What if there was mandatory money instruction for every child in America from kindergarten on up and every adult was required to take an annual test confirming those concepts well into their senior years?
It’s a nice fantasy. But in reality, the first money lessons a child gets come from their parents, and experts agree that the way parents teach and reinforce those concepts will have a major impact on their kids avoiding major financial problems later in life.
So, a question for parents: How equipped are you to teach your kids about money?
If you don’t feel confident about creating a money curriculum for your child, don’t worry, there’s help. Start by planning your own financial future with a qualified financial planner. You can take a close look at where you need to be with your finances and gather ideas to teach your kids about money as well.
However you personalize the lesson, every parent needs to involve these five basic concepts in a child’s money education:
1. Work: It’s true. The first great lesson isn’t so much about money as what it takes to earn money. As early as kindergarten or first grade, your kid is going to have to start paying for things. Children need to understand as early as possible that a good day’s work should deliver a good day’s pay, so it’s a good idea to come up with age-appropriate chores in exchange for an allowance. The best place to start is with simple jobs like setting the table and making beds. For older kids, yard work, laundry and housecleaning are good to add to the list.
How big should that allowance be? Try to match the allowance closely to the expenses you want your child to cover and leave a little wiggle room for treats. That way, the child begins to understand choice while learning that spending requires limits. Also offer options that allow children the opportunity to earn additional money for extras – toys or privileges, for instance – then stress why working for treats is important. When kids are younger, you should keep a frequent watch over how they’re handling their cash – checking in every day or so – and then allow them more leverage as they demonstrate wise decisions.
2. Saving: Once you teach your kids about spending, help them identify larger goals they have to save for. Buy a piggy bank – young children relate very well to this tried-and-true symbol of saving. It gives them someplace to put money out of sight so they don’t spend it, and you should impress upon them that they are free to tap into it only to accomplish a goal that the both of you initially discuss. Again, as they make smarter decisions, let them have more responsibility. And this lesson shouldn’t just be about buying stuff – kids need to learn how money can be used for setting and accomplishing goals.
If it makes sense for you, you can also add incentives to save. One idea: Tell your son or daughter that you’ll give them $1 for every $5 or $10 they put in the bank. It will definitely make them think twice about an impulse purchase.
3. Budgeting: Budgeting is one of the most universally misunderstood money concepts for children and adults. That’s why it’s so important to make sure a child understands why it’s so important to write down money priorities and keep track of whether those priorities are being met. When a child gets a little older, it might be a good idea to help them establish a budget for everyday expenses with an important side goal, such as accumulating spending money for a much-anticipated family vacation. Parents might show kids a similar exercise for how they’re setting aside money for the trip. Unsure how to set up a budget? PBS Kids offers an example.
For younger kids, it might make sense to turn the budgeting process into a game. Parents might take a stack of fake money, give it to the child and ask what they would spend it on. The child would write down each purpose – toys, school lunches and special things they need to save for – and get them to write down how they’d allocate the cash. This can turn into a real exercise later.
4. Delayed gratification: If budgeting and savings are going to work, kids need to know they can’t spend their money whenever they feel like it. Parents need to lead by example here. If kids always see you paying with plastic and bringing home carfuls of shopping bags each week from the mall, they might get a sense that money is limitless. On the other hand, if they see you making lists, tearing out coupons and talking about saving for particular goals over the long term – they might start to mimic that behavior.
5. Helping others: It’s important for children to know that there is always someone less fortunate than themselves and it’s important to help, even in a small way. Increasingly, kids are involved in charitable and community activities as part of their educational process – such work even figures into college applications. Teaching your children to set aside a little for those who have less might be a good first lesson in what should be a lifetime of sharing with others. Also, don’t forget that charity isn’t always about money. Kids should also learn the importance of giving their time and labor to important causes and people in need. And if they think of unique and effective ideas to help, by all means, praise and encourage that activity.
September 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Scott M. Spann, CFP(R), EA, a local member of FPA.
Wednesday, September 29, 2010
Thursday, July 8, 2010
Keeping Your Credit Score Healthy
It doesn’t take much these days to damage a credit score. Before the recession, late payments and blasting through credit limits would take its toll. But in the past year, Fair Isaac, the company that developed the algorithm that is the leading determinant of our scores, made an important change in its formula.
It’s now putting much more emphasis on the size of your balances and how close they are to your total credit limit. It’s a behavior trigger that creditors see as a bigger worry than ever. So the best thing you can do for your credit score is to get your balances down to under half of your credit limit.
Even better, pay them off entirely and use them only when you know you can pay them off at the end of the month. Inactive accounts will ding your credit score, but quick payments can only help.
The latest revision in the FICO system will actually allow a bit of lenience on late payment – something that might affect more than a few consumers with the downturn in the economy. Obviously, this won’t mean that someone can chronically pay late, but once or twice won’t make the same impact as in earlier FICO versions.
Yet credit utilization – the amount of credit you’re actually using relative to your credit limit – is a much bigger deal simply because high balances are still prevalent among consumers. From the lender’s perspective, high balances mixed with a tough economy means a higher risk of default among customers.
So, one more time. What’s a good target utilization rate for all your revolving credit accounts? No more than 50 percent of your credit limit, and if you can get it significantly lower than that over time, that’s a good plan. The lower your credit utilization, the better your score.
What does that mean for ordinary Americans who don’t meet that under-50 percent goal? It means you shouldn’t be applying for new credit or refinancing for awhile, and that includes something as innocuous as a department store charge.
So maybe that means deferring gratification for awhile until you get things under control. But look at it this way – you can use this time as a way to develop more knowledge about credit and be in a better position long-term. Here are some things you need to know:
You’ll need at least a 740 score for the best rates: You’ll often hear that credit scores of 700 and up will get you best customer status with lenders. That’s true, but you need to aim significantly higher. For the lowest rates and best terms, you need to get your credit score above 740 (the top credit score, by the way, is 850), so keep that target in mind.
Budget: If you’ve never reviewed your spending and picked out areas where you can cut, you’ve never done a budget. Start tracking your spending either on paper or with financial planning software and start pinpointing what spending you can shift over to paying off debt.
Get some advice: Remember that debt is just one part of your overall financial picture. It might not be a bad time to sit down with a financial planner to talk about your debt issues, planning for retirement, your kids’ college education and any other key financial goals.
Monitor your credit reports: Remember that you have the right to get all three of your credit reports -- from Experian, TransUnion and Equifax -- once a year for free. You can do so by ordering them at www.annualcreditreport.com. Order them individually at different points in the year. That means you’ll get an extended picture of how your credit picture looks because the three bureaus feed each other the latest information. You’ll also be able to clean up errors as you find them -- errors can drag down a credit score – and you’ll also keep an eye on identity theft. Oh, and make sure you use the site above and avoid the businesses that use “free credit report” in their title. It’s easy. If they ask for your credit card number, don’t do business with them.
Make electronic payments: Electronic bill payment will allow you to save on postage while guaranteeing on-time payment, and the budgeting advice mentioned above will allow you to put a few more bucks toward getting that loan or credit card bill paid off. It’s important to always pay more than the minimum payment on your bill – otherwise your balance will barely move.
July 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Scott M. Spann, CFP(R), EA, a local member of FPA.
It’s now putting much more emphasis on the size of your balances and how close they are to your total credit limit. It’s a behavior trigger that creditors see as a bigger worry than ever. So the best thing you can do for your credit score is to get your balances down to under half of your credit limit.
Even better, pay them off entirely and use them only when you know you can pay them off at the end of the month. Inactive accounts will ding your credit score, but quick payments can only help.
The latest revision in the FICO system will actually allow a bit of lenience on late payment – something that might affect more than a few consumers with the downturn in the economy. Obviously, this won’t mean that someone can chronically pay late, but once or twice won’t make the same impact as in earlier FICO versions.
Yet credit utilization – the amount of credit you’re actually using relative to your credit limit – is a much bigger deal simply because high balances are still prevalent among consumers. From the lender’s perspective, high balances mixed with a tough economy means a higher risk of default among customers.
So, one more time. What’s a good target utilization rate for all your revolving credit accounts? No more than 50 percent of your credit limit, and if you can get it significantly lower than that over time, that’s a good plan. The lower your credit utilization, the better your score.
What does that mean for ordinary Americans who don’t meet that under-50 percent goal? It means you shouldn’t be applying for new credit or refinancing for awhile, and that includes something as innocuous as a department store charge.
So maybe that means deferring gratification for awhile until you get things under control. But look at it this way – you can use this time as a way to develop more knowledge about credit and be in a better position long-term. Here are some things you need to know:
You’ll need at least a 740 score for the best rates: You’ll often hear that credit scores of 700 and up will get you best customer status with lenders. That’s true, but you need to aim significantly higher. For the lowest rates and best terms, you need to get your credit score above 740 (the top credit score, by the way, is 850), so keep that target in mind.
Budget: If you’ve never reviewed your spending and picked out areas where you can cut, you’ve never done a budget. Start tracking your spending either on paper or with financial planning software and start pinpointing what spending you can shift over to paying off debt.
Get some advice: Remember that debt is just one part of your overall financial picture. It might not be a bad time to sit down with a financial planner to talk about your debt issues, planning for retirement, your kids’ college education and any other key financial goals.
Monitor your credit reports: Remember that you have the right to get all three of your credit reports -- from Experian, TransUnion and Equifax -- once a year for free. You can do so by ordering them at www.annualcreditreport.com. Order them individually at different points in the year. That means you’ll get an extended picture of how your credit picture looks because the three bureaus feed each other the latest information. You’ll also be able to clean up errors as you find them -- errors can drag down a credit score – and you’ll also keep an eye on identity theft. Oh, and make sure you use the site above and avoid the businesses that use “free credit report” in their title. It’s easy. If they ask for your credit card number, don’t do business with them.
Make electronic payments: Electronic bill payment will allow you to save on postage while guaranteeing on-time payment, and the budgeting advice mentioned above will allow you to put a few more bucks toward getting that loan or credit card bill paid off. It’s important to always pay more than the minimum payment on your bill – otherwise your balance will barely move.
July 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Scott M. Spann, CFP(R), EA, a local member of FPA.
Friday, May 28, 2010
Ingredients for Effective Change
I have a dirty little secret share. Actually, it is not so much a secret to those who really know me and my occasionally stubborn ways. Sometimes, no matter how much I know changes need to be made in my personal or professional life- I DO NOT ALWAYS LOVE TO CHANGE. I guess this simply makes me a normal person because change is something that we all struggle with at times. Some people more than others.
The financial life planning process centers itself around the concept of meaningful and effective change. Change is an extremely complex psychological process. When it comes to the topic of changing various aspects of our financial lives it is important to first start with well defined goals and objectives. Common life planning goals and objectives generally fall within the following categories:
• Family
• Career
• Social
• Physical Health
• Spiritual
• Financial
• Intellectual
If you are seeking change in any (or all) of these areas of your life ask yourself one simple question: What are the primary steps you need to take to move in a positive direction?
