Money Talks Blog by william_lako
529 Plan Funds When Your Child Receives a Scholarship or Decides Not to Attend School
August 26, 2013 03:10 PM | 24456 views | 0 0 comments | 1224 1224 recommendations | email to a friend | print | permalink

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The “Kiddie Tax” on Your Child’s Unearned Investment Income
by william_lako
March 11, 2013 10:49 AM | 1552 views | 0 0 comments | 20 20 recommendations | email to a friend | print | permalink

In my last blog post, I discussed whether your dependent children needed to file a tax return. I warned that unearned investment income in your child’s name is potentially subject to “Kiddie Tax.”

Kiddie Tax is actually not a tax at all. Instead, it is a limitation the IRS has put into place allowing a child under age 18 and full-time students under age 23 to have unearned income, such as, interest, dividends and capital gains, taxed at the child’s lower tax rate. Basically, some parents found that they could sometimes lower their income tax liability by shifting investment income to their child, since the child’s marginal tax bracket was lower than theirs. The Congress closed this loophole by enacting certain rules known as the kiddie tax.

The kiddie tax rules apply to those under age 18; those age 18 whose earned income doesn’t exceed one-half of their support, and children ages 19 to 23 who are full-time students and whose earned income doesn’t exceed one-half of their support. For tax year 2012, the first $950 in unearned income a child receives is not subject to tax. Income of more than $950 and up to $1,900 is allowed to be taxed at the child’s tax rate—which is usually less than the parent’s income tax rate. When the child receives unearned income of more than $1,900, the amount over $1,900 must be taxed at the parent’s rate.

There are two ways to report this income. The first option is to prepare a return for your child. The Kiddie Tax would be computed using Form 8615. If this option is chosen, the child’s unearned income over $1,900 will be calculated at the parent’s tax rate. If the child’s parents file separately, the parent’s highest tax bracket will be used. The second option is for you to report your child’s income on your tax return using Form 8814. The first $1,900 is taxed at the child’s rate, but is not included in the parent’s taxable income. The amount over $1,900 is then taxed at the parent’s rate.

You should consider both possibilities to see the total tax effect for each, as well as consider the effect each situation would have on your tax breaks to maximize your tax credits and deductions.

If you report your child’s unearned income on your tax return, you will omit the hassle of filing a separate return for the child. However, the additional income reported on your return could accelerate the phase-out of itemized deductions because of Adjusted Gross Income (AGI), limitations. With AGI limitations, additional income could also phase out your ability to deduct your IRA contributions. Finally, this additional income could reduce the amount of credits available to you. The child’s income can be included on your tax return only if the child’s unearned income is in the form of interest or dividends. If your child has any capital gains or losses, the child would be required to file a separate tax return.

Reporting your child’s unearned income on his own tax return would not affect your AGI. Therefore, your child's unearned income would not affect your eligibility for certain credits and deductions.

William G. Lako, Jr., CFP®, is a principal at Henssler Financial, and a co-host on Atlanta's longest running, most respected financial talk radio show "Money Talks" airing Sundays at 10 a.m. on Talk 920 AM, WGKA.

 

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Tax Planning—Your Kids, Their Money
by william_lako
February 25, 2013 11:15 AM | 1693 views | 0 0 comments | 18 18 recommendations | email to a friend | print | permalink

Let’s talk a little about the tax rules for children. A dependent child under the age of 19, as well as full-time students under the age of 24, must generally file a federal tax return for 2012 if the child has:

  • Earned income greater than $5,950;
  • Unearned income greater than $950, or
  • Gross income greater than the larger of $950 or earned income (up to $5,650) plus $300.

Your dependent child’s basic standard deduction is generally the greater of $950 or their earned income (up to the regular standard deduction of $5,950). No personal exemption is allowed on your child’s return if the child can be claimed as a dependent on your return.

