Thursday, August 1, 2013

Tax breaks for life's big events

Kay Bell for BankRate.com writes: Taxes have been a part of your life since your parents welcomed you into this world.

From that beginning as a spanking new tax break for mom and dad, taxes have had an important role in all your major life events, from getting a job, saying "I do," buying and selling homes, having kids of your own, and even retiring.
In some cases, the involvement of the Internal Revenue Service is not such a good thing.
But in many ways, the tax code can be your best friend. You just need to know how it applies to your personal circumstances so you can take advantage of it. Read on to learn more about tax breaks for life's big events.


Getting your first job
Uncle Sam gets a portion of your paycheck via payroll taxes. You do, however, have a bit of a say in how much comes out of your pay by adjusting your withholding.
If you have too much withheld, you'll get a refund when you file. That's not necessarily bad, but wouldn't you rather have your own money year-round instead of giving the IRS an interest-free loan?
On the other hand, if you don't have enough taken out, you could face a major tax bill, and possible underwithholding penalties, at filing time. Ask your boss for a new Form W-4 so you can run the numbers and adjust your withholding.
Your job likely offers several tax breaks. If your employer provides health care coverage, your medical insurance is a tax-free benefit to you. You'll find out how much that's worth on next year's W-2 earnings statement.
A flexible spending account, or FSA, also might be part of your job benefits. Here you can save pretax dollars to pay for medical care not covered by insurance.
You also want to take advantage of your workplace's tax-deferred 401(k) retirement plan.
And if you move to take a job, even your first one, you can write off many of your relocation costs.


Getting married
Uncle Sam probably wasn't a guest at your wedding, but he becomes a big part of your life when you are a married taxpayer. Now that you've combined your personal lives, you likely will do the same with your tax filing.
Married filing jointly is the most common choice of married couples because it generally produces the best tax results. The once-dreaded marriage tax penalty has been largely eliminated thanks to the broadening of the tax bracket for that filing status. Plus, some tax breaks aren't allowed to a husband and wife who file separate returns.
If both husband and wife work, each should reassess withholding amounts. The IRS says it's generally better for the higher-earning spouse to claim all the couple's allowances on his or her W-4, with the lower wage earner claiming zero.
Reassess your individual retirement accounts. Income limits apply to tax-free Roth accounts and also with deductible traditional IRAs if you contribute to a workplace plan. So your combined income could affect your retirement contributions.
Update your flexible spending account. A new marriage is a change in family circumstances that allows you to make midyear changes to this tax-favored company benefit plan.


Having children
Congratulations on your new baby. Let your Uncle Sam help cover some of your growing family's costs.
A dependent youngster is an added exemption. Kids also allow parents to claim the child tax credit as long as the youngster was 16 at the end of the tax year. Large families might be able to get money back from the IRS via the refundable additional child tax credit.
If your family grew via an adoption, there's a tax credit to cover some of the many costs of that process.
Working parents can use the child and dependent care credit to pay for some of the costs of caring for their kids while they are on the job.
And the tax code also offers several ways to save and pay for higher education costs, including 529 college savings plans, the Coverdell education savings account and the American opportunity and lifetime learning tax credits.


Starting a business
Once you decide it's time to break out of the corporate cubicle and start a new business, the tax code can help.
Filing is relatively easy for sole proprietors. They report their income as part of their annual individual tax filing by attaching Schedule C to Form 1040. Schedule C also offers many ways for individual entrepreneurs to write off many of their business expenses.
Among the deductible small-business costs are home office expenses. Business use of a vehicle also is deductible, as are health insurance premiums and contributions to self-employed retirement plans. New businesses also are allowed to deduct thousands in certain startup costs.
If you have kids, putting them to work in your sole proprietorship could be a tax-smart move. Depending on how much you pay them, they might not owe income taxes and you can deduct the salary as a business expense.
But starting a business is not all about tax breaks. Sole proprietors also must pay self-employment taxes. These are the equivalent of the payroll taxes collected from wage-earning employees. As both the employer and employee, a sole proprietor has to pay the boss and worker components of Social Security and Medicare taxes.


