resources to pay for help, it might be wise to consult with experts after checking their references and qualifications.

•        Take full advantage of the Internet: Older relatives tend to trust traditional means of paying bills, but automatic bill pay and other online financial tools provide an extraordinary benefit for caregivers or relatives charged with managing someone else’s finances. By gathering all bills that need to be paid and programming in their payment dates, there’s little or no risk that any regular bills will be paid late. Automatic bill payment should be one of the first decisions made if an elderly relative establishes a joint checking account with a caregiver or whoever holds their financial power of attorney. Also, if a relative wants to continue a regular savings or investment plan while they are incapacitated, those payments can be made as well. Most important – once those automatic transactions are set up, all the security codes and passwords must be kept in a safe place for both to access.

•        Set up a home maintenance schedule: If the relative is hoping to return to the home or if it must be sold at a later date to pay bills or to settle the estate, it must be maintained to assure its value at the time it needs to be reoccupied or sold.

•        Develop a paperwork system: the sheer amount of paperwork associated with caring for a sick or disabled person can shake the most organized individual. A trained financial expert can help you set up a system for collecting and sorting all the medical and care-based paperwork that will accumulate during your loved one’s care. This is a particular priority for those who are managing this situation remotely. If the house is unoccupied, it’s also important that there is a way to keep mail secure to avoid identity theft – buy a shredder for all mailed materials that don’t need to be filed. Also ask your loved one for permission to pull their credit reports annually so you can confirm all accounts are current and they haven’t been targeted by identity thieves.

What if I need to move? Never say never – this is the reality of a caregiver’s life. Particularly as loved ones get to the end stage of their lives or suffer emergencies and other setbacks, supervising caregivers need to plan for anything. The need to relocate, even temporarily, should always stay in the back of your mind, and the best time to coordinate with family and employers is always before the need arises.

November 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.


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Small Business Jobs Act - A Look at the Benefits

On September 27, 2010, President Obama signed the Small Business Jobs Act of 2010 into law - a $42 billion bill in tax cuts, increased loans, and other measures. The bill is designed to prop up small businesses so they can create more jobs.

Many of the Act's provisions have already kicked in - which means it's time to learn how they benefit you.

More Loan Money Available

The main focus of the Small Business Jobs Act is to help small businesses get loans. Here are the three major ways the Act makes loan money available to small business owners.

SBA Recovery Loans. The American Recovery and Reinvestment Act of 2009 (the Recovery Act) was last year's attempt by Congress to aid struggling small businesses. The Jobs Act of 2010 extends some of the Recovery money. With the passage of the Jobs Act, the Small Business Administration began funding new Recovery loans within a few days of the president's signature.

7(a) and 504 Loans. These are the two largest SBA loan programs, and under the Jobs Act, they got a huge boost.

The bill increased the maximum 7(a) and 504 loans from $2 million to $5 million, and the maximum 504 manufacturing-related loan from $4 million to $5.5 million.

Increased Capital to Community Banks. The Jobs Act established a $30 billion fund, run by the Treasury Department, that extends ultra-cheap capital to community banks with incentives to lend to small businesses. This means higher loans - with better guarantees - are now available at your local bank.

Tip: Now is an excellent time to explore your borrowing options - whether it's through a national organization like the Small Business Administration or your hometown lending institution.

Don't miss out on the chance to use some of this capital for your business. Give us a call to talk over your needs.

Tax Cuts, Credits, and Breaks

The Small Business Jobs Act includes $12 billion in tax incentives. Take a look at the top six:
  1. The elimination of capital gains tax on certain small business investments if they're held for five years.
  2. Higher limits on the amount of investments small business owners can write off for 2010 and 2011.
  3. The extension of a Recovery Act provision that allows for a 50% bonus depreciation. This means small businesses can deduct capital expenditures on certain investments.
  4. The ability to deduct all of your health insurance payments for you and your family when figuring your self-employment tax.
  5. An increase in the amount entrepreneurs can deduct for start-up expenses for this year.
  6. The ability to offset tax liabilities for five years by carrying back general business credits.
Less Red Tape

Some of the Act's benefits reside in reduced paperwork and clearer regulations, which allow you to take advantage of tax breaks much more easily.

Deduct Your Cell Phone Simply. Previous policies required lots of documentation to deduct charges from an employer-provided cell phone. With onerous and confusing paperwork, you had to prove you used the mobile device for business purposes more than 50% of the time.

The Small Business Jobs Act addresses this headache. The legislation removes cell phones from the Internal Revenue Code's definition of "listed property."

