October 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.
 
October Tips -
  • Now is the time to think about tax projections. After December, tax planning options become more limited. If you want to look at potential tax planning strategies contact Jim Oliver & Associates to get a 2010 tax projection.
  • Bexar County Appraisal District (BCAD) has been sending out notices asking homeowners to recertify the owners and current exemptions. This should be returned by November 1st, without it, BCAD will revoke previously granted exemptions like Homestead, Over-65, and/or Disabled Person's Exemption.


Are You Enjoying a Hobby - or Running a Business? Why It Matters

Millions of Americans use hobbies to relax and take their mind off work. But hobbies that turn a profit - such as sewing, woodworking, fishing, gardening, stamp and coin collecting - may actually be considered businesses by the IRS.

So, when does a hobby become a business and how does that change the tax implications? Definition of a Hobby vs a Business.

The IRS defines a hobby as an activity that is not pursued for profit. A business, on the other hand, is an activity carried on with the reasonable expectation of earning a profit.

The tax considerations are different for each activity - so taxpayers should determine whether an activity is engaged in for profit as a business, or is engaged in as a hobby.

Of course, you must report and pay tax on income from almost all sources, including hobbies. But when it comes to expenses and losses, the two activities differ in their tax implications.

Note: Internal Revenue Code Section 183 (Activities Not Engaged in for Profit) limits deductions that can be claimed when an activity is not engaged in for profit. IRC 183 is sometimes referred to as the "hobby loss rule." Is Your Hobby Actually a Business?

If you're not sure whether you're running a business or simply enjoying a hobby, here are some of the factors you should consider:
  • Does the time and effort put into the activity indicate an intention to make a profit?
  • Do you depend on income from the activity?
  • If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
  • Have you changed methods of operation to improve profitability?
  • Do you have the knowledge needed to carry on the activity as a successful business?
  • Have you made a profit in similar activities in the past?
  • Does the activity make a profit in some years?
  • Do you expect to make a profit in the future from the appreciation of assets used in the activity?
An activity is presumed to be for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training, or racing horses).

The IRS says that it looks at all facts when determining whether a hobby is for pleasure or business. The profit test is the primary test. If the activity earned income in three out of the last five years, it is for profit. If the activity does not meet the profit test, the IRS will take an individualized look at the facts of your activity using the list of questions above to determine whether it's a business or a hobby. (It should be noted that this list is not all-inclusive.)

Business Activity: If the activity is determined to be a business, you can deduct ordinary and necessary expenses for the operation of the business on a Schedule C or C-EZ on your Form 1040 without considerations for percentage limitations. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is appropriate for your business.

Hobby: If an activity is a hobby, not for profit, losses from that activity may not be used to offset other income. You can only deduct expenses up to the amount of income earned from the hobby. These expenses, with other miscellaneous expenses, are itemized on Schedule A and must also meet the 2 percent limitation of your adjusted gross income in order to be deducted. What Are Allowable Hobby Deductions?

If your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity.

Deductions for hobby activities are claimed as itemized deductions on Schedule A, Form 1040. These deductions must be taken in the following order and only to the extent stated in each of three categories:
  • Deductions that a taxpayer may claim for certain personal expenses, such as home mortgage interest and taxes, may be taken in full.
  • Deductions that don't result in an adjustment to the basis of property, such as advertising, insurance premiums, and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.
  • Deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.
If your hobby is regularly generating income, it could make tax sense for you to consider whether it's a business or not. You may be able to save on taxes.

If you're not sure whether your hobby is actually a business, give us a call and we'll help you figure it out.


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Ten Things to Know – and Ask -- About Long-Term Care Insurance

For Americans over the age of 50, the time to consider long-term care coverage is now. Whether to buy it is a separate question that’s as individual as you are.

Long-term care insurance (LTC) is generally recommended to anyone who has suitable income to pay premiums, significant assets (i.e. a home and assets valued at $70-100K minimum to multi-millions) to protect in the event of a chronic illness, a desire to maintain independence and personal choices of care in their senior years, as well as the peace of mind that might come from owning such a policy that fits their needs.

A 2010 Genworth Financial study reports that the cost of a private room in a nursing home is a national average of $206 a day, placing the national average expenditure at $75,190.

Those cost-of-care numbers tend to grow annually at a rate ahead of inflation. In 2006, Genworth put that cost at $194.28 a day, equal to $70,912.

It makes sense to discuss your situation with a qualified financial planner before you start wading through coverage options, of which there are many. It also makes sense to check with a tax expert before you buy because both the federal government and possibly your state might have particular tax incentives associated with owning a LTC insurance policy.

In general, here are 10 important things you should know and ask about this coverage before you buy.