So what does it take for meaningful and effective change to occur? The ingredients for effective change are as follows:
1. Vision (Awareness/ Insight Into Yourself)
2. Internal Capacity for Change (Skills and Ability to Change)
3. External Pressure (Incentive/Motivation)
4. Action (Have Plan and Take Action)
5. Time (Real Change Takes Time)
The financial life planning process centers itself around the concept of meaningful and effective change. Change is an extremely complex psychological process. When it comes to the topic of changing various aspects of our financial lives it is important to first start with well defined goals and objectives. Common life planning goals and objectives generally fall within the following categories:
• Family
• Career
• Social
• Physical Health
• Spiritual
• Financial
• Intellectual
If you are seeking change in any (or all) of these areas of your life ask yourself one simple question: What are the primary steps you need to take to move in a positive direction?
So what does it take for meaningful and effective change to occur? The ingredients for effective change are as follows:
1. Vision (Awareness/ Insight Into Yourself)
2. Internal Capacity for Change (Skills and Ability to Change)
3. External Pressure (Incentive/Motivation)
4. Action (Have Plan and Take Action)
5. Time (Real Change Takes Time)
Thursday, April 8, 2010
Moving Toward a No-Debt Lifestyle: Steps to Consider
Any financial planning process begins with necessary changes in financial behavior. The degree of change varies based on financial priorities, but in the end, it’s about adopting good habits and abandoning bad ones.
Before you take any of the following steps, it makes sense to talk to an expert who can help you see your whole financial picture. A financial planning professional can examine all your sources of income and expenses and find the most efficient ways to cut expenses, pay off debt and boost the money you have for saving and investing.
In the meantime, here are some ideas:
Start with nickels and dimes: You can’t wish your way out of debt – it takes cash. And recovery literally can start with loose change. If you’ve never done a real budget, it’s time. That means tracking every cent of your spending either online (Mint.com is a free online website that offers some unique expense-tracking tools) or on paper. Once you see what’s left your wallet in the last month, start cutting non-essential spending like designer coffee, carryout and deluxe cable and start applying that extra cash to the highest-rate, non-deductible debt you have. Seeing everything you spend in black and white is the first step in changing your relationship with money for a lifetime.
Attack the highest-rate debt first: In most households, this means attack the credit card balances. While February’s credit card reform law has given borrowers a slight boost by applying monthly payments to highest-rate balances within every credit card statement, it won’t matter much unless you begin paying more each month than the minimum balance. Zero in on your highest-rate cards first, pay more than the minimum and then work downward.
Refinance if you can: Mortgage rates are still at historically low levels. You’ll need at least 10 percent equity in your home and a credit score exceeding at least 740 (out of 850) to qualify for the best rates, but negotiating with your current lender first is a great place to start. Be sure to inquire about the various government programs and how they pertain to your specific situation.
Make debt-fighting a family lesson: When you’re talking to kids about budgeting and lowering your expenses, you have to walk a fine line between discipline and fear. But setting money priorities is part of growing up, and it’s essential to discuss and agree upon them as a family. Generally speaking, it helps to solicit the input from others as they feel involved in the decision making process.
Set some post-debt money goals: Getting out of debt means you’ll be in for an extended period of frugality, and that might be a bit depressing. But as you battle your balances, make some time to really think about what you want to do with your life after the debt is gone. Having a debt-free lifestyle doesn’t stop at having zero balances (though that might call for a celebration!). Being debt-free is the gateway to better money management that will help you reach your dreams. A financial planner can get the conversation started on what those dreams and aspirations are and what permanent savings, spending and investment philosophies will be necessary to achieve them.
Shop differently: The retail explosion of the last generation – and its implosion of the last 2-3 years – have revealed to a wider audience what money-smart people have always known. Happiness is not measured in what you wear, what you drive, or even where you live. If there is a cheaper solution to find both necessities and luxuries, adopt it. If used or wholesale options are available for food, clothing, housewares or services, why pay retail? Internet retailers, price-comparison shopping sites and online coupon sources are popular for a reason – they almost always offer lower-cost paths to savings. Use them and compare. Here’s another suggestion – keep a centralized shopping list on a big sheet of paper that lets you see all the spending you feel you have to do, and then try to handle it during one organized trip. Seeing everything in front of you will make it easier to prioritize what you really need and what you don’t.
Do-it-yourself or barter repairs and services: The do-it-yourself movement is in a new phase with the downturn. For any home or auto maintenance chores you may have during the year, learn as much as you can about those tasks and estimate the cost of materials and your time before doing them yourself. Previous generations made do-it-yourself a necessity. See if that option is right for you and you might save considerable money doing it. Also, for more complicated jobs, partner with friends and family and you can help each other save money.
Rebid your home and life insurance: Most everyone knows that bundling home and auto insurance with one carrier saves money. Increase your deductibles if you can afford to. But ask your agent specifically about changes in behavior that can save you money. See what taking mass transit most of the week can do for your insurance rates. See if you can benefit from age-related discounts. And check whether it might be worth beefing up your home security or adding more protection against weather-related disasters (storm shutters, shatter-proof glass, etc.) or upgrades to appliances, plumbing or electrical systems. Lastly, be tax-smart about improvements – EnergyStar.gov lists rebates and other breaks for upgrades around your home.
Go debit: Debit cards wearing a bankcard logo are typically welcome at most stores where credit cards are accepted. This way, you pay cash without carrying cash. If you don’t have such a card, you can probably get one from your bank to replace your traditional ATM card, but remember to tell them to limit your buying power on the card to only what you have in your account. And use overdraft protection to avoid fees.
April 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Scott M. Spann, CFP(R), EA, a local member of FPA serving Charleston, South Carolina.
Before you take any of the following steps, it makes sense to talk to an expert who can help you see your whole financial picture. A financial planning professional can examine all your sources of income and expenses and find the most efficient ways to cut expenses, pay off debt and boost the money you have for saving and investing.
In the meantime, here are some ideas:
Start with nickels and dimes: You can’t wish your way out of debt – it takes cash. And recovery literally can start with loose change. If you’ve never done a real budget, it’s time. That means tracking every cent of your spending either online (Mint.com is a free online website that offers some unique expense-tracking tools) or on paper. Once you see what’s left your wallet in the last month, start cutting non-essential spending like designer coffee, carryout and deluxe cable and start applying that extra cash to the highest-rate, non-deductible debt you have. Seeing everything you spend in black and white is the first step in changing your relationship with money for a lifetime.
Attack the highest-rate debt first: In most households, this means attack the credit card balances. While February’s credit card reform law has given borrowers a slight boost by applying monthly payments to highest-rate balances within every credit card statement, it won’t matter much unless you begin paying more each month than the minimum balance. Zero in on your highest-rate cards first, pay more than the minimum and then work downward.
Refinance if you can: Mortgage rates are still at historically low levels. You’ll need at least 10 percent equity in your home and a credit score exceeding at least 740 (out of 850) to qualify for the best rates, but negotiating with your current lender first is a great place to start. Be sure to inquire about the various government programs and how they pertain to your specific situation.
Make debt-fighting a family lesson: When you’re talking to kids about budgeting and lowering your expenses, you have to walk a fine line between discipline and fear. But setting money priorities is part of growing up, and it’s essential to discuss and agree upon them as a family. Generally speaking, it helps to solicit the input from others as they feel involved in the decision making process.
Set some post-debt money goals: Getting out of debt means you’ll be in for an extended period of frugality, and that might be a bit depressing. But as you battle your balances, make some time to really think about what you want to do with your life after the debt is gone. Having a debt-free lifestyle doesn’t stop at having zero balances (though that might call for a celebration!). Being debt-free is the gateway to better money management that will help you reach your dreams. A financial planner can get the conversation started on what those dreams and aspirations are and what permanent savings, spending and investment philosophies will be necessary to achieve them.
Shop differently: The retail explosion of the last generation – and its implosion of the last 2-3 years – have revealed to a wider audience what money-smart people have always known. Happiness is not measured in what you wear, what you drive, or even where you live. If there is a cheaper solution to find both necessities and luxuries, adopt it. If used or wholesale options are available for food, clothing, housewares or services, why pay retail? Internet retailers, price-comparison shopping sites and online coupon sources are popular for a reason – they almost always offer lower-cost paths to savings. Use them and compare. Here’s another suggestion – keep a centralized shopping list on a big sheet of paper that lets you see all the spending you feel you have to do, and then try to handle it during one organized trip. Seeing everything in front of you will make it easier to prioritize what you really need and what you don’t.
Do-it-yourself or barter repairs and services: The do-it-yourself movement is in a new phase with the downturn. For any home or auto maintenance chores you may have during the year, learn as much as you can about those tasks and estimate the cost of materials and your time before doing them yourself. Previous generations made do-it-yourself a necessity. See if that option is right for you and you might save considerable money doing it. Also, for more complicated jobs, partner with friends and family and you can help each other save money.
Rebid your home and life insurance: Most everyone knows that bundling home and auto insurance with one carrier saves money. Increase your deductibles if you can afford to. But ask your agent specifically about changes in behavior that can save you money. See what taking mass transit most of the week can do for your insurance rates. See if you can benefit from age-related discounts. And check whether it might be worth beefing up your home security or adding more protection against weather-related disasters (storm shutters, shatter-proof glass, etc.) or upgrades to appliances, plumbing or electrical systems. Lastly, be tax-smart about improvements – EnergyStar.gov lists rebates and other breaks for upgrades around your home.
Go debit: Debit cards wearing a bankcard logo are typically welcome at most stores where credit cards are accepted. This way, you pay cash without carrying cash. If you don’t have such a card, you can probably get one from your bank to replace your traditional ATM card, but remember to tell them to limit your buying power on the card to only what you have in your account. And use overdraft protection to avoid fees.
April 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Scott M. Spann, CFP(R), EA, a local member of FPA serving Charleston, South Carolina.
Wednesday, March 17, 2010
When Doing Your Own Taxes Makes Sense…And When It Doesn’t
Tax deadline is April 15, so if you haven’t begun gathering your annual tax records it’s time to do so. Every year, however, people’s lives change – they buy and sell houses and move, they take new jobs, have kids, buy and sell stock. Those and dozens more reasons might give you cause to hire a tax preparer.
It’s worth going over the primary reasons why some people should get help with their taxes and others can continue going it alone.
Should you do it by yourself? If you meet the following circumstances, you can probably do your taxes by yourself:
• You work for only one employer who gives you a W-2 tax form each year.
• You rent your residence and don’t own a home or vacation property.
• You don’t have kids or other dependents.
• You don’t have any complex investments such as a partnership, a trust or extensive stock holdings.
• You really like numbers, are willing to investigate annual changes to the tax code and double-check your work.
• You’re comfortable doing computations by calculator or by hand, or by using tax software on your computer or online.
For do-it-yourselfers with computers, the Internal Revenue Service’s Free File program is aimed at some 95 million taxpayers with an Adjusted Gross Income (AGI) of $57,000 or less in 2009 to prepare and e-file their federal tax returns for free. E-file, the IRS’s online tax filing service, is available to both tax professionals and individuals with compatible home computer tax software. You can learn more about the e-File program here.
Should you seek help? It generally makes more sense to get help with your taxes if:
• You’re buying or selling property.
• You own a business or rental property.
• You get regular income from a trust or partnership.
• You trade investments frequently or have a complex portfolio.
• You’ve undergone a major financial impact during the previous tax year, such as a divorce, death of a spouse, an inheritance or a move of more than 50 miles for a new job.
• You are supporting a child between the ages of 19 and 24 who is a full-time college student.
• You don’t have time to do it yourself.
• You are subject to the Alternate Minimum Tax (AMT).
• Your income has increased by a considerable amount from the previous year.
