It’s that time of year again! Tax documents are arriving by mail and the race towards April 18th is on. While 2010 is over and gone, there are still things we can do to reduce our tax liability for last year. Here’s a list of a few things you can do now that might reduce your tax bill for 2010.
1. Take full advantage of available tax credits
The government offers taxpayers an array of credits for items and services purchased last year. Remember that credits are a dollar for dollar reduction in tax liability as compared to a tax deduction, which will reduce your taxable income. In short, tax credits are preferable to tax deductions. While some credits are phased out by income, such as the child tax credit, other credits are not phased out by income, such as the residential energy credit.
Below is a list of popular credits that often get overlooked:
Residential Energy Credit. Taxpayers can use this credit for improvements to a principle residence that creates an increase in energy efficiency: i.e. Installation of a tankless hot water heater.
Alternative Motor Vehicle Credit. The government may give you a tax credit if you purchased an alternative fuel vehicle, such as a hybrid automobile. Speak with your preparer about the applicable restrictions and rules.
First Time Homebuyers Credit. This credit certainly made the headlines last year. If you purchased a home in 2010, you may be eligible for a tax credit that could save you tax dollars.
American Education Opportunity Tax Credit. This credit extends the credit formerly known as the Hope credit. If you sent a child to college in 2010, this credit might be for you!
Dependent and Child Care Credit. This credit is available for working tax payers with dependents that require care during working hours. There are several requirements and regulations with this credit, but it is certainly worth the effort, if applicable.
The above list is only a portion of available credits. It is beyond the scope of this article to explore the entire list. It is important to discuss the applicability of tax credits with your tax professional for items applicable to your 2010 return. It could save you big bucks!
2. Maximize Retirement Contributions
Did you know that the government will subsidize your retirement? That’s right, through tax deductions the government effectively is subsidizing your retirement. Many personal retirement accounts allow contributions up until April 18th, and those contributions can apply to 2010.
Contributions into tax-deferred retirement accounts, such as IRAs, SEPs, and SIMPLE IRAs reduce current taxable income; therefore reducing tax liability. For example, a couple in the 25% tax bracket who can make an allowable Traditional IRA contribution of $10,000 could save $2500 or more. That’s a 25% return on investment before this money is even invested! Best of all, this contribution can be made as late as April 18th.
There are a multitude of rules and regulations regarding allowable retirement contributions and deadlines, so it’s imperative to speak with a tax professional before making a decision.
3. Review Itemized Deductions
Schedule A (Itemized Deductions) is a common area for mistakes and omissions. In my experience, I have seen mistakes and omissions on this form due to a lack of effort from the taxpayer. For example, many people leave tax dollars on the table when it comes to charitable deductions. Charitable deductions can help reduce taxable income and ultimately decrease your tax bill.
Here are a few other areas that are often overlooked.
Charitable Mileage. A deduction is allowable for qualifying charitable mileage. For example, if you drive to a local Goodwill to drop off items, the mileage to and from is deductible.
Sales Taxes. For your 2010 return, you may deduct sales taxes paid for automobile purchases. Depending on the state in which you live, this deduction can save you several hundred dollars or more. Let your tax preparer know if you purchased a vehicle in 2010.
Non-cash Charitable Contributions. Organizations such as Goodwill perform a great service to our communities. It’s important to properly substantiate non-cash contributions to maximize deductibility. Make sure to always get a receipt from the organization, create an itemized list of items being donated, and do not forget to properly value the items being donated to fully substantiate these types of donations. There are several documents available to assist taxpayers in determining the donated value of each item, including one on Goodwill’s website. It’s worth the additional effort.This is another area where a good tax preparer can come in handy. Don’t be afraid to ask for assistance from your preparer when it comes to properly valuing your donated items. Also, make sure to keep up with your mileage as well!
Utilize Miscellaneous Items Deductions. Miscellaneous itemized deductions are subject to a 2% floor of adjusted gross income. This means in order to get a deduction you must present allowable deductions greater than 2% of your adjusted gross income. The number of employees working from home has increased in the past few years. An office in the home of an employed taxpayer is a fine example of a miscellaneous itemized deduction. Tax preparation fees, financial planning, unreimbursed employee expenses, and investment expenses are a few more examples of miscellaneous itemized deductions.