  1. The government doesn’t pay for long-term care: One of the greatest myths about Medicare is that it will pay for both nursing home care and extensive care options in the home. The facts are that Medicare requires that most care be received in a skilled nursing facility and that it pays only for the first 100 days of the illness as long as the patient is improving and must include a minimum 3-day hospitalization. In short, an extended care situation means you might use up your entire retirement nest egg, including any money you plan to leave your heirs.
  2. Money is only one resource you need to consider: The average nursing home stay is somewhere between two to three years. So taking the above dollar figures into consideration, the out-of-pocket average cost of  long-term care may go north of $200,000. In addition, at-home caregiving puts an enormous strain on family members who have their own obligations and life goals.   So, you may be unable to count on your children or younger relatives to assist. nly one resource you need to consider:
  3. It’s not cheap, but pay smart: Unsubsidized premiums for LTC insurance may run into the thousands annually.  Rate increases are always an option for an insurer if a state allows it, so check in with your state insurance commissioner’s office on those questions. Also, some insurers offer "shared benefits" policies for couples, providing the pool of money to either party. 
  4. How’s your health? People in good health at age 55 – the typical age for purchase – usually get the most affordable premiums. Your premium is based on your current health status and your age at the time you apply.  Personal health habits and lifestyle such as obesity, tobacco use, and alcohol abuse might be serious considerations in underwriting your application. Keep in mind that your partner’s health matters, too. Caring for a sick spouse or partner can drain a family’s finances, compromise your caregiver partner’s health, and leave you drained of resources when it’s your turn. That’s why LTC insurance is also a valuable safeguard for surviving spouses and partners.  
  5. LTC isn’t just for old people: It’s important to know that people of all ages may need long-term care assistance.  According to the Family Caregiver Alliance, 63 percent of Americans needing long-term care are age 65 and older, which means that a sizable eligible population of younger people may need long term care due to illness, accident or congenital issues.
  6. Women might need LTC coverage more than men: Because women on average live longer than men – and because they generally earn less than their male counterparts -- women should take a heightened interest in providing for their long-term care risk.  A woman’s spouse may exhaust the couple’s assets receiving care in his final years leaving the surviving widow with a severely compromised lifestyle. Long-term care insurance not only provides for the surviving or single woman’s peace of mind during her final third of life, but also protects assets.  
  7. What LTC insurance covers: A basic LTC insurance policy pays for assistance with primary activities of daily living including eating, dressing, bathing, toileting, continence, and transferring (bed to chair, etc.).  Each policy lists the types of services that are covered under nursing home and related facility care and under home health care.  Homemaker services are generally covered with other services as listed in the policy.  
  8. A quicker startup of benefits will cost you: A qualified LTC benefit is not paid  until the covered individual is unable to perform two of the 6 basic activities  of daily living expected to last for a period, of at least 90 days, or if that person requires substantial supervision related to a cognitive impairment.  Some policies are more restrictive than others paying a benefit for simple “stand-by” assistance while others require “hands on” caregiving.  More affordable policies include a higher deductible or elimination period (the period when you pay for care out-of-pocket before the insurer pays a benefit).  Be certain that the coverage provided on a daily or monthly basis is adequate to meet the costs of care in your area.
  9. If you don’t want to leave your home, make sure home care and nursing home coverage options are provided at the same levels: The best-designed LTC policies pay the same or greater amount of benefit whether care is received in a long-term care facility, an assisted living facility, an adult day care center, or in the home.  Some policies offer a smaller benefit for care received at home versus care received in a skilled nursing facility, but it’s a better idea to maximize the home health care benefit since most people would rather remain in their home while receiving care. 
  10. Evaluate companies carefully: Experience counts. Check the A.M. Best ratings of the various companies  you are considering, but don’t stop with financial ratings.  Before you settle on your policy,  read all the up-to-date information you can about product offerings from various LTC insurers that have a track record. Read about how LTC costs are increasing and what insurers are changing their policies to deal with this risk. Finally, keep an eye peeled for any controversy about any company’s repeated efforts to reject justified claims or any other excessive complaints from policy holders The best LTC insurer is the one who is there to pay your claim.
October 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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Renovating Smart in 2010: Looking for Tax Breaks, Anticipating What Will Bring Value in the Future

Though the housing market has yet to stabilize in many communities, homeowners can’t ignore property maintenance and other critical spending that will add to their home value in the future. Yet for most of us, the days of spending multiple thousands of dollars on a kitchen, bath or room addition expecting our market value will grow exponentially is much like the U.S. housing boom – over.

Simply put, as Americans have been forced to get more realistic about using their homes as piggy banks, it’s time for similar realism about what improvements and renovations will pay off in a housing market with years of inventory to sell.  Here are some steps to consider when improving your property in today’s market.

Before you borrow or spend, get some advice on your overall financial picture: During the boom years of the housing market, people treated renovation as a financial fait accompli: Put in a $40,000 kitchen and add $60,000 to your selling price.  Today, putting more money into your house requires a significant reality check. A financial planner can look at your overall savings and tax picture and give you an idea whether the dream kitchen you want is a worthwhile investment or if it’s time to downsize the job to a new sink.

Check current values on the payoff your chosen renovation will have: Remodeling magazine’s annual Cost vs. Value report breaks down average cost and market return for projects large and small based on your region of the country. Their website is www.remodeling.hw.net.  The current 2009-2010 report reports that upscale projects like a bathroom addition returns only about 60 percent of its cost in the current market; adding an attic bedroom would return 83 percent of the cost. None of the projects in Remodeling’s annual survey currently break even.

