Would You Pay Less Taxes in Another Country?

Tax day has passed in the U.S., along with the usual complaints about the complexity and financial burden that federal and state taxes (and FICA) impose on our lives. But have you ever wondered how U.S. taxes compare with what citizens in other countries have to pay?

Recently, the accounting firm PricewaterhouseCoopers calculated the tax burden, for tax year 2013, for people living in 19 of the G20 nations (the 20th member is the European Union, which has a variety of tax regimes). The report looked first at people who are in the upper-income levels–a person with a salary equivalent of $400,000, with a home mortgage of $1.2 million. After all income tax rates and Social Security (or equivalent) contributions have been taken out, what percentage of his/her income would this person have left over?

The people we should have the most sympathy for on our annual tax day live in Italy, where this person would get to keep $202,360 of that $400,000 income–or 50.59%. A comparable person living in India would keep 54.9%, while someone living in the United Kingdom would keep 57.28%.

Here’s the full list. Notice that the U.S. is about in the middle of the pack:

19. Italy – 50.59%
18. India – 54.90%
17. United Kingdom – 57.28%
16. France – 58.10%
15. Canada – 58.13%
14. Japan – 58.68%
13. Australia – 59.30%
12. United States – 60.45%
11. Germany – 60.61%
10. South Africa – 61.78%
9. China – 62.05%
8. Argentina – 64.02%
7. Turkey – 64.64%
6. South Korea – 65.75%
5. Indonesia – 69.78%
4. Mexico – 70.60%
3. Brazil – 73.32%
2. Russia – 87%
1. Saudi Arabia – 96.86%

Before you conclude that the U.S. is below average on this list, you should know that PricewaterhouseCoopers applied New York state (13.3%) and New York city (maximum 3.9%) taxes on the American calculation. If it had used Texas or Florida state tax rates instead, the U.S. would easily have ranked somewhere in the top ten.

And this list is somewhat skewed because so many European countries are left off, because they are lumped into the EU. It also doesn’t include Canada, which imposes a 29% top federal tax rate on its citizens, and then tacks on a maximum 25.75% rate at the province level.

PricewaterhouseCoopers did include many of the EU countries when it calculated the tax burdens on people with average incomes, and here the list looks somewhat different. The accounting firm assumed that a hypothetical married couple, with two children, earned the average income in each nation, and then calculated the overall tax rate the family would have to pay.

Denmark – 34.8%
Austria – 31.9%
Belgium – 31.8%
Finland – 29.4%
Netherlands – 28.7%
Greece – 26.7%
United Kingdom – 24.9%
Germany – 21.3%
United States – 10.4%
South Korea – 10.2%
Slovak Republic – 10%
Mexico – 9.5%
Chile – 7%
Czech Republic – 5.6%
(China, Russia, South Korea, Indonesia and Brazil would assess 0% taxes on this hypothetical family)

Does this mean that the U.S. tax system is fair? Or equitable? It depends on your perspective. Tax rates in the U.S. have been as high as 94% on all income over $200,000 (1944-45), and as low as 28% (1988-1990), with the bulk of years coming in between 40% and 70%. Meanwhile, some countries assess more taxes from corporations than from their citizens, while some have it the other way around. And some nations are evolving. At the beginning of World War II, individuals and families paid 38% of the total federal tax burden, and corporations picked up the other 62%. Today, thanks to aggressive lobbying, corporations have turned that around and then some. Individuals and families pay 82% of today’s total federal income tax haul, and corporations pay 18%.

We should also remember that high taxes don’t necessarily correlate with economic misery or poverty. Consistently, Belgium, which had the highest tax burden on average wage-earners (and imposes a top 50% rate on upper-income citizens) also consistently scores as one of the happiest countries in the world.




Click to access nyc_tax_rate_schedule.pdf



Expiring Tax Provisions: How You Probably WON’T Be Affected

Happy Thanksgiving! I hope that your families and you have an enjoyable holiday and (hopefully) extended weekend.

You may have read that the last day of 2013 is scheduled to be the last day for an estimated 57 different tax deductions–unless the U.S. Congress turns its attention away from the next potential government shutdown and extends some or all of them.  All of these deductions will be available to the 2013 tax return that you file by April 15.  But as it stands now, they won’t be available next year, creating another potential stealth tax increase in 2014.
How will this impact you?  Only a few of the 57 are relevant to you at all, unless you qualify for the American Samoa Economic Development Credit, the “special expensing” rules for film and television production, the mine rescue team training credit or special three-year depreciation for your race horses that happen to be two years or younger.
You probably do, however, claim deductions for state and local taxes, which expire at the end of the year, and people with kids and/or grandkids in college might miss the above-the-line deduction for tuition and related educational expenses.  Many Americans will be at least slightly affected by the loss of the deduction for mortgage insurance premiums, and some retired Americans over age 70 1/2 will be distressed to learn that they can no longer make tax-free distributions of up to $100,000 from an IRA account to their favorite charity.  School teachers will lose their classroom expense deductions of up to (a whopping) $250 for un-reimbursed expenses.
And thousands of homeowners whose homes are listing below what they paid for them should realize that, at the end of December, they will lose a provision that lets them exclude from their taxable income any reduction in their mortgage obligation (through debt modification or a short sale) up to a maximum of $2 million.
Other expiring tax breaks that may affect some people reading this:
-Enhanced tax breaks for people who donate property (or easements on their property) to the Nature Conservancy or a local land trust.
-Tax credits for the purchase of 2- or 3-wheeled electric vehicles and a separate credit of $7,500 for those who buy certain 4-wheeled electric vehicles like the Ford Focus Electric and the Nissan Leaf.
-A maximum $500 tax credit for making certain energy-efficiency improvements in your home (like adding insulation), plus other credits for constructing new energy-efficient homes and a credit for energy-efficient appliances.
The biggest expiring corporate tax break is the research and development tax credit.  At the end of the year, companies will also lose the additional first-year depreciation for 50% of the basis of qualified property.
In the past, Congress has allowed tax provisions to expire and then, retroactively, extended them for another year or two–and many tax observers believe this will almost certainly happen with the state/local tax deduction and corporate R&D tax credits, and quite possibly for the tuition tax credit as well. 