You’re still legally responsible for your return even though you have professional help, so it’s important to choose a qualified professional to help you. The IRS gives the following suggestions for finding a qualified preparer:
1. Ask how they charge: Avoid preparers who claim they can obtain larger refunds than other preparers. If your returns are prepared correctly, every preparer should derive substantially similar numbers.
2. Don’t believe promises: If a preparer guarantees results or bases fees on a percentage of the amount of the refund, be suspicious. Tax preparers aren’t allowed to charge a contingent fee (percentage of your refund) for preparing an original tax return.
3. Ask what preparers will need: Reputable preparers will expect you to provide receipts and other paperwork if they need it to justify the return they’re preparing for you. You need to keep scrupulous records.
4. Make sure you know exactly who’s preparing your return: It’s OK if your preparer has onsite staff assistance in preparation of your return, but the person you hire needs to be the person who reviews your return and signs off on it.
5. Investigate your preparer’s record: Check with the Better Business Bureau, the state’s board of accountancy for CPAs, the state’s bar association for attorneys or the IRS Office of Professional Responsibility (OPR) for enrolled agents.
6. Check your preparer’s credentials: Find out if the preparer is affiliated with a professional organization that provides or requires its members to pursue continuing education and holds them accountable to a code of ethics.
7. Stay aware of tax scams: Newspaper business sections and news programs focus on abusive tax shelters and scams. So does www.IRS.gov. If you have a preparer encouraging you to get involved in tax avoidance strategies that are overly complex, check them out before you agree to jump in.
March 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Scott M. Spann, CFP(R), EA, a local member of FPA and owner of LifeSpan Financial Planning, LLC located in Mt. Pleasant, South Carolina.
It’s worth going over the primary reasons why some people should get help with their taxes and others can continue going it alone.
Should you do it by yourself? If you meet the following circumstances, you can probably do your taxes by yourself:
• You work for only one employer who gives you a W-2 tax form each year.
• You rent your residence and don’t own a home or vacation property.
• You don’t have kids or other dependents.
• You don’t have any complex investments such as a partnership, a trust or extensive stock holdings.
• You really like numbers, are willing to investigate annual changes to the tax code and double-check your work.
• You’re comfortable doing computations by calculator or by hand, or by using tax software on your computer or online.
For do-it-yourselfers with computers, the Internal Revenue Service’s Free File program is aimed at some 95 million taxpayers with an Adjusted Gross Income (AGI) of $57,000 or less in 2009 to prepare and e-file their federal tax returns for free. E-file, the IRS’s online tax filing service, is available to both tax professionals and individuals with compatible home computer tax software. You can learn more about the e-File program here.
Should you seek help? It generally makes more sense to get help with your taxes if:
• You’re buying or selling property.
• You own a business or rental property.
• You get regular income from a trust or partnership.
• You trade investments frequently or have a complex portfolio.
• You’ve undergone a major financial impact during the previous tax year, such as a divorce, death of a spouse, an inheritance or a move of more than 50 miles for a new job.
• You are supporting a child between the ages of 19 and 24 who is a full-time college student.
• You don’t have time to do it yourself.
• You are subject to the Alternate Minimum Tax (AMT).
• Your income has increased by a considerable amount from the previous year.
You’re still legally responsible for your return even though you have professional help, so it’s important to choose a qualified professional to help you. The IRS gives the following suggestions for finding a qualified preparer:
1. Ask how they charge: Avoid preparers who claim they can obtain larger refunds than other preparers. If your returns are prepared correctly, every preparer should derive substantially similar numbers.
2. Don’t believe promises: If a preparer guarantees results or bases fees on a percentage of the amount of the refund, be suspicious. Tax preparers aren’t allowed to charge a contingent fee (percentage of your refund) for preparing an original tax return.
3. Ask what preparers will need: Reputable preparers will expect you to provide receipts and other paperwork if they need it to justify the return they’re preparing for you. You need to keep scrupulous records.
4. Make sure you know exactly who’s preparing your return: It’s OK if your preparer has onsite staff assistance in preparation of your return, but the person you hire needs to be the person who reviews your return and signs off on it.
5. Investigate your preparer’s record: Check with the Better Business Bureau, the state’s board of accountancy for CPAs, the state’s bar association for attorneys or the IRS Office of Professional Responsibility (OPR) for enrolled agents.
6. Check your preparer’s credentials: Find out if the preparer is affiliated with a professional organization that provides or requires its members to pursue continuing education and holds them accountable to a code of ethics.
7. Stay aware of tax scams: Newspaper business sections and news programs focus on abusive tax shelters and scams. So does www.IRS.gov. If you have a preparer encouraging you to get involved in tax avoidance strategies that are overly complex, check them out before you agree to jump in.
March 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Scott M. Spann, CFP(R), EA, a local member of FPA and owner of LifeSpan Financial Planning, LLC located in Mt. Pleasant, South Carolina.
Wednesday, February 3, 2010
What To Do If You Owe Taxes To The IRS
Tax season has arrived and many Americans are still struggling financially. The recent economic crisis is still having a dire impact on the ability for families to manage their day to day finances. It is no surprise that an increasing number of people are having trouble meeting their income tax obligations. So what can you do if you find yourself unable to pay your income taxes?
Do not panic or procrastinate. IRS tax notices and balances due on recently filed tax returns can bring out a lot of negative emotions. Once you recognize that you owe taxes to the IRS take action immediately. Just because you cannot afford to pay the taxes due immediately does not mean there are no options. Many people make a tax problem worse by procrastinating or avoiding it altogether.
Create a financial plan. The creation of a financial plan is the single most important step to take when you owe taxes to the IRS. Why? A financial plan provides the guidance needed to help you address the tax situation and other important financial life goals. Unfortunately, most people tend to avoid this step altogether. When working with clients experiencing tax debt problems I refer to their financial plan as a tax resolution plan.
In order to resolve tax problems the most cost-effective way possible you need a tax resolution plan. The ultimate goal should be to get out of debt quickly so you can focus on other more important aspects of your financial life. Goals such as saving for your child's education, retirement, paying off debt, buying a house, etc. are difficult to achieve if you owe the IRS. A financial plan will also help you with future income tax planning. Some areas of focus could include maximizing all potential tax deductions, reducing future taxes, tax efficient investing, and planning ahead for future tax related events.
File your taxes. Go ahead and file a tax return even if you cannot pay the taxes owed in full. This will eliminate the failure to file or late filing penalties. In many cases the IRS will not work with you until you have filed all past due tax returns.
Stay current with future tax obligations. While you are working to resolve your tax debt problems you must stay current with your tax obligations. For self-employed individuals this requires you to continue (or begin) making estimated tax payments. If you are a wage earner you need to make sure that you are having sufficient taxes withheld from your pay.
Establish a plan. By following the financial planning process you should obtain a good understanding of where you stand financially. Complete a net worth analysis that explores everything you own and everything you owe to others. You will also need to complete a cash flow analysis that looks at your income and expenses. These two factors are critical when exploring all of your available options to resolve the tax debt.
Explore all available tax resolution options. If a taxpayer cannot pay taxes owed in full, the most common tax resolution alternative is to establish a payment plan or Installment Agreement. Other alternatives include Partial Payment Installment Agreements, Currently Not Collectible Status, bankruptcy, or requesting an Offer in Compromise. If you are considering an option other than setting up a payment plan you should consult an Enrolled Agent, CPA, or tax attorney.
Follow the plan and take action. Tax debt resolution requires discipline and planning. If you follow basic elements of the financial planning process you will be able to get out of debt sooner and move on with your life. Tax problems are stressful. However, effective solutions do exist for those that take action and follow a tax and financial plan.
For more information on the LifeSpan Process of Tax Resolution and Financial Freedom contact LifeSpan Financial Planning at 843-469-3505.
Do not panic or procrastinate. IRS tax notices and balances due on recently filed tax returns can bring out a lot of negative emotions. Once you recognize that you owe taxes to the IRS take action immediately. Just because you cannot afford to pay the taxes due immediately does not mean there are no options. Many people make a tax problem worse by procrastinating or avoiding it altogether.
Create a financial plan. The creation of a financial plan is the single most important step to take when you owe taxes to the IRS. Why? A financial plan provides the guidance needed to help you address the tax situation and other important financial life goals. Unfortunately, most people tend to avoid this step altogether. When working with clients experiencing tax debt problems I refer to their financial plan as a tax resolution plan.
In order to resolve tax problems the most cost-effective way possible you need a tax resolution plan. The ultimate goal should be to get out of debt quickly so you can focus on other more important aspects of your financial life. Goals such as saving for your child's education, retirement, paying off debt, buying a house, etc. are difficult to achieve if you owe the IRS. A financial plan will also help you with future income tax planning. Some areas of focus could include maximizing all potential tax deductions, reducing future taxes, tax efficient investing, and planning ahead for future tax related events.
File your taxes. Go ahead and file a tax return even if you cannot pay the taxes owed in full. This will eliminate the failure to file or late filing penalties. In many cases the IRS will not work with you until you have filed all past due tax returns.
Stay current with future tax obligations. While you are working to resolve your tax debt problems you must stay current with your tax obligations. For self-employed individuals this requires you to continue (or begin) making estimated tax payments. If you are a wage earner you need to make sure that you are having sufficient taxes withheld from your pay.
Establish a plan. By following the financial planning process you should obtain a good understanding of where you stand financially. Complete a net worth analysis that explores everything you own and everything you owe to others. You will also need to complete a cash flow analysis that looks at your income and expenses. These two factors are critical when exploring all of your available options to resolve the tax debt.
Explore all available tax resolution options. If a taxpayer cannot pay taxes owed in full, the most common tax resolution alternative is to establish a payment plan or Installment Agreement. Other alternatives include Partial Payment Installment Agreements, Currently Not Collectible Status, bankruptcy, or requesting an Offer in Compromise. If you are considering an option other than setting up a payment plan you should consult an Enrolled Agent, CPA, or tax attorney.
Follow the plan and take action. Tax debt resolution requires discipline and planning. If you follow basic elements of the financial planning process you will be able to get out of debt sooner and move on with your life. Tax problems are stressful. However, effective solutions do exist for those that take action and follow a tax and financial plan.
For more information on the LifeSpan Process of Tax Resolution and Financial Freedom contact LifeSpan Financial Planning at 843-469-3505.
Friday, January 22, 2010
Tax Season is Back: Tax Tips for your 2009 Return
Believe it or else, tax season is back. The arrival of the 2009 tax filing season reminds us that income tax planning is a year round effort.
As a comprehensive financial planner I encourage clients to understand how tax related decisions impact their overall financial plan. Contact a fee only financial planner or tax professional (CFP, CPA, EA) if you have any questions regarding the tax planning component of your comprehensive financial life plan. Always make sure that your professional support system is working together as a team with your best interests at the forefront of every decision. In the meantime, check out these basic filing tips:
• Employers are required to send W-2 forms to employees by the end of January.
• The American Opportunity Credit for Education Expenses gives credit up to $2,500 per student for qualified households. This credit is designed to help Did you purchase a car through the Cash for Clunkers program? That money is not taxable and should not be reported on your 2009 tax return.
• The first $2,400 of unemployment benefits received by jobless taxpayers in 2009 are not taxed. Unemployment benefits over $2,400 are taxable.
• Check the credentials of your tax preparer. Only attorneys, CPAs and Enrolled Agents can represent taxpayers before the IRS in all matters, including audits, collection and appeals. Other return preparers may only represent taxpayers for audits of returns they actually prepared.