Most Taxpayers don’t have the time and energy to fully understand all the available deductions, credits, and retirement contribution options available. The key to properly handling one of the largest recurring expenses (taxes) in anyone’s financial world is by implementing a proactive tax strategy. But, even with good tax planning, numbers can change and life can get in the way. When that occurs, the above options allow taxpayers another chance to reduce their tax liability.
I utilize integral tax planning for my clients. I feel this area is one of the most important (if not the most important) part of the financial planning puzzle. Taxes can touch and impact (both positively and negatively) many aspects of our financial world, so it’s important to manage our tax liability. It’s important that taxpayers work closely with tax preparers.
I am a firm believer in holistic financial planning, which includes proactive tax planning. If you are searching for a holistic financial planner in your area, The Alliance of Cambridge Advisors (ACA) is a great place to start. ACA advisors integrate taxes into financial planning, which is an enormous benefit to clients.
In full disclosure, Troy Von Haefen is a member of The Alliance of Cambridge Advisors.
Any of the above information is intended for informational purposes only and is not intended to be considered tax advice or implemented as such.
By Troy Von Haefen, CFP®
March 27, 2011
March 23, 2011
Claiming Homebuyer’s Credit on your 2010 Tax Return
Question: I was wondering what documentation you are suggesting your clients submit to claim the $6,500 home-buyer’s tax credit.
Answer: Here is what I would do for a client:
- Paper file return
- Properly complete Form 5405
- Copy of HUD Settlement Statement showing signature of buyer and seller
- Copy of mortgage statements from the last 5 years you lived in your previous home
By Kevin Jacobs, CFP®
March 19, 2011
Rising Oil Prices and Falling Dictators
The headlines and talk shows scream at us about the rising oil prices and Mideastern dictators falling like dominos. The stock market is scared and so the S&P500 has fallen 5% in the past week. Here we go again, you might say. Are we sliding back into another recession? These are very legitimate concerns but let’s look at the facts:
• The demand for oil is at an all time high. With the emerging markets of India and China coming on strong, they have an enormous appetite for oil. Increased oil prices should not be a surprise. It’s a fact of life and reflects our utter dependence on oil. Most economists will tell you that oil demand is on a continually upward sloping line so it stands to reason that oil prices will go up. And most economists are still bullish about the recovery and predict that gross domestic product (GDP) in the US will grow by 3.2% in 2011 and 2012. However, all bets are off if oil climbs to over $125/barrel. But that’s a long way to go.
• The fed is still predicting benign inflation for the next few years. How can this be with the rising oil prices? And food prices keep rising? If you look at food and energy costs as a percentage of family expenses, it comes to 13%. That is a small part of the whole pie. Housing and healthcare represents 38% and housing costs are sure not going to be inflated any time soon.
• Corporate earnings drive the stock market. Yes, the market has periods of increased jitters like we are seeing now but in the end and over time; it is corporate earnings that make the line go ever upward. And corporate earnings are expected to be 9-10% this year. Price earning (P/E) ratios for stocks is at 13 and the long term P/E ratio is 15. Stocks are still underpriced when you look at historical averages. Most economists predict another good year for stocks.
• The best mouse trap ever devised for creating wealth is an appropriate asset allocation financial plan. That means that you hold a combination of stocks, bonds, cash and real estate. That combination is dependent on your goals, your age and your risk tolerance. You own a diversified portfolio and you rebalance this portfolio every year. So, in a year when your stocks do well and you are now over allocated to stocks, you sell them and put the money into bonds. This is a disciplined non-emotional strategy and allows you to sell high and buy low. By doing this year after year, you ride the ups and downs but your portfolio steadily grows. More importantly, you sleep at night!