Buying a home
Your home is probably your biggest investment. Homeownership also provides many tax breaks.
Interest paid on a primary residence mortgage up to $1 million is deductible as an itemized expense. If you take out a home equity loan or line of credit, interest on those loans up to $100,000 also is deductible. Even the interest on a second home is tax deductible.
Property tax you pay on your main house and any other residences you own also is deductible.
The tax benefit of a home is even better when you sell it. Up to $250,000 in sales gain ($500,000 for married joint filers) on your home is tax-free as long as you owned the property for two years and lived in it for two of the five years before the sale.
Many home improvements, such as structural additions, kitchen modernization and landscaping, can increase the basis in your home. This is essentially your investment in the home. A larger basis means less profit that might be taxable.
And some home upgrades, such as installing solar energy systems, also will get you an immediate tax credit to help offset the high cost of this type of improvement.


Dealing with divorce
As with marriage, your filing status is determined on the last day of the tax year. If your divorce is final Dec. 31, then you are considered unmarried for the full year.
One of the stickiest divorce issues is child custody. The parent who has physical custody of the children for most of the year usually gets to claim them as dependents. That means that parent gets the exemption, child tax credit and child care tax credit savings.
One spouse typically is granted sole ownership of the family home. This could, however, pose a problem for the solo owner. When the lone ex sells the property, the amount of profit exempt from capital gains is just $250,000 versus the $500,000 that married filing jointly homeowners can exclude. Because of that, some couples sell the house before they divorce and split the tax-free profits.
Similarly, take into account the cash the recipient partner will net after taxes when dividing other marital assets.
And note that alimony has tax implications for both ex-spouses. It is taxable income to the recipient and can be deducted by the paying ex. Child support, however, offers no tax breaks to the paying ex, as it is not deductible. However, to the recipient it isn't taxable.


Retiring
Your golden years will be more enjoyable if you take advantage of the many tax breaks afforded by retirement plans.
A traditional IRA contribution could produce a tax deduction when you file your tax return. Remember, though, that you'll have to pay taxes on this account when you start taking out money in retirement.
With a Roth IRA, you put in already-taxed money, but that means eventual distributions from a Roth are tax-free. The biggest drawback to a Roth is that you can't open or contribute to a Roth if you make a lot of money. However, regardless of your income, you can convert a traditional IRA to a Roth.
Workplace retirement plans, usually known as 401(k)s or Roth 401(k)s, offer similar retirement saving options, but with a nice bonus. Many employers match some of your plan contributions, which helps your retirement savings grow more quickly.
Social Security benefits generally are tax-free as long as you don't have a lot of other income.
And if you do have to file a tax return when you're older, you can claim a larger standard deduction amount simply because you're age 65 or older.
Posted on 6:09 AM | Categories:

Firm takes pain out of chasing bills / Xero-Add-on "Debtor Daddy" aims to help companies' cashflow by automating reminders on customers' overdue accounts

Christopher Adams for NZ Herald writes: Getting customers to pay their bills on time is something few small businesses are likely to relish, but technology created by a local start-up aims to take the pain out of the process.


Wellington-based Debtor Daddy was established around four years ago and already has customers in more than 10 countries.
It's a Xero "add-on", meaning it works in tandem with the Kiwi online accounting software platform.

Co-founder Matt McFedries said Debtor Daddy downloaded the latest information from Xero each day to check if any payments were overdue.
If a payment was found to be late an automatic reminder email is sent to the customer.
"It goes through a series of escalating emails that get more stern the more reminders (the client) gets," McFedries said.

He said many small business operators were so busy they neglected to remind customers to pay their bills, which could result in cashflow problems.
"Some (businesspeople) are pretty good at doing follow-up but others really hate it - it's not a very nice conversation to have with your customers, so having a level of automation really helps detach them from that awkward conversation," said the 36-year-old, self-taught software developer.

