End of Year Stock Selling to Offset Capital Gains

A relatively common year-end strategy is to sell underperforming stocks at a loss in order to offset capital gains from other stock sales. Sometimes an investor does not really want to sell the underperforming stock, and quickly repurchases the same or similar stock after the sale. This can be a problem because the transaction may be considered a wash sale. In a wash sale, the loss cannot be taken. Instead the loss is added to the basis of the repurchased stock.

If you are thinking about being clever and buying the replacement stock before you sell the old stock, the IRS had already filled that hole. Here is a small portion of what the IRS has to say about wash sales.

“You cannot deduct losses from sales or trades of stock or securities in a wash sale. A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:

1.       Buy substantially identical stocks   or securities

      2.       Acquire substantially identical stocks or securities in a fully taxable trade
      3.       Acquire a contract or option to buy  substantially identical stock or securities, or
      4.      Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA”

And, if your spouse or a corporation that you control buys substantially identical stock, you have a wash sale.

If you were involved in day-trading or frequent trading, wash sales can be a real problem because you may not be able to claim a loss until you sell the repurchased stock. On one hand, most people who buy and sell stocks are considered stock investors, as opposed to stock traders. Investors must use Schedule D to report their transactions, and are subject to capital loss limitations and wash sale rules. One the other hand, stock traders report their stock transactions on Form 4797 and related expenses on Schedule C. They are not subject to wash sale rules or capital loss limitations. However, there are strict requirements and procedures that must be followed to be considered a stock trader.

So, if you are planning on taking capital losses to offset capitals gains, wait the appropriate amount of time if you are repurchasing stocks.

Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
contact: service@brycast.com http://www.brycast.com/
Enrolled Agent; Investment Advisor

The Cost of a Loan Taken From Your 401(k)

Borrowing from your 401(k) can be expensive in a way that you may not have thought of.  In my June 9^th Article I wrote about some of the good and bad characteristics of 401(k) loans. However, there is a not so obvious cost in the loan that you should be aware of.

As you may know, 401(k)s are funded with pre-tax dollars. This is great because you delay paying income tax on your contributions until you start taking money out of your 401(k) account. To be clear, a loan is not a distribution. So, you do not pay income tax on a loan…sort of. Here is an example of what can happen. Let’s assume your marginal tax rate (MTR) is 25%.  

1. Over time, you’ve contributed $10,000 to your 401(k) in pretax dollars.
2. You decide to borrow $1000, maybe you want a new TV
3. There’s probably a loan origination fee, maybe $50
4. Loan interest rate may be a little high, but you’re paying it to yourself…~5%
5.  You pay back the loan over a one year term. Including interest, you’ll have to pay back $1028. Unfortunately, you do it with post-tax dollars. With an MTR of 25%, you’ll have to earn $1371 to pay back the original $1000.

In the end, that $1000 loan cost you $421 ($50 + $371). Naturally, the cost scales with your MTR, interest rate, loan term and amount borrowed. But as you can see, the repayment using after tax dollars is expensive. And here's another no so obvious cost. When you finally take distributions from your 401(k),  you'll have to pay tax on 100% of the distributions. So, before you decide to borrow money from your 401(k), carefully consider all of the costs and risks.

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Income Tax Preparation in Austin Texas

contact: service@brycast.com http://www.brycast.com/

Enrolled Agent; Investment Advisor

Restricted Stock Units (RSU) -- Potential to be Double Taxed!

If your employer grants RSUs (Restricted Stock Units) to you, count your blessings. This is a method of rewarding employees for exceptional contributions, loyalty, or just wanting to say “thanks”. However, there are some things that you should know about the way RSUs are treated from an income tax perspective so that you will not be double taxed.

First of all, RSUs are taxed as ordinary income to you, not capital gains. This sometimes confuses people because most of the time stocks and capital gains go together. When your employer grants RSUs to you, there is a restriction associated with them. Usually, the restriction is that you cannot sell the stock until a certain amount of time has passed, aka vesting period. Typically, an employee will vest in a certain percentage of the granted RSUs every year. For example, it could be that your employer granted 400 RSUs to you that proportionally vest over a 4 year period. This means that you will be vested in 100 RSUs every year for the next 4 years. Every year, once the vesting period is passed, two things happen. Your employer will add the value of the RSUs that vested to your income. And, you will be able to sell the vested RSUs.

