If you are looking at retiring soon, do you have the answers to the questions to adequately prepare for this time in your life? I have listed below and also included in the video typical questions I help clients answer. If you have these questions, you may want to consider seeking out a financial planning professional.
Will I outlive my retirement savings?
What will I spend my time in retirement doing?
Will social security be available to me?
Should my annuity really be inside of an IRA account?
How much money do I really need to retire?
I want to retire early. How much should I be saving now?
I am a teacher. What pension payout option should I select?
I find three of the most common “do-it-yourself” tax preparation mistakes include capital gains, business asset depreciation and rental home cost basis.
Many people do not know the difference between short-term (1 year or less) and long-term (1 year and 1 day+) capital gains tax treatment. I have met individuals who had to pay more in tax then necessary because they sold their asset within a day or two of it becoming a long-term asset. Knowing the difference between short-term and long-term capital gains can save you up to 20% or more on your federal return. If you receive an inherited asset, it is deemed to be a long-term capital gain and it receives a step-up in basis. This means your basis is what it was worth on the day the grantor died. If you have capital gains on your return and/ or your received an inherited asset, I strongly encourage you to seek out a professional and competent tax professional.
Moreover, another area worth significant tax savings on your return is calculating and planning your business asset deprecation correctly. I have had to amend many returns to correct their depreciation schedules. It is important you keep your purchase documentation for business assets and allow your tax professional to determine the best course of action in preparing your depreciation schedules. Many times, if I have a start-up business, it is more advantageous to depreciate business assets rather than taking a Section 179 expense deduction. If your business is showing a loss even before you have calculated depreciation, it is probably not in your best interest to expense the asset.
Finally, cost basis tracking on rental properties is another area where I see common mistakes. This is especially evident with converted personal to rental property. If you convert your home from a personal residence to a rental, your basis for depreciation is either the FMV (Fair Market Value) or adjusted basis at the time the property was converted. The adjusted basis is the original purchase price of the home in addition to many improvements and purchasing expenses. The basis for your rental property is the lower of these numbers (current FMV or adjusted cost basis).
Unless you have a very simple tax return, I strongly encourage you to seek out the advice of a competent professional. Tax preparation work is very tricky and can cost you in the long run if it is not done correctly. If you have capital gains, business depreciation or rental property on your return, I would consult with either a CPA or Enrolled Agent before filing your own return. The value of a good professional should far outweigh any fee they may charge.
I am frequently asked: what is a “fee-only advisor” and why should I work with one? First, a fee-only advisor’s compensation comes directly from the client. The advisor does not receive any commissions or referral fees from selling financial products (such as annuities, insurance or investments). A fee-only advisor may receive compensation from assets under management, retainer fees or an hourly rate. I focus the majority of my business on retainer fees.
In contrast, a “fee-based” advisor receives compensation from both charging a fee for completing a financial plan and from commissions on the products recommended as part of the “implementation strategy.” Many times the financial plan is offered at severe discount. Their real profit comes from selling you the products they recommend. Their belief is that by charging you a fee for their “objective” advice you are more likely to “implement” the strategies they recommend.
A commission-only advisor makes his compensation strictly from selling you financial products that have a “load” or commission attached to them. In my humble opinion, I tend to trust “commission-only” advisors more then “fee-based” advisors because you know they are only getting paid from what you buy from them and they do not have any ulterior motive in offering you a “plan.”
I personally believe each of these advisors has a place in the financial service industry. However, the main thing I ask from each one of them is to disclose to the client how they are going to get paid. The main reason why you should work with a fee-only advisor is they can give you objective, unbiased financial advice free from the potential conflict of interest inherent in product sales. Yes, the fee-only advisor is still selling to you, although the “product” he is selling is an education and trustworthy advice.
When it comes to your money follow this common sense rule: “When you know how your advisor is getting paid you will know who he is really working for!”
Kevin Jacobs, doing business as Step By Step Financial, LLC, is registered with the State of Oklahoma as a Registered Investment Advisor.
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