Investing

How to Approach Buying Your First Investment Property

house

You’ve probably heard that investment properties can provide a stream of passive income. While that may sound like easy money, there’s actually a lot of work involved in property investments. Before diving in headfirst, find out what you should do below.

Consider the Work Involved

Owning an investment property takes just as much work, if not more, than having your own home. If you choose to rent out the property, you’re responsible for covering just about everything a landlord covers when they rent out an apartment. If you aren’t prepared, the amount of work can quickly overwhelm you.

For that reason, many investors choose to hire a professional management company. A good company will offer local support whenever you need it, in addition to handling every aspect of running the property. By outsourcing your management, you don’t have to worry about routine home maintenance and dealing with tenants.

Beef Up Your Savings

If you currently have your own mortgage, then you already know how expensive it is to own a home. Even though you hope your investment property will generate some extra income, there are still a lot of expenses.

To start, you have to make a substantial down payment. Lenders usually want at least 25 percent down, which is a lot more than the standard 5 percent minimum for primary residences. So if you’re buying a second home in White Plains, you could easily have to put down more than $100,000 with home sales averaging $462,000 in the area.

If you have the cash needed to buy a home outright, you won’t need to worry about financing the purchase. However, there are still operating expenses. It’s a good idea to build a strong financial cushion to cover things such as routine maintenance and unexpected repairs. Having a good budget and a strong understanding of your cash flow is critical.

Start Small

It’s all too easy to bite off more than you can chew with your first investment property. For example, buying a home that needs major repairs can seriously hamper your ability to make money quickly.

There’s no rule against buying a fixer-upper for your first investment, but you have to think about how long it will take to get the home move-in ready. According to the House Flipping Academy, it can take three months to fix cosmetic repairs throughout the whole house, and up to one year to do a complete renovation. Consider the fact that you’ll be missing out on any potential rental income for that period of time. When you’re just starting out, it might be better to get a home that only needs one or two updates.

Choose a Property Wisely

When picking a home, be sure to think about your long-term goals. Will you hold onto it until you can sell it for profit? Or will you rent it out to families or vacationers? There are pros and cons to each decision. A residential rental property will need to be located in a neighborhood that attracts families or young professionals. A vacation property, on the other hand, should be in an area where people are going to actually want to book short-term rentals.

If you’re thinking about getting a vacation property, be aware that some cities are cracking down on the short-term rental industry. Always check local regulations before making a decision. And keep in mind that laws may change, potentially killing your idea for a successful short-term rental property.

If done right, property investment can be incredibly profitable whether you choose to rent out the home or sell it for profit at a later date. By having enough financial cushion, having a management plan in place, and choosing a property with a lot of potential, you’ll greatly improve your chances of success.

6 FAQs About 529 College Savings Plans

College is a large expense and one worth planning for, especially if you want your future college graduate to start their lives with minimal debt. One common way to prepare for such an expense is to open a 529 college savings plan.

Photo by Ruijia Wang on Unsplash

Photo by Ruijia Wang on Unsplash

What is a 529 plan?

College savings 529 plans are state-sponsored savings accounts that offer both tax and financial aid benefits.

What states run a 529 program?  

Almost every state has a 529 program, each with different perks and benefits. You can pick based on perks and you don’t need to live in the state you opened the account in.

You can look at 529 plan options using this tool from SavingforCollege.com.

What are the two types of college 529 plans?

There are two types of 529 plans, they are:

  • College savings plans – This plan is similar to a Roth 401k or Roth IRA by allowing you to contribute after-tax income in the form of mutual funds and other types of investments. There are a number of investment options to choose from and the 529 account will go up and down and value according to those investment choices. The money is this account is available for tuition, books, and often housing.

  • College prepaid tuition-  This plan can be used to pre-pay all or part of the costs of an in-state public college education. Sometimes, they can be converted for use at private or out-of-state colleges.

What are the perks of using a 529 savings plan?

Each state provides slightly different incentives for its 529 programs. But some of the overall benefits include:

  • Large income tax breaks (for federal and often state taxes)

  • The donor stays in control of the account until its use

  • They’re low maintenance

When can you start them?

You can start one of these savings plans at any time. Most 529 programs are “set it and forget it” meaning the investments come straight out of your paycheck or bank account.

Where can I learn more about college 529 plans?

There are a lot of online resources for comparing and ranking different 529 programs. You can reference one of these, or reach out to your friendly neighborhood tax professionals. We can help you select the best option for you.