Large employers usually relegate the RSU transactions to a broker. Your employer might initially set up the account for you, so you can see how many RSU you have, and when they will vest. Once you become vested in the RSUs, your employer will add the value of the RSUs to your income (assuming an 83(b) election was not made). He’s also obligated to withhold taxes from the distribution, usually referred to as backup withholding. If your employer uses a broker to handle the RSUs, he’ll require that just enough of the vested RSUs be sold to potentially cover all income and social security taxes resulting from the vesting. This is known as Sell to Cover. However you can select another option to sell all of the vested RSUs. This is usually referred to as a Same Day Sale. If you elect the Same Day Sale option, post-deductions proceeds are deposited into your cash brokerage account.

Here is an example of how the double taxation can occur. Let’s say your employer granted 1000 RSUs to you last year. You become vested in 250 shares this year. On the day that you become vested, the stock value is $50. Also, let’s say that you setup the Same Day Sale option in the brokerage account. On the day that you become vested, your broker will sell 250 shares of stock on your behalf. The gross amount from the sale is $12,500 (250sh * $50/sh). However, your broker will probably withhold a fee, maybe $100, for executing the transaction. And, your broker will transfer some amount to your employer to help pay the taxes due. Assume the transfer for taxes is 28% of the sale, or $3500. Whatever is left over, $8900 in this case, is deposited into your cash account at the brokerage firm.

Your end-of-year W-2 will show that you received $12,500 of additional income, and it will also show the $3500 of additional tax paid. Also, you broker is going to issue a 1099-B to you, and therein lies the problem. In this example, your broker should report net proceeds of $12,400 ($12,500 - $100 commission). You must report this 1099-B transaction on your income tax. How you handle it is very important. Your cost basis on the transaction is what the stocks sold for, $12,500. So this essentially turns out to be a short term capital loss on your Schedule D. If you fail to report it, the IRS will assume that your cost basis is zero, and will want you to pay the additional income tax, plus interest and penalties. I’ve seen some people report the transaction with zero cost basis because their employer gave them the stock! Ok, it was a gift, but the employer has already added it to your W-2 income. So, be sure and report the correct basis.

If you sell the stock as soon as you become vested, it’s known as a Same Day Sale. But, if you sell just enough shares to cover the estimated taxes due, it’s known as a Sell to Cover.  

Remember, as soon as you become vested in the RSUs, your employer adds their value to your W-2 income and tax is due. So what happens if the value of the stock that you didn’t sell drops? Well, it’s too bad. You’ve already paid taxes on the RSUs, and it doesn’t matter that their value has decreased. In fact, you can’t get any relief until you sell the stock. Then, you can enter a capital loss on your tax return. Notice I said capital loss, not ordinary loss. Although you can use capital losses to offset capital gains, you can only deduct $3000 of capital losses per year.

If the stock price increases, you are in good shape. If you wait more than a year to sell the stock, then you can report the stock sale as a long-term capital gain. Otherwise, it’s a short-term capital gain.

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Income Tax Preparation in Austin Texas
contact: service@brycast.comhttp://www.brycast.com/
Enrolled Agent; Investment Advisor

Employer Matching in Roth 401(k), Roth 403(b) and Roth 457(b) Plans

Most people understand the employer matching concept as it applies to traditional 401(k), 403(b) and 457(b) plans. In these plans, employees make pre-tax contributions and employers make pre-tax matching contributions into the employees’ accounts. Usually, there is vesting period for the employee before he gains access to the employer matching funds. However, employees are always 100% vested in their own contributions.

When it comes to Roth 401(k), Roth 403(b) and Roth 457(b) plans, the mechanics are different. The IRS states that the “Roth” prefix does not create a new plan. Instead, Roth defines the type of contribution being made to the plan. Designated Roth contributions are included in your gross income, unlike non-Roth contributions. However, your employer’s matching contribution goes into a pre-tax account, just like the non-Roth versions of the plan. Here is an example.

Let’s say you make $100,000 per year and you elect to contribute 5% of your salary to your employer provided 401(k) plan. And, your employer matches 100% of your contribution to the plan. So, you contribute $5000 to your account, and your employer matches your contribution, contributing $5000. The total deposit into your account is $10,000. Your employer will report that your salary is $95,000 for the year (W-2 Box 1). When you withdraw the money from your 401(k), you’ll have to pay tax on the entire withdrawal. If that $10,000 grew to $12,000, you would have to pay tax on $12,000.

Using the same facts as before, but you now contribute to a Roth 401(k). Your $5000 contribution goes into your post-tax account, but your employer’s matching contribution goes into a pre-tax account. The total deposit into your account is still $10,000. However, your employer will report that you made $100,000 (W-2 Box 1), instead of $95,000. Also, let’s assume that the $10,000 contribution also grows to $12,000. When you withdraw the $12,000, you will only need to pay tax on $6000, instead of $12,000.