• Use a reputable tax professional who signs the tax return and provides a copy.
• Use caution if a tax preparer claims they can obtain larger refunds than others. Large refunds are often a sign of poor planning and are equivalent to loaning the federal government your money in return for zero percent interest. Not a great idea!
• Electronically file your returns. Taxpayers who use e-file and direct deposit can get a refund in as few as 10 days.
• Taxes must be filed by April 15 unless you are granted an extension. Keep in mind an extension to file is not an extension to pay.
As a comprehensive financial planner I encourage clients to understand how tax related decisions impact their overall financial plan. Contact a fee only financial planner or tax professional (CFP, CPA, EA) if you have any questions regarding the tax planning component of your comprehensive financial life plan. Always make sure that your professional support system is working together as a team with your best interests at the forefront of every decision. In the meantime, check out these basic filing tips:
• Employers are required to send W-2 forms to employees by the end of January.
• The American Opportunity Credit for Education Expenses gives credit up to $2,500 per student for qualified households. This credit is designed to help Did you purchase a car through the Cash for Clunkers program? That money is not taxable and should not be reported on your 2009 tax return.
• The first $2,400 of unemployment benefits received by jobless taxpayers in 2009 are not taxed. Unemployment benefits over $2,400 are taxable.
• Check the credentials of your tax preparer. Only attorneys, CPAs and Enrolled Agents can represent taxpayers before the IRS in all matters, including audits, collection and appeals. Other return preparers may only represent taxpayers for audits of returns they actually prepared.
• Use a reputable tax professional who signs the tax return and provides a copy.
• Use caution if a tax preparer claims they can obtain larger refunds than others. Large refunds are often a sign of poor planning and are equivalent to loaning the federal government your money in return for zero percent interest. Not a great idea!
• Electronically file your returns. Taxpayers who use e-file and direct deposit can get a refund in as few as 10 days.
• Taxes must be filed by April 15 unless you are granted an extension. Keep in mind an extension to file is not an extension to pay.
Monday, January 11, 2010
How to Get 2010 Off to a Great Financial Start
Plenty of people make resolutions to lose weight, get a new job or make other things happen in their personal life, but relatively few make solid resolutions about money. Make 2010 the year you’ll live a better life financially. Here are a few resolutions to think about:
Write down the things you really want in life: Have you ever written down the big things you want in life? Granted, all great dreams don’t cost money, but many of them do. Money buys freedom – to travel, to retire early, to start a business, to change careers. Putting goals in writing gives them a formality and a starting point for the planning you must do.
Evaluate your risk tolerance: One of the most beneficial things financial planners do is help you articulate your financial goals and establish (or re-establish) your tolerance for risk. With the recent recession and market turbulence, many individuals would benefit from an analysis of how much risk they want (or need) to take based on what they want to achieve with their money.
Track your spending: If you haven’t purchased financial accounting software or set up a reliable accounting method of your own, this is the year to do it. Diligent expense tracking is the first critical step to getting personal finances in order whether you do it on paper or on your computer. Mint.com or QuickenOnline.com are free online programs that help you do this.
Get tax and planning advice toward retirement, other goals: Maybe you’ve always winged it with your taxes and considered your company 401(k) the ticket to your financial future. Chances are your planning is inadequate. Start getting references on good tax professionals and consider sitting down with a CERTIFIED FINANCIAL PLANNER™ professional to discuss your whole financial picture.
Cut your debt: If you can’t ever seem to get yourself completely out of credit card debt, make this the year to do it. Take inventory of your balances, figure out if you can consolidate them under your lowest-rate card, and resolve to pay off an amount that exceeds the minimum -- on time, every month. And if you can pay extra toward mortgage, auto, student or other borrowings, do so.
Start saving -- or save more: If you haven’t signed up for your employer’s 401(k) plan or begun a savings plan tailored for the self-employed, this is the year. And resolve to save at least 5-10 percent of your take-home pay based on your cash flow, and place the maximum amount in your retirement plans and savings.
Invest in yourself: If going back to college or taking specific coursework will help you advance in your career, plan to do it. If investing in a health club membership that you actually use makes sense for your health as well as your insurance costs, do it. Keep in mind that bettering yourself is always a good investment.
Redefine the way you shop: If you’re an impulse shopper, break the habit in 2010. As a suggestion, get a legal pad and make that your centralized shopping list – use a single page for groceries, stock-up goods (it’s wise to start buying essentials in bulk if you can measure the savings), essential clothing or big expenditures you’ll need to make at specific times. Taking that pad with you wherever you spend money is a good way to keep a grip on your wallet as long as you don’t stray from the list.
Change the way you commute: If driving is the single best option to getting to work or other destinations, it’s tough to make that switch. But if you have the option to leave the car in the garage at least one day a week and walk, bike, carpool or take public transportation instead, try it. You’ll save money on gas, maintenance, insurance and parking costs, you’ll benefit the environment and in the case of walking or biking, the exercise may do you good.
Cut unnecessary expenses: Do you really need deluxe cable? How much are you paying for your Internet service? Can you wear a sweater around the house and lower the thermostat? In every budget, there are items that can be cut – or at least trimmed. Take a hard look at all your “essentials” to see how essential they really are. Aim for a target of at least 10 percent and start setting that money aside on a regular basis.
January 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by LifeSpan Financial Planning, LLC, a local member of FPA serving Charleston, Mount Pleasant, Daniel Island, Goose Creek, Summerville, Moncks Corner, and Beaufort, South Carolina.
Write down the things you really want in life: Have you ever written down the big things you want in life? Granted, all great dreams don’t cost money, but many of them do. Money buys freedom – to travel, to retire early, to start a business, to change careers. Putting goals in writing gives them a formality and a starting point for the planning you must do.
Evaluate your risk tolerance: One of the most beneficial things financial planners do is help you articulate your financial goals and establish (or re-establish) your tolerance for risk. With the recent recession and market turbulence, many individuals would benefit from an analysis of how much risk they want (or need) to take based on what they want to achieve with their money.
Track your spending: If you haven’t purchased financial accounting software or set up a reliable accounting method of your own, this is the year to do it. Diligent expense tracking is the first critical step to getting personal finances in order whether you do it on paper or on your computer. Mint.com or QuickenOnline.com are free online programs that help you do this.
Get tax and planning advice toward retirement, other goals: Maybe you’ve always winged it with your taxes and considered your company 401(k) the ticket to your financial future. Chances are your planning is inadequate. Start getting references on good tax professionals and consider sitting down with a CERTIFIED FINANCIAL PLANNER™ professional to discuss your whole financial picture.
Cut your debt: If you can’t ever seem to get yourself completely out of credit card debt, make this the year to do it. Take inventory of your balances, figure out if you can consolidate them under your lowest-rate card, and resolve to pay off an amount that exceeds the minimum -- on time, every month. And if you can pay extra toward mortgage, auto, student or other borrowings, do so.
Start saving -- or save more: If you haven’t signed up for your employer’s 401(k) plan or begun a savings plan tailored for the self-employed, this is the year. And resolve to save at least 5-10 percent of your take-home pay based on your cash flow, and place the maximum amount in your retirement plans and savings.
Invest in yourself: If going back to college or taking specific coursework will help you advance in your career, plan to do it. If investing in a health club membership that you actually use makes sense for your health as well as your insurance costs, do it. Keep in mind that bettering yourself is always a good investment.
Redefine the way you shop: If you’re an impulse shopper, break the habit in 2010. As a suggestion, get a legal pad and make that your centralized shopping list – use a single page for groceries, stock-up goods (it’s wise to start buying essentials in bulk if you can measure the savings), essential clothing or big expenditures you’ll need to make at specific times. Taking that pad with you wherever you spend money is a good way to keep a grip on your wallet as long as you don’t stray from the list.
Change the way you commute: If driving is the single best option to getting to work or other destinations, it’s tough to make that switch. But if you have the option to leave the car in the garage at least one day a week and walk, bike, carpool or take public transportation instead, try it. You’ll save money on gas, maintenance, insurance and parking costs, you’ll benefit the environment and in the case of walking or biking, the exercise may do you good.
Cut unnecessary expenses: Do you really need deluxe cable? How much are you paying for your Internet service? Can you wear a sweater around the house and lower the thermostat? In every budget, there are items that can be cut – or at least trimmed. Take a hard look at all your “essentials” to see how essential they really are. Aim for a target of at least 10 percent and start setting that money aside on a regular basis.
January 2010 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by LifeSpan Financial Planning, LLC, a local member of FPA serving Charleston, Mount Pleasant, Daniel Island, Goose Creek, Summerville, Moncks Corner, and Beaufort, South Carolina.
Monday, December 21, 2009
Too Early To Think About New Year's Resolutions?
In my professional practice I work with a variety of different types of financial planning clients. Some need help managing significant amounts of wealth. Others need assistance getting out of serious amounts of debt. One thing is usually common in all of my clients. They share a strong desire to make the smartest decisions possible with their money. So as the year comes to a close I wonder if it is too soon to start thinking about making New Year's Resolutions?
2009 was a difficult year financially for many individuals and families. For those with tax problems the financial stress was likely increased dramatically. With a New Year around the corner, the hope of better financial life is a goal for many. The real challenge for people with tax and other debt problems will most often be related to more than just knowing what to do to improve their financial lives. The ultimate challenge is developing positive money related behaviors that lead to meaningful change.
If you have ever made a New Year’s resolution you probably understand the difficulty of changing any behavior. Perhaps you were not ready for change. Maybe you did not know how to implement change the best way. Frequently these resolutions are abandoned due to frustration and discouragement. Lasting change is rarely a simple process. If you have ever tried to lose weight, give up caffeine, stop smoking, exercise more, etc. you probably realized that a simple solution does not exist for everything.
Behavior change can be difficult to maintain over the course of time. Tax and financial planning undoubtedly involves a substantial commitment of time, effort, and emotions and is a form of behavior change. Fortunately, there is a technique that has proven to be the most effective method of achieving tax and financial freedom- Tax Resolution Planning.
If you are looking to change your financial life in 2010 do not wait on the New Year. Take action now and set a strong foundation with an action. Do more than just have good intentions when it comes to important money related decisions next year. Create a written tax and financial plan and implement it. Financial freedom may be closer than you think.
Best wishes for a Merry Christmas and a Happy New Year!
2009 was a difficult year financially for many individuals and families. For those with tax problems the financial stress was likely increased dramatically. With a New Year around the corner, the hope of better financial life is a goal for many. The real challenge for people with tax and other debt problems will most often be related to more than just knowing what to do to improve their financial lives. The ultimate challenge is developing positive money related behaviors that lead to meaningful change.
If you have ever made a New Year’s resolution you probably understand the difficulty of changing any behavior. Perhaps you were not ready for change. Maybe you did not know how to implement change the best way. Frequently these resolutions are abandoned due to frustration and discouragement. Lasting change is rarely a simple process. If you have ever tried to lose weight, give up caffeine, stop smoking, exercise more, etc. you probably realized that a simple solution does not exist for everything.
Behavior change can be difficult to maintain over the course of time. Tax and financial planning undoubtedly involves a substantial commitment of time, effort, and emotions and is a form of behavior change. Fortunately, there is a technique that has proven to be the most effective method of achieving tax and financial freedom- Tax Resolution Planning.