*Contact us here*

4 Ways to Pay Less Taxes on Your Investments

If you’re considering jumping into investing (or have already started), you need to know the tactics to avoid paying massive amounts of taxes on them. We’ve compiled a list of tax tips for investors. Check them out.

by Austin Distel

Hold investments for longer than a year

Whenever you make money off your investments (aka capital gains) you are taxed on that income. However, the length of time you held the investment dictates the rate you’ll be taxed at.

These taxes, called capital gains taxes, change at the year mark. If you hold your investments for a year or less, you’ll be taxed at the short term capital gains rate, which is the same rate as income tax.

But if you hold your investments for a year and a day, you’ll get taxed at a more manageable long-term capital gains rate.

This rate can get as high as 20% for big earners, but it’s more likely you’ll pay somewhere between 0 and 15%.

Buy Municipal Bonds  

Buying bonds means you get to collect interest on those bonds, which is a great source of passive income if you buy enough.

But unless you buy municipal bonds, the IRS is entitled to a share of that interest. When you buy either city, state, or county bonds, you are exempt from paying federal income tax on those bonds. If you buy municipal bonds in your home state, you’ll be exempt from state and local taxes as well.

One thing to note is that if you sell your municipal bonds for a profit, you’ll have to pay taxes on the gain.

Sell Losing Investments   

If you’re losing money on a particular investment, you might want to consider selling it off.  Investment losses offset capital gains, so if you make $2,000 and lose the same amount, you won’t have to pay on the amount you’ve lost.

In addition, if your investment losses exceed your gains, you can use them to offset up to $3,000 in taxable income.

Put Your Money in Tax Sheltered Accounts  

Putting your investment money into tax-sheltered accounts is a great way to defer paying taxes on various investments.

Accounts like 401(k)s, 403(b)s, and certain IRA plans aren’t tax-free, but you won’t have to worry about paying taxes until you start making withdrawals. By the time you do that (barring some emergency), you’ll likely be in a lower tax bracket anyway.

 

Have more questions about investments and taxes? Shoot us an email or give us a call.

IRA Contributions

Westchester NY accountant Paul Herman has all the answers to all your personal finance questions!

One popular tax savings outlet available to taxpayers today is the Individual Retirement Account, more commonly referred to as an IRA.

http://www.flickr.com/photos/scottwills/244518573/

Keep your nest egg secure with these quick tips!

There are several options you have when deciding which type of IRA account to enter into. You may be able to take a tax deduction for the contributions to a traditional IRA, depending on whether you€” or your spouse, if filing jointly are covered by an employer’s pension plan and how much total income you have. Conversely, you cannot deduct Roth IRA contributions, but the earnings on a Roth IRA may be tax-free if you meet the conditions for a qualified distribution.

Generally, you can contribute a percentage of your earnings for the current year or a larger, €œcatch-up€ if you are age 50 or older. You can fund a traditional IRA, a Roth IRA (if you qualify), or both, but your total contributions cannot be more than these annual amounts (currently $5,500 for 2013, or $6,500 if you are age 50 or older).

You can file your tax return claiming a traditional IRA deduction before the contribution is actually made. However, the contribution must be made by the due date of your return, not including extensions. If you haven’t contributed funds to an Individual Retirement Account (IRA) for last tax year, or if you’ve put in less than the maximum allowed, you still have time to do so. You can contribute to either a traditional or Roth IRA until the April 15 due date for filing your tax return for last year, not including extensions.

Be sure to tell the IRA trustee that the contribution is for last year. Otherwise, the trustee may report the contribution as being for this year, when they get your funds.

If you report a contribution to a traditional IRA on your return, but fail to contribute by the deadline, you must file an amended tax return by using Form 1040X, Amended U.S. Individual Income Tax Return. You must add the amount you deducted to your income on the amended return and pay the additional tax accordingly.

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions, and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Bedford NY, Chappaqua NY, Harrison NY, Scarsdale NY, Mt. Kisco NY, Pound Ridge NY, Greenwich CT and beyond.

Photo Credit: scottwills via Photopin cc

Stock FAQs

Accountants in Westchester NY here at Herman and Company CPA’s have all the answers to your personal finance questions! Stock trading can be a tremendous way to grow your finances if approached with the correct research and are carefully monitored.

stock trading tips from scarsdale accountant paul hermanThe following are FAQs our Westchester accounting firm regularly receives regarding stock trading and how it works. 
▼ How does stock trading work?

Stocks are traded in quantities of 100 shares, called round lots. Any quantity of stock under 100 shares will be considered an odd lot.

▼ What is the difference between Preferred and Common Stock?

Most stocks are common stocks. However, there is another type (known as preferred) which gives certain advantages regarding dividends. Generally, preferred stock holders do not have the same voting rights that the holders of common shares do. Common stocks are based on company performance, while preferred stocks will usually have a stated dividend.