Consult Uncle Sam: The American Recovery and Reinvestment Act is still allowing taxpayers certain deductions and credits for energy-smart renovations to their property. For example, the Residential Energy Property Credit applies to taxpayers who install insulations, energy-efficient exterior windows and energy-saving heating and air conditioning with a maximum credit limit of $1,500 for improvements put in place through the end of 2010. It’s smart to consult your tax professional before going ahead on any of these moves in case Washington extends, limits or possibly increases these breaks for homeowners.

Think about how long you’ll be in the home: If you want to get your money out of a renovation, keep in mind you’ll probably be waiting awhile. In August, the National Association of Realtors reported a plunge in home sales after the expiration of the federal home buyer tax credit. In July, existing-home sales were down 27 percent from June and a full 25 percent below the year-ago month. Most home sales experts are not predicting full stabilization for the U.S. housing in the market for at least six months.

Beware the bump in property taxes: The great thing about a more valuable home is the potentially higher value when you sell. The bad thing is a visit from the county assessor – more valuable property tends to lead to higher tax assessments. Make sure you cannot only afford the cost of renovation, but what you’ll need to pay in higher taxes if your home is reassessed. Also, keep in mind that the fall in home values hasn’t led to lower taxes in many communities.

Don’t forget to deduct applicable sales tax: If sales tax was imposed on a major renovation or if your state or locality imposes a general sales tax on the sale of a home or the cost of a substantial addition or major renovation, you might be able to deduct it.  This alternative is particularly valuable in low-tax states, and the sales tax paid on the purchase of some large items including the purchase of a home or major addition can be added to the table amounts. Discuss this with your tax professional.

Always check local valuations: A reliable and experienced local real estate broker knows what the market will bear. Talk to them about any anecdotal evidence they have about what renovations might be most sensible as your home market improves. You’ll also get a tutorial on what current buyers are willing to pay for based on the current attributes of your home.

October 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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Living Trusts 101

A trust, like a corporation, is an entity that exists only on paper but is legally capable of owning property. A flesh and blood person, however, must actually be in charge of the property; that person is called the trustee. You can be the trustee of your own living trust, keeping full control over all property legally owned by the trust.

Note: Property held in trust is actually "owned" by the trustees of the trust, subject to the rights of the beneficiaries. The trust itself doesn't actually own anything.

There are many kinds of trusts. A living trust (also called an inter vivos trust) is simply a trust you create while you're alive, rather than one that is created at your death under the terms of your will.

All living trusts are designed to avoid probate. Some also help you save on death taxes, and others let you set up long-term property management.

Do I need a living trust? Property you transfer into a living trust before your death doesn't go through probate. The successor trustee, the person you appointed to handle the trust after your death, simply transfers ownership to the beneficiaries you named in the trust.

In many cases, the whole process takes only a few weeks and there are no lawyer or court fees to pay. When the property has all been transferred to the beneficiaries, the living trust ceases to exist.

Is it expensive to create a living trust? The expense of a living trust comes upfront. Many lawyers would charge relatively little for drafting your will, in hopes of getting your estate later as a client. But they may charge more for a living trust.

Some people choose to use a book or software program to create a Declaration of Trust (the document that creates a trust). That's a fine choice, but keep in mind that when doing it on your own, there's always the danger of problems you don't see - problems a lawyer could help you avoid if consulted.

Is a trust document ever made public, like a will? A will becomes a matter of public record when it is submitted to a probate court, as do all the other documents associated with probate - inventories of the deceased person's assets and debts, for example. The terms of a living trust, however, need not be made public.

Does a trust protect property from creditors? Holding assets in a revocable trust does not shelter those assets from creditors. A creditor who wins a lawsuit against you can go after the trust property just as if you still owned it in your own name.

After your death, however, property in a living trust can be quickly and quietly distributed to the beneficiaries (unlike property that must go through probate). That complicates matters for creditors; by the time they find out about your death, your property may already be dispersed, and the creditors have no way of knowing exactly what you owned (except for real estate, which is always a matter of public record). It may not be worth the creditor's time and effort to try to track down the property and demand that the new owners use it to pay your debts.

On the other hand, probate can offer a kind of protection from creditors. During probate, known creditors must be notified of the death and given a chance to file claims. If they miss the deadline to file, they're out of luck forever.

Do I need a trust if I'm young and healthy? Probably not. At this stage in your life, your main estate planning goals are probably making sure that in the unlikely event of your early death, your property is distributed how you want it to be and, if you have young children, that they are cared for. You don't need a trust to accomplish those ends; writing a will, and perhaps buying some life insurance, would be simpler.

Can a living trust save taxes? A simple probate-avoidance living trust has no effect on either income or estate taxes. More complicated living trusts, however, can greatly reduce your federal estate tax bill if you expect your estate to owe estate tax at your death.

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