Go Back to School!

The American Opportunity Credit. – Make it work for you.  This education credit helps parents and students pay for college and college-related expenses.

Here’s how you can benefit from it when you file your 2009 taxes (and for 2010 too).

The American Opportunity Credit can be claimed for expenses paid for any of the first four years of post-secondary education.

The credit is worth up to $2,500 and is based on a percentage of the cost of qualified tuition and related expenses paid during the taxable year.

Qualified expenses now includes expenditures for required course materials

You may receive a tax credit based on 100 percent of the first $2,000 spent plus 25 percent of the next $2,000 paid during the taxable year.

Forty percent of the credit is refundable, so even those who owe no tax can get up to $1,000 of the credit for each eligible student as cash back.

It always pays to sharpen your educational skills.  Consider post grad studies today.

Your Friend – The Focus Group

What Are You Earning?

Have you ever heard the term, what is your real rate of return? Inflation is annually assumed to be about 3%, and then there are fees and taxes, which also eat into your return. Unless you’re in a Roth IRA or in some type of UL you probably wont get out of paying taxes on earnings!

I read a great article recently that highlighted what rate of return you probably need to achieve to earn the “real rate of return” that you think you are getting. The article gives a range of 11 – 13% a year before cost and inflation to achieve a real return of about 6%. Don’t we all feel like we should be able to achieve a 6% rate of return on our investments? Well maybe not, but I do!

A big part of achieving that real rate of return may be to limit fees, trade less, hold longer, and to implement tactical tax strategies. Maybe you can fund a Roth IRA instead of a standard brokerage account, or fund a pension, which you can eventually convert to a Roth IRA. Timing can be everything. Sometimes you can sell appreciated assets or investments to absorb tax losses and deductions, effectively reducing the tax you paid on the investments.

Unfortunately we can’t lower inflation, but you can also consider using a portion of your portfolio to hedge against it! Consider gold, commodities, oil and gas or even REITs.

There are thousands of philosophies on earning the highest potential real rate of return. No matter what that philosophy is, you can’t underestimate the importance of tax strategy.

Your Friend – The Focus Group

Why You Should E-File

Here are two important reasons to e-file your return.  

• It’s fast Your tax return will get processed more quickly if you use e-file.  If there is an error on your return, it will typically be identified and can be corrected right away.  If you file electronically and choose to have your tax refund deposited directly into your bank account, you will have your money in as few as 10 days.  
• It’s safe The IRS is fully committed to protecting your tax information and e-filed returns are protected by the latest technology. In 20 years, nearly 800 million e-filed returns have been processed safely and securely by the IRS.   

When you e-file your tax return an electronic receipt is generated notifying you that the IRS received your tax return.   

E-file is available 24 hours a day, seven days a week; you are not restricted by post office hours.  

If you owe money to the IRS, e-file also allows you to file your tax return early and delay payment up until the due date.  

In 37 states and the District of Columbia, you can simultaneously e-file your federal and state tax returns.

Counting Beans is Easier with Technology

Does your CPA Utilize Technology?

I recently read an article in the Journal of Accountancy that really hit me in a funny way.  As if I do not get enough slack for being a tax geek already, I also love technology.  Improved efficiency means more time is spent on thinking and helping the client reduce their tax burden while also lowering costs to the consumer.  It may also mean more efficient record retention and less stress when tax season comes.   Virtual communication is a great enhancement to phone and in-person interviews.  It is fast and provides documentation to the practioner.

The Journal of Accountancy cites that out of 100 high-performing firms, 75% already have a paperless strategy in place.  They also mention that 90% expect to within 3 years. Some of the top paperless strategies are mentioned to be.

•      Document retention and destruction policy.
•      Policies and procedures using scanned documents.
•      The storage of digital information.
•      Using multiple monitors for more efficient tax preparation.

The Journal of Accountancy cites many more statistics.  If you’re interested, the article is written by Alexandra DeFelice in the January 2010 issue. 

The Focus Group has long been using all of these forms of paperless strategies.  It is all about maximizing value to the consumer, and this is a major step in bringing value in today’s environment.  Expect your CPA to utilize paperless strategies as well as the ability to E-file.

Roth Rage

                A New Era of Retirement

In 2005 congress passed a tax act which would change the Roth IRA rules forever in 2010.  Guess what? You may have noticed 2010 is here and now over 1.7 trillion dollars have the potential of being converted to a Roth IRA.   Man I would love to get all that money converted to Roth IRAs! Well, before you can take advantage of a Roth conversion, you must know the basic rules that have changed

1. There is no longer an income limitation to convert to a Roth IRA, this change is permanent.
2. Unless you elect otherwise, the conversion income of a 2010 Roth conversion will be recognized 50% in 2011 and 50% in 2012. Remember, the top two income tax rates are scheduled to increase in 2011!!

You must understand the basics of a Roth IRA vs. a Traditional IRA.  For example, earnings are tax free after 5 years have passed and the owner is 59 ½.  Second, unlike Traditional IRAs, Roth IRAs owners do not have to take out money every year starting when they are 70 ½.   Here is a simple example of a properly performed Roth Conversion. 

• Male converts at 60 years old and passes away at 85 (when his son takes a lump sum distribution).
• The conversion amount is $200,000 and an annual rate of return of 5% is assumed.
• The tax rate paid on conversion is 35% and the tax rate assumed at distribution is 40%
• The capital gains tax rate is 20%

 

Click on graph to enlarge

Conclusion – Because the taxes were paid from an outside taxable account, and the tax rates increase, we see a significant increase in value of the Roth IRA over the Traditional IRA plus the $70,000 dollars used on the tax up front.

Stay Simple

Is your head spinning yet?  It should be, this is a big decision for many people and professional advice should be sought ought before a decision is made.

Just Remember

There are many factors to consider when choosing whether or not to convert your retirement funds to a Roth IRA.  Do you have the outside funds to pay the tax?  Do you think your tax rates will go up or down?  Are you going to need a fixed income stream for retirement or pass the money on?  Do you have estate considerations?  How might it affect Social Security taxation?  Do you want to take your Require Minimum Distributions?  Is your account eligible for a Roth conversion?  Are there cash flow issues?

Everyone I talk to is scared of rising tax rates, a Roth conversion can be a great way to hedge against future tax rates.  A conversion can also be a great wealth transfer tool and even a good way to absorb personal and business losses on your income tax return. 

For some retirees, it could be very detrimental as well. 

Only a few variables have been discussed.  Consult an expert before making any decisions about Roth IRAs and your retirement money. 

Your friend – The Focus Group