▼ How can I invest in foreign stocks?

It is fairly easy to invest in foreign corporations, because these corporations need to register these securities with the SEC. These companies are subjected to the same rules as U.S. companies.

How are stock prices determined?

A stock’s prices are a result of trading on stock exchanges, and prices rise and fall based on the supply and demand of the stock.

What are common and preferred stocks?

Common stock is piece of corporate ownership. Those who hold common stock share profits from the corporation as dividends, and also have voting rights. This means that common stock holders benefit financially if a company succeeds, but also means they lose money if a company does not. Those who hold preferred stock in a company have an unchanged dividend amount of stock in a company, and often do not have voting rights. Over a period of time, companies often increase their common stock dividend.

 How can I be a successful stock trader?

Determine your goals and do your homework. Get to know the industry and companies you’re investing in, and keep up with the latest news and trends. Make sure you know when to cut your losses, and focus on making small and steady short-term profits.

Our Scarsdale tax preparers here at Herman & Company CPA’s are here for all your financial needs. Please contact us if you have questions about these provisions or any other tax compliance/planning issues, and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Bedford NY, Bedford Hills NY, Chappaqua NY, Larchmont NY, Rye Brook NY, Purchase NY, Bronxville NY, White Plains NY, Stamford CT and beyond.

Photo Credit:  David Paul Ohmer via Photopin cc

Our 2013 Annual Year-End Tax Planning Letter

 

Tax planning advice from cpa in scarsdale ny

 

Fall, 2013

To our clients and friends,

As a follow up to the first of our year-end tax planning letters, we provide here specific strategies for your consideration. The implementation of just one of these strategies can save you meaningful dollars.

Remember tax rates for many are now higher than they were last year. We all have a serious opportunity to save taxes now by devoting time to reviewing our tax situation. Please contact us shortly to see which strategies can benefit you.

The old standby strategies, now with some modification: 

1. Postpone income 

In most years, it usually pays to postpone income to a subsequent year. This gives you the use of the money for a year before having to pay tax.

If it makes sense to delay income to the following year, you might defer compensation, defer year-end bonuses, defer the sale of capital gain property (or take installment payments rather than a lump-sum payment) or postpone receipt of distributions (other than required minimum distributions) from retirement accounts.

2. Accelerate your deductions 

The phasing out of itemized deductions is now back in the tax law starting this year. If you itemize deductions, consider paying medical expenses in December rather than January, if doing so will allow you to qualify for the medical expense deduction (now a higher threshold at 10% of your adjusted gross income). Charge deductible expenses on credit cards to get the current deduction even if the payment of the charge will not be made until 2014. Also, you can prepay your January mortgage payment in December, so you can deduct the interest included in that payment this year. Pay your final state estimated tax payment before year-end as long as you are not in an AMT situation. If you are likely to be paying taxes under the AMT rules, hold off this payment until January as you will get no benefit at all this year by paying it early and you’ll lose the deduction for next year.

You also can make alimony payments early or make charitable contributions in advance, subject to certain limitations. If you are planning to donate property, consider whether to do it before or after the end of the year. Remember substantiation rules for donations. If the property is valued at more than $5,000, a “qualified” written appraisal is mandatory. You must get receipts for contributions over $250. Your cancelled check alone will not satisfy the IRS. Instead of putting cash in the collection basket, you may want to put a check in! If you want to make a donation but won’t have the money until next year, consider charging your gift on a credit card before the end of the year. The gift will be deductible on your 2013 return!

Remember that you can’t deduct contributions of clothing or household items unless the property is in at least “good condition.”

3. Distributions from IRA’s 

Whenever possible, withdraw money you need from taxable savings and investments accounts. IRA accounts should be left to grow tax-free as long as possible. Once you reach the age of 70, you MUST begin taking distributions and paying income tax on the monies withdrawn. Distributions taken before age 59. are subject to a 10% penalty in addition to the tax due.

4. Incentive stock options 

Exercise ISO’s early in the year. Exercise of ISO’s may put you in the AMT unless you dispose of the stock in the same calendar year it was purchased. Exercising your options early in the year gives you the full year to see if the shares are down, get rid of them and not get hit with the AMT. You may have heard the horror stories of people who converted their options, then held the stock they got until it subsequently went down. They ended up with an AMT bill higher than the value of their stock. A nightmare scenario.

For more tips now and throughout the year follow us on . . . 