In summary, even though you contribute to a Roth plan, the employer matching contributions are treated as if the plan is non-Roth.

For more information, read the IRS FAQ.

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Income Tax Preparation in Austin Texas
contact: service@brycast.comhttp://www.brycast.com/
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Small Business Introduction (3) – The General Partnership

Previously, I discussed the Sole Proprietorship and the Single Member LLC. Although it might seem natural to discuss the Multimember LLC next, I’m going to talk about the General Partnership instead. The reason is that if I were to discuss the MM-LLC, I would have to mention partnerships.

General Partnership

A General Partnership (GP) is a joint business venture between two or more persons or entities.  Normally, a GP does not have to be registered with the state; it is automatically formed when two or more persons conduct a for profit business together.  Ownership and control of a GP is generally determined by how much capital is contributed. If there are 4 partners in a GP, and each one contributed equally to its formation, everyone would be a 25% owner. Partners share in the profits and losses of the GP according to their ownership interest. Although not required, there should be a written partnership agreement. The agreement should spell out the rights and responsibilities of the partners.  A lawyer may be required to draft thorough partnership agreement, but there are templates available that may serve your purpose.

Sometimes friends or relatives engage in an informal partnership where they might buy a duplex or co-own some other property together.  This is generally referred to as a co-ownership.  Although there are obvious advantages to sharing upfront expenses, this type of relationship can have many, sometimes disastrous, consequences.  Co-owner disputes can erupt early, or down the road as personal situations change. You should strongly consider engaging an attorney produce a co-owners agreement for you at the start of your relationship.

 

Liability

Each partner is jointly and severally liable for the partnership’s obligations. Each partner’s personal assets are at risk and can be seized in order to satisfy the partnership’s obligations. In a way, this is similar to the liability of a Sole Proprietorship, except a partner has potentially more exposure to risk. 

Income Tax Reporting

Partnerships must file IRS Form 1065, Return of Partnership Income. The partnership itself should have an accountant to keep track of partnership income and expenses, as well as the partner’s basis. Preparing Form 1065 is a task that should be left to a tax pro. The partnership then issues a Schedule K-1 (Form 1065) to each partner.  Anyone receiving a K-1 must report the K-1 items on their individual tax return.   Unfortunately, this may require tax preparation knowledge beyond the expertise of most individuals. K-1 entries can flow into many unfamiliar tax forms, so use a tax professional like an Enrolled Agent to prepare your tax return.

Additional Taxes

There are no taxes unique to a GP, but depending on the partnership’s activities, partners may have to report income from rentals, royalties, capital gains, ordinary, interest, etc.

Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
contact: service@brycast.com http://www.brycast.com/
Enrolled Agent; Investment Advisor

529 College Savings Plans

Higher education has gotten very expensive and maybe unaffordable to many families. Parents should realistically look at higher education costs, and determine whether or not they can afford to pay for 100% of their child’s education. If you have more than one child, it might be a bitter pill to swallow if you determine that you cannot afford to pay for all of your children’s college expenses. You may want to consider funding less than 100% of the costs.

Current estimates to send your child to the University of Texas-Austin and live on campus are $22,464 to $27,168 per year, see UT Costs .  Over the past decade, public college costs have risen about 6.9%. If your child starts today and takes 5 years to graduate, it could cost over $155,000 for their education.

Unless you are a multi-millionaire, $155,000 is a significant portion of your wealth.  And if you have more than one child that you want to put through college well…do the math.     

In order to help put Texas residents through college, Texas has several college savings plans, aka Section 529 plans. Here are some characteristics of 529 plans.

1)      Contributions to 529 plans are from post-tax funds. There is no tax-deferral characteristic with regard to the money used to fund the account.

2)      Once money is inside the fund, the earnings grow tax free. When withdrawals are made, if the funds are used for tuition and required fees, then there is no tax on the earnings. However, if you not use the withdrawal for eligible expenses, there is a 10% penalty on the earnings.

3)      One person owns the account, and there is one account beneficiary. 

4)      The first one that I would like to discuss is the Texas Tuition Promise Fund.  You should know that the money you contribute to this plan is not FDIC insured. Although the State works with the plan managers, no government agency, either state or federal, insures or guarantees that you will not lose money. See “Plan Detail” in TTPF

The following discussion only pertains to Texas residents who are undergraduates attending public universities.

The fund is a prepaid tuition plan, meaning that you pay for college tuition before your child starts college.  Also, it locks in the tuition and fees costs at today’s rates. Remember, over the past decade college costs have risen by about 6.9% per year.  So, freezing costs is a very important feature of the plan. Also note that it actually pays for tuition and required fees, but not room and board or books. Here is how it works.