So when you read about the 57 expiring provisions, and you are not in the biodiesel fuel business (four expiring credits) or planning to claim the electricity production credit for building a renewable power plant, or actively mining coal on Indian lands, you shouldn’t get too worried.  Chances are you aren’t going to get hammered on next year’s taxes–and Congress may even get around to extending the provisions that you really care about, at the very last minute of course.

Whether you’re looking for year-end tax planning, financial planning or money management help, please get in touch with us for unbiased, fiduciary advice that always puts your interests first.

I welcome your feedback, questions and comments. Have a great long weekend!

Source: https://www.jct.gov/publications.html?func=startdown&id=4499


My thanks to Bob Veres, publisher of Inside Information, for his help with this post


2013 Year-End Tax Planning Tips

As we approach year-end, it’s again time to focus on last-minute moves you can make to save taxes—both on your 2013 return and in future years.

For most individuals, the ordinary federal income tax rates for 2013 will be the same as last year: 10%, 15%, 25%, 28%, 33%, and 35%. However, the fiscal cliff legislation, passed early this year, increased the maximum rate for higher-income individuals to 39.6% (up from 35%). This change affects taxpayers with taxable income above $400,000 for singles, $450,000 for married joint-filing couples, and $425,000 for heads of households. In addition, the new 0.9% Medicare tax and 3.8% Net Investment Income Tax (NIIT) potentially kick in when modified adjusted gross income (or earned income in the case of the Medicare tax) goes over $200,000 for unmarried, $250,000 for married joint-filing couples, which can result in a higher-than-advertised federal tax rate for 2013.

Despite these tax increases, the current federal income tax environment remains relatively favorable by historical standards. This article presents several tax-saving ideas to get you started. As always, you can call on us to help you sort through the options and implement strategies that make sense for you.

Ideas for Maximizing Non-business Deductions

One way to reduce your 2013 tax liability is to look for additional deductions. Here’s a list of suggestions to get you started:

Make Charitable Gifts of Appreciated Stock. If you have appreciated stock that you’ve held more than a year and you plan to make significant charitable contributions before year-end, keep your cash and donate the stock (or mutual fund shares) instead. You’ll avoid paying tax on the appreciation, but will still be able to deduct the donated property’s full value. If you want to maintain a position in the donated securities, you can immediately buy back a like number of shares. (This idea works especially well with no load mutual or exchange traded funds because there are no transaction fees involved.)

However, if the stock is now worth less than when you acquired it, sell the stock, take the loss, and then give the cash to the charity. If you give the stock to the charity, your charitable deduction will equal the stock’s current depressed value and no capital loss will be available. Also, if you sell the stock at a loss, you can’t immediately buy it back as this will trigger the wash sale rules. This means your loss won’t be deductible, but instead will be added to the basis in the new shares. You must wait more than 30 days to buy back shares sold at a loss to avoid the wash sale rules.

Don’t Lose a Charitable Deduction for Lack of Paperwork. Charitable contributions are only deductible if you have proper documentation. For cash contributions of less than $250, this means you must have either a bank record that supports the donation (such as a cancelled check or credit card receipt) or a written statement from the charity that meets tax-law requirements. For cash donations of $250 or more, a bank record is not enough. You must obtain, by the time your tax return is filed, a charity-provided statement that shows the amount of the donation and lists any significant goods or services received in return for the donation (other than intangible religious benefits) or specifically states that you received no goods or services from the charity.

Maximize the Benefit of the Standard Deduction. For 2013, the standard deduction is $12,200 for married taxpayers filing joint returns. For single taxpayers, the amount is $6,100. Currently, it looks like these amounts will be about the same for 2014. If your total itemized deductions are normally close to these amounts, you may be able to leverage the benefit of your deductions by bunching deductions in every other year. This allows you to time your itemized deductions so that they are high in one year and low in the next. You claim actual expenses in the year they are bunched and take the standard deduction in the intervening years.

For instance, you might consider moving charitable donations you normally would make in early 2014 to the end of 2013. If you’re temporarily short on cash, charge the contribution to a credit card—it is deductible in the year charged, not when payment is made on the card. You can also accelerate payments of your real estate taxes or state income taxes otherwise due in early 2014. But, watch out for the AMT, as these taxes are not deductible for AMT purposes.