Facebook at facebook.com/hermancpa

Twitter at twitter.com/hermancpa

Linkedin at linkedin.com/in/newyorkcpa

Our blog at blog.hermancpa.com 

5. Capital gains and losses 

If you have realized capital gains this year, be sure to take capital losses now to offset those capital gains. Anyone sitting with net gains in 2013 should take action now if possible.

Even under the new law, long-term gains are taxed at a lower rate than short-term gains and ordinary income. Planning for investment gains can reduce your taxes significantly. Beginning on January 1, 2013, the long-term capital gains tax can be as much as 24%. An asset must be held for more than a year to be considered long-term.

Here is an easy way to save some potential taxes that every investor should take the time to check out. Review the securities you have sold so far this year to see if you have a net gain or loss. Net any carry-forward losses from last year against 2013 trades. If the result is a short-term capital gain, it will be taxed as ordinary income unless you offset it with additional losses. If you have a net loss, remember that the maximum net capital loss you may deduct in any one year is $3,000. Losses in excess of this limit may be carried forward to 2014 and beyond, if necessary.

What to do? If you have net gains, review your current holdings for sales that would result in a loss and which will reduce or eliminate your net gain. If you have losses already and are holding some positions with gains that you no longer wish to own, sell them to use up your existing losses or just keep the losses to use in the future when rates are higher. Remember that capital losses realized in an IRA account are not deductible.

Although you can choose when to realize capital gains and losses, we advise you to consider the worth of investments and not let tax consequences alone dictate when to sell.

6. Watch out for the “wash sale” rule 

To accelerate a loss without significantly changing your investment position, you can “tax swap” securities. That is, sell securities to recognize a loss and replace them with the same or similar securities. But watch out for the “wash sale” rule. If you sell a stock to recognize a loss, you may not repurchase the same stock for a 30-day period before or after the date of sale or the loss will be disallowed. You can replace it with a similar, but different security. The wash sale rule does not apply to gains.

If you like a particular stock for the long term, but would like to sell it this year to get the benefit of the loss, double up on the position more than 30 days before selling the original position. After at least 31 days, sell the higher cost shares. You’ll create a tax loss and be left with the same number of shares you originally owned. You must act quickly so as to have owned the shares for at least 31 days and be able to sell the shares prior to December 31st.

7. Contribute to a Qualified Tuition Program (“QTP”) for your child’s future college costs 

These so-called Section 529 plans let you establish a savings plan from which tuition can be paid. Contributions are generally deductible for state tax purposes and distributions are tax-free as long as used for qualified higher education costs. The income earned in such accounts will not be taxed. This definitely is worth a look for those with young children. Speak to us as we can help you setup and manage such an account.

8. Take losses on your 529 plans! Yes, that’s what I said, take losses on the college savings plan you set up for your child. 

This is not widely publicized. You may be able to take a loss on your investment in a QTP, if you distribute all of the amounts in an account and the total distributions are less than the amounts contributed. The loss is not taken as a capital loss, but rather as a miscellaneous itemized deduction which is an ordinary deduction (i.e. not subject to the $3,000 capital loss limitation). All miscellaneous itemized deductions must exceed 2% of adjusted gross income to be of benefit. Of course if you find yourself in the AMT, this strategy won’t help you at all. You can reinvest the money taken out into another 529 plan account, but there are some rules to be dealt with.

Among the services we provide . . . When you are considering life, health or long-term care insurance, we can help find the right policy for you. We’ll help you analyze your needs, determine the appropriate amount of coverage necessary to protect your family and determine the right policy to suit your needs. 

9. Reduction of tax on certain dividends 

If you are an owner of a closely held ‘C’ corporation and the company is in the 15% bracket and you are in at least the 25% bracket, taking a dividend payout in place of salary can result in more money in your pocket after taxes. Note that dividends on stocks are taxed at a lower rate than interest paid on bonds.

10. Keep track of accrued interest you paid 

Keep accurate records for any accrued interest you paid when you bought bonds. You received interest from the last date the bond paid interest. This interest will be reported on your 1099 Form. Since you purchased the accrued interest, it’s not taxable to you. Speak to us for information on how to write-off the accrued interest on your 2013 return.

11. Get a receipt from your charity 

As previously noted, the Internal Revenue Service requires that you have a written receipt from charities for each contribution. The receipt must be for a donation made in 2013. If you are examined and you do not have a receipt, your deduction will be disallowed; the check will not be enough. You can make more than one contribution to a charity in one year each of less than $250 (that cumulatively exceed $250 for the year) without a receipt, but the Internal Revenue Service has the authority to curb abuses such as with multiple checks issued on the same day. Also, a charity is required to give you a breakdown of the deductible portion of your contribution when goods or services are purchased in connection with a charitable event (dinners, tickets, etc.).