College costs (tuition & fees) are represented by Tuition Units, rather than dollars. It starts to get a little complicated after this.  As you may or may not know, tuition and fees are not the same at every Texas college. For example, the tuition and fees at UT-Dallas are more than the tuition and fees at Sul Ross State University-Rio Grande, by almost two and a half times.  Not only that, but for many universities the tuition and fees vary from major to major. To address this diversity, the plan creates types of Tuition Units.

What is a Tuition Unit?

The first type is simply called Type 1. 100 Type 1 units will pay for 30 semester hours, or 1 academic year at Texas’s most expensive colleges. Today’s cost for a Type 1 unit is $107.44 per unit. So, 1 academic year will cost you 100 units times $107.44 per unit = $10,744. If you want to pay for 5 years of college, the cost is 5 time $10,744 = $53,720. 

This seems like a pretty good deal.  After all, today at UT-Austin tuition and fees range from $17,040 to $19,616 per academic year (UT Costs).  One reason for the discount is that you cannot use a tuition unit for at least 3 years after purchase.    

The second type of units is obviously Type 2; today’s cost for a Type 2 unit is $75.47. Instead of using Texas’ most expensive colleges as a reference, the value of Type 2 units is based on a weighted average cost of tuition and fees at 4 year public Texas colleges.  If the tuition and fees at your chosen college are less than the weighted average, then 100 Type 2 units will fully cover one academic year at the college. However, if the tuition and fees are greater than the weighted average, 100 Type 2 units will not cover all of the related expenses.

The last class of units is Type 3. Like the Type 2 units, its value is based on a weighted average of tuition and fees. However, the tuition and fees are for 2-year Texas colleges, not 4 year. As expected, the cost of a Type 3 unit is significantly less than the other two units. Today, the cost of a Type 3 unit is $18.51. Again, if the tuition and fees of your selected 2-year college are more than the weighted average, 100 Type 3 units will not cover all of the college expenses.

How Do You Pay for the Plan?

There are three ways to pay; the first is a lump sum.  You could buy 500 Type 1 units, and make a one-time payment of $53,720. The second option is to setup an installment plan. In this scenario, monthly payments are due for either a 5 or 10 year term.  If you choose this option, the finance charge is about 8%. The third option is referred to as “Pay-As-You-Go”.  Here you can purchase from 1 to the equivalent of 600 Type 1 tuition units.

In summary, I’ve tried to highlight some important features of the plan. There are many other plan characteristics that you should be aware of before making a decision as to whether or not participate in the plan. Brycast will be happy to review the plan with you.

For more info on paying for college, you may want to visit the website http://www.savingforcollege.com/

Small Business Introduction(2) - The Single Member LLC

Last time I talked about the Sole Proprietor business entity and some of its advantages and disadvantages. In this installment, I discuss the Single Member Limited Liability Company (SMLLC). The SMLLC is a relatively new business entity, but it is very popular. Here are some of its characteristics.

Single Member LLC

SMLLCs have popped up across the country very quickly. They are easy to form, flexible, and have easy tax reporting requirements. SMLLCs are neither a corporation nor a partnership; they are unique. SMLLC must be registered at the State level. In Texas, they are registered with the Secretary of State, in the forms section.  The form is about 6 pages long, but half the pages are instructions or descriptions. LLCs have members; obviously the SMLLC just has one member.  After the form is completed, it can be faxed to the SoS along with a $300 filing fee payment.

Liability      

As the name implies, your liability is limited to your investment. In other words, you can only lose as much as you invest in the company. So, if you invest $10,000 in your SMLLC, the max that you can lose is your $10,000 investment. But you have to be very careful with how you conduct your business. You must keep the SMLLC separate from your personal finances. If you don’t and you get sued, the person suing you may try to pierce the veil. That is, they may argue that there is really no distinction between your SMLLC and you personally.  If they are successful, your personal assets are at risk. So, conducting your business as a separate entity is important.

Income Tax Reporting

The income tax return for a SMLLC is prepared the same way as it is for a Sole Proprietor. You would prepare IRS Form 1040, and report business income and expenses on Schedule C. If you actually work for someone and your wages are reported on Form W-2, and you also run a business and either get issued or do not get issued a 1099-MISC, you report all of your income on the same tax return. You do not create two tax returns, just one that contains both your W-2 wages and your SMLLC income.

