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When Doing Your Own Taxes Makes Sense … And When It Doesn’t
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The 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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
Please call our office at (925) 299-1500 or toll free (888) 299-1500 should you need a referral to a qualified tax professional, or if you are interested in scheduling a review of your investment strategy and/or financial plan. If you are not a client of Capital Advantage, Inc., we offer free no obligation consultations. |
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Ways to Afford Your Retirement Account with Catch-Up Contributions
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Turning 50 might not be everyone’s idea of excitement, but when it comes to saving for retirement, 50 is when things start getting a lot more interesting.
That’s because people age 50 and over can make what are known as “catch-up” contributions to IRAs and most workplace-based retirement plans. These special contributions are in addition to regular contribution limits and allow individuals to maximize the amount of tax-advantaged retirement savings they can stash away.
The catch-up phenomenon has never been more important as American workers attempt to rebuild retirement savings devastated by recent market losses. Taxpayers 50 or older are permitted to make additional contributions beyond standard limits. For calendar year 2010, here are the standard contribution limits with their catch-up amount:
- Traditional and Roth IRAs have a standard contribution limit of $5,000 with an over-50 catch-up contribution of $1,000 for a total contribution limit of $6,000.
- SIMPLE IRAs have a standard contribution limit of $11,500 with an over-50 catch-up contribution of $2,500 for a total contribution limit of $14,000.
- 401(k), 403(b), 457(b), Roth 401(k) and Roth 403(b) plans have a standard contribution limit of $16,500 with a catch-up contribution of $5,500 for a total contribution limit of $22,000.
So, where to find the money? Here are some suggestions to make it happen:
Earn more:
Yes, a tall order in a tough economy. But if you can take on extra freelance work or a part-time job that you enjoy, you can work to extinguish debt and maximize your savings.
Cut out the extras:
Either on paper or on the computer, record every dollar you spend in the average week (and cut off credit card use during that week). At the end of that week, start marking out non-essential items just to see how much you could live without. Start with gourmet coffee and restaurant or carryout meals and work backward from there. And don’t forget those regular monthly expenditures that can really add up. Do you really need premium cable? Can you surrender your landline in favor of a cell phone that’s matched to the exact number of minutes you’ll need? Can you afford a higher deductible on your health, home or auto insurance to save on premiums?
Set a budget:
Once you’ve established how your income covers the essential expenses you must plan for and a few inexpensive treats that should stay in, build a budget that includes specific amounts you can allocate toward debt. Going forward, keep a running total of your spending and revisit how that budget is working on a monthly basis until you start to see some positive results, and then you can review the performance of that budget a little less frequently.
If you can do it safely, take over home and auto maintenance yourself:
The do-it-yourself movement is in a new phase with the economic 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 bigger jobs, pair up with friends and family and you can help each other save money.
Turn down the thermostat and park the car:
Don’t underestimate the value of energy savings in your budget. Keep the temperature down at home and opt for public transit, biking and walking where you need to go. For a look at how much public transit can save you, go to the American Public Transit Association’s gas savings calculator . And if you’re going to walk or bike, that’s not only going to save your money, it’ll do wonders for your health.
Go debit:
Debit cards wearing a bankcard logo are typically welcomed 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.
Buy used for yourself:
If you need clothing, a car or a new watch to replace the old one that’s past fixing, it might be worthwhile to buy second-hand at shops or on the Internet. Plenty of people have unloaded items in relatively good shape to bring in cash during the recent downturn. Get in the habit of saving money on everything.
Please call our office at (925) 299-1500 or toll free (888) 299-1500 if you are interested in scheduling a review of your investment strategy and/or financial plan. If you are not a client of Capital Advantage, Inc., we offer free no obligation consultations.
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The Have and Have Not of Group Disability Insurance
Provided by: Steve Way, CLU, ChFC, Northwestern Mutual Financial Network
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If you are one of the lucky workers with an employer sponsored Disability Income policy, you are more fortunate than most. It is better to have group coverage, than not. But it is best, whether you have a group policy or not, to make sure you are adequately protected. Becoming disabled due to accident or illness is a very real risk. Statistically, you are three times more likely to become disabled during your working years, than you are to die (1). Yet most of us, nearly 90% according to one survey, vastly underestimate these odds (2) and fail to put a safeguard in place. The question to ask yourself is whether your family could meet expenses for three or four months if the primary wage earner lost his or her income due to a disability. Given the current financial conditions, now would be an excellent time to review your assets and consider about how long could your family could make ends meet if the primary wage earner suffers from cancer, a heart attack, an accident or some other disabling event.
Even if you have an employer provided disability plan, such policies seldom provide families with enough benefits to meet all their financial obligations.
Limitations of Employer-Provided Plans
Here are some typical limitations of group disability income insurance plans provided through an employer:
• They pay only 60 percent of base salary, which leaves you to meet your financial obligations on a 40 percent drop in income.
• They do not cover incentive compensation such as profit sharing contributions, deferred compensation or regular incentive bonuses.
Have and Have Not – Group Disability Insurance
• Benefits paid out are taxable income to the employee when the premium is paid by the employer.
• Benefits paid are often offset by Social Security and any other disability benefits received.
• Employer policies often have maximum monthly benefit caps. For example, if the policy’s benefit scale runs to $100,000, anyone making more than that receives even less than 60% of base salary when faced with a disability.
Some employees mistakenly believe that the government will fill in any gaps left by a company plan. Social Security disability benefits, however, are only intended for long-term, total disabilities. For this reason, 65 percent of the 2.5 million workers who applied for Social Security Disability Insurance benefits in 2007 were declined (3).
Calculating Your Income Post Disability
Clearly, everyone who relies on a paycheck needs to assess how long he or she could continue to meet their financial obligations in the event of a disability, including any ongoing savings for education and retirement.
As a first step, it’s important to consult with an experienced insurance professional. Look for someone who is both knowledgeable and trustworthy. Make sure the insurance company is reputable, and has financial strength and stability and commitment for the future.
A financial professional, such as your Capital Advantage, Inc. financial advisor, can help you assess whether you would have the financial resources to meet your obligations in the event of a disability, and for how long. If additional disability income coverage is needed, he or she can advise what types of supplemental coverage would be appropriate. Underwriting rules by insurance companies often dictate how much coverage is available to an individual, but the wide variety of policies on the market today can suit many different income levels and budget requirements.
What’s most important is to have a solid, complete plan in place to get you through the “have not” periods of life.
1. Social Security Administration, Actuarial Publications, 2007
2. “Most Workers Underestimate Risk, Are Financially Unprepared for Disability,” survey findings published by The Council for Disability Awareness, 2007.
3. Social Security, Actuarial Publications, 2007.
Article prepared by Northwestern Mutual with the cooperation of Steve Way, CLU, ChFC. Steve Way is a Financial Representative with Northwestern Mutual Financial Network, the marketing name for the sales and distribution arm of The Northwestern Mutual Life Insurance Company (NM), Milwaukee, Wisconsin, its affiliates and subsidiaries. Financial Representative is an agent of NM based in Walnut Creek, California. To contact Steve, please call 925-930-6401, e-mail him at steveway@nmfn.com, or visit his Web site at www.steveway-nm.com. CA license number 0464438. |
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John Hayman, CFP
Founder & President
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Donna Zinman, MBA
Senior Financial Advisor
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Gary Clarke
Senior Financial Advisor
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Rick McNamara, CFMC
Director of Investments
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Dawnalizabeth Henke,
MBA, MSFA
Chief Compliance Officer
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Catherine Norris
Manager of Client Service
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Aimee Schwartze
Director of Client Service
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Amy Montano
Office Manager
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