McFedries said that since February 2011 Debtor Daddy had sent out more than 215,000 payment reminders and helped to secure payment of invoices worth close to $90 million.
"We believe that too many small businesses go out of business simply because they run out of cash," he said. "We aim to increase the survival of small businesses globally by helping them to control and manage their cashflow more effectively."
While the firm's core markets are Australasia and Britain, McFedries said the technology was also being used in Botswana, Tanzania, South Africa, Indonesia and Thailand.
Debtor Daddy's prospects are in many ways tied to Xero's growth.
McFedries is bullish about NZX-listed Xero's prospects, but said that company had a big challenge on its hands as it expanded internationally.
"They're up against some pretty big players like (US-based) Intuit with their QuickBooks product," he said. "But Xero seems to do a really good job of promoting their business using social media. They're kind of similar to Apple in the way that they create fans."

"Small businesses can pick a commodity financial product like ours - which is nice and cheap - and then augment that with some other low-cost or even higher-cost products that work for their specific requirements," Drury said.Xero chief executive Rod Drury said there were now close to 250 add-ons that connected into his firm's online accounting platform.
He said developing Xero add-ons was a good place for aspiring software developers to start out.
"Small development companies can build a niche application and then piggy-back off our customer base," Drury said.
"It's really interesting - the amount of innovation we're seeing is cool."
McFedries said Debtor Daddy was looking to expand its technology to other accounting software providers, including MYOB's online platform.
"The best path to market will be for us to connect with other online accounting software - we won't only ever be connected just to Xero," he said.
Users pay $29 a month to use the Debtor Daddy service.
Posted on 6:09 AM | Categories:

Mobilizing the Cloud for Small Business Accounting

Michael Callan, CPA, cofounder of Swizznet for AccountingWeb writes:  It wasn't that long ago that small and medium-size business (SMB) accounting software resided on a PC  and only on a PC. Today, with more than 1.3 million Intuit QuickBooks users alone accessing the online version of QuickBooks, it's time for every accountant to take a look at what Cloud computing can offer for streamlining the process of everyday tasks. When coupled with mobile devices, the Cloud offers the freedom of anywhere/anytime availability that can be hugely beneficial to in-house financial teams as well as consultants.
In a recent American Institute of CPAs (AICPA) white paper, Accounting Services: Harness the Power of the Cloud, based on research by Dr. Geoffrey Moore, the AICPA strongly endorsed the move from paper to digital, recommending that members harness the power of pervasive computing: "The key investment to fund is a technology transition focused on aggressively displacing the use of paper and on-premise PC hosting in favor of digital workflows hosted in the Cloud. Paper is the anchor that keeps CAS [client accounting services] practice margins at unacceptably low levels, so driving it out of the system is fundamental to building a sustainable business." 
I'd go one step further. While it's called Cloud computing today, in the very near future, it will just be the way we do business. And mobile technologies will play a key role in amplifying the Cloud's usefulness by enabling accountants to exchange information with their teams and/or clients on demand, 24/7. 
It's already happening. Now that the full power and data of applications like QuickBooks are available to users on a mobile phone or tablet, businesses are taking the opportunity to rationalize their internal processes. For example, a construction firm or plumber can create and enter a quote or invoice while on-site using a tablet, rather than taking down data, going back to the office, and creating an invoice there. Not only does this save time, it minimizes the need for double entry and reduces mistakes, thereby improving overall data accuracy. 

Arguably, small businesses have the most to gain from the transition to Cloud computing and mobile devices. Sole proprietors and employees of small firms often wear many hats. Being able to access critical data from anywhere and record transactions directly onto a mobile device and have the transactions sync to a Cloud-based accounting system is a huge time-saver.
Small businesses also have limited time and/or personnel to deal with IT issues, such as data storage, software updates, and server maintenance. Cloud computing shifts these tasks to the service provider and can result in enormous time savings by enabling small businesses to concentrate on their business and customers instead of on IT needs.

How to Find the Perfect Provider

When evaluating a technology and hosting provider, here are a few tips and discussion points for finding the perfect partner to accommodate not only your move to the Cloud, but its access via mobile devices:
  • How frequently does the hosting provider offer automatic backup of data?
  • What is the provider's uptime track record?
  • Does the provider support mobile users with a formal mobile device management (MDM) program? Are there any device restrictions?
  • How many people can access Cloud documents and applications simultaneously?
  • How easily can document migration be facilitated?
  • Does the provider offer live customer support? If so, is it available around the clock?