Additional Taxes

If you are an employee, Social Security taxes are withheld through the FICA system. Under this system, half of the Social Security taxes are paid by your employer, and the other half is paid by you. However, if you have income from self-employment, you are going to have to pay the entire Social Security tax on this income. This is in addition to income tax, and usually comes as a surprise to new self-employed individuals. Additionally, you may be required to make estimated tax payments throughout the year.

Franchise Tax

In Texas, LLCs are subject to a franchise tax, collected by the Comptroller of Public Accounts.  Although most companies will be taxed at the 1.0% rate, the no tax due limit is less than or equal to $1 million of total revenue for tax reports originally due on or after January 1, 2010 and before January 1, 2012.

Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
contact: service@brycast.com http://www.brycast.com/
Enrolled Agent; Investment Advisor

Small Business Introduction(1) - The Sole Proprietor

I’m writing this series of articles because I’ve talked to and prepared tax returns for several people who don’t realize that the IRS considers them a business. Also, there are many people who intentionally create a business, but do not think about what type of business entity they are creating. I’m hoping to shed some light on the tax consequences as well as liability implications as they relate to the business entity.

Sole Proprietorship

The first and probably the most common business entity is the Sole Proprietorship. This entity doesn’t require any filing with the state and that’s probably the reason why it’s the most common. So, if you go into business on your own, like a plumber, electrician, website designer, etc. and don’t register your business as some other entity with your state, then you’re probably a Sole Proprietor. What many people don’t know is that even contractors are self-employed business owners. For example, if your “employer” issues a 1099-MISC to you after the tax year, the IRS treats you as self-employed with respect to the income you received on the 1099-MISC. Usually Box 7 of the form will have the amount that you were paid for the tax year. If you also receive a W-2 from another employer, you are both an employee and self-employed. What does it mean to be a Sole Proprietor?

Liability

There is no separation between your business assets and your personal assets. If you get sued for something that you do in your business, all of your assets, business and personal, are at risk. The same is true if you get sued on your personal side, your business assets are at risk too. As you can see, this can be a very risky business entity.

Income Tax Reporting

You would prepare IRS Form 1040, and report business income and expenses on Schedule C. If you actually work for someone and your wages are reported on Form W-2, and you also run a business and either get issued or do not get issued a 1099-MISC, you report all of your income on the same tax return. You do not create two tax returns, just one that contains both your W-2 wages and your business income.

Additional Taxes

If you are an employee, Social Security taxes are withheld through the FICA system. Under this system, half of the Social Security taxes are paid by your employer, and the other half is paid by you. However, if you have income from self-employment, you are going to have to pay the entire Social Security tax on this income. This is in addition to income tax, and usually comes as a surprise to new self-employed individuals. Additionally, you may be required to make estimated tax payments throughout the year.

Reporting Requirements

The filing requirements for W-2 income (employee wages) and self-employment income are different. For W-2 income, the threshold is the filing status standard deduction plus the personal exemption(s). For example, if your filing status is Single, the 2011 standard deduction is $5800 and the personal exemption is $3700. So if you make less than $9500($5800 + $3700), you do not have to file an income tax return. However, if you have net self-employment income of $400 or more, you must file.

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Income Tax Preparation in Austin Texas
contact: service@brycast.com http://www.brycast.com/
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National Do Not Call Registry – Stop Wasting Cell Phone Minutes

If you are receiving telemarking calls on your land line or cell phone you can have them stopped. All you need to do is register your phone number(s) at the US government’s website, Don’t Bother Me. After registration, they’ll send you a confirmation email. By the way, registration doesn’t expire so if you registered before, you don’t need to register again. You can also check to see if your phone number is already registered at the same website.

A really interesting website is www.usa.gov.   You can find just about everything related to the US at this site. This is how I ran across the do not call website. Under the Get Services tab, there’s a Seized Property Sales link. If you happen to live in one of the cities where the auctions take place, you’re in luck. Most items look new, like they “just fell off the truck”.

Under the jewelry section, you’ll see things like pinky rings, silver shark cufflinks, pendants inlaid with every gem known to man, and many more strange items.  And watches galore.

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Income Tax Preparation in Austin Texas
contact: service@brycast.com http://www.brycast.com/
Enrolled Agent; Investment Advisor

FDIC – NCUA -- SIPC – US Treasury – Who’s Got Your Back? Part 2

Last time I discussed the FDIC & NCUA. These are the agencies that you will have to deal with in order to get your money from a failed bank or credit union. If you have a broker, you broker is probably covered by the Securities Investor Protection Corporation, aka SIPC.  If they aren’t, you may want to look for another broker.