If you are looking to change your financial life in 2010 do not wait on the New Year. Take action now and set a strong foundation with an action. Do more than just have good intentions when it comes to important money related decisions next year. Create a written tax and financial plan and implement it. Financial freedom may be closer than you think.
Best wishes for a Merry Christmas and a Happy New Year!
Tuesday, November 3, 2009
Financial Life Planning and Tax Resolution
Financial life planning is about more than just money. A financial life planning approach can provide a deeper meaning to the management of personal finances. Every person going through the tax resolution process needs a vision, purpose, and a plan if they want to succeed. George Kinder is a well respected financial planner and a leading proponent of the life planning movement within the financial planning industry. His financial counseling process includes three questions that are popular for their ability to help clients focus on what really matters to them about money. While I have adapted a version of these questions for the tax resolution client, similar questions are also asked of my Fee Only financial planning clients.
The main purpose of this exercise is to begin thinking about what you want your money to do for you. The first question is designed to initiate the process of thinking about all of life’s possibilities; the second and third questions are created to help people with tax troubles focus on their priorities in life.
Since the accumulation of excessive tax and consumer debt has such an immediate and overwhelming impact on household finances it is easy to lose sight of long-term goals and dreams. Looking beyond the current state of financial stress is an important way to help prioritize goals during the tax resolution process. It also helps to have something to work to achieve while reinforcing the need to attack your tax problems with passion and enthusiasm.
The life planning questions below should be used to help you identify what you want to get out of life. Since money plays such an integral role in our lives it is important that you are able to understand your values that lie beneath the surface of your financial world.
1. Imagine that you have paid off all of your tax and consumer debt. You owe absolutely nothing and have enough money to take care of your needs, now and in the future. How would you live your life? Would you change anything?
2. Imagine that you visit the doctor and he or she says you have only five to ten years to live. You will not feel any pain or sickness, but you will never know when death will actually come. What will you do? Will you change your life? How?
3. Finally, now try to imagine that your doctor says you have only one day left to live. Ask yourself: What did I miss? What did I not get to be or do? Do I have any regrets?
This three questions exercise is designed to tap into the heart’s core. What are your values? What is your vision?
Now is the time to start thinking about a life without any debt. Setting a goal to resolve a tax liability is usually the #1 priority during the tax resolution process as it should be. It can be difficult to look beyond the stress of the here and now when it comes to tax and financial matters. Establishing life planning goals add more meaning to the tax resolution process. If you have avoided debt and do not have a tax problem, these questions are just as relevant during your financial life planning journey.
The main purpose of this exercise is to begin thinking about what you want your money to do for you. The first question is designed to initiate the process of thinking about all of life’s possibilities; the second and third questions are created to help people with tax troubles focus on their priorities in life.
Since the accumulation of excessive tax and consumer debt has such an immediate and overwhelming impact on household finances it is easy to lose sight of long-term goals and dreams. Looking beyond the current state of financial stress is an important way to help prioritize goals during the tax resolution process. It also helps to have something to work to achieve while reinforcing the need to attack your tax problems with passion and enthusiasm.
The life planning questions below should be used to help you identify what you want to get out of life. Since money plays such an integral role in our lives it is important that you are able to understand your values that lie beneath the surface of your financial world.
1. Imagine that you have paid off all of your tax and consumer debt. You owe absolutely nothing and have enough money to take care of your needs, now and in the future. How would you live your life? Would you change anything?
2. Imagine that you visit the doctor and he or she says you have only five to ten years to live. You will not feel any pain or sickness, but you will never know when death will actually come. What will you do? Will you change your life? How?
3. Finally, now try to imagine that your doctor says you have only one day left to live. Ask yourself: What did I miss? What did I not get to be or do? Do I have any regrets?
This three questions exercise is designed to tap into the heart’s core. What are your values? What is your vision?
Now is the time to start thinking about a life without any debt. Setting a goal to resolve a tax liability is usually the #1 priority during the tax resolution process as it should be. It can be difficult to look beyond the stress of the here and now when it comes to tax and financial matters. Establishing life planning goals add more meaning to the tax resolution process. If you have avoided debt and do not have a tax problem, these questions are just as relevant during your financial life planning journey.
Friday, October 9, 2009
Creating an Investment Policy Statement
Do you have a written plan in place to guide your investment decisions? If not, how do you know if your investment plan is on track to meet your financial life planning goals?
An excellent way to make sure that you follow an investment plan and have a measurement stick in place to track your progress is the setup an investment policy statement. A solid investment plan requires proper direction and guidelines that will help any investor stay on track regardless of the situation. Plans will frequently change or be altered over time, but if you have a plan in place from the beginning you can always figure out whether or not you are on track to meet your financial goals. That is why you need to put your investment plan in writing and create an investment policy statement to guide your investment decisions. An investment policy statement is a written document that defines how an investment portfolio should be managed.
An investment policy statement typically answers the following questions:
* How much do you intend to invest each month?
* How many years will you be investing?
* What is the expected rate of return for the portfolio?
* What is your target asset allocation mix?
* What are your allowable assets?
* Which no-load index mutual funds or ETFs fit into those asset categories?
* What are the benchmarks for the portfolio (DJIA, S&P 500, FTSE, etc.)?
* How often will you review your investment plan?
* When will you rebalance your portfolio?
An investment policy statement is critical whether you are working with a trusted advisor or using a do it yourself approach to investing. Next time you review your investment performance take a few moments to review your investment policy statement. If you do not have a written set of guidelines for current and future investments you should go ahead and put your game plan in writing.
An excellent way to make sure that you follow an investment plan and have a measurement stick in place to track your progress is the setup an investment policy statement. A solid investment plan requires proper direction and guidelines that will help any investor stay on track regardless of the situation. Plans will frequently change or be altered over time, but if you have a plan in place from the beginning you can always figure out whether or not you are on track to meet your financial goals. That is why you need to put your investment plan in writing and create an investment policy statement to guide your investment decisions. An investment policy statement is a written document that defines how an investment portfolio should be managed.
An investment policy statement typically answers the following questions:
* How much do you intend to invest each month?
* How many years will you be investing?
* What is the expected rate of return for the portfolio?
* What is your target asset allocation mix?
* What are your allowable assets?
* Which no-load index mutual funds or ETFs fit into those asset categories?
* What are the benchmarks for the portfolio (DJIA, S&P 500, FTSE, etc.)?
* How often will you review your investment plan?
* When will you rebalance your portfolio?
An investment policy statement is critical whether you are working with a trusted advisor or using a do it yourself approach to investing. Next time you review your investment performance take a few moments to review your investment policy statement. If you do not have a written set of guidelines for current and future investments you should go ahead and put your game plan in writing.
Wednesday, October 7, 2009
Tax Debt and IRS Levies
Can you afford to let the IRS levy your bank account or garnish your wages? That is what could happen if you owe back taxes and avoid their attempts to contact you.
IRS collection activities are negative events and represent anything but freedom, and therefore should be avoided. You must be proactive and take action to avoid IRS collection measures such as wage garnishments, bank account levies, property seizures, and liens placed on your property. It is important to know what the IRS is capable of doing. Most people find this knowledge a helpful motivator to stay on track with the tax resolution process. If the collection process has already started you should still proceed through the tax resolution process quickly and accurately to start resolving your tax problems on your terms rather than simply accepting defeat and allowing the IRS to control your financial life.
What does the IRS typically attempt to levy?
The IRS may intent to levy any federal payments due, retirement benefits, Social Security benefits, wages, or employee travel advances or reimbursements. The IRS can also levy property such as real estate, automobiles, business assets, bank accounts, wages, commissions, and other income. A levy is a seizure of property. The IRS will try to levy assets unless you TAKE ACTION. Why allow the IRS or any creditor to take control of your assets on their terms? If you owe taxes you need to pay them (or at least come up with some type of tax resolution alternative). However, you need to have a plan to pay them on your terms and not the terms of the IRS.
The IRS may involuntary collect the tax debt owed to them through different types of levies. A levy is served after the IRS has exhausted all other collection efforts to encourage taxpayer compliance. Levies commonly attach a taxpayer’s bank account, salary and wages, and/or business accounts receivable.
The IRS is required to release levies in several circumstances, including:
• The levy is creating an economic hardship.
• The taxpayer agrees to make an Installment Agreement.
• The liability is no longer owed.
• The 10-year statutory collection period has expired.
• The levy was wrongfully served.
• An Offer in Compromise is accepted for review.
The two circumstances most often utilized to request a levy release are when the levy is creating an economic hardship or when the taxpayer agrees to make an Installment Agreement. In both of these situations, the taxpayer must provide a Collection Information Statement for Individuals and Self-Employed Individuals (Form 433-A) and/or Collection Information Statement for Businesses (Form 433-B). To obtain a levy release, the taxpayer must also file all required tax returns and be current in estimated payments or Federal Tax Deposits, if required.
The IRS usually will not release a levy until the taxpayer has proposed a solution to the delinquent tax problem and demonstrated that they will remain in compliance with future obligations. In certain circumstances, the IRS may release a levy if the taxpayer promises missing tax returns or financial information by a fixed date, but this cannot be counted on. It is always best if the taxpayer can get all of the needed documentation before contacting the IRS for a release of levy.
In conclusion, if you are facing the possibility of an IRS levy it is always in your best interests to take action. Do not avoid the tax problem. A tax resolution plan is a proactive strategy that will help you resolve tax debt problems the best way possible for your situation.
Contact LifeSpan Financial Planning at 877-TAX-9110 if you are interested in finding out more about using a Tax Resolution Plan to overcome tax problems.
IRS collection activities are negative events and represent anything but freedom, and therefore should be avoided. You must be proactive and take action to avoid IRS collection measures such as wage garnishments, bank account levies, property seizures, and liens placed on your property. It is important to know what the IRS is capable of doing. Most people find this knowledge a helpful motivator to stay on track with the tax resolution process. If the collection process has already started you should still proceed through the tax resolution process quickly and accurately to start resolving your tax problems on your terms rather than simply accepting defeat and allowing the IRS to control your financial life.
What does the IRS typically attempt to levy?
The IRS may intent to levy any federal payments due, retirement benefits, Social Security benefits, wages, or employee travel advances or reimbursements. The IRS can also levy property such as real estate, automobiles, business assets, bank accounts, wages, commissions, and other income. A levy is a seizure of property. The IRS will try to levy assets unless you TAKE ACTION. Why allow the IRS or any creditor to take control of your assets on their terms? If you owe taxes you need to pay them (or at least come up with some type of tax resolution alternative). However, you need to have a plan to pay them on your terms and not the terms of the IRS.
The IRS may involuntary collect the tax debt owed to them through different types of levies. A levy is served after the IRS has exhausted all other collection efforts to encourage taxpayer compliance. Levies commonly attach a taxpayer’s bank account, salary and wages, and/or business accounts receivable.
The IRS is required to release levies in several circumstances, including:
• The levy is creating an economic hardship.
• The taxpayer agrees to make an Installment Agreement.
• The liability is no longer owed.
• The 10-year statutory collection period has expired.
• The levy was wrongfully served.
• An Offer in Compromise is accepted for review.
The two circumstances most often utilized to request a levy release are when the levy is creating an economic hardship or when the taxpayer agrees to make an Installment Agreement. In both of these situations, the taxpayer must provide a Collection Information Statement for Individuals and Self-Employed Individuals (Form 433-A) and/or Collection Information Statement for Businesses (Form 433-B). To obtain a levy release, the taxpayer must also file all required tax returns and be current in estimated payments or Federal Tax Deposits, if required.