But engaging with one of the dizzying array of potential solution providers can be a daunting task. So, if you're just now exploring how to migrate to the Cloud and provide access to employees and clients via mobile devices, here are two ideas to consider:
1. Establish BYOD policies. Today, at least 30 percent of accounting firms have generic bring-your-own-device (BYOD) policies for employees. BYOD policies are regulations set in place that align and support the corporate environment. Traditional office boundaries are vanishing, and BYOD is one way to enable employees to easily check e-mails and to work off-site or at home on their smartphones or mobile devices.
2. Select a Cloud technology that allows for mobile device flexibility.Your customers and staff already own mobile devices. Make it easy for them to use the device they're most comfortable with to access and share critical documents via the Cloud. 
Moving to the Cloud and enabling mobile devices to access needed information anywhere, anytime will not only erase some business headaches, it will prepare your operations for future technological improvements while adding to the bottom line through more efficient accounting practices.
Posted on 6:08 AM | Categories:

Taking the Mystery Out of Exchange-Traded Funds (tax efficient ETFs)

Eric Balchunas Business Week writes:  As much publicity -- good and bad -- as exchange-traded funds have gotten recently, the ETF world remains a mystery to many. A Charles Schwab study found that overall understanding of the investments remains elementary, with nearly half of investors calling themselves “novices" when it comes to ETFs and only 8 percent considering themselves "experts."


With 1,484 (and counting) ETFs holding $1.5 trillion in assets in the U.S., learning about ETFs is worth the time. The funds have opened up access to investors in all areas of the market through low-cost, tax-efficient, transparent vehicles that trade like equities. In short, ETFs have leveled the investing playing field as individual investors now have the same tools at the same cost as institutions.
Why are ETFs hard to understand? Like mutual funds, they stretch into every nook and cranny of the investable universe. An investor needs some knowledge of a wide range of financial markets, including stocks, bonds, commodities, derivatives and international markets.
Beyond that similarity, it gets trickier. The way ETFs trade and how their shares are created and destroyed in the (rather biblically named) creation/redemption process are among the ways they differ dramatically from mutual funds.

Plain-English Resources

Below are a few of the most helpful plain-English resources for investors who want to demystify exchange-traded funds.
Websites: A popular website for all things ETF is www.etftrends.com, a one-stop shop of easy-to-digest pieces on any and every ETF out there. Many articles provide embedded links to other useful sites, making this a particularly good first stop. It has an easy-to-find and comprehensive education center. Other popular sites, aside from bloomberg.com itself, include www.indexuniverse.com, www.etfdb.com and www.morningstar.com.
Books: "ETFs for the Long Run," by Lawrence Carrel, benefits from the author’s storytelling ability. Carrel, a journalist, gets readers hooked on the narrative and characters involved in the invention of the ETF and all the battles along the way. While it's one of the least text-bookish books on the funds, Carrel provides a healthy dose of information on the mechanics and structure of ETFs as well as how to use them for asset allocation.
For those who want more advanced information, "The ETF Handbook," by David J. Abner, is a comprehensive look at the valuation, trading and liquidity of ETFs. It includes a thorough tour of the creation/redemption process, which is often a stumbling block for investors new to ETFs.
Podcasts: On the audio front, a popular educational podcast is “The ETF Store Show.” It's hosted by an amiable group of investment advisers and is aimed at individual investors. The show is constantly comparing ETFs with mutual funds, breaking down industry jargon and trumpeting the importance of asset allocation. The site gives access to all the podcasts.
Videos: iShares' YouTube channel contains short videos on a wide variety of educational and trending ETF topics. One of the most popular clips is a cartoon called “The Story of ETF Creation and Redemption.” ("This is not a prison movie narrated by Morgan Freeman," says the narrator.) The clip uses the analogy of a florist to describe the mechanics of ETFs.
Finally, remember that you or your adviser can always ask questions. Self-directed investors can call ETF issuers directly. They will actually pick up the phone and help you. Don’t be afraid to ask something basic -- as in all of the investing world, there is no such thing as a dumb question.
Posted on 6:08 AM | Categories:

Mutual Funds or ETFs? / These two types of funds have key differences.