Here is a portion of the SIPC’s mission statement, “When a brokerage firm is closed due to bankruptcy or other financial difficulties and customer assets are missing, SIPC steps in as quickly as possible and, within certain limits, works to return customers' cash, stock and other securities, and other customer property”.  The SIPC covers cash and securities, like stocks and bonds. But, there are many investments that are not covered. Among investments not covered are commodity futures contracts (unless defined as customer property under the Securities Investor Protection Act) and currency, as well as investment contracts (such as limited partnerships) and fixed annuity contracts that are not registered with the U.S. Securities and Exchange Commission under the Securities Act of 1933.

The SIPC is not like the FDIC or NCUA; it does not guarantee that it will recover all of your lost assets. If a firm fails, and sufficient funds are not available in the firm's customer accounts to satisfy claims within these limits, the reserve funds of SIPC are used to supplement the distribution, up to a ceiling of $500,000 per customer, including a maximum of $250,000 for cash claims. Additional funds may be available to satisfy the remainder of customer claims after the cost of liquidating the brokerage firm is taken into account. Additionally, losses due to investment fraud are not covered by the SIPC.

The SIPC recommends that you keep all transaction records and at least your monthly brokerage statement in case there are discrepancies between your books and the broker’s books. More information is available at the SIPC website.

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Income Tax Preparation in Austin Texas
contact: service@brycast.com http://www.brycast.com/
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FDIC – NCUA -- SIPC – US Treasury – Who’s Got Your Back?

With bank failures, crooked funds managers and brokers, and warnings of the US government not being able to pay its bills, you might be wondering if your money is really safe. Well, that’s a good question. If the US Government cannot pay its bill, we have a huge problem. And by “we”, I mean everyone in the world. Investing or loaning money to the US government has historically been considered to be risk-free. However, if you’ve been listening to the news lately, you’ve heard about the national debt and the growing concern about being unable to repay it.  For this discussion I’m going to assume that Uncle Sam can still pay the bills.

FDIC
If you deposit your money in an FDIC insured bank and the bank fails, you’ll probably be working with the FDIC to recover your deposits. The FDIC claims “Since the FDIC was established in 1933, no depositor has ever lost a single penny of FDIC-insured funds”.  The key words are FDIC-insured funds.   You may not be able to recover all of your money. First off, there is an upper limit of $250,000 per account. So, if you have more than that in one bank, you may not be able to collect the excess funds. Also, there are restrictions on the accounts that are covered. For example, covered accounts are Savings, Checking, CDs, and Money Markets.  Many banks offer investment products like mutual funds, annuities, life insurance policies and stocks and bonds; these are not FDIC insured. 

Remember, the value of all of your accounts is insured up to $250,000. So, if you have $200,000 in a CD, and $100,000 in a savings account, you can only recover $250,000 instead of $300,000.

You may be able to have more than $250,000 insured in a single bank. The FDIC says “The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.” The “account ownership category” part opens up some additional coverage.  Here’s how it works. You can have both an individual account and a joint account. In each account, you’ll have the $250,000 of coverage. So your total coverage is $500,000. In fact, you can also have an IRA account that will be covered up to $250,000.

The FDIC has an excellent tool that can help you determine your coverage. For more information, visit their website at FDIC Calculator

NCUA

If you belong to a Credit Union, your deposits are insured by NCUA (National Credit Union Administration) instead of the FDIC.  Like the FDIC covered accounts, NCUA covered accounts are backed by the full faith and credit of the US Government.  As I went through the NCUA website insurance discussion, I could not see any difference between FDIC vs. NCUA.  In fact, they also have a calculator to help you determine your coverage, see NCUA Tool. The interface looks suspiciously like the FDIC tool. As far as I can tell, you can read my FDIC section, replace bank with credit union and replace FDIC with NCUA.

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Income Tax Preparation in Austin Texas
contact: service@brycast.com http://www.brycast.com/
Enrolled Agent; Investment Advisor

Non-Essential Expenses…Why Wait to Save Money?

Sometimes Hollywood accurately portrays real life. I was watching a movie where several people had lost their jobs as their employer was “cutting costs”. A couple of the individuals who were affected made the comment to their spouse’s that they would have to cut out the non-essentials. Unfortunately, I’ve heard this same reaction from friends going through the same ordeal.  

I can’t help but wonder why were they ever paying for non-essentials? Why not cut them out before you lose your job, and save the money. If you do lose your job, the saved money would really come in handy.  

So, I’ve come up with a list that you may or may not consider non-essential items. I’m just trying to get you to think about ways to save money without changing your lifestyle. A good mental exercise is to imagine that you get laid off from work. What are the first things that you would cut?