By Judy Stewart, CFP®, MBA, EA
• The demand for oil is at an all time high. With the emerging markets of India and China coming on strong, they have an enormous appetite for oil. Increased oil prices should not be a surprise. It’s a fact of life and reflects our utter dependence on oil. Most economists will tell you that oil demand is on a continually upward sloping line so it stands to reason that oil prices will go up. And most economists are still bullish about the recovery and predict that gross domestic product (GDP) in the US will grow by 3.2% in 2011 and 2012. However, all bets are off if oil climbs to over $125/barrel. But that’s a long way to go.
• The fed is still predicting benign inflation for the next few years. How can this be with the rising oil prices? And food prices keep rising? If you look at food and energy costs as a percentage of family expenses, it comes to 13%. That is a small part of the whole pie. Housing and healthcare represents 38% and housing costs are sure not going to be inflated any time soon.
• Corporate earnings drive the stock market. Yes, the market has periods of increased jitters like we are seeing now but in the end and over time; it is corporate earnings that make the line go ever upward. And corporate earnings are expected to be 9-10% this year. Price earning (P/E) ratios for stocks is at 13 and the long term P/E ratio is 15. Stocks are still underpriced when you look at historical averages. Most economists predict another good year for stocks.
• The best mouse trap ever devised for creating wealth is an appropriate asset allocation financial plan. That means that you hold a combination of stocks, bonds, cash and real estate. That combination is dependent on your goals, your age and your risk tolerance. You own a diversified portfolio and you rebalance this portfolio every year. So, in a year when your stocks do well and you are now over allocated to stocks, you sell them and put the money into bonds. This is a disciplined non-emotional strategy and allows you to sell high and buy low. By doing this year after year, you ride the ups and downs but your portfolio steadily grows. More importantly, you sleep at night!
By Judy Stewart, CFP®, MBA, EA
March 15, 2011
Three Steps to a Solid Financial Decision
I recently had a client call and ask my opinion about an extended warranty offer for his car. This was an interesting conversation which I thought may be helpful to share with others. Not so much in the sense of the viability of extended warranties for cars, but more so from the standpoint of learning how to make a well informed decision.
When it comes to decisions, I generally follow three steps to assist and guide clients. While some decisions may require more, these three steps are great starting points in the search for clarity.
1. Information
Information is golden when it comes to making a decision. The more information you can ascertain the easier the decision. The detail and fine print usually contain key points that often get over-looked but can be big factors in the decisions making process. Ex. Does the extended warranty require a deductible, and, if so, how much?
The point of gathering information is to ascertain black and white data and remove as much emotion as possible. While the salesman pushing the car warranty delivers the hard sell by emoting fear based on the possible financial liability of expensive repairs, the car owner needs to understand the true cost of the warranty. Sure, auto repairs can be expensive, but does the warranty truly cover those expensive repairs and for how much?
2. The Financial Bottom Line
This is the subjective area of the decision process. Where do you draw the line when it comes to cost? How much is too much to pay?
Let’s go back to the warranty example. The cost of the warranty was roughly $2000. The car was a Toyota with 30,000 miles. Using the information we gathered from the details of the proposed plan we learned this warranty would only be a viable option for the next 2-2 ½ years (due to mileage restrictions). I simply asked my client how many repairs $2000 would cover. He responded just as I thought, “quit a few!” After looking at what was actually covered and factoring the deductible and other limitations, the cost suddenly seemed pricey. My client drew the line and decided the cost was just too high.
3. Gut Check
We really need to listen to what our gut tells us when it comes to decisions. We also have to be careful not to rationalize a bad decision. This is why it’s important to follow steps 1 & 2, especially in regards to removing the emotion. If we can remove the emotion from the decision, the answer usually becomes clear.
While my client’s gut told him the warranty didn’t feel right (prompting his phone call to me), the salesman worked hard to play on emotions and cloud the decision making process. After removing the emotion my client’s gut proved to be right. The risk of possible repairs was a risk my client was willing to bear…and more importantly, one my client’s gut was willing to bear.
Most decisions get made without too much thought and deliberation, but the occasional difficult financial decision can be painful. Following the three steps above can help to clarify and remove some of the pain. While the simple example I used above may seem small to some, the three steps know no financial limit.