The IRS usually will not release a levy until the taxpayer has proposed a solution to the delinquent tax problem and demonstrated that they will remain in compliance with future obligations. In certain circumstances, the IRS may release a levy if the taxpayer promises missing tax returns or financial information by a fixed date, but this cannot be counted on. It is always best if the taxpayer can get all of the needed documentation before contacting the IRS for a release of levy.
In conclusion, if you are facing the possibility of an IRS levy it is always in your best interests to take action. Do not avoid the tax problem. A tax resolution plan is a proactive strategy that will help you resolve tax debt problems the best way possible for your situation.
Contact LifeSpan Financial Planning at 877-TAX-9110 if you are interested in finding out more about using a Tax Resolution Plan to overcome tax problems.
Tuesday, September 22, 2009
Creating a Personal Spending Plan
The definition of insanity may be doing the same things over and over again and expecting different results. I think the key defining element of seeking financial change (and eliminating insane amounts of debt) is doing the right things over and over again and actually getting positive results. Spending with a plan is the right thing to do, and it must be done over and over again.
The creation of a personal spending plan is one of the most important steps of the tax resolution process. A personal spending plan is also the foundation for achieving financial freedom. On the surface a spending plan or budget is extremely basic. Most people do not even have a simple budget much less a spending plan to guide their financial decisions. The purpose of this tax resolution step is to create a personal spending plan that will help you make sure that your money is working for you the best ways possible. Spending plans are also needed to resolve your tax debt and reach your other life planning goals.
A budget is generally defined as:
a) an itemized summary of estimated or intended expenditures for a given period along with proposals for financing them,
b) a systematic plan for the expenditure of a usually fixed resource, such as money or time, during a given period, and
c) the total sum of money allocated for a particular purpose or period of time.
When used as a verb the word budget means to plan in advance the expenditure of something. These definitions each focus on the action of planning. Budgeting is defined as estimated projection of the amount of certain expenses. During the tax resolution process you should use the word budget as a verb and take action. Tell your money where you want it to go rather than trying to figure out where it all went or worse, spending more than you have available and relying on credit cards and debt to get you through the month.
Unfortunately, most people approach the budgeting process the wrong way and do things backwards. They use a legal pad, spreadsheet or budgeting software and track where spending occurred across various categories (food, utilities, credit card bills, etc.). This is a great way to see where your money went during the previous month. But it is a horrible way to plan where your money will go in the future. During the previous step we analyzed where your money has been going in the past. Going forward, you should use the information gathered during the cash flow analysis to create a spending plan or budget.
The budgeting process is often misunderstood because it is typically viewed in a negative manner by the people who need one the most. We have discussed at length how many individuals in debt display problematic financial behaviors. One of the biggest problem behaviors is trying to manage personal finances without a plan. The lack of a personal spending plan or budget is common in the majority of people with tax problems. Many people are resistant to change when it comes to budgeting. Some tax resolution clients view a budget as a form of constraint that inhibits freedom. This is ironic because a personal spending plan will actually lead to financial freedom if used consistently.
Every single household spending plan is unique and each person will be presented with his or own set of challenges. Do not expect your personal spending plan to work perfectly the first time around. It may take a few months to figure this process out. This is normal. Whatever happens on a month to month basis, DO NOT QUIT and NEVER allow frustration to get in your way. Remember that the LifeSpan Process of Tax Resolution and Financial Freedom requires you to take action to replace negative financial behaviors with positive alternatives. The old way of doing things got you into this mess. Replace the old way with a new and improved way of handling your personal finances.
The creation of a personal spending plan is one of the most important steps of the tax resolution process. A personal spending plan is also the foundation for achieving financial freedom. On the surface a spending plan or budget is extremely basic. Most people do not even have a simple budget much less a spending plan to guide their financial decisions. The purpose of this tax resolution step is to create a personal spending plan that will help you make sure that your money is working for you the best ways possible. Spending plans are also needed to resolve your tax debt and reach your other life planning goals.
A budget is generally defined as:
a) an itemized summary of estimated or intended expenditures for a given period along with proposals for financing them,
b) a systematic plan for the expenditure of a usually fixed resource, such as money or time, during a given period, and
c) the total sum of money allocated for a particular purpose or period of time.
When used as a verb the word budget means to plan in advance the expenditure of something. These definitions each focus on the action of planning. Budgeting is defined as estimated projection of the amount of certain expenses. During the tax resolution process you should use the word budget as a verb and take action. Tell your money where you want it to go rather than trying to figure out where it all went or worse, spending more than you have available and relying on credit cards and debt to get you through the month.
Unfortunately, most people approach the budgeting process the wrong way and do things backwards. They use a legal pad, spreadsheet or budgeting software and track where spending occurred across various categories (food, utilities, credit card bills, etc.). This is a great way to see where your money went during the previous month. But it is a horrible way to plan where your money will go in the future. During the previous step we analyzed where your money has been going in the past. Going forward, you should use the information gathered during the cash flow analysis to create a spending plan or budget.
The budgeting process is often misunderstood because it is typically viewed in a negative manner by the people who need one the most. We have discussed at length how many individuals in debt display problematic financial behaviors. One of the biggest problem behaviors is trying to manage personal finances without a plan. The lack of a personal spending plan or budget is common in the majority of people with tax problems. Many people are resistant to change when it comes to budgeting. Some tax resolution clients view a budget as a form of constraint that inhibits freedom. This is ironic because a personal spending plan will actually lead to financial freedom if used consistently.
Every single household spending plan is unique and each person will be presented with his or own set of challenges. Do not expect your personal spending plan to work perfectly the first time around. It may take a few months to figure this process out. This is normal. Whatever happens on a month to month basis, DO NOT QUIT and NEVER allow frustration to get in your way. Remember that the LifeSpan Process of Tax Resolution and Financial Freedom requires you to take action to replace negative financial behaviors with positive alternatives. The old way of doing things got you into this mess. Replace the old way with a new and improved way of handling your personal finances.
Monday, September 14, 2009
How Does a Personal Spending Plan Work?
A personal spending plan is a written plan to guide your spending habits and provide you with important direction for your money. Operating without a budget or personal spending plan can put you on the fast track to tax problems and debt while giving you a strong sense of feeling completely out of control financially. Following through with the budgeting process and sticking with a personal spending plan will help you assume control of your finances and will empower you to make smart financial decisions.
You cannot eliminate your tax and financial problems without a spending plan. You will not achieve financial freedom with a savings and investment plan. A personal spending plan will help you resolve your tax problems. Subsequently it will allow you to reach financial freedom by maximizing your ability to pay off your tax debt as quickly as possible and then save or invest as much as possible for your life planning goals.
Be prepared for everyone around you to think you are going insane when they see you are implementing a spending plan. Friends and family may act confused or completely freaked out by the fact that you have seen the light and are now operating on a budget. Most people just do not get it. They are probably spending without a clue themselves. That is why most Americans are in debt. It is important to realize this in advance because you should be prepared to explain to your friends and family why you are choosing to manage your money in a more effective manner. There is no need to be embarrassed or ashamed by the fact that you actually have the courage to say enough is enough- I am taking control of my life!
Most budgets fail because they lack purpose. During the tax resolution and financial freedom process your purpose is clear. Eliminate the tax problem, get out of debt, and focus on more important financial and life planning issues. When you create and stick with a personal spending plan never lose sight of the main purpose of following a budget in the first place- tax and financial freedom.
You cannot eliminate your tax and financial problems without a spending plan. You will not achieve financial freedom with a savings and investment plan. A personal spending plan will help you resolve your tax problems. Subsequently it will allow you to reach financial freedom by maximizing your ability to pay off your tax debt as quickly as possible and then save or invest as much as possible for your life planning goals.
Be prepared for everyone around you to think you are going insane when they see you are implementing a spending plan. Friends and family may act confused or completely freaked out by the fact that you have seen the light and are now operating on a budget. Most people just do not get it. They are probably spending without a clue themselves. That is why most Americans are in debt. It is important to realize this in advance because you should be prepared to explain to your friends and family why you are choosing to manage your money in a more effective manner. There is no need to be embarrassed or ashamed by the fact that you actually have the courage to say enough is enough- I am taking control of my life!
Most budgets fail because they lack purpose. During the tax resolution and financial freedom process your purpose is clear. Eliminate the tax problem, get out of debt, and focus on more important financial and life planning issues. When you create and stick with a personal spending plan never lose sight of the main purpose of following a budget in the first place- tax and financial freedom.
Tuesday, September 1, 2009
Tax Resolution and Financial Planning
What role does financial planning play during the tax resolution process? Financial planning is about taking control of your finances and is often defined as the process of meeting life goals through the proper management of your money. The planning process helps people make smart decisions about money and prepare for the demands of the future. More importantly, financial planning is about a better now. Some obvious demands are life's major events: getting an education, buying a home, retiring, providing for your children and even their children. Financial planning also concentrates on day to day concerns such as organizing your finances and preparing for the inevitable surprises that occur in life.
So, how does the financial planning process work when a financial crisis related to a tax problem occurs? Tax resolution is a financial planning challenge that is just as much about replacing ineffective financial behavior patterns of financial decision making with more positive ways of managing money and paying taxes as it is getting rid of the tax problem itself. Therefore, tax resolution planning is a natural fit with the financial planning process.
Wednesday, August 26, 2009
SMART Financial Life Planning Goals and Objectives
Whether you are working with a professional or creating your own financial plan, a comprehensive list of goals and objectives is an important starting point in the establishment of a tax and financial plan. Many people make the mistake of jumping into certain aspects of the financial planning process without a clear sense of direction. Even if you are not working with a planner you should start the planning process with specific goals and objectives.
First, start by making a comprehensive list of the things you would like money to help you accomplish in life. Then rank these goals and objectives from the most important to the least important. Establishing personal goals and objectives is your opportunity to identify what is most important to you. There are no right or wrong answers! This may seem like an easy step. However, this step should not be neglected. Goal setting will help define what you look to accomplish during the financial life planning process.
The following are some of the most common tax and financial planning goals that people generally set. I encourage people to be honest with themselves when ranking goals and objectives. Do not feel constrained by this list by any means. Add your own goals if this list does not include an important area of concern in your life.
Rank from 1 (most important) to 12 (least important).
Level of Importance Tax and/or Financial Planning Goal
______ Complete a planned major purchase (home, rental property, automobile, boat)
______ Increase Net Worth through, savings, investments
______ Establish a debt reduction plan to manage consumer debt
______ Manage income and expenses to maintain good cash flow
______ Minimize current income taxes
______ Ensure a comfortable retirement with income to maintain desired lifestyle
______ Provide education funds for children or grandchildren
______ Maximize the benefits of owning a business, provide for business continuation
______ Provide cash and income for survivors in the event of death
______ Protect assets and income against loss in the event of disability
______ Protect property from loss by natural or legal disaster
______ Pass money and property on to the next generation, minimize potential death taxes
______ Achieve Other Goals (Be Specific). Examples include: change jobs, career change, self-employment, learn a new skill or hobby, lose weight, improve physical fitness.
Life Planning Goals
Next, try to set goals that go beyond the traditional areas of focus listed above. These financial life planning goals should tap into your passions and values. These goals provide deeper meaning and purpose to the entire financial planning process.