Manage Your Adjusted Gross Income (AGI). Many tax breaks are only available to taxpayers with AGI below certain levels. Some common AGI-based tax breaks include the child tax credit (phase-out begins at $110,000 for married couples and $75,000 for heads-of-households), the $25,000 rental real estate passive loss allowance (phase-out range of $100,000–$150,000 for most taxpayers), and the exclusion of social security benefits ($32,000 threshold for married filers; $25,000 for other filers). In addition, for 2013 taxpayers with AGI over $300,000 for married filers, $250,000 for singles, and $275,000 for heads-of-households begin losing part of their personal exemptions and itemized deductions. Accordingly, strategies that lower your income or increase certain deductions might not only reduce your taxable income, but also help increase some of your other tax deductions and credits.

Making the Most of Year-end Securities Transactions

For most individuals, the 2013 federal tax rates on long-term capital gains from sales of investments held over a year are the same as last year: either 0% or 15%. However, the maximum rate for higher-income individuals is now 20% (up from 15% last year). This change affects taxpayers with taxable income above $400,000 for singles, $450,000 for married joint-filing couples, $425,000 for heads-of-households, and $225,000 for married individuals who file separate returns. Higher-income individuals can also get hit by the new 3.8% NIIT on net investment income, which can result in a maximum 23.8% federal income tax rate on 2013 long-term gains.

As you evaluate investments held in your taxable brokerage firm accounts, consider the tax impact of selling appreciated securities (currently worth more than you paid for them). For most taxpayers, the federal tax rate on long-term capital gains is still much lower than the rate on short-term gains. Therefore, it often makes sense to hold appreciated securities for at least a year and a day before selling to qualify for the lower long-term gain tax rate.

But be smart about this and don’t let the tax “tail” wag the investment “dog”; you don’t want hold the investment long term just to gain tax benefits at the cost of a possible loss of the accumulated gain.

Biting the bullet and selling some loser securities (currently worth less than you paid for them) before year-end can also be a tax-smart idea. The resulting capital losses will offset capital gains from other sales this year, including high-taxed short-term gains from securities owned for one year or less. For 2013, the maximum rate on short-term gains is 39.6%, and the 3.8% NIIT may apply too, which can result in an effective rate of up to 43.4%. However, you don’t need to worry about paying a high rate on short-term gains that can be sheltered with capital losses (you will pay 0% on gains that can be sheltered).

If capital losses for this year exceed capital gains, you will have a net capital loss for 2013. You can use that net capital loss to shelter up to $3,000 of this year’s high-taxed ordinary income ($1,500 if you’re married and file separately). Any excess net capital loss is carried forward to next year.

Selling enough loser securities to create a bigger net capital loss that exceeds what you can use this year might also make sense. You can carry forward the excess capital loss to 2014 and beyond and use it to shelter both short-term gains and long-term gains recognized in those years.

Identify the Securities You Sell. When selling stock or mutual fund shares, the general rule is that the shares you acquired first are the ones you sell first. However, if you choose, you can specifically identify the shares you’re selling when you sell less than your entire holding of a stock or mutual fund. By notifying your broker of the shares you want sold at the time of the sale, your gain or loss from the sale is based on the identified shares. This sales strategy gives you better control over the amount of your gain or loss and whether it’s long-term or short-term.

Secure a Deduction for Nearly Worthless Securities. If you own any securities that are all but worthless with little hope of recovery, you might consider selling them before the end of the year so you can capitalize on the loss this year. You can deduct a loss on worthless securities only if you can prove the investment is completely worthless. Thus, a deduction is not available, as long as you own the security and it has any value at all. Total worthlessness can be very difficult to establish with any certainty. To avoid the issue, it may be easier just to sell the security if it has any marketable value. As long as the sale is not to a family member, this allows you to claim a loss for the difference between your tax basis and the proceeds (subject to the normal rules for capital losses and the wash sale rules restricting the recognition of loss if the security is repurchased within 30 days before or after the sale).

Ideas for Seniors Age 701/2 Plus

Make Charitable Donations from Your IRA. IRA owners and beneficiaries who have reached age 701/2 are permitted to make cash donations totaling up to $100,000 to IRS-approved public charities directly out of their IRAs. These so-called Qualified Charitable Distributions, or QCDs, are federal-income-tax-free to you, but you get no itemized charitable write-off on your Form 1040. That’s okay because the tax-free treatment of QCDs equates to an immediate 100% federal income tax deduction without having to worry about restrictions that can delay itemized charitable write-offs. QCDs have other tax advantages, too. Contact us if you want to hear about them.

Be careful—to qualify for this special tax break, the funds must be transferred directly from your IRA to the charity. Also, this favorable provision will expire at the end of this year unless Congress extends it. So, this could be your last chance.

Take Your Required Retirement Distributions. The tax laws generally require individuals with retirement accounts to take withdrawals based on the size of their account and their age every year after they reach age 701/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount not withdrawn. There’s good news for 2013 though—QCDs discussed above count as payouts for purposes of the required distribution rules. This means, you can donate all or part of your 2013 required distribution amount (up to the $100,000 limit on QCDs) and convert taxable required distributions into tax-free QCDs.