We have all made a few bad decisions along life’s journey, and, looking back on those decisions, we can usually agree that something was missing in the process. Take a look back at those decisions and see if one of the three points above was removed during your time of deliberation.
Have you experienced a difficult financial decision recently? How did you resolve the issue? What methods do you use to help you conquer a difficult decision?
By Troy Von Haefen, CFP®
When it comes to decisions, I generally follow three steps to assist and guide clients. While some decisions may require more, these three steps are great starting points in the search for clarity.
1. Information
Information is golden when it comes to making a decision. The more information you can ascertain the easier the decision. The detail and fine print usually contain key points that often get over-looked but can be big factors in the decisions making process. Ex. Does the extended warranty require a deductible, and, if so, how much?
The point of gathering information is to ascertain black and white data and remove as much emotion as possible. While the salesman pushing the car warranty delivers the hard sell by emoting fear based on the possible financial liability of expensive repairs, the car owner needs to understand the true cost of the warranty. Sure, auto repairs can be expensive, but does the warranty truly cover those expensive repairs and for how much?
2. The Financial Bottom Line
This is the subjective area of the decision process. Where do you draw the line when it comes to cost? How much is too much to pay?
Let’s go back to the warranty example. The cost of the warranty was roughly $2000. The car was a Toyota with 30,000 miles. Using the information we gathered from the details of the proposed plan we learned this warranty would only be a viable option for the next 2-2 ½ years (due to mileage restrictions). I simply asked my client how many repairs $2000 would cover. He responded just as I thought, “quit a few!” After looking at what was actually covered and factoring the deductible and other limitations, the cost suddenly seemed pricey. My client drew the line and decided the cost was just too high.
3. Gut Check
We really need to listen to what our gut tells us when it comes to decisions. We also have to be careful not to rationalize a bad decision. This is why it’s important to follow steps 1 & 2, especially in regards to removing the emotion. If we can remove the emotion from the decision, the answer usually becomes clear.
While my client’s gut told him the warranty didn’t feel right (prompting his phone call to me), the salesman worked hard to play on emotions and cloud the decision making process. After removing the emotion my client’s gut proved to be right. The risk of possible repairs was a risk my client was willing to bear…and more importantly, one my client’s gut was willing to bear.
Most decisions get made without too much thought and deliberation, but the occasional difficult financial decision can be painful. Following the three steps above can help to clarify and remove some of the pain. While the simple example I used above may seem small to some, the three steps know no financial limit.
We have all made a few bad decisions along life’s journey, and, looking back on those decisions, we can usually agree that something was missing in the process. Take a look back at those decisions and see if one of the three points above was removed during your time of deliberation.
Have you experienced a difficult financial decision recently? How did you resolve the issue? What methods do you use to help you conquer a difficult decision?
By Troy Von Haefen, CFP®
March 11, 2011
Common “Do-It-Yourself” Tax Preparation Mistakes
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.
By Kevin Jacobs, CFP®
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.
By Kevin Jacobs, CFP®
March 7, 2011
Top Ten Things To Do During Tax Season (Apologies to David Letterman)
10. Get your things organized and to your preparer as soon possible to avoid needing to file an extension.
9. If you owe a lot or are getting a big refund, adjust your withholdings or quarterly estimated payments now.
8. If you can deduct an IRA contribution and owe tax, consider making a contribution before April 15 and getting it on your 2010 tax return.
7. If you live in Colorado, have kids in college, and don’t have a Colorado 529 plan, set one up and put this year’s tuition in it now.
6. Start your file now for 2011 tax data.
5. If you’re going through a divorce…oh shoot, taxes are the least of your problems.
4. Start a mileage log with a section for charitable miles, medical miles, and business miles.
3. Keep track of all your out-of-pocket business expenses.
2. Keep organized on your other financial issues, not just taxes.
1. Reward your tax preparer with chocolate – especially if it’s me!
By Linda Leitz, CFP®, EA
9. If you owe a lot or are getting a big refund, adjust your withholdings or quarterly estimated payments now.
8. If you can deduct an IRA contribution and owe tax, consider making a contribution before April 15 and getting it on your 2010 tax return.