1.      Unused gym memberships – The gym I go to is packed in January and starts to thin out in February. By March, it’s back to its old self. Many people don’t cancel because they are too lazy to go to the gym and fill out the form. This could be costing you $400 to $1000 per year.

2.      Cable/Satellite TV with Premium Channels – It’s easy to spend over a $1000 per year to watch television. Many people comment that they only watch about 12 channels, yet they are paying for over 200 channels, plus premium channels. With Redbox charging about a dollar to rent a DVD, it’s hard to justify paying for the premium “movie” channels.

3.      Weekly Haircuts – Really? At $30-$40 a pop, this translates to $1500 to over $2000 per year. I bet you can stretch out the frequency to every 2 months without anyone really noticing.

4.      Cell Phones – Easily $1000 per year. Carriers will sell you everything under the sun, need it or not. If you don’t talk a lot on your cell, consider using a pre-paid plan. Also, scrutinize the features that you are paying for, and see if you are really using them.

5.     Dry Cleaning – Ok, I’m not telling you to wash your suit. But most men’s shirts can be put through the washer and dryer.  Think about have many shirts you have dry cleaned over a year and ask yourself if it’s worth it. This goes for jeans too.

6.     Eating Out – When I council people about how to save money, I ask them to list their expenses. Almost 100% of the time, they are shocked by how much they spend over a year’s time on restaurants. If you eat out for lunch every day, it really adds up. If you spend $10 a day, 5 days a week, 52 weeks a year, then your lunch tab is $2,600. If you ate out every other day, you could cut out $1,300.

7.      Designer Coffee – If your employer offers free coffee, you really don’t have to swing by Starbuck’s every day.  $4 per cup times 5 days per week times 52 weeks per year equals $1040. Even if you did it every other day, you could save over $500.

8.     Afternoon Soda – If you buy a soda from a vending machine, it’s probably costing you 75 cents to a dollar per can. If you buy from a grocery store, it’s about 33 cents per can. Buy a 12 pack and put a can in the break room fridge.  It’ll be nice and cold by the time the afternoon comes around. You can save about $100 a year.

9.      Land Line – A lot of people have started to get rid of their land line because they use their cell phone almost exclusively. If you feel that you need a land line, look to see what options you are paying for. The last time I looked, caller-id was $12 month ($144 per year).  It cheaper to just let answer machine pick up and decide if you want to talk.

10.   Insurance deductible – One of the biggest knobs for adjusting the cost of either auto or homeowners insurance is the deductible. If you have your deductible set to $250, you probably can save a few hundred dollars a year by raising the deductible. Put the money you save in a savings account to pay for the higher deductible, in case you have a claim. By the way, if you’ve had the same insurance carrier for several years, you probably can save even more money by checking out the costs of other carriers. Fifteen minutes on the phone might save you several hundred dollars per year.

Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
contact: service@brycast.com http://www.brycast.com/
Enrolled Agent; Investment Advisor

Deciphering Auto Liability Insurance Limits

If you are in an accident involving your car, you’re going to be looking at your auto insurance policy to see what your coverage is. If you are at fault, it falls under the liability side. If you live in Texas, the minimum coverage is 30/60/25.

30/60/25 refers to 3 different items. The first number, 30, refers to how much money the insurance company will pay to any one person, not including you, for bodily injury in an accident that you caused. The 30 translates to 30 thousand dollars. So if you injure someone while driving your car, your insurance company will pay up to $30 thousand to that person.

The second number, 60, refers to the total amount of dollars that your insurance company will pay to two or more people that you injure while driving your car. It means that up to $60 thousand will be paid to the injured parties. Let’s say that you injure 3 people in an auto accident, and each one sustains $30,000 in bodily injuries. Even though their claims against you total $90,000 (3 times $30,000), your insurance company will only pay out the maximum $60 thousand. And, no one will receive more than $30 thousand.  

The third number, 25, refers to a property damage payment of up to $25 thousand.  Property damage includes the car(s) you ran into, and other structures that you may have damaged. So, if you total a luxury car like a Mercedes, you may have to get out your check book to make up the difference.

As you may have noticed, if you have only the minimum of liability insurance, you are probably woefully underinsured.   If you injure someone and they need to go into the hospital, it won’t take long to exceed the minimum $30 thousand coverage. Then, you’ll be liable for amounts beyond the $30 thousand.

If you have the minimum liability insurance now, consider talking to an insurance agent and asking how much it would cost to increase the liability limits. Protecting your assets and future income may not be as expensive as you think.

Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
contact: service@brycast.com http://www.brycast.com/
Enrolled Agent; Investment Advisor Representative

10 Tax Free Sources of Income

According to the IRS, all income is taxable unless they tell you that it isn’t. That’s a pretty good blanket to toss over everyone.  So, if you are wondering if income you received is taxable, assume that it is unless a financial advisor or tax pro tells you that it isn’t.