Also, if you turned age 701/2 in 2013, you can delay your 2013 required distribution to 2014, if you choose. However, waiting until 2014 will result in two distributions in 2014—the amount required for 2013 plus the amount required for 2014. While deferring income is normally a sound tax strategy, here it results in bunching income into 2014. Thus, think twice before delaying your 2013 distribution to 2014—bunching income into 2014 might throw you into a higher tax bracket or have a detrimental impact on your other tax deductions in 2014.

Ideas for the Office

Maximize Contributions to 401(k) Plans. If you have a 401(k) plan at work, it’s just about time to tell your company how much you want to set aside on a tax-free basis for next year. Contribute as much as you can stand, especially if your employer makes matching contributions. You give up “free money” when you fail to participate to the max for the match.

Take Advantage of Flexible Spending Accounts (FSAs). If your company has a healthcare and/or dependent care FSA, before year-end you must specify how much of your 2014 salary to convert into tax-free contributions to the plan. You can then take tax-free withdrawals next year to reimburse yourself for out-of-pocket medical and dental expenses and qualifying dependent care costs. Watch out, though, FSAs are “use-it-or-lose-it” accounts—you don’t want to set aside more than what you’ll likely have in qualifying expenses for the year.

Married couples who both have access to FSAs will also need to decide whose FSA to use. If one spouse’s salary is likely to be higher than what’s known as the FICA wage limit (which is $113,700 for this year and will likely be somewhat higher next year) and the other spouse’s will be less, the one with the smaller salary should fund as much of the couple’s FSA needs as possible. The reason is that the 6.2% social security tax levy for 2014 is set to stop at the FICA wage limit (and doesn’t apply at all to money put into an FSA). Thus, for example, if one spouse earns $120,000 and the other $40,000 and they want to collectively set aside $5,000 in their FSAs, they can save $310 (6.2% of $5,000) by having the full amount taken from the lower-paid spouse’s salary versus having 100% taken from the other one’s wages. Of course, either way, the couple will also save approximately $1,400 in income and Medicare taxes because of the FSAs.

If you currently have a healthcare FSA, make sure you drain it by incurring eligible expenses before the deadline for this year. Otherwise, you’ll lose the remaining balance. It’s not that hard to drum some things up: new glasses or contacts, dental work you’ve been putting off, or prescriptions that can be filled early.

Adjust Your Federal Income Tax Withholding. As stated at the beginning of this article, higher-income individuals will likely see their taxes go up this year. This makes it more important than ever to do the calculations to see where you stand before the end of the year. If it looks like you are going to owe income taxes for 2013, consider bumping up the federal income taxes withheld from your paychecks now through the end of the year. When you file your return, you will still have to pay any taxes due less the amount paid in. However, as long as your total tax payments (estimated payments plus withholdings) equal at least 90% of your 2013 liability or, if smaller, 100% of your 2012 liability (110% if your 2012 adjusted gross income exceeded $150,000; $75,000 for married individuals who filed separate returns), penalties will be minimized, if not eliminated.

Watch Out for the Alternative Minimum Tax

Recent legislation slightly reduced the odds that you’ll owe the alternative minimum tax (AMT). Even so, it’s still critical to evaluate all tax planning strategies in light of the AMT rules before actually making any moves. Because the AMT rules are complicated, you may want our assistance.

Don’t Overlook Estate Planning

For 2013, the unified federal gift and estate tax exemption is a historically generous $5.25 million, and the federal estate tax rate is a historically reasonable 40%. Even if you already have an estate plan, it may need updating to reflect the current estate and gift tax rules. Also, you may need to make some changes for reasons that have nothing to do with taxes.

Ideas for Your Business

Take Advantage of Tax Breaks for Purchasing Equipment, Software, and Certain Real Property. If you have plans to buy a business computer, office furniture, equipment, vehicle, or other tangible business property or to make certain improvements to real property, you might consider doing so before year-end to capitalize on the following generous, but temporary tax breaks:

  • Bigger Section 179 Deduction. Your business may be able to take advantage of the temporarily increased Section 179 deduction. Under the Section 179 deduction privilege, an eligible business can often claim first-year depreciation write-offs for the entire cost of new and used equipment and software additions. (However, limits apply to the amount that can be deducted for most vehicles.) For tax years beginning in 2013, the maximum Section 179 deduction is $500,000. For tax years beginning in 2014, however, the maximum deduction is scheduled to drop to $25,000.
  • Section 179 Deduction for Real Estate. Real property costs are generally ineligible for the Section 179 deduction privilege. However, an exception applies to tax years beginning in 2013. Under the exception, your business can immediately deduct up to $250,000 of qualified costs for restaurant buildings and improvements to interiors of retail and leased nonresidential buildings. The $250,000 Section 179 allowance for these real estate expenditures is part of the overall $500,000 allowance. This temporary real estate break will not be available for tax years beginning after 2013 unless Congress extends it.

Note: Watch out if your business is already expected to have a tax loss for the year (or be close) before considering any Section 179 deduction, as you cannot claim a Section 179 write-off that would create or increase an overall business tax loss. Please contact us if you think this might be an issue for your operation.

