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.
Many people fail to plan when it comes to taxes. You can save significant amounts of money regarding your tax liability if you are willing to be plan. Below you will find some proactive tax planning strategies:
3. Fund your available retirement plans as much as possible. Don’t just contribute what the company gives you as a match!
4. Document the non-cash charitable contributions you make to organizations, such as Goodwill and Salvation Army. You give more than you realize.
5. Keep track of miles for business, unreimbursed employee expenses, charity and medical.
6. Use your investment losses in your non-retirement accounts to offset gains.
7. Be mindful of potential state tax deductions for contributions to 529 college savings plans.
8. Consider Donor Advised Funds for charitable purposes.
There are many other potential tax planning strategies so I encourage you to speak to your tax professional for ideas and suggestions. Tax preparation is nothing other than “documenting history.” Tax planning is where the real money is saved. I encourage you to take some time before the end of the year to see how you can proactively plan to reduce your 2010 tax liability.
I get asked a lot of times what is a “fee-only” advisor and why should I work with one? Let me answer these frequent questions. First, a fee-only financial 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 and 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, however, I do some minimal pay per hour projects.
For information sake, a “fee-based” advisor receives compensation from both charging a fee for completing a financial plan and also selling you financial products that come about as a result of the planning recommendations in the plan. I call these folks “double dippers.” Many times the financial plan is offered at severe discount. Their real profit comes from selling you the products they recommend. They beleive if they charge you a fee for their advice you are more likely to implement their advice. Some “fee-based” planners criticize “fee-only” advisors because they say “fee-only” advisors offer planning without implementation.
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” folks more than “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 that each of these advisors have a place in the financial world, however, the main thing I ask from each one of them is to disclose to the client how they are going to get paid and allow the client to make the decision.
The #1 reason why you should work with a fee-only advisor is they can give you “objective, unbiased” financial advice free of the potential conflict of product sales. Yes, a fee-only advisor is still selling a product to you. The product he is selling is an education and trustworthy advice.
When it comes to you and your money follow this common rule:
“Know how your advisor gets paid and you will likely find out the quality of his advice!”
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!”
One of the greatest risks that I see in a lot of people’s financial portfolios is that they do not have enough cash. My business serves a wide range of individuals and families and I get to review their financial life from an objective perspective. I have found some couples, who even after the market downturn in the fall of 2008, still have not learned the value of having “ready cash” and “emergency cash.” I think some people believe that an “emergency” will not happen to them so why should they keep so much in cash. My job as a financial planner is to recommend to them what I believe is in their best interest.
I am not against investing and taking risk. However, I am against investing and taking risk before you are ready. I do not care how young you are; if you do not have proper cash set aside in the event of an emergency you should not be investing in the stock market.
In my recommendations to clients, I follow a few basic principles that I learned from Bert Whitehead, the founder of the Alliance of Cambridge Advisors. First, if you are a W-2 employee, you should keep a minimum of 10% of your income in a interest-bearing savings account. I call this the “ready cash” account. If you are self-employed or retired you will want to keep a larger percentage of your income in “ready cash.” Next, I recommend you keep 2 times your “ready cash” inside of your 401k or Traditional IRA* invested inside of a money market or government-backed fund. However, if 20% of your mortgage balance is higher then 2 times your “ready cash” then you will want to set aside that amount instead. I know this may seem like a lot of cash but the best feeling your financial plan can offer you is security and if you know you have proper amounts of cash in your portfolio then you have the freedom to take appropriate risk in other areas of your investment portfolio.
*I can hear it already. You might be asking why I recommend to keep emergency cash inside of a 401k or Traditional IRA. Well, let’s just save the answer to that question for a later blog entry.
“Control the Things You Can” was written by Tedd Oyler, a member of the Alliance of Cambridge Advisors who practices in Saugatuck, Michigan. This article was originally published as the second part of a series on how to do a financial check-up.
The lament of the powerless goes something like this: “It doesn’t matter how hard I work–the bills just keep piling up; the stock market and the cost of living are killing me; the politicians are ruining everything.” You may have had these, or similar, thoughts before. This is sad, for it is unnecessary to feel like you have no control over your financial future.
Our information culture offers a range of financial data and “advice,” ostensibly to help you take control of your financial life. Perhaps you listen to daily (or even hourly) market reports.
Perhaps you are concerned that the Fed is changing interest rates.
Perhaps you care about the pundits’ predictions as to what the economy will do over the next quarter, or year, as if what they think matters. Perhaps you even read books on investing, and there are certainly enough of those. If we take seriously the notion that we can do something about our financial health, and if we acknowledge that money is but a tool that we can learn to master, then we are ready to look at what things we CAN control in our financial lives.
This post was written by Virginia Nolen, a homeschooling mother, wife and occasional blogger.
While so many of us adults are struggling to learn to manage money and finance our lives, we often forget to make sure our children are receiving a proper financial education. If we want our kids to avoid the same pitfalls and traps we’ve experienced, we have to make sure we’re giving them the tools they need to succeed. Fortunately, we can learn alongside them and anything that leads to dinner conversation rising above the level of “Are we raising a cow, dear? Do you think our daughter could chew with her mouth closed tonight?” is a positive step in my book!
The first consideration is the age of the children in question. It’s never too late (or too early) to start, but the sooner the better. Kevin recommends the book Why Smart People Do Stupid Things With Money by Bert Whitehead for his clients, and there’s an excellent section within the Financial Life Cycle chapter dealing specifically with youth. Bert Whitehead lays out a chart separating childhood into three stages: early childhood, middle childhood and the teen years. I won’t go into futher detail (read the book!) but I want to elaborate on his ideas. I think about those years somewhat more concretely (having children in the early childhood stage myself). In addition to his very good suggestions for topics to be covered at those ages, I add the following general concepts for each age group: in early childhood, the focus should be on the definition of money and it’s mathematical properties. In middle childhood, the focus should be on the function of money and the variety of accumulatory functions it has. In the teen years a focus on the consumer value of money (I’d like them to have a good idea of how much those fancy jeans cost) as well as the far more important ability of assigning a value to consumer products. That teen year focus sounds redundant, but I assure you it is not. The grocery store says that apples are worth $1.99 a pound while out of season, $1.25 a pound while in season but am I really willing to pay that much for apples in the first place? Would my money be better spent buying bananas at $0.40 a pound so that I have money to buy yogurt with? I’m starting to get hungry talking of food and about to go on a rant about the cost of fresh produce so let’s move on, shall we?
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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