It turns out that there are a lot of income sources that are not taxable. Here is a short incomplete list of non-taxable income streams.

Municipal Bond Interest

This is still a nice income stream, particularly for individuals in high tax brackets.  For example, suppose that you are in the 28% tax bracket, and the muni is paying 6%.  When you take your tax bracket into account, your effective interest rate is 8.33% because the interest payment is tax free.

Life Insurance Proceeds

If you are the beneficiary of life insurance proceeds that are paid because someone has died, then the payment is generally income tax free. Since proceeds from life insurance may be subject to estate tax, I used the word generally.  However, in many cases a life insurance payment to the policy’s beneficiary is tax free.

Gifts

Wow, if someone gives you a $100,000 gift, you probably don’t have to pay taxes on it. However, the donor may have to pay gift tax. If he doesn’t pay the gift tax owed, the IRS may come after you for collection.   

Inheritance

Most items that you receive such as cash and property are not subject to income tax. Notable exceptions are retirement accounts.  

Social Security Income

In many, many cases social security income is non-taxable. However, it becomes taxable if your income from other sources is high.  The IRS uses something called modified adjusted gross income (MAGI) to determine if your benefits are taxable or not. If your filing status is married filing jointly, your benefits start become taxable if your MAGI exceeds $32,000, otherwise it’s $25,000.

Workers’ Compensation

 If you are receiving benefits under a workers’ compensation act or statute because you are sick or injured, then those payments are not taxable. Okay, good to know.

Veterans’ Benefits

If the Department of Veterans’ Affairs (VA) is making payments to you, then you don’t have to report those payments as income. This is a well-deserved tax break.

Disability Payments

If you paid the premiums for short or long-term disability insurance, then the received payments due to your disability are not subject to income tax and do not need to be included on your income tax return. However, if your employer pays part or the entire premium for the insurance, the benefit is taxable to the extent of your employer’s contribution.

Grants and Scholarships

These are generally tax free to the extent that they are used for qualified educational expenses. If the grant/scholarship you received is more than your qualified educational expenses are, then the excess is subject to income tax.    

Cash Rebates from a Dealer or Manufacturer

That big check you received as a rebate for buying a car is not taxable. But, the basis of your purchase must be lowered by the rebate amount.

Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
contact: service@brycast.com http://www.brycast.com/
Enrolled Agent; Investment Advisor Representative

How to Save Money on Long Distance Calls

If you use a conventional (non-internet based) land line in your home, you are probably being charged for long distance calls.  A company like ATT offers long distance plans with different pricing options. In my area, they have the following 3 plans:

 1)      Unlimited Nationwide Calling - $25+taxes/month
 2)      One Rate Nationwide $5+taxes/month + 7₵ per minute
 3)      All Distance $40+taxes/month – unlimited calling + popular features.

Notice the “+ taxes” by every price.  I don’t know what the taxes will be, but I’m usually overwhelmed by the taxes on my monthly phone bill. So, I’m guessing that they are not insignificant. If it’s been a while since you looked at the details on your phone bill, have another look. But, you may want to sit down first.  

So, here is my proposal. Consider buying a Prepaid Long Distance phone card. I bought one from Verizon for $20+tax that has 700 minutes. I know it’s a pain to have to punch in the numbers before you actually get to the phone number that you want to call. But, I found a solution to that. Many phones have “memory” buttons on them labeled as M1, M2, M3, etc. I’ve programmed two of the buttons to handle the 800 access number and the PIN. I dug around to find the phone manual to figure how to program the phone, but could never find it. So, I got on the internet and searched for the manual by phone brand and model. Still, didn’t find it…I think my phone is too old. But, I did find one for the same brand and used those instructions…it worked.

Here is a table that shows the annual cost of the different options based off of the number of minutes you use in a month.   

Minutes/  Month	Verizon	Unlimited	One Rate	All Distance
58	$22	$330	$115	$528
233	$88	$330	$262	$528
350	$132	$330	$360	$528
525	$198	$330	$507	$528
817	$308	$330	$752	$528
1050	$396	$330	$948	$528

As you can see, the Verizon pre-paid plan costs less annually compared to all plans if you use less than 800 minutes per month. Since I don’t know what the taxes are, I assumed they were 10%.

Brycast Financial Planning in Austin Texas --- We Can Help
Income Tax Preparation in Austin Texas
contact: service@brycast.com http://www.brycast.com/
Enrolled Agent; Investment Advisor Representative