  • 50% First-year Bonus Depreciation. Above and beyond the bumped-up Section 179 deduction, your business can also claim first-year bonus depreciation equal to 50% of the cost of most new (not used) equipment and software placed in service by December 31 of this year. For a new passenger auto or light truck that’s used for business and is subject to the luxury auto depreciation limitations, the 50% bonus depreciation break increases the maximum first-year depreciation deduction by $8,000 for vehicles placed in service this year. The 50% bonus depreciation break will expire at year-end unless Congress extends it.

Note:First-year bonus depreciation deductions can create or increase a Net Operating Loss (NOL) for your business’s 2013 tax year. You can then carry back a 2013 NOL to 2011 and 2012 and collect a refund of taxes paid in those years. Please contact us for details on the interaction between asset additions and NOLs.

Evaluate Inventory for Damaged or Obsolete Items. Inventory is normally valued for tax purposes at cost or the lower of cost or market value. Regardless of which of these methods is used, the end-of-the-year inventory should be reviewed to detect obsolete or damaged items. The carrying cost of any such items may be written down to their probable selling price (net of selling expenses). [This rule does not apply to businesses that use the Last in, First out (LIFO) method because LIFO does not distinguish between goods that have been written down and those that have not].

To claim a deduction for a write-down of obsolete inventory, you are not required to scrap the item. However, in a period ending not later than 30 days after the inventory date, the item must be actually offered for sale at the price to which the inventory is reduced.

Employ Your Child. If you are self-employed, don’t miss one last opportunity to employ your child before the end of the year. Doing so has tax benefits in that it shifts income (which is not subject to the Kiddie tax) from you to your child, who normally is in a lower tax bracket or may avoid tax entirely due to the standard deduction. There can also be payroll tax savings since wages paid by sole proprietors to their children age 17 and younger are exempt from both social security and unemployment taxes. Employing your children has the added benefit of providing them with earned income, which enables them to contribute to an IRA. Children with IRAs, particularly Roth IRAs, have a great start on retirement savings since the compounded growth of the funds can be significant.

Remember a couple of things when employing your child. First, the wages paid must be reasonable given the child’s age and work skills. Second, if the child is in college, or is entering soon, having too much earned income can have a detrimental impact on the student’s need-based financial aid eligibility.


Through careful planning, it’s possible your 2013 tax liability can still be significantly reduced, but don’t delay. The longer you wait, the less likely it is that you’ll be able to achieve a meaningful reduction. The ideas discussed in this article are a good way to get you started with year-end planning, but they’re no substitute for personalized professional assistance. Please don’t hesitate to contact us with questions or for additional strategies on reducing your tax bill. We’d be glad to set up a planning meeting or assist you in any other way that we can. You can find us at http://ydfs.com

Update on Extension of Bush Era Tax Cuts

I promised to update you on progress in changes to income tax legislation that affects all of us in 2011.  As you may recall, the Bush-era tax cuts were scheduled to expire after 2010, which essentially amounts to a tax increase if Congress didn’t act to extend them.

After the stock market close yesterday, President Obama, in a televised speech, announced a compromise with Republicans in Congress which, if passed into law, would amount to a much bigger fiscal package in 2011 than virtually anyone expected. In addition to a two-year extension of the Bush-era tax cuts, he added a one-year reduction in the payroll tax and a huge investment tax credit.  While the ultimate bill that gets passed may be different than detailed below, I wanted to get you some details right away.

I would expect that the proposal will be signed and turned into law in the next couple of weeks.  Among the highlights of the proposed bill are:

— A two year extension of tax cuts for all income levels.   The 15% rate on capital gains and dividend income would also be extended as part of the deal. The president also proposes a 35% estate tax rate, with a $5 million exemption.  It appears that the President traded tax extensions for the “rich” for unemployment benefit extensions and the below payroll tax deduction.

— Payroll tax deduction. This would reduce the 6.2% Social Security payroll tax applied to employee wages by 2 percentage points.

— Renewal of emergency unemployment benefits through the end of 2011. This would be more than the three-month extension most analysts had expected. It puts around $60 billion in the hands of unemployed citizens, which is much more than the consensus expected.

— ARRA tax cut extensions. Several small tax cuts in the American Recovery and Reinvestment Act, passed in 2009, will be extended, including an expanded earned income tax credit, and various education-related tax breaks.

— Full expensing of business investments in 2011.  This would allow the expensing of business investment in 2011, similar to the policy that the president proposed in September.  It will allow companies to deduct the entire cost of capital expenditures on their taxes rather than depreciate them.

Congress and the White House will need to work out the details, but I expect this tax bill to pass. It’s not likely that this lame duck Congress would leave for the holidays until this is sent to the President for his signature.  It’s rare that I pity the Internal Revenue Service, but with tax forms to revamp and guidance and rules to formulate, they will be behind the curve on getting this out.  I would expect some delays of 2010 income tax refunds for returns filed early, but none that are terribly lengthy.

The stock markets have been expecting this, and some of it already factored into current levels, but I still expect market reaction to be positive and further bolster any Santa Claus rally we may have coming.  This is essentially another huge fiscal stimulus plan, perhaps larger than any of us have been expecting or realize.