What does this mean for the small business owner? It's now much less complicated to deduct the use of your mobile phone on your taxes.

Tip: Other telecommunications devices have also been removed from "listed property," including Blackberries and PDAs.

Limited Penalties. The bill limits the penalty for failing to report a transaction that the IRS has formally identified as an abusive tax shelter. The penalty is set at 75% of the tax benefit and capped at $200,000 for corporations and $100,000 for individuals.

Questions?

Do you have questions about how to take advantage of the Jobs Act's provisions? Make an appointment to meet with us. We're eager to help you claim the capital you need for your business.


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10 Things You Must Do to Baby-Proof Your Finances

For most prospective parents, financial issues come fairly far down the list of wishes and hopes for their new baby. Health and happiness typically comes first, and by the time the subject turns to money, the discussion often begins and ends at saving for the baby’s education.

That’s where most families go wrong.

We’ll start with the latest frightening cost-of-raising-a-child statistic from the U.S. Department of Agriculture released this past June – based on 2009 figures, the average child will cost $222,360 to raise to the age of 17. Note that number doesn’t include the price of college tuition – the federal government counts only the basics like food, housing, clothing and health and child care.

In reality, proper financial planning for a family involves planning for the whole family, and that includes you, the parents. In reality, parents need to think as much about their retirement and estate planning as they do about sending their kids to college. While this makes the idea of planning more stressful, the good news is that help is easy to find, and best of all, planning early means parents will be able to make use of the best asset of all – time.

Here are 10 things prospective parents can do to baby-proof their finances:

1.     Get money advice now: Even if you have zero debt and money in the bank, give yourself the gift of qualified financial advice, because as a new parent you’re going to be extremely busy and outside help can make a big difference. A qualified financial planner is a good first stop on the road to understanding any strengths and weaknesses you have in your current financial picture so you can build a sound financial future for yourself and the baby. That’s true whether you’re expecting a biological or adopted child.

2.     Make sure your health insurance covers maternity expenses: One of the more problematic issues for individuals and couples having a baby now is making sure your health insurance plan adequately covers maternity benefits. According to Parenting Weekly, the average cost for an uneventful pregnancy can run between $7,000-$10,000 out-of-pocket and complications send the bill much higher. In October, the U.S. House Energy and Commerce Committee published a memorandum noting that “Women who are pregnant, expectant fathers, and families attempting to adopt children are generally unable to obtain health insurance in the individual market.” That’s why whether you are individually insured or insured through an employer it makes sense to check that coverage before you or your spouse or partner plan to start your family.

3.     Start retirement planning now: If you’re consulting a financial expert, it’s critical to get a retirement plan in place, even if it’s only a few dollars a month into your company 401(k) or the start of individual retirement saving on your own. Because retirement planning often takes a back seat to planning for the needs of children, it’s best to start this process early so your retirement funds can compound over time.

4.     Price child care now: According to 2010 figures from the National Association of Child Care Resource & Referral Agencies (NACCRA), the average annual cost of having a four-year-old child in a child care center ranged from $4,050 in Mississippi to over $13,000 in Massachusetts. While there are neighborhood and family options available that can save considerable money, working parents need to know that child care options are a huge drain on a family’s budget.

5.     Learn to budget: A financial planner can help new parents budget for overall household costs, including specific costs for the baby. It will help parents save for retirement as well.

6.     Get your baby a Social Security number: The sooner you can get your child a Social Security number, the sooner you’ll be able to qualify and document tax benefits that will help you defray some of your child-rearing costs.

7.     Check your W-4: Increasing your allowances will boost your take-home pay, but go over this move with your tax expert first.

8.     Get your will and life insurance in place: Estate issues are too complex to cover in detail here, but talk to financial, tax and estate experts about writing a proper will with specific health and financial directives and make sure you get adequate life insurance in place to support your spouse and your child if you die before they’re grown.

9.     Start planning for college: Like retirement, parents need to save for college with a number of savings and investment vehicles, not just one. Get advice from an expert on choices regarding 529 college savings plans and other options to start salting away college savings.

10.   Talk to family members who want to help: If your parents want to help financially with the new baby, there are ways to do this that will help with their tax and estate issues. Specifically, they can also make contributions to a child’s tax-advantaged 529 plan and other educational savings vehicles and they can adopt tax-smart gifting strategies that lower the size of their estates over time. Parents, grandparents or other close relatives should get qualified advice on these matters so they can coordinate their efforts with the parents.

November 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.

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