Under certain circumstances, if your child is younger than 19 years old or under age 24 if a full-time student, you may elect to report your child’s income on your return. This election alleviates the need for your child to file a separate return. However, this election is available only if your child’s income is comprised entirely of interest and dividends; your child’s income is less than $9,500, and no estimated tax payments have been made in your child’s name and Social Security number. The downside to this election is the additional income increases your adjusted gross income, which could cost you the loss of tax credits and itemized deductions.

If your child’s investment income was more than $1,900 in 2012 and the child is required to file a tax return for the year, then part of your child’s investment income may be subject to tax at your income tax rate, thus, subject to “Kiddie Tax.”

Kiddie Tax is actually not a tax at all. Instead, it is a limitation the IRS has put into place allowing a child under age 18 to have unearned income taxed at the child’s lower tax rate. Next week, I’ll take a closer look at the “Kiddie Tax” and how it may affect your adjusted gross income.

William G. Lako, Jr., CFP®, is a principal at Henssler Financial, and a co-host on Atlanta's longest running, most respected financial talk radio show "Money Talks" airing Sundays at 10 a.m. on Talk 920 AM, WGKA.

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Choosing Your Tax Return Preparer
by william_lako
February 18, 2013 12:40 PM | 1087 views | 0 0 comments | 22 22 recommendations | email to a friend | print | permalink

With the last-minute tax law changes, taxpayers who have always prepared their own returns are looking for outside help to ensure they receive all the benefits they are entitled to under the new laws. Additionally, once you have a relationship with a tax professional, he should be able to advise you how the new laws will affect your 2013 taxes.

Most tax preparers are professional, ethical and honest. When choosing someone to prepare and file your taxes, you should consider several factors. First, there are several types of preparers you should never consider. Among these are companies or preparers who claim they can get you a higher refund than others. Returns that are prepared honestly and competently will all result in you receiving the same refund. There is no secret formula to calculate a bigger refund.

Second, you should avoid any preparer who bases the fee charged on a percentage of the refund. This can lead to the “padding” of your expenses and the “shaving” of your income. While these can increase the refund you receive, the fee you pay the preparer is increased, resulting in a tax return that may be questionable at best. Remember you are legally responsible for the information contained in your tax return, not the preparer.

When choosing a tax professional, you should keep in mind reputation, credentials and stability. Ask your friends and associates who they use as their preparer, and if they are satisfied with the service they received. You should be comfortable entrusting your personal information with this person or company.

Tax preparers can have different titles based on their education and experience. They can be called a Certified Public Accountant (C.P.A.), an Enrolled Agent (E.A.), an Accredited Tax Preparer, a Licensed Public Accountant or a Tax Attorney. Only C.P.A.s, E.A.s and attorneys can represent taxpayers before the IRS in all matters. This representation includes audits, collection actions and appeals. Other types of preparers can represent you during an audit only. You should inquire about the preparer’s affiliation with professional tax organizations. These organizations provide tax preparers with ongoing education and resources and hold them to a code of ethics.

Unfortunately, the IRS does not respond instantly when problems occur with your return. Sometimes it is months, even years, before they question an entry in your return. When choosing a preparer, you need to consider whether that individual or their firm will be in business for the long run. The tax professional you choose should always sign the return and provide you with a copy for your records. They should make you aware of how to reach them should you have questions when the busy tax season is over.

Choosing a tax professional is an important decision and should be made carefully. Please keep these cautions and suggestions in mind when choosing someone to prepare your return(s).

William G. Lako, Jr., CFP®, is a principal at Henssler Financial, and a co-host on Atlanta's longest running, most respected financial talk radio show "Money Talks" airing Sundays at 10 a.m. on Talk 920 AM, WGKA.

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On a Scale of One to Five
by william_lako
February 08, 2013 12:28 PM | 967 views | 0 0 comments | 15 15 recommendations | email to a friend | print | permalink
One of the fundamental steps when developing a portfolio is to know what you are buying.

If you’ve researched stocks, you’ve likely come across a section offering “Analyst Opinions” with either a numerical or alphabetical score.  When you are using an outside source for an opinion on a stock, you should always check to see what the information being provided means. Most information providers define their ratings or rankings to make it somewhat clear as to what they represent.

For example, on Yahoo Finance, the “Analyst Opinion” is provided by a third-party source, Thomson Reuters. The Thomson rating is a numerical score from 1 to 5, with the lower score being the most favorable. The number actually reflects the average analyst opinion on the stock. Thus, if one of the analysts polled by Thomson rates the company a “Buy,” it receives a 1 rating from that analyst; a “Sell” opinion would garner a 5 rating. Once all opinions are made, the numerical average provides the rating you see in Yahoo Finance.

Paid rating services like Value Line provide a large amount of information, including a Safety Ranking and Financial Strength rating. For a specific stock, the Safety Ranking will be from 1 to 5, with 1 being the best rating (safest), while the Financial Strength rating ranges from A (best) down to C (worst). Financial Strength is a measure of the financial position of the company. Low debt or the ability to easily service its debt, high levels of working capital, and solid earnings potential, are the attributes of a financially strong company. The Safety Rating is derived from the Financial Strength and the stock’s price stability.

Morningstar.com is a good resource for mutual fund research, as is the fund’s own prospectus. Morningstar has a widely respected rating system by which the company rates mutual funds from one to five stars with, more stars meaning a more desirable investment fund. Again, the Morningstar website lays out the criteria for their ratings, but in a nutshell the rating measures funds against their style group peers —i.e., other funds that share the same investment objective or market capitalization—on the basis of returns and risk.

Lipper also provides a numerical rating on mutual funds as seen in the Wall Street Journal, MarketWatch.com and Barron’s. Their rating system is fairly simple with a range of 1 to 5 being assigned to funds on the basis consistency, preservation, tax efficiency and expense with an overall score. An overall Lipper score of five is best, but the rating system adds value by showing the additional ratings.

Overall, ratings for both stocks and mutual funds vary from one service to the next, as each will use various methods and emphasize different factors. When researching an investment, you may want to consult several, rather than relying on just one.

William G. Lako, Jr., CFP®, is a principal at Henssler Financial, and a co-host on Atlanta's longest running, most respected financial talk radio show "Money Talks" airing Sundays at 10 a.m. on Talk 920 AM, WGKA.

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Permanent Expansion of Coverdell Accounts
by william_lako
January 29, 2013 08:24 AM | 970 views | 0 0 comments | 15 15 recommendations | email to a friend | print | permalink

The American Taxpayer Relief Act of 2012 permanently extended the expanded Coverdell education savings accounts (ESA). Coverdell accounts are tax-advantaged educational savings account that you can establish for any child under the age of 18. The Economic Growth and Tax Relief Reconciliation Act of 2001 increased the annual contribution limit for Coverdell ESAs to $2,000 per beneficiary. This increased limit was extended through 2012, and the recent tax law makes the expansion permanent.

While there are many different investment vehicles to save for education, one unique feature of Coverdell Accounts is that funds can be used for qualified expenses at elementary and secondary schools, including public, private, and religious schools.

As a parent, if you are committed to sending your children to private elementary or secondary school, you’re likely aware that financial aid is nearly nonexistent at this level of education. Most families pay out of pocket for private elementary or secondary schools. With a Coverdell education savings account, you can withdraw money tax free for these school expenses.

Contributions to Coverdell ESAs are made with after-tax dollars, and there is no tax deduction for contributions. However, distributions that are used to pay qualified education expenses are income tax free at the federal level. In Georgia distributions are also exempt from state income tax. Your modified adjusted gross income for the year must be less than $110,000 if filing a single return or $220,000 if married filing jointly to be eligible to open a Coverdell ESA. Contributions are then limited as your modified adjusted gross income increases between $95,000 and $110,000 if filing a single return or between $190,000 and $220,000 if married filing jointly.

Coverdell ESAs may not be the right savings vehicle for every family saving for education expenses. However, the permanent expansion for contributions and the ability to use funds for elementary and secondary schools may make them worth considering.

William G. Lako, Jr., CFP®, is a principal at Henssler Financial, and a co-host on Atlanta's longest running, most respected financial talk radio show "Money Talks" airing Sundays at 10 a.m. on Talk 920 AM, WGKA.

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Tax Relief Credits for Families and Children
by william_lako
January 18, 2013 01:36 PM | 1116 views | 0 0 comments | 12 12 recommendations | email to a friend | print | permalink

The American Taxpayer Relief Act of 2012 permanently extended some tax relief credits for families and children. The Act permanently extended the expanded child and dependent care credit from The Economic Growth and Tax Relief Reconciliation Act of 2001. Generally, you are eligible for a tax credit if you pay someone to watch a qualifying dependent so that you can be gainfully employed. Qualifying dependents include a dependent child under the age of 13 or a disabled adult dependent who is unable to care for himself.

Taxpayers are eligible for a maximum credit of $1,050, or 35% of qualifying expenses of up to $3,000 per year for the care of one child. For the care of two or more eligible dependents, the maximum credit is $2,100, or 35% of up to $6,000 of qualifying expenses. It is important to note that you must reduce your qualifying expenses by any amounts provided by a dependent care benefits plan through your employer.

For taxpayers with incomes of $15,000 or less, the applicable percentage is 35%. The percentage is reduced by 1% for each $2,000 of income over $15,000, until the percentage reaches the 20% level for income of more than $43,000.



While this benefit was designed to help low-income working taxpayers with children, middle and upper-income families can benefit as well. Qualifying expenses can include the in-home related expenses of a housekeeper, babysitter or cook. If the daycare center cares for more than six children, services performed are allowed only if the center is certified and in compliance with all local laws. Day camps often qualify for the credit. A portion of boarding-school expenses may also qualify for the credit, but fees paid for sending your child to an overnight camp are specifically not allowed.

William G. Lako, Jr., CFP®, is a principal at Henssler Financial, and a co-host on Atlanta's longest running, most respected financial talk radio show "Money Talks" airing Sundays at 10 a.m. on Talk 920 AM, WGKA.

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Health Care Provisions Effective in 2013
by william_lako
January 07, 2013 08:31 AM | 1284 views | 0 0 comments | 51 51 recommendations | email to a friend | print | permalink

2013 will be a big year for health care, with several provisions from the Patient Protection and Affordable Care Act becoming effective.

On the benefits side, Medicare Part D participants will see increased subsidies to reduce drug costs as they reach the gap in their drug coverage. Known as the “donut hole,” the coverage gap begins after you and your drug plan have spent $2,970. In 2013, participants will pay 47.5% of the cost for covered brand-name drugs and 79% of the cost for covered generic drugs. The entire price of your prescription will count as out-of-pocket costs, which will help you get out of the coverage gap.

With a Section 125 cafeteria plan flexible spending account, you chose an amount to be deducted from your paycheck before federal and state income taxes are deducted. The money is then used for reimbursement of medical expenses, not covered by insurance, such as, deductibles, co-pays, prescription drugs, dental services or eye care. The Patient Protection and Affordable Care Act reduced the annual contribution limit to $2,500, subject to annual increases for cost-of-living adjustments.

Medical expenses that meet certain qualifications may be tax-deductible, using an itemized deduction. In 2013, the threshold for itemized deductions increases to 10% of adjusted gross income. However, for taxpayers age 65 and older, the threshold remains at 7.5% of adjusted gross income.

Unfortunately, some tax increases outlined in the Patient Protection and Affordable Care Act take effect next year, including additional Medicare taxes on wages for high-income individuals. Currently, employees pay 1.45% of their wages into Medicare, with the other 1.45% paid by the employer. In 2013, individuals with wages exceeding $200,000 ($250,000 for married couples filing jointly, and $125,000 for individuals married filing separately) will pay an additional 0.9% on their earned income above that threshold. There is no employer match on the additional tax.

In addition, those same high-income individuals should see the new 3.8% Medicare contribution tax on unearned income. The tax is calculated by multiplying the 3.8% tax rate by the lower of either net investment income for the year, or modified adjusted gross income over a certain threshold amount. The 3.8% Medicare “surtax” is a complicated subject, which I’ll be covering in my column soon.

William G. Lako, Jr., CFP®, is a principal at Henssler Financial, and a co-host on Atlanta's longest running, most respected financial talk radio show "Money Talks" airing Sundays at 10 a.m. on Talk 920 AM, WGKA.

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Setting Financial Resolutions for the New Year
by william_lako
January 02, 2013 04:28 PM | 1561 views | 0 0 comments | 38 38 recommendations | email to a friend | print | permalink

The snickering because of your holiday sweater has ceased, the presents have been opened, and the decorations have been stored away for another year. It is now time to discuss New Year's resolutions that could help lower your stress and pad your wallet. Here are a variety of ways to get your financial situation in better shape.

Set a Plan.

Determine your risk tolerance—the degree of uncertainty that you can handle in regard to a negative change in the value of your portfolio. Keep your time horizon, spending needs, and other circumstances in mind when determining your risk tolerance to allocate your portfolio assets appropriately.

Pay Yourself First.

Consider investing in your 401(k) at least up to your company’s match. Even if your company is not matching your contributions, you should still be putting some money toward your retirement account. Consider setting your 401(k) contributions to the highest level you can handle (in 2013, $17,500 max for those under age 50; $23,000 max if 50 or older). If you are self-employed, consider talking to a professional about other special tax-saving opportunities, including Solo 401(k) plans, SEP-IRAs, and Keoghs.

Rebalance As Needed.

Depending on your risk tolerance factors, such as your age, income, etc, and portfolio's performance, it may be time to rebalance. When you rebalance, you trim assets that are overweight and use the proceeds to invest in underweighted assets, or you can use new investment dollars to buy underweighted securities. In doing this, you may be able to benefit by buying low and selling high, since often overweighted assets have performed better and underweighted assets should be relatively cheaper. However, tax consequences should be considered before making these decisions.

Review Your Losers.

In addition to reviewing the big picture and your overall asset allocation, you should compare the returns of your individual investments with their appropriate benchmarks. If a holding underperformed its benchmark by 3% to 5%, try to find out why. If that particular investment was out of fashion, it may be worthwhile to keep it in hopes for a turnaround. However, if your investment consistently underperformed its peers for multiple years, you may be better off dumping it for a better long-term performer.

Convert For Tax Free Growth.

While you will be hit with taxes up front, converting a traditional IRA to a Roth IRA will allow your money to grow tax free. As another bonus, there are no required minimum distributions after age 70. This may not be beneficial if you are going to pay too much in tax for converting. This decision should be carefully considered with the help of an investment professional or tax consultant.

William G. Lako, Jr., CFP®, is a principal at Henssler Financial, and a co-host on Atlanta's longest running, most respected financial talk radio show "Money Talks" airing Sundays at 10 a.m. on Talk 920 AM, WGKA.

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Charitable Giving­
by william_lako
December 11, 2012 02:42 PM | 1656 views | 0 0 comments | 29 29 recommendations | email to a friend | print | permalink

Charitable giving is more than answering a ringing bell with your spare change when you leave the shopping malls. It’s also more than looking for that last-minute tax deduction. While your year-end generosity might benefit you come tax time, it’s equally important to ensure that your donation is well spent.

For your charitable contributions to be tax deductible, the charity must meet IRS requirements to be classified as a tax-exempt organization. With more than 1.4 million nonprofit organizations registered with the IRS, you should find a charity that supports a cause you care about. Reputable nonprofit organizations should be more than happy to provide you with information on its tax status.

When you talk to a solicitor representing a charity, practice caution and never provide personal information, such as your Social Security number, or debit or credit account numbers, if you did not initiate the contact. Unfortunately, unsolicited requests for charitable donations—both by phone and email—could be a scam. It is wise to fully check out the charity before you donate.

You can usually obtain information about a charity’s mission and how your gift will be used on the charity’s website. You may wish to follow up by checking consumer websites like the Better Business Bureau's BBB Wise Giving Alliance at www.bbb.org/us/charity, or Charity Navigator at www.charitynavigator.org. These sites can provide information on the charity’s financial status and how much of the donations go to administrative costs versus their programs or services.

While you can provide a traditional cash donation, you may also be able to give stock, real estate or personal property. You may consider donating to a charity through your estate by way of a trust, charitable gift annuity, or designating a charity as a beneficiary of a life insurance policy. If you choose one of these methods, you should consult a C.P.A. or financial adviser to determine potential income and estate tax consequences based on your individual circumstances.

You should get a receipt from the charity showing their name and the date and amount of your donation. If you follow the IRS’ rules on tax deductions for donations, you should be able to deduct charitable donations as an itemized expense on Schedule A of your Form 1040. The amount of your deduction may be subject to certain limitations, depending on the type of gift, the charitable organization and your adjusted gross income.  For detailed information and a list of requirements, see IRS Publication 526, Charitable Contributions.

William G. Lako, Jr., CFP®, is a principal at Henssler Financial, and a co-host on Atlanta's longest running, most respected financial talk radio show "Money Talks" airing Sundays at 10 a.m. on Talk 920 AM, WGKA.

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Will debt consolidation hurt or help my credit rating?
by william_lako
December 03, 2012 09:33 AM | 1289 views | 0 0 comments | 33 33 recommendations | email to a friend | print | permalink

Your debt-to-credit ratio weighs heavily on your credit rating at 30% of your FICO score. It is suggested that you keep the amount of open debt owed on each credit card or credit line relatively low, preferably no more than 25% to 50% of the credit limit. For example, it is better to owe $1,000 on three separate credit cards, with each card's limit being $4,000, versus owing $3,000 on one credit card, with a credit limit of $4,000. Spreading the debt over three cards results in a favorable debt-to-credit ratio of only 25%; whereas, owing $3,000 on one card with a $4,000 credit limit unfavorably uses up 75% of that particular credit line. In this case, debt consolidation may not be beneficial.

Perhaps you are considering that you should consolidate your debt by taking a loan at a lower interest rate to pay off several smaller loans at higher interest rates. Making one payment instead of many could make it easier for you to make timely payments, and thus, improve your credit rating over time.

If, for example, you have multiple accounts in default, generally, lenders will consider you a bad credit risk. If you pay the outstanding debts with a consolidation loan, a new credit report should show that you have resolved your debts. Now you have only one active line of credit, being your consolidation loan. Provided you stay current on the consolidation loan payments, your credit rating should be viewed more favorably than before. Payment history accounts for 35% of your credit score. Therefore, you need to pay your bills on time, every time.

Generally, there is no point in consolidating if you cannot lower your interest rate or increase the number of months you have to pay off the debt. The main goal of debt consolidation is to make your payments more affordable. The monthly payment on your consolidation loan should be less than the sum of the monthly payments on your individual debts. If this is not the case, consolidation may not be your best option. Carefully consider the interest rate you pay as well. One downside to debt consolidation is that by extending the time to pay off your debt, you could pay more in interest charges over the life of the loan.

William G. Lako, Jr., CFP®, is a principal at Henssler Financial, and a co-host on Atlanta's longest running, most respected financial talk radio show "Money Talks" airing Sundays at 10 a.m. on Talk 920 AM, WGKA.

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