I’ve been saying all along that Congress will “hem and haw”, posture for their constituents, and pretend to be against tax cuts and for fiscal responsibility.  But ultimately the economy is too fragile to be saddled with a tax increase this year or next. Even I am a bit surprised by the depth and breadth of the bill, but I could not see Congress not doing something before year-end. Failing to pass something would have amounted to a quantitative easing neutralizer (i.e., rendering quantitative easing worthless).

I will keep my eyes and ears peeled open for more details about this bill and its ultimate passage and will let you know what ultimately gets passed. If you, a family member, friend or colleague would like more information about this or just need to talk about a financial situation, please feel free to forward a link to this post to them and suggest they get in touch with me (http://www.ydfs.com).  I will be sure to take good care of them.  As always, I’m available for any questions you may have and welcome your comments.

Have a great holiday season and look for my year-end and 2011 Economic and Market Outlook letter later this month.

Feel Like Un-Retiring? Here’s How to Prepare

Last October, the MetLife Mature Market Institute released a study that said the over-55 workforce will account for almost 93 percent of the net increase in the U.S. civilian labor force between 2006 and 2016.  At the same time, MetLife reported that many American workers plan to stay on the job at least until age 69.

The Pew Research Center’s Social & Demographic Trends Project echoed those findings in May 2009, saying that just over half of all working adults aged 50-65 plan to delay their retirement, with 16 percent saying they never plan to stop working.   The issue, says the Pew study, is not about what these Americans earn, but how much they lost during the investment meltdown and the worst economic downturn in more than 70 years.

Add all these factors together and you have one of the most interesting labor situations for older Americans ever.  That’s why that for every retiree or potential retiree who feels they need to return or stay on the job, it’s particularly important to review investment, insurance and tax issues.  It therefore makes sense to meet to discuss these areas with a financial advisor such as a fee-only Certified Financial Planner™ professional.

Here are some critical points to address:

How are your skills? This is a valid point for current and potential retirees. The best job candidates are those with current skills in technology and procedures specific to an industry, so staying in the workforce may mean retraining.  If there’s a way to get an employer to pay, then you should take advantage of it.  But if you have to pay for your own education, then you really need to weigh whether your earnings will justify it unless you enjoy the area of education or going back to school.

Be realistic about your demographic in the workplace: While age discrimination is illegal, there are some workplace cultures where older workers frankly seem out of place.  You have to ask whether you are going to be happy staying in a field that’s populated by younger workers with different interests or whether you might try another line of work.

Consider how a return to the workplace will affect you personally and socially: If you’re 40, 50 or 60, working right now probably feels like breathing – when have you not worked?  But it may not be the best option after a year or two out of the workplace.

Consider health insurance issues: If a retiree returning to the workforce is already receiving Medicare or is covered by a “Medigap” policy, they may be able to lower their costs or improve their coverage by accepting group coverage as primary underwriter of their medical expenses.  Since people over age 55 are generally the greatest users of the health care system, coverage issues are particularly important to run by a financial planner.

Know your tax picture: Tax issues shouldn’t determine your ambitions and goals, but it’s important to consider the impact full or part-time income will have on your finances.  Most retirees realize that it doesn’t take much income to knock them into a higher bracket.  Look for ways to control the taxes you’ll ultimately pay, including continued participation in qualified plans, IRAs, and other tax-favored accumulation vehicles and using annuity income to fill the gap between the beginning of the “post-retirement” period and the age when full Social Security benefits can be drawn without an offset for employment income.  Additional work income may affect the amount of taxable social security income you’re receiving, so be sure to take that into account.

Consider what earnings will do to all your retirement payments: If you are planning to continue working or returning to work, consider not only the tax impact, but also how that might change the way you plan to draw on your retirement savings and investments as well as Social Security.  If you are planning to work, it’s important you consider suspending or delaying receipt of those benefits for as long as you can.

Look for work-related incentives: Particularly for public sector workers, there are opportunities to return to state employment and actually augment existing pensions.  Keep an eye out for these programs and see if they work for you.

Keep saving: If you return to the workplace, see what you can do to take advantage of your new employer’s 401(k) plan or any other tax-advantaged retirement savings benefit, particularly if an employer matches your contribution.  Don’t miss a chance to enhance your retirement savings.

Returning to the workforce after retiring can be immensely rewarding both professionally and personally.  If you’ve un-retired yourself, please feel free to post your comments or additional insights about your experience.

This article was produced by the Financial Planning Association (FPA), the membership organization for the financial planning community, and is provided by Sam H. Fawaz and YDream Financial Services, a local member of FPA and a fee-only member of the National Association of Personal Financial Advisors.

15 Small-Business Tax Deductions

I recently contributed to an Entrepreneur Magazine online article written by Karen Mueller Prince about small-business Tax Deductions.  Here’s an excerpt with a link to the full article:

Opportunities abound for small businesses to cut their tax bills.  The key is understanding what’s deductible for your business. A good tax preparer can guide you, but it is your responsibility to save receipts throughout the year.