7. If you live in Colorado, have kids in college, and don’t have a Colorado 529 plan, set one up and put this year’s tuition in it now.
6. Start your file now for 2011 tax data.
5. If you’re going through a divorce…oh shoot, taxes are the least of your problems.
4. Start a mileage log with a section for charitable miles, medical miles, and business miles.
3. Keep track of all your out-of-pocket business expenses.
2. Keep organized on your other financial issues, not just taxes.
1. Reward your tax preparer with chocolate – especially if it’s me!
By Linda Leitz, CFP®, EA
March 3, 2011
You Get What You Pay For
Several years ago, after the completion my CFP® coursework, I was searching for practical guidance in tax preparation. I enrolled in the H&R Block tax course. I was seeking a pencil to paper type experience after the high level learning in taxation from the CFP® tax course.
I breezed through the Block course and did walk away with the experience I desired. I was able to get comfortable with some of the more complex tax forms and put my CFP® knowledge to the test. Of course, after completion of the Block course, their recruiters tried to sink their claws into me, but I politely declined. I knew I didn’t want to participate in a “drive through” tax preparation system.
There are many choices in tax preparers, and choosing the right preparer is important. Making a poor choice can be an expensive decision. The preparer/client relationship is essential, and I certainly see evidence of disconnected relationships by the number of tax return mistakes I find on prospective client’s returns.
Most mistakes I find are due to a lack of communication. How does the client know what information the preparer needs if the preparer doesn’t ask for it? And, how does the preparer know what info is needed if he/she doesn’t know the client?
Building a good client/preparer relationship takes time, and, unfortunately, the “drive through” tax prep services seen in many forms across the country doesn’t allow for time. If you want a relationship, you will have to pay for it, but the price you pay will be worth the cost. A preparer who knows you and your situation is golden when it comes to seeking out additional deductions.
If your return is very simple, say just a w-2, one the many national chain type preparers would be fine to utilize. But, if your return has any hint of complexity, it’s worth the additional expense to find a preparer who will take the needed time to complete the return thoroughly.
If you are searching for a tax pro this season, ask questions and explore the potential relationship. How thoroughly will your return be prepared? Will you have the ability to ask questions and receive acceptable answers? Will you have the ability to build a relationship that will position you to save tax dollars now and in the future? Remember, the preparer you are looking for and need may not be the least expensive option.
By Troy Von Haefen, CFP®
I breezed through the Block course and did walk away with the experience I desired. I was able to get comfortable with some of the more complex tax forms and put my CFP® knowledge to the test. Of course, after completion of the Block course, their recruiters tried to sink their claws into me, but I politely declined. I knew I didn’t want to participate in a “drive through” tax preparation system.
There are many choices in tax preparers, and choosing the right preparer is important. Making a poor choice can be an expensive decision. The preparer/client relationship is essential, and I certainly see evidence of disconnected relationships by the number of tax return mistakes I find on prospective client’s returns.
Most mistakes I find are due to a lack of communication. How does the client know what information the preparer needs if the preparer doesn’t ask for it? And, how does the preparer know what info is needed if he/she doesn’t know the client?
Building a good client/preparer relationship takes time, and, unfortunately, the “drive through” tax prep services seen in many forms across the country doesn’t allow for time. If you want a relationship, you will have to pay for it, but the price you pay will be worth the cost. A preparer who knows you and your situation is golden when it comes to seeking out additional deductions.
If your return is very simple, say just a w-2, one the many national chain type preparers would be fine to utilize. But, if your return has any hint of complexity, it’s worth the additional expense to find a preparer who will take the needed time to complete the return thoroughly.
If you are searching for a tax pro this season, ask questions and explore the potential relationship. How thoroughly will your return be prepared? Will you have the ability to ask questions and receive acceptable answers? Will you have the ability to build a relationship that will position you to save tax dollars now and in the future? Remember, the preparer you are looking for and need may not be the least expensive option.
By Troy Von Haefen, CFP®
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