Manisha Thakor | for MorningStar writes: A lot of people use the terms mutual fund and exchange-traded fund interchangeably. While similar in many respects, these two investment vehicles have key differences. Mutual funds, particular those low costs ones following indexes, tend to be ideally suited for long-term, “evidenced-based”, asset allocation oriented investors. ETFs, on the other hand, are able to be traded intra-day, tend to be cheaper than active mutual funds and have the potential to be more tax-efficient if utilized in an active management context.

Simply put, mutual funds and exchange-traded funds are both mixes of various investments such as stocks and bonds that professional investors create. Think of them as financial smoothies. Rather than buy the individual fruits and vegetables, you purchase a serving of a smoothie that someone else prepares.


That serving is called a share of a mutual fund or an ETF. The key benefits of these financial smoothies are diversification and professional oversight.
The main difference is that mutual funds get priced at the end of the day, making them more appealing to long-term investors. These aren’t for hyperactive traders that want to take advantage of daily price swings. You can easily purchase specific dollar amounts at regular intervals, often with minimal transaction costs. The tax consequences of owning mutual funds are spread across all shareholders. But if you focus on the subset of mutual funds known as passive funds, these costs are minimal. Passive funds track indexes, so their managers seldom have to run up costs buying and selling positions.


However, if you plan to actively trade in and out of positions, based on the latest news, or want to set a pre-determined price at which you buy or sell a security, ETFs make more sense. ETFs trade all day long, just like individual stocks. You can place orders to buy or sell at a specific price. A downside: If you make frequent short-term trades like that, tax consequences are greater than holding for long periods.


So which is better? The answer really depends on your investment strategy. My personal opinion is that the vast majority of investors are best off with a diversified, low cost, long-term investment approach consisting of investments in index (a.k.a., passively) oriented vehicles. If you concur with this concept (and not everyone does), mutual funds often make the most sense. Index funds are set to track a benchmark such as a stock index. Passive management means that the investors aren’t paying for excessive trading fees and sky-high managers’ salaries and bonuses.


ETFs are hot right now because many believe they have lower fees than mutual funds. While ETFs do charge lower fees than the average actively managed mutual funds, passively managed mutual funds charge low fees on par with ETFs.
What ETFs do provide over mutual funds is greater control over the tax impacts of the investment. Taxes are not assessed on ETF investments until you sell your shares. This includes any taxes on sales of assets within the fund. Unlike mutual funds, you can delay the entire tax impact until you sell your shares. One common strategy is to sell the shares at a profit when other investments suffer losses, allowing the losses to offset the gains. This lessens the tax impact because your total capital gains are lower.


Your personal tastes and preferences determine which combination is right for you. Understanding the basic differences is a solid first step in creating your own investment recipe.
Posted on 6:08 AM | Categories:

The Taxpayer Advocate Service: Helping You Resolve Tax Problems

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that helps taxpayers who are experiencing unresolved federal tax problems. Here are 10 things every taxpayer should know about TAS:

1. The Taxpayer Advocate Service is your voice at the IRS.
2. You may be eligible for our help if you’ve tried to resolve your tax problem through normal IRS channels and have gotten nowhere, or you believe an IRS procedure just isn't working as it should.
3. We help taxpayers whose problems are causing financial difficulty. This includes businesses, organizations and individuals.
4. We’ll do everything we can to resolve your problem. And our service is always free.
5. If you qualify for our help, you’ll be assigned to one advocate who will be with you at every turn.
6. We have at least one local taxpayer advocate office in every state, the District of Columbia and Puerto Rico. To find your advocate:
  • Visit www.irs.gov/advocate
  • Call us toll-free at 1-877-777-4778
  • Check your local directory
  • Look at Pub. 1546, Taxpayer Advocate Service – Your Voice at the IRS, which lists our offices nationwide
7. Our tax toolkit at www.TaxpayerAdvocate.irs.gov has basic tax information, details about tax credits, and more.
8. TAS also handles broader problems that affect many taxpayers. If you know of one of these systemic issues, please report it to us at www.irs.gov/sams.
9. You can get updates at:
10. TAS is here to help you because when you’re dealing with a tax problem, the worst thing you can do is to do nothing at all!
Posted on 6:07 AM | Categories: