MAKING CENTS: Business Owners year-end tax strategies

Many business owners are sitting on their hands when it comes to committing significant cash to any project; from expansion to hiring these owners commonly cite uncertain tax and regulatory policy as some of their biggest fears for the future growth of their businesses.  Regardless of future policies, there are still some tried and true tax planning opportunities available for owners to reduce their 2012 tax burdens now.

The first involves those who need equipment for their businesses.  This equipment can include office furniture, computers or any type of depreciable office or manufacturing equipment used in your workplace.  Under section 179 of the internal revenue code, businesses can deduct up to 100% of the cost of new equipment in the year that the equipment is placed into service.  The limit to this deduction exceeds $130,000 and is scheduled to drop to $25,000 in 2013. In addition to the up-front section 179 deduction, equipment purchases may also be eligible for a bonus depreciation deduction of up to 50% of the cost of the items placed into service.

The key for purchases made this year is that the asset is in fact placed in service.  Ordering today and installing in February 2013 will not help you.  The stuff has to be in your shop and ready to go by 12/31/2012.

Vehicle purchases can also qualify for vehicles placed in service before 12/31.  For large SUVs and trucks, the benefits are even better with both section 179 deductions and bonus depreciation rates available.

If you need to hire anyone, consider hiring a Veteran.  By hiring an unemployed Veteran, you may be eligible for tax credits from $2,400 to $6,600 depending on a few factors.  The Vet must begin work by 1/1/2013 for the employer to receive the tax credit.  More details on the tax benefits of hiring a Veteran can be found at www.dol.gov/vets/. 

For employers with benefit plans, take a look at upgrading your employee benefits.  This advice is sometimes a tough one for larger employers to swallow because it is typically a one way street.  That is once benefits get richer for employees, it is very difficult to scale them back during tougher times.  But if your company is fairly profitable, and you have none to only a few key employees, upgrading your benefit plans could be one of the best tax planning moves for you.  The candidates for upgrade may include your group plans for health, life, disability or dental.  Your retirement plan may also be eligible for a major upgrade increasing your annual contribution and the resulting deduction substantially.

Of course, no one really knows what is going to happen next year.  A rational approach to save taxes this year is to examine where you stand as of now, and attempt to forecast what your entire year will look like. With that knowledge, you can make a sound judgment about the magnitude of any tax savings move made now as opposed to waiting around to see what happens next near. 

John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthcompanies.com or on Facebook as JohnPNapolitano and US Wealth

John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

Securities offered through LPL Financial, Member FINRA/SIPC.

Investment advice offered through U.S. Financial Advisors, a registered investment advisor and separate entity from LPL Financial. The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with resident of the following states: AL, AR, AZ, CA, CO, CT, DC, FL, GA, HI, IA, ID, IL, IN, KS, KY, LA, MA, MD, ME, MN, NC, ND, NH, NJ, NM, NV, NY, OH, OK, OR, PA, RI, SC, TN, TX, UT, VA, VT, WA, WV. USFA, and U.S. Insurance Brokers, LLC are wholly-owned subsidiaries of U.S. Wealth Management. U.S. Wealth Management companies are not affiliated with LPL Financial.

The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. We make no representation as to the completeness or accuracy of information provided at these web sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to.

MAKING CENTS: Getting through future retirement roadblocks

If someone asked you your three greatest concerns about maintaining or improving your life style during retirement, what would they be? Think of this for a moment before you read on.

Under the category of additional food for thought, let me introduce some other factors to consider that may impact your retirement way down the road.

 

The first thought is inflation. We have been spoiled for the past several years with a historically lower than average inflation rate according to the U. S. bureau of statistics.  On top of that, the statistics that you hear about in the popular press exclude two very important categories. These stats exclude food and energy costs, which may or may be more volatile 10 or 20 years from now.

 

These statistics also do not include price increases that are due to performance improvements. Each year, the inflation numbers routinely exclude quality enhancements to certain products or services, even if that product or service is no longer offered without the enhanced new feature or benefit.

 

This may be material for someone who likes to stay ahead of the technology and quality curve. Perform a stress test on your savings, and run a scenario with significantly higher inflation and see where that leaves you.

 

Another factor is your assumed rate of return. What are you using in your forecasts? Of course, we all know what fixed rates are today. For many, using today’s guaranteed rates alone will flag a potential problem way down the road. But even for those with risk in their portfolios are not guaranteed to hit their total return targets.

 

Many experts are warning that riskier assets classes may not grow in the next decade or two as well as they did during the last bull market run with greater volatility. This will be a challenge for conservative investors who need more than what today’s risk free rate of return may provide.

 

Their challenge is to be a bit more tactical in their allocations, and actively attempt to avoid losses while increasing your to more asset classes.

 

Taxes will also change. While no one knows for sure whether income taxes will go up or go down, most professionals would suggest that you consider higher taxation in the future. Stress test your net cash flow in retirement by assuming a tax increase, and see what that does to your nest egg.

Another factor that many will not completely consider is longevity. People are living longer today. This can cause several issues for you later in life. Take a look at your basic living expenses if you add another ten years of life. Is your savings adequate to handle that extra ten years? What does your forecast look like if you purchase long term care insurance?

 

While that may mitigate the consequences of a long term catastrophic illness, the cost of the coverage itself may be an expense that gives rise to future cash flow shortages.

 

There are two ways to settle this issue for you. Run the numbers under a few stress test scenarios or stick your head in the sand and spend less.

John P. Napolitano is CEO of U.S. Wealth Managementin Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthcompanies.com or on Facebook as JohnPNapolitano and US Wealth

John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

Securities offered through LPL Financial, Member FINRA/SIPC.

Investment advice offered through U.S. Financial Advisors, a registered investment advisor and separate entity from LPL Financial. The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with resident of the following states: AL, AR, AZ, CA, CO, CT, DC, FL, GA, HI, IA, ID, IL, IN, KS, KY, LA, MA, MD, ME, MN, NC, ND, NH, NJ, NM, NV, NY, OH, OK, OR, PA, RI, SC, TN, TX, UT, VA, VT, WA, WV. USFA, and U.S. Insurance Brokers, LLC are wholly-owned subsidiaries of U.S. Wealth Management. U.S. Wealth Management companies are not affiliated with LPL Financial.

The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. We make no representation as to the completeness or accuracy of information provided at these web sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to.

MAKING CENTS: Where do you get your financial education?

If you read this column regularly, you know that I have a low tolerance for financial procrastinators. Those who know that they need a will, more life insurance or to re-allocate their retirement plan frequently think that re-arranging their sock drawer is more important than getting to the important financial issues that may devastate their plans or survivors. Their creative avoidance of these significant personal responsibilities is often grounded in the same fears – the fear of not knowing what to do or who to trust.

There is no shortage of financial information available for free to those who are seeking knowledge. We have the libraries, the Internet and information published by financial companies and journalists. That too is a part of the problem; there is simply too much information available. So let’s break this knowledge down into categories that correlate to your own education experience.

Elementary financial education is where we all need to start. These are the basics from understanding checking accounts, credit cards and debit cards through a basic spending and savings plan. Earlier this week I attended an all-day meeting of the Massachusetts Financial Educational Collaborative. This not-for-profit agency was established to see that all residents of Massachusetts have access to quality financial education. There is no shortage of information available for free. Look at the masssaves.org web site, and see for yourself.

Intermediate-level knowledge or the high school equivalent is where you’ve mastered the basics and are ready to move into the specifics of portfolio management, evaluating risk management strategies or looking to do pro-active income tax or estate planning. This is where it starts to get impacted or slanted by opinions of the creators. To get the answer that may best fit you, you’ll have to examine all points of view and maybe supplement that with some textbook-like publications.

The university level may be where you are comparing specific strategies, and attempting to assess the possible outcomes of each choice. For this, you will need technology and advanced training such as CFP® or some other professional designation for your own benefit or hire a professional to be your personal professor.

John P. Napolitano is CEO of U.S. Wealth Managementin Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthcompanies.com or on Facebook as JohnPNapolitano and US Wealth

Securities offered through LPL Financial, Member FINRA/SIPC.

Investment advice offered through U.S. Financial Advisors, a registered investment advisor and separate entity from LPL Financial. The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with resident of the following states: AL, AR, AZ, CA, CO, CT, DC, FL, GA, HI, IA, ID, IL, IN, KS, KY, LA, MA, MD, ME, MN, NC, ND, NH, NJ, NM, NV, NY, OH, OK, OR, PA, RI, SC, TN, TX, UT, VA, VT, WA, WV. USFA, and U.S. Insurance Brokers, LLC are wholly-owned subsidiaries of U.S. Wealth Management. U.S. Wealth Management companies are not affiliated with LPL Financial.

The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. We make no representation as to the completeness or accuracy of information provided at these web sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to.

MAKING CENTS: Look over your deductions before it’s too late

As the fourth quarter rolls around, it may be your last chance to pro-actively improve your tax, and maybe even your overall financial situation in 2012.

Whether we see the extension of the Bush-era tax cuts or not still remains to be seen, but the first consideration may be to see how you are doing so far this year with 401(k) withholdings. It’s not too late to adjust your deposit amount to take advantage of the maximum amount allowable.

Also on the 401(k), if you find yourself in a low tax bracket this year yet still making traditional 401(k) contributions, consider switching these contributions to Roth 401(k) contributions. For the Roth 401(k) contribution you’ll receive no current deduction, but both the earnings and future withdrawals remain tax free under current law.

Consider a Roth conversion. This is a painful pill to swallow because you’d owe taxes for this year on the entire amount of the conversion. It can, however create lasting tax benefits if you don’t think you’ll need the money soon. If you don’t think you’ll ever spend this money, and have a desire to get it to the next generation or two, the Roth has tremendous legacy power due to the extended years of tax deferral.

If you are over age 71, make sure that you’ve taken your required minimum distribution from all qualified plans like 401(k), IRA, SEP. The penalty for missing the distribution or taking too little is 50 percent of the under-withdrawal. Also, if you have any room left in the lower tax brackets, consider upping your withdrawal beyond the minimum amount. This could be helpful if taxes rise throughout your lifetime of distributions.

Take a look at your charitable plans now. Too many people wait until December, and then it is simply too late to do anything creative such as gifting appreciated assets. If the gifted asset were a security or fund for that matter, you’d get a deduction for the full amount of the fair market value of that security on the date of the gift, even if your tax cost basis is zero. Maybe you’ve got some closets to clean out or some furniture to donate. Do it now and the deduction will find its way to your 2012 tax return if you itemize your deductions.

After you decide which course of action to pursue, prepare a forecast of your 2012 tax return and see if you’ve paid enough in estimates or have had enough tax withheld. Don’t forget your state taxes here, while the federal tax is often the larger of the two, don’t ignore your state tax obligations. Their penalties can be costly too.

Take a look through your portfolio as well. Are there opportunities to cash in losses to take advantage of the $3,000 maximum deduction against ordinary income? Conversely, this may be a good time to re-balance your holdings to take advantage of the current low capital gains tax rates.

Avoid last minute surprises, have a close look now before it is too late to make a difference for this year.

 

John P. Napolitano is CEO of U.S. Wealth Managementin Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthcompanies.com or on Facebook as JohnPNapolitano and US Wealth

Securities offered through LPL Financial, Member FINRA/SIPC.

Investment advice offered through U.S. Financial Advisors, a registered investment advisor and separate entity from LPL Financial. The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with resident of the following states: AL, AR, AZ, CA, CO, CT, DC, FL, GA, HI, IA, ID, IL, IN, KS, KY, LA, MA, MD, ME, MN, NC, ND, NH, NJ, NM, NV, NY, OH, OK, OR, PA, RI, SC, TN, TX, UT, VA, VT, WA, WV. USFA, and U.S. Insurance Brokers, LLC are wholly-owned subsidiaries of U.S. Wealth Management. U.S. Wealth Management companies are not affiliated with LPL Financial.

The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. We make no representation as to the completeness or accuracy of information provided at these web sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to.

Making Cents: How much tax do you pay?

There seems to be a lot of confusion in the popular press about how much tax is paid by the wealthiest Americans versus the hard-working earners without much accumulated wealth.

 To truly understand this political football, there are a few basic issues that need to be discussed.

Marginal tax bracket and average tax rate are two completely different terms.

The easiest to understand is your average tax rate. That is simply your total taxes paid divided by your total gross income.

Yet even here the numbers can get fuzzy. Are we talking about gross income, adjusted gross income or next taxable income? This number, as you’ve been hearing in the popular press, gets pretty low for all Americans.

How does the average tax rate calculate to be lower for wealthy Americans versus those with modest or no wealth? That happens because of a few items, such as capital gains taxes, tax-free income and deductions from state income taxes to charitable contributions that are significantly larger than most taxpayers.

Long-term capital gains are currently federally taxed at 15 percent, and they may go to 20 percent on Jan. 1. This 33 percent increase will be painful for those who generate much of their income through capital gains.

Tax-free income comes from investments in municipal bonds. With today’s low rates in other guaranteed-income-driven holdings, muni bonds still hold a place in a high bracket taxpayer’s portfolio. But the wealthy are also smart enough to do a before and after tax comparison to evaluate whether they may be better off investing in muni’s or taxable bonds.

The last item that impacts an average tax bracket is deductions. Most high-income taxpayers own a home, pay state income taxes and make charitable contributions. All of these deductible items combine to reduce one’s overall federal tax burden and, therefore, lower the average tax rate. Some or all of these deductions may disappear in the future, which could cause its own set of ripple effects in the not-for-profit or mending communities.

Now let’s explore marginal tax bracket. We all have heard that the fiscal cliff of expiring Bush era tax cuts will cause top income tax rates to reach 39.6 percent in 2013. What this means is that once your income exceeds the highest taxable income limit of $372,950 for married taxpayers in 2012, your next dollar of ordinary income will be subjected to the highest marginal bracket.

Remember this: Much of the preferentially-taxed items on a personal tax form, such as gains and muni bond interest, came from ordinary income that may have been taxed at the highest marginal tax bracket in the first place. Even those who built major businesses that were eventually sold and taxed as a capital gain paid a lot of ordinary income tax both personally and corporately.

 

John P. Napolitano is CEO of U.S. Wealth Managementin Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthcompanies.com or on Facebook as JohnPNapolitano and US Wealth
Securities offered through LPL Financial, Member FINRA/SIPC.

Investment advice offered through U.S. Financial Advisors, a registered investment advisor and separate entity from LPL Financial. The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with resident of the following states: AL, AR, AZ, CA, CO, CT, DC, FL, GA, HI, IA, ID, IL, IN, KS, KY, LA, MA, MD, ME, MN, NC, ND, NH, NJ, NM, NV, NY, OH, OK, OR, PA, RI, SC, TN, TX, UT, VA, VT, WA, WV. USFA, and U.S. Insurance Brokers, LLC are wholly-owned subsidiaries of U.S. Wealth Management. U.S. Wealth Management companies are not affiliated with LPL Financial.

The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. We make no representation as to the completeness or accuracy of information provided at these web sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to.