Common “Do-It-Yourself” Tax Preparation Mistakes

Written by on February 6, 2011 in broken arrow, Enrolled Agent, fee only, financial adviser, Financial Planning, Tax Planning - 1 Comment

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.

“Rapping” Financial Advisor

Written by on June 7, 2010 in Financial Education, Financial Humor - No Comments

http://www.youtube.com/watch?v=C3GtxtWSZxE

Even with the equation of snacks to cash equivalents and the fact that Mr. Robinson eerily resembles my father-in-law, there’s a great message hidden in here:  the markets are resilient, diversify and RELAX.  Oh, and learn how to hunt.

Avoiding the Extremes

Written by on April 18, 2010 in Uncategorized - No Comments

I believe one of my greatest responsibilities is to help my clients avoid extremes.  It seems like there is a lot of “extreme” talk right now.  I hear it everywhere.  Regarding politics, this is either the worst time in American history (if you are a conservative) or this is the beginning of a new era of Enlightenment (if you are liberal).  I hear it with sports as well.  How many people said the last Super Bowl between the Saints and Colts was the best Super Bowl ever?  How many times did you hear reporters ask Coach K if he thought this year’s Duke team was the best ever?  How many people are already comparing LeBron James to the all-time greats of NBA history?  On the other hand, how many people would watch “Makeover:  Home Edition?”

The reason why I say this is to show you how all this “extreme” talk effects people’s view of their finances.  When people believe the investments they own will either go to one extreme or the other, then they will make an irrational decision not based on the facts, but based on fear or foolishness.  It is my job and the job of any Financial Advisor worth the fee you pay him to help you avoid the “extremes” regarding your financial life and financial decisions.  It is okay to be concerned about the future of the economy and to invest more conservatively or to feel a need to invest more aggressively because you think the market will go up.  However, it is not okay to go extreme!  The saying is true:  Do not put all your eggs in one basket.  The basket is your emotions and it is important to know the facts and to make decisions based on facts, not the latest idea conjured up by the talking head on TV or the “guru” you read about in the paper.

If you are looking for financial guidance, I encourage you to seek out a Financial Advisor that can help keep you from making “extreme” decisions about your money.  You do not want a “yes-man” who is only looking out for themselves but rather, you need to look for an advisor that will keep you and your emotions in mind, so you do not make inappropriate long-term financial decisions.

Revisiting Financial Security

Written by on April 5, 2010 in Economics, Financial Education, Investing, Motivational, Security, Tax Planning - No Comments

When I first started this blog, I wrote an entry about defining and achieving financial security.  As I talk to more and more people about their experiences over the last 18 months during what the popular culture has called the “Great Recession,” I am witnessing some common themes of concern:

1.  The stock market is up considerably since its low in March of 2009, but how do we know it won’t “crash” again tomorrow? We don’t know! It used to be common knowledge and belief that you knew you would have some ups and downs in your investments, but in the long run you would achieve profits by investing in market.  From the conversations I have had with many people, it seems like there is this general sense they are waiting for the “next shoe to drop.”  It reminds me of the weeks and months after 9-11 where I was glued to the cable news networks waiting to hear about the next terrorist attack.  I sense an underlying fear in most individuals and business owners.  They are waiting to see how everything works itself out.  The danger of this view is that you become a market timer and try to “guess” what your latest stock holdings and the economy as a whole will do.  The danger is you get so consumed with things you can’t do anything about and fail to make a difference in your life and the lives of those you care about the most.

2.  What will higher taxes do to my future plans? I have been hearing this one especially since the passing of the health reform bill.  There is a general confusion of what is and what is not in the legislation and I think people are skeptical of what may happen to their individual tax situation in the future.  For the clients I work with, I tell them there is one thing for sure:  their taxes will go up!  How much their taxes will go up we do not know yet.  I tell them it is important we continue to plan and make the best tax and financial planning decisions we can at the time with the information available to us.

3.  How do I know I have reached financial security? I hear this quite often.  An individual may also say, “how do I know I will not run out of money?”  These are important questions to address no matter what the economy and the stock market are doing.  Where many people fail in their quest to achieve financial security is they fail to define what financial security is for themselves and instead they allow the “talking-heads” on TV or the magazine covers to define it for them.  Until you define what is most important to you and lay out a plan to achieve it, you will never reach financial security.

So these are some of the concerns people have right now is these difficult times, however, with all the chaos it is important to remember you are in control of your situation more then you believe.  You need to control the things you can, such as how much you save, how much you spend and what you invest in and let everything else take care of itself.

Cash is King!

Written by on January 20, 2010 in Financial Education, Investing, Security - No Comments

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

Written by on January 18, 2010 in Financial Education, Security - No Comments

“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.

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Teaching Kids About Money

Written by on January 14, 2010 in Kids and Money - No Comments

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?

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Proposed Tax Preparer CE and Competency Requirements

Written by on January 6, 2010 in Economics, Financial Education, Tax Planning - No Comments

It looks like the IRS has finally put together some proposed recommendations for tax preparer continuing education and competency requirements.  These requirements are for unenrolled tax preparers.  If your tax preparer is an Enrolled Agent, CPA or attorney they are already required to fulfill similar requirements based of their professional status.

Check out the IRS proposed requirements at http://www.irs.gov/newsroom/article/0,,id=217781,00.html

To Keep or Not to Keep?

Written by on August 19, 2009 in Security - 1 Comment

I was asked by a friend recently to post a blog about what financial documents to keep and which ones not to keep.  She said every month she finds herself at a dilemma of what to keep, to shred or to recycle.  With this blog, I hope to give you some suggestions of how to sort through the pile of papers sitting somewhere in your house right now.

My first suggestion is to buy a durable shredder (do not buy a cheap one or you will regret it).  The majority of the financial papers you receive will need to be shredded.  If it has any type of personal data or information on it the rule is SHRED IT!

Second, get yourself a box near your work space that you can throw all of the magazines and newspapers that don’t need to be shredded into a recycle box.  (Here in Broken Arrow, OK we have paper recycle dumpsters all over town which makes it easy to recycle newspaper and magazines).

Next, you will want to go to www.homefile.com (site is down as I write this blog) and purchase their Financial Planning Organizer Kit.  (I give this to my new clients and we have a meeting where I specifically teach them how to use it.)  This kit is awesome and you will not regret purchasing it, especially if you are a “piler” when it comes to your financial papers.  In our house, I have implemented this system and my wife and I now call it the “love box.”  It has that name because it is an act of love to your spouse or loved ones in the event something devastating were to happen to you.  Let’s say you do not make it home from work today, who in your family knows where all your important papers and documents are located?  If you love them, you will put these documents together for them.  (If you don’t even know, how will anyone else know?)  The Financial Planning Organizer Kit will show what important papers to keep, where to keep them and for how long.  (Unless you have a special attachment to them, you do not need to keep your tax returns for over 20 years like one of my clients has done.)

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