Organization and good record keeping are the keys to lower tax preparation fees and painless IRS audits,” says Sam Fawaz, a certified financial planner and certified public accountant with Y.D. Financial Services
in Franklin, Tennessee and Canton, Michigan. “Bringing a shoe box to your CPA or accountant and saying, ‘Here are my tax records; please prepare my return’ will undoubtedly cost you more in compilation and accounting fees to arrive at tax return numbers.”

Here’s a rundown of expenses to track in preparation for tax day.

To continue reading, please click here http://bit.ly/a49I1K

A Few Year-end 2009 Tax Planning Tips

As we approach year-end, it’s again time to focus on last-minute moves you can make to save taxes—both on your 2009 return and in future years.  The federal income tax environment is very favorable right now, but it’s not likely to continue much longer.  Now is the time to take advantage of the tax breaks that Congress has provided before they disappear. To get you started, we’ve included a few money-saving ideas here that you may want to put in action before the end of the year.

I have a more comprehensive list of year-end tax planning tips in the works for anyone interested in them.  Please e-mail me at “shfawaz at y d f s . c o m” to be added to my periodic e-mail newsletter (no more than one e-mail per week) and I will send you the comprehensive list. 

  • For 2009, the tax rate on long-term capital gains is 0% when the taxpayer falls within the 10% or 15% regular income tax rate brackets. This will be the case to the extent that your taxable income (including long-term capital gains) does not exceed $67,900 if you’re married and file jointly ($33,950 if you’re single). While your income may be too high to benefit from the 0% rate, you may have adult children, grandchildren, or other loved ones who can. If so, consider giving them some appreciated stock that you’ve held for more than a year which they can then sell and pay 0% tax on the resulting long-term gains.  Watch out though, if you give securities to someone who is under age 24, the kiddie tax rules could cause the gains to be taxed at the parent’s higher rates.
  • A great way to cut energy costs and save up to $1,500 in income taxes this year is to make energy efficiency improvements to your principal residence.  Basically, if you install energy efficient insulation, windows, doors, roofs, heat pumps, hot water heaters or boilers, or advanced main air circulating fans to your home during 2009 or 2010, you may be entitled to a tax credit of 30% of the purchase price, up to a maximum credit of $1,500.  For 2009, the credit is allowed against the AMT.  However, unless Congress changes the rules, this will not be the case for 2010.  So if there is any possibility you’ll be subject to AMT next year you may want to make these improvements this year.
  • If you run your own business and have plans to buy office furniture, equipment, or other tangible business property, you might consider doing so before year-end to take advantage of the temporarily increased Section 179 deduction and the temporary 50% bonus depreciation.  For 2009, the maximum Section 179 deduction is a whopping $250,000 (assuming property purchases for the year don’t exceed $800,000).  This means that an eligible business can often claim first-year write-offs for the entire cost of new and used equipment and software additions.  You can also claim first-year bonus depreciation equal to 50% of the cost (reduced by the Section 179 deduction) of most new (not used) equipment and software placed in service during 2009.  Unless Congress takes action, the Section 179 deduction will drop to about $134,000 in 2010 and the 50% first-year bonus depreciation break will expire at year-end.
  • If you’re age 70½, or older, there a couple of temporary tax saving opportunities that you might want to take advantage of this year.  First, you can arrange to transfer up to $100,000 of otherwise taxable IRA money to the public charity of your choice (such as your church or other favorite charity).   The distribution is federally income tax free.  You don’t get to claim it as an itemized deduction, but the tax-free treatment equates to a 100% write-off, without the need to itemize your deductions. Second, although you are normally required to withdraw a minimum amount out of your retirement accounts each year, a temporary tax law change made in late 2008 waives this requirement for 2009.  So, if you haven’t already received your required distribution during 2009 and you do not need the funds, you can just leave them in your retirement account for another year.  If you have already received the distribution and now wish you hadn’t, you may be able to roll the funds back into your retirement account, even if the normal 60-day rollover period has already expired.  However, this may require action before 11/30/09. If this situation applies to you, please contact your tax advisor.
  • And finally, watch out for the alternative minimum tax (AMT) in all of your planning because what may be a great move for regular tax purposes may create or increase an AMT problem.

There’s really only one way to tell if you would benefit from year-end tax planning: that is, project income and tax deductible expenses for two years (2009 and 2010) and see what actions result in the lowest combined tax bill.  Qualified individuals can receive a no-obligation complimentary year-end tax planning consultation.  Please call us if you’d like to know more about this service or want to discuss other ideas.

Sam H. Fawaz, CPA, CFP®

Y.D. Financial Services, Inc.

Your Unbiased, Trusted Financial Coordinator

(734) 447-5305 or (615) 395-2010


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Sam H. Fawaz CFP®, CPA is president of Y.D. Financial Services, Inc. and YDream Financial Services, Inc., a registered investment advisor in Franklin, TN and Canton, MI. Sam is a Certified Financial Planner ( CFP ), Certified Public Accountant and registered member of the National Association of Personal Financial Advisors (NAPFA) fee-only financial planner group.  Sam has expertise in many areas of personal finance and wealth management and has always been fascinated with the role of money in society.  Helping others prosper and succeed has been Sam’s mission since he decided to dedicate his life to financial planning.  He specializes in entrepreneurs, professionals, company executives and their families.