Life planning goals generally fall into seven different categories. Take a moment and write down your life goals for each of these areas.
• Family
• Career
• Social
• Physical
• Spiritual
• Financial
• Intellectual
Other goals: ____________________________
After you have ranked your goals and their level of importance take the top three and write them down. Make sure that your goals are SMART and follow the guidelines below.
How SMART are your goals?
S = Specific (Be clear and precise)
M = Measurable (Identify how will you measure progress and success)
A = Attainable (Set goals that you are capable of accomplishing)
R = Realistic (Know your limitations but never underestimate your own abilities)
T = Timely (Set a time frame regarding when you would like to accomplish your goals)
The Three Most Important Goals in My Life
1.
2.
3.
Financial life planning goals focus on the “big picture” and provide a deeper meaning to the tax and financial planning process. Focusing on improving your life as it relates to money is the real challenge that you should be called to achieve. This means finding ways to understand how smart money related decisions will have an impact on your life plan. As this exercise should have demonstrated, smart decisions regarding money matters are guided by the establishment of "SMART" goals.
Financial life planning requires a focus on what matters to you the most in life. It starts the thinking process about what is important to you about money. When establishing tax and financial goals you should consider the role that money plays in your life. That is the "smart" way to approach the financial planning process.
Tuesday, August 25, 2009
Tax Resolution: Identifying the Need for Change
The tax resolution industry is highly fragmented with the largest tax resolution firm commanding less than 1% of the industry share. Unfortunately, tax resolution firms are unregulated and many of the largest firms do not have stellar track records of service and performance. Recently I surveyed some of the marketing slogans of tax resolution firms advertising on television and the internet. Most of the messages these companies use to reach new clients convey offers of hope and encouragement. However, some companies are marred with extensive customer service complaints and broken promises. Others flat out mislead their clients, misrepresent their services, or market “pennies on the dollar” and “one time only- act now!” settlements. Here are some marketing slogans that I came across recently:
“You could reduce your IRS tax debt to a fraction and be tax debt free”
“Settle for pennies on the dollar- Ex IRS Agents”
“End your IRS Fears”
“Get the IRS off your back”
“Do not be another IRS victim”
“IRS tax problems ruining your life?”
What do all of these statements have in common? They are attempting to reach at the most common emotions shared by a significant number of taxpayers that owe the IRS: FEAR and DESPARATION. The one thing that is missing sometimes is a message that promotes empowerment and accountability while offering the professional expertise that is often needed to help resolve tax problems. It is true that the financial stresses of debt can be overwhelming and debilitating. The IRS and collection agencies can make even the strongest willed person feel powerless and overmatched. Unfortunately, many desperate people make a huge financial mistake when they let fear guide their decision regarding where to seek tax assistance.
Tax representation firms understand the underlying fear and procrastination that is associated with the typical tax resolution client. Emotions and psychological factors play a key role in the tax resolution process. Tax representation firms also understand that some people with tax problems do not usually possess a high degree of financial literacy. That is why the typical American with tax problems is at risk of being taken advantage of when dealing with the IRS.
The following are some of the most common mistakes that people make when seeking to resolve tax problems with a tax resolution or tax representation firm:
* Focusing solely on getting rid of tax debt rather than on changing the underlying financial behaviors that helped create the tax problem.
* Financing the cost of tax representation services only to dig deeper in debt.
* Allowing their fears and doubts to increase the chances they will make an emotional decision with respect to choosing a tax representation firm.
* Failing to realize that an Offer in Compromise (resolving tax debt for less than the amount owed) is not for everyone.
* Falling for the lure of a commissioned sales agent providing empty promises they will qualify for an Offer in Compromise when more realistic alternatives exist.
* Hearing what they want to hear (“you can get out of tax debt”) rather than what they need to hear (“you can take control of your tax and financial situation”).
* Settling for high interest IRS payment plans when other resources are available to pay off the tax debt faster and with lower interest and penalties.
* Getting taken advantage of by not taking the time to do their homework with respect to seeking professional tax resolution guidance.
* Assuming that their tax professional will do all the work and neglecting to send in relevant documents and paperwork needed to proceed with their case.
* Trying to resolve tax problems without a plan.
Rather than simply offering promises of hope and resolution, I prefer to be upfront with my tax resolution clients and let them know that dealing with tax problems is part of a bigger financial process of change. This process may require a great deal of work on their behalf to implement the tax and financial planning recommendations. The end result of the hard work is a genuine sense of financial freedom and is definitely worth the effort. If you or someone you care about has a tax problem, always remember that the ideal solution starts with a personalized tax and financial plan.
Tuesday, August 11, 2009
Protecting Your Investment Assets From Future Tax Rate Hikes
With the potential for significant tax law changes looming on the horizon strategic planning becomes necessary now more than ever to help preserve and build wealth. From a historical perspective, Americans are currently enjoying favorably low income tax rates. Unfortunately for affluent individuals and families this is soon likely to change. With massive government spending and growing federal deficits it is becoming apparent that changes to the tax code are inevitable and significant tax hikes will likely occur in the not too distant future. So, beyond participating in tax deferred retirement accounts (401k, 403b, IRA, Roth IRA, etc.) what can investors do to protect their current and future assets from these expected tax rate increases?
There are a number of different tax strategies available to consider in advance of these expected tax increases. However, one thing to keep in mind is that tax considerations should never be the sole basis for a planning strategy. Income tax planning is just one part of a comprehensive financial plan. Consider the following strategies as you adapt your financial life plan to the possibility of higher taxes.
Establish a comprehensive plan
The best starting point in preparation of future tax increases is to have a plan in place prior to tax law changes. One of the biggest mistakes that many investors are making today is taking a "wait and see" approach and not being proactive. Comprehensive planning strategies help prepare for life's uncertainties and add meaning and purpose to important decisions related to taxes and other money matters. If you are investing for future life goals and objectives, be sure that you have a written set of guidelines to help you track investment decisions. An investment policy statement should be used to help monitor investments and take into account all potential tax implications.
Shifting income
While there is no guarantee that we will see an increase in tax rates during 2010, it does not hurt to be prepared. In some cases it may make good sense to receive ordinary income in 2009 rather than in 2010 when tax rates may be higher. The highest marginal income tax rate is currently 35%. If you have non-qualified stock options you should consider exercising the options in 2009 if you anticipate moving into a higher tax bracket the following year. Small business owners and investors who have control over when income is received should also consider receiving ordinary income in 2009 rather than in a later year when rates may increase.
Capital gains
If the tax cuts that were initiated during the Bush Administration are allowed to expire, the highest capital gains rate will move from 15% to 20%. If you have investments that have increased in value over the past few years you could consider taking capital gains in 2009 while rates are at their lowest levels. Of course this should only be done if it makes sense from a strategic asset allocation perspective and you were planning on selling within the next 3-5 years anyway.
Tax efficient mutual funds and ETFs
Some mutual funds do a better job than others with tax efficiency. As income tax rates rise, the importance of monitoring the tax efficiency of investments held in taxable accounts becomes essential. As an investor, it is necessary to find money managers who are capable of balancing investment returns with tax considerations. Keep in mind that after-tax investment returns should be taken into account. Do not simply focus on pre-tax investment returns.
Index mutual funds and exchange traded funds (ETFs) are excellent investment vehicles from a tax efficiency standpoint. Traditional index funds and ETFs are, by nature, tax efficient — and cheap. The mutual fund industry also has a wide selection of tax-managed offerings that focus on minimizing taxation. The bottom line is as tax rates go up, the need to focus on tax efficient returns increases for investments held outside tax advantaged accounts such as IRAs or 401ks.
Variable Annuities
Although variable annuities are not my favorite investment vehicles due to cost and other factors, they do have a place in some financial planning situations. Annuities allow investors the opportunity for tax deferred growth and investment gains are not taxed until they are withdrawn. Upon withdrawal variable annuity income is taxed at ordinary rates (penalties may apply to withdrawals prior to age 59 1/2). The tax deferral of annuities becomes more appealing in a rising interest rate environment. If you are considering variable annuities, focus your search on low cost options available through a Fee Only financial planner.
Municipal Bonds
Municipal bonds are another investment vehicle that becomes increasingly appealing for taxable brokerage accounts as tax rates increase. This is due to the increase in the taxable equivalent yield of municipal bonds. Municipal bonds and municipal bond funds provide federally tax-exempt interest. In some cases state and local taxes may also be tax-exempt. If you are reviewing alternatives for the fixed income portion of an asset allocation plan, be sure to consider municipal bonds for your brokerage account.
The taxable equivalent yield calculation is as follows:
Tax-Equivalent Yield = Tax-Free Interest Rate ÷ (1 – tax rate)
So, if the municipal bonds interest rate is 3% and the highest tax rate increases to 40% the tax equivalent yield is 5% (3 divided by .60 equals 5%).
Buy and hold, but do not forget
I have never been a strong advocate of active trading. Active trading adds additional costs and historically underperforms passive investment approaches. The most important determinant of investment performance over time is asset allocation. While investors cannot control the movements of securities markets, they can control costs. As capital gains rates increase, the tax deferral strategies when using a buy and hold approach provide a valuable element of defense. If you have a long-term time horizon for investments, you will likely see a variety of tax law changes during the lifetime of your investment holdings. Buy and hold strategies help defer capital gains taxes until the actual sale.
In summary, aside from Roth IRA's, 401k's, and other tax deferred retirement accounts there are other options investors must be aware of to protect themselves from an increase in tax rates. As the old saying goes, the only constant in life is change. Tax laws in America are about to do just that- change. We don't know exactly when or how much, but tax rate changes are coming. The biggest line of defense is to be proactive and establish a comprehensive financial plan that focuses on investments, taxes, and other aspects of your financial life.
There are a number of different tax strategies available to consider in advance of these expected tax increases. However, one thing to keep in mind is that tax considerations should never be the sole basis for a planning strategy. Income tax planning is just one part of a comprehensive financial plan. Consider the following strategies as you adapt your financial life plan to the possibility of higher taxes.
Establish a comprehensive plan
The best starting point in preparation of future tax increases is to have a plan in place prior to tax law changes. One of the biggest mistakes that many investors are making today is taking a "wait and see" approach and not being proactive. Comprehensive planning strategies help prepare for life's uncertainties and add meaning and purpose to important decisions related to taxes and other money matters. If you are investing for future life goals and objectives, be sure that you have a written set of guidelines to help you track investment decisions. An investment policy statement should be used to help monitor investments and take into account all potential tax implications.
Shifting income
While there is no guarantee that we will see an increase in tax rates during 2010, it does not hurt to be prepared. In some cases it may make good sense to receive ordinary income in 2009 rather than in 2010 when tax rates may be higher. The highest marginal income tax rate is currently 35%. If you have non-qualified stock options you should consider exercising the options in 2009 if you anticipate moving into a higher tax bracket the following year. Small business owners and investors who have control over when income is received should also consider receiving ordinary income in 2009 rather than in a later year when rates may increase.
Capital gains
If the tax cuts that were initiated during the Bush Administration are allowed to expire, the highest capital gains rate will move from 15% to 20%. If you have investments that have increased in value over the past few years you could consider taking capital gains in 2009 while rates are at their lowest levels. Of course this should only be done if it makes sense from a strategic asset allocation perspective and you were planning on selling within the next 3-5 years anyway.
Tax efficient mutual funds and ETFs
Some mutual funds do a better job than others with tax efficiency. As income tax rates rise, the importance of monitoring the tax efficiency of investments held in taxable accounts becomes essential. As an investor, it is necessary to find money managers who are capable of balancing investment returns with tax considerations. Keep in mind that after-tax investment returns should be taken into account. Do not simply focus on pre-tax investment returns.
Index mutual funds and exchange traded funds (ETFs) are excellent investment vehicles from a tax efficiency standpoint. Traditional index funds and ETFs are, by nature, tax efficient — and cheap. The mutual fund industry also has a wide selection of tax-managed offerings that focus on minimizing taxation. The bottom line is as tax rates go up, the need to focus on tax efficient returns increases for investments held outside tax advantaged accounts such as IRAs or 401ks.
Variable Annuities
Although variable annuities are not my favorite investment vehicles due to cost and other factors, they do have a place in some financial planning situations. Annuities allow investors the opportunity for tax deferred growth and investment gains are not taxed until they are withdrawn. Upon withdrawal variable annuity income is taxed at ordinary rates (penalties may apply to withdrawals prior to age 59 1/2). The tax deferral of annuities becomes more appealing in a rising interest rate environment. If you are considering variable annuities, focus your search on low cost options available through a Fee Only financial planner.
Municipal Bonds
Municipal bonds are another investment vehicle that becomes increasingly appealing for taxable brokerage accounts as tax rates increase. This is due to the increase in the taxable equivalent yield of municipal bonds. Municipal bonds and municipal bond funds provide federally tax-exempt interest. In some cases state and local taxes may also be tax-exempt. If you are reviewing alternatives for the fixed income portion of an asset allocation plan, be sure to consider municipal bonds for your brokerage account.
The taxable equivalent yield calculation is as follows:
Tax-Equivalent Yield = Tax-Free Interest Rate ÷ (1 – tax rate)
So, if the municipal bonds interest rate is 3% and the highest tax rate increases to 40% the tax equivalent yield is 5% (3 divided by .60 equals 5%).
Buy and hold, but do not forget
I have never been a strong advocate of active trading. Active trading adds additional costs and historically underperforms passive investment approaches. The most important determinant of investment performance over time is asset allocation. While investors cannot control the movements of securities markets, they can control costs. As capital gains rates increase, the tax deferral strategies when using a buy and hold approach provide a valuable element of defense. If you have a long-term time horizon for investments, you will likely see a variety of tax law changes during the lifetime of your investment holdings. Buy and hold strategies help defer capital gains taxes until the actual sale.
In summary, aside from Roth IRA's, 401k's, and other tax deferred retirement accounts there are other options investors must be aware of to protect themselves from an increase in tax rates. As the old saying goes, the only constant in life is change. Tax laws in America are about to do just that- change. We don't know exactly when or how much, but tax rate changes are coming. The biggest line of defense is to be proactive and establish a comprehensive financial plan that focuses on investments, taxes, and other aspects of your financial life.
Wednesday, August 5, 2009
LifeSpan Tax Resolution: Free Book Giveaway
I am pleased to announce that my firm is currently giving away free copies of a book on tax resolution planning. This current promotion is designed to increase the awareness of tax resolution planning. "Tax Resolution and Financial Freedom: Using the Financial Planning Process to Resolve IRS Tax Problems" (ISBN- 9780578014777, $24.95) was released in March 2009. The purpose of "Tax Resolution and Financial Freedom" is to help individuals and small business owners make the smartest decisions possible when trying to deal with IRS tax problems. Free copies of the print version of Tax Resolution and Financial Freedom will be distributed to the first 25 people that sign up for a complimentary Tax Resolution Analysis. A limited number of copies are also available to tax professionals seeking to incorporate basic financial planning techniques with the tax resolution process.
Tax debt problems are a growing concern for millions of Americans. Recently the tax gap in the United States was estimated at $290 billion. The Internal Revenue Service announced in January that they are willing to work with taxpayers experiencing difficulty meeting their tax obligations. However, with the recent levels of government spending and the growing need to close the tax gap IRS collection efforts are likely to increase for taxpayers that ignore previous collection efforts. Many different solutions exist for taxpayers having difficulty resolving their tax problems. The LifeSpan Process of Tax Resolution and Financial Freedom was designed to help people choose the most cost effective solution to their problems related to money and taxes. Most importantly, a tax resolution plan follows basic principles of the financial planning process. Many tax resolution efforts fail over the long haul because they only treat the symptoms of tax debt rather than the underlying problem- lack of a genuine tax and financial plan.
LifeSpan Financial Planning, LLC currently provides a free Tax Resolution Analysis for our prospective clients. The confidential analysis generally lasts 30-45 minutes and is completed by phone, in-person meetings, or via secure video conferencing. This brief analysis is designed to provide a basic action plan to help people take the steps necessary to resolve tax debt problems using a tax resolution plan. LifeSpan encourages people with tax problems to look at all of their options and always do their research when choosing whether or not tax representation is necessary.
The Tax Resolution Analysis is a no-blame, no shame, no obligation opportunity to take the first steps toward financial freedom. Relatively few financial planners specialize in tax resolution planning. I think it is essential for people with tax debt to receive objective, unbiased guidance as they try to get their financial lives back on track. As a Fee Only financial planner, my firm is obligated to uphold the fiduciary responsibility to our clients. In general, this means that we will always act in the best interests of the client as they work to resolve tax debt related issues.
To reserve a free copy of Tax Resolution and Financial Freedom contact me toll-free at 877-TAX-9110 or send an email to scott@lifespanplanning.com with the subject line BOOK OFFER.
Monday, August 3, 2009
Money and Relationships
One common problem in marriages is a disagreement on how to manage money. Unfortunately, comments such as “you spent how much on that?” are more common than the ultimate question- “how much should we be spending?” It is not surprising that financial disagreements are often cited as the number one reason couples end up getting divorced. Many couples struggle with the task of openly discussing their finances. The tax and financial planning process requires couples to work together to achieve a common goal of financial freedom. This means that both parties need to take action and make the commitment to change financial behaviors.
Money and taxes should not be viewed as an issue of mine and yours. As a couple you should view everything as an “ours” issue. Talking about money with anyone can be very difficult because money is such a taboo subject in American culture. When that special someone is your spouse the talk can be even more complicated.
Why does money have such a powerful impact on our relationships? This is a difficult question that I encourage couples to explore. Money represents different things to each partner. One partner may view money as a symbol of power and success. The other may see money as a symbol of comfort and security. If the topic of dealing with tax or financial matters and thus taking control of personal finances makes one or both parties emotionally uncomfortable or defensive, you should seek the help of a financial planner or financial counselor. Professional counseling is also available for couples experiencing problems communicating about money.
Make a commitment to one another to handle your tax or financial problems as a couple. This is especially important if debt or other financial problems were assumed prior to the marriage or a non-liable spouse is involved. Simply determining that your partner’s debt is not your problem is not an effective alternative. Blaming will also do nothing to help the situation. Other unhealthy habits include sabotaging personal spending plans by secret spending or hiding financial decisions from the other spouse.
Each spouse should be accountable to the other. Aim to create a tax and financial plan that works for both of you. Make sure that the commitment to work toward financial freedom is a vision that you both share. If only one person is doing the work then you have a major problem brewing.
Communicating About Money
How we communicate with each another can be just as important as the message you are trying to get across to the other person. If you have a recent history of tax or financial problems it is easy to let emotions and the past take over the discussion. When talking to a spouse or significant other about money it is also easy for things to get lost in translation. Always be aware of how you are actually communicating with a spouse or loved one about money matters. Never forget that how you say things is just as important as what you actually say. Talking about money is not something that comes easily for most people. Try following these basic communication tips when talking about taxes and money matters.
1. Set a date
Schedule a convenient time to talk about money. Try to pick a time during the week when you are both available to have a calm discussion free from any distractions (e.g., no children, no television).
2. Establish open lines of communication
Remember that what you say is sometimes not as important as how you say it. Use “I” messages to improve communication.
3. Talk about your life experience with money
What lessons did you learn early in life about money?
4. Give and Take
If you are going to ask your spouse to sacrifice something you need to be willing to do the same.
5. Set boundaries on what can and cannot be discussed
Stay focused. Do not bring up off-limit topics.
6. Avoid secret-spending
Be open and honest with your spouse.
7. Agree on a personal spending plan
A budget or personal spending plan will not work unless you both work the plan together.
8. Discuss your financial matters on a regular basis
This is a key element to staying focused and on track.
9. Seek professional assistance if necessary
Know when to seek assistance. If you cannot talk to your spouse or significant other about money then you may need help. Marital counselors and financial life planners can both be helpful.
Money and taxes should not be viewed as an issue of mine and yours. As a couple you should view everything as an “ours” issue. Talking about money with anyone can be very difficult because money is such a taboo subject in American culture. When that special someone is your spouse the talk can be even more complicated.
Why does money have such a powerful impact on our relationships? This is a difficult question that I encourage couples to explore. Money represents different things to each partner. One partner may view money as a symbol of power and success. The other may see money as a symbol of comfort and security. If the topic of dealing with tax or financial matters and thus taking control of personal finances makes one or both parties emotionally uncomfortable or defensive, you should seek the help of a financial planner or financial counselor. Professional counseling is also available for couples experiencing problems communicating about money.
Make a commitment to one another to handle your tax or financial problems as a couple. This is especially important if debt or other financial problems were assumed prior to the marriage or a non-liable spouse is involved. Simply determining that your partner’s debt is not your problem is not an effective alternative. Blaming will also do nothing to help the situation. Other unhealthy habits include sabotaging personal spending plans by secret spending or hiding financial decisions from the other spouse.
Each spouse should be accountable to the other. Aim to create a tax and financial plan that works for both of you. Make sure that the commitment to work toward financial freedom is a vision that you both share. If only one person is doing the work then you have a major problem brewing.
Communicating About Money
How we communicate with each another can be just as important as the message you are trying to get across to the other person. If you have a recent history of tax or financial problems it is easy to let emotions and the past take over the discussion. When talking to a spouse or significant other about money it is also easy for things to get lost in translation. Always be aware of how you are actually communicating with a spouse or loved one about money matters. Never forget that how you say things is just as important as what you actually say. Talking about money is not something that comes easily for most people. Try following these basic communication tips when talking about taxes and money matters.
1. Set a date
Schedule a convenient time to talk about money. Try to pick a time during the week when you are both available to have a calm discussion free from any distractions (e.g., no children, no television).
2. Establish open lines of communication
Remember that what you say is sometimes not as important as how you say it. Use “I” messages to improve communication.
3. Talk about your life experience with money
What lessons did you learn early in life about money?
4. Give and Take
If you are going to ask your spouse to sacrifice something you need to be willing to do the same.
5. Set boundaries on what can and cannot be discussed
Stay focused. Do not bring up off-limit topics.
6. Avoid secret-spending
Be open and honest with your spouse.
7. Agree on a personal spending plan
A budget or personal spending plan will not work unless you both work the plan together.
8. Discuss your financial matters on a regular basis
This is a key element to staying focused and on track.
9. Seek professional assistance if necessary
Know when to seek assistance. If you cannot talk to your spouse or significant other about money then you may need help. Marital counselors and financial life planners can both be helpful.
Subscribe to:
Posts (Atom)
Posts