All material presented herein is believed to be reliable, but we cannot attest to its accuracy.  Investment recommendations may change and readers are urged to check with their investment advisors before making any investment decisions.  Opinions expressed in this writing by Sam H. Fawaz are his own, may change without prior notice and should not be relied upon as a basis for making investment or planning decisions.  No person can accurately forecast or call a market top or bottom, so forward looking statements should be discounted and not relied upon as a basis for investing or trading decisions.

Should College Freshman Start A Roth IRA?

At no time since the Great Depression have college students worried more about money.  Tuition continues to rise, financing sources continue to contract.  So why should a student worry about finding money for, of all things, retirement?

Because even a few dollars a week put toward a Roth IRA can reap enormous benefits over the 40-50 years of a career lifetime that today’s average college student will complete after graduation.  Take the example of an 18-year-old who contributes $5,000 each year of school until she graduates.  Assume that $20,000 grows at 7.5 percent a year until age 65.  That would mean more than a half-million dollars from that initial four-year investment without adding another dime.

Consider what would happen if she added more.

There are a few considerations before a student starts to accumulate funds for the IRA.  First, students should try and avoid or extinguish as much debt – particularly high-rate credit card debt – as possible.  Then, it’s time to establish an emergency fund of 3-6 months of living expenses to make sure that a student can continue to afford the basics at school if an unexpected problem occurs.

To contribute to an IRA, you must have earned income; that is, income earned from a job or self-employment.  Even working in the family business is allowable if you get a form W-2 or 1099 for your earnings.  Contributions from savings, investment income or other sources is not allowed.

Certainly $5,000 a year sounds like an enormous amount of outside money for today’s student to gather, but it’s not impossible.  Here’s some information about Roth IRAs and ideas for students to find the money to fund them.

The basics of Roth IRAs: I’ll start by describing the difference between a traditional IRA and a Roth IRA and why a Roth might be a better choice for the average student.   Traditional IRAs allow investors to save money tax-deferred with deductible contributions until they’re ready to begin withdrawals anytime between age 59 ½ and 70 ½.  After age 70 1/2, minimum withdrawals become mandatory.

Roth IRAs don’t allow a current tax-deductible contribution; instead they allow tax-free withdrawal of funds with no mandatory distribution age and allow these assets to pass to heirs tax-free as well.   If someone leaves their savings in the Roth for at least five years and waits until they’re 59 1/2 to take withdrawals, they’ll never pay taxes on the gains. That’s a good thing in light of expected increases in future tax rates.  For someone in their late teens and early 20s, that offers the potential for significant earnings over decades with great tax consequences later.  Also, after five years and before you turn age 59 1/2, you may withdraw your original contributions (not any accumulated earnings) without penalty.

Getting started is easy: Some banks, brokerages and mutual fund companies will let an investor open a Roth IRA for as little as $50 and $25 a month afterward. It’s a good idea to check around for the lowest minimum amounts that can get a student in the game so they can plan to increase those contributions as their income goes up over time.  Also, some institutions offer cash bonuses for starting an account.  Go with the best deal and start by putting that bonus right into the account.  Watch the fine print for annual fees or commissions and avoid them if possible.

It’s wise to get advice first: Every student’s financial situation is different. One of the best gifts a student can get is an early visit – accompanied by their parents – to a financial advisor such as a Certified Financial Planner™ professional.   A planner trained in working with students can certainly talk about this IRA idea, but also provide a broader viewpoint on a student’s overall goals and challenges.  While starting an early IRA is a great idea for everyone, students may also need to know how to find scholarships, grants and other smart ideas for borrowing to stay in school.  A good planner is a one-stop source of advice for all those issues unique to the student’s situation.

Plan to invest a set percentage from the student’s vacation, part-time or work/study paychecks: People who save in excess of 10 percent of their earnings are much better positioned for retirement than anyone else. Remarkably few people set that goal.  One of the benefits of the IRA idea is it gets students committing early to the 10 percent figure every time they deposit a paycheck. It’s a habit that will help them build a good life.  Better yet, set up an automatic withdrawal from your savings or checking account for the IRA contribution.

Get relatives to contribute: If a student regularly gets gifts of money from relatives, it might not be a bad idea to mention the IRA idea to those relatives.  Adults like to help kids who are smart with money, and if the student can commit to this savings plan rather than spending it at the mall, they might feel considerably better about the money they give away.  At a minimum, the student should earmark a set amount of “found” money like birthday and holiday gift money toward a Roth IRA in excess of the 10 percent figure.  Again, the IRA contributions cannot exceed the student’s earned income for the year.

Sam H. Fawaz is a Certified Financial Planner ( CFP ), Certified Public Accountant and registered member of the National Association of Personal Financial Advisors (NAPFA) fee-only financial planner group.  Sam has expertise in many areas of personal finance and wealth management and has always been fascinated with the role of money in society.  Helping others prosper and succeed has been Sam’s mission since he decided to dedicate his life to financial planning.  He specializes in entrepreneurs, professionals, company executives and their families. This column was co-authored by Sam H. Fawaz CPA, CFP and the Financial Planning Association, the membership organization for the financial planning community, and is provided by YDream Financial Services, Inc., a local member of FPA.

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