12. Donations of used cars 

Remember that you are now only able to deduct an amount equal to what the charity sells the car for.

13. Donate appreciated securities 

Consider using appreciated securities that you’ve owned at least a year to make your charitable contributions. You can deduct the fair market value of the securities and avoid paying the capital gains tax you would incur if you sold the securities. There are limits related to your income on the amount of charitable contributions that can be deducted.

Contributions in excess of the deductible amount can be carried to subsequent years. Note that gifts of appreciated assets sometimes affect the alternative minimum tax.

If you have losses in securities you want to donate, sell the securities to recognize the loss for your taxes and then donate the proceeds.

14. Pay off nondeductible interest with a home equity loan 

You can benefit by paying off your credit card balances (which typically carry high interest charges and are non-deductible) with a home equity loan, the interest on which may be deductible. Interest is deductible on home equity loan balances up to $100,000.

15. Casualty losses 

A casualty loss occurs when your property is damaged as a result of a disaster such as a storm, flood, car accident, theft or similar event. The general rule is that such a loss is deductible only after it has been reported to your insurance company. Then the unrecovered loss less $100 may be deducted to the extent that it exceeds 10% of your adjusted gross income. Losses occurring in declared disaster areas have additional rules but give us some flexibility to enhance the tax benefit.

16. Look into tax advantaged health care accounts or flexible spending accounts 

Participation allows you to use pre-tax income for medical expenses that were not covered by insurance or for other eligible expenses. This includes co-pays.

17. If eligible, contribute to an IRA 

If you are not an active participant in an employer-provided retirement plan and have wages or self-employment income, you are eligible to make a tax deductible contribution of up to $5,500 ($6,500 if you are age 50 older) per year to an Individual Retirement Account (IRA) up until the year that you turn 70½, subject to phase-outs based on your income. This money will earn income tax-free and is taxable only when you withdraw funds from the account. If you withdraw the money before age 59½ there may be a penalty tax of 10%. You must begin withdrawing from the account based on a formula at age 70½. You (and/or your spouse) must have wages or self- employment income at least equal to the amount you contribute. Payment can be made to the IRA anytime up until April 15, 2014 to be deductible on your 2013 return.

If you are covered by a retirement plan at work, you can take a full IRA deduction in 2013 if your modified adjusted gross income is less than $59,000 if you are single or $95,000 if you are married and filing jointly. Above these income levels, the ability to deduct an IRA contribution is reduced and eventually fully phased out. If you have self-employment income, you should consider establishment of a SEP, SIMPLE or Keogh retirement plan before year-end. You can contribute significantly more than $5,500 to these plans and you may not have to make any contributions to the plans until the filing date (including extensions) of your personal tax return.

Retirement plan contribution limits for 2013 are as follows: 401(k) Plans IRA’s Keogh’s/SEP’s SIMPLE Plans
Taxpayers under 50 $17,500 $5,500 $51,000 $12,000
Taxpayers over 49 22,500 6,500 51,000 14,500

18. Consider Roth IRA contributions or rollovers 

See our comments earlier in this letter. A Roth IRA is one of the few items in the tax law that is too good to be true. Monies put in a Roth accumulate tax-free. No taxes must be paid on future earnings or withdrawals as long as distributions are made more than five years after the first contribution and after the individual has reached the age of 59. An individual with earned income may make a nondeductible contribution to a Roth IRA of up to $5,500 plus a $1,000 “catch-up” contribution if you are at least 50 in 2013 (reduced by any amount contributed to a regular IRA). Unfortunately, married taxpayers with adjusted gross incomes (“AGI”) over $188,000 (singles over $127,000) can’t make a contribution to a Roth. Under those amounts you can make at least a partial contribution.

19. Start your child’s savings with a tax-smart Roth IRA 

If your child earns income from babysitting, an after-school job, a summer job or from helping out in your office, he or she is eligible for a Roth IRA. Although your teenager is probably not thinking about retirement, a Roth IRA is perfect for a child in a low tax bracket who has many years to let their account grow tax-free. You can contribute for your child as long as you don’t exceed the annual gift tax limits. This is a great savings strategy.

20. Consider your family’s total tax bill. Shift income to your children. Consider making gifts to family members. Put your kids on the payroll! 

Income taxes can be saved by shifting income-producing assets from parents or grandparents who are in a high income tax bracket to their children and grandchildren who are in lower tax brackets.

Planning considerations include asset protection (accomplished through the use of trusts) and the “kiddie tax” for beneficiaries under age 24.

Therefore, any assets should not be sold until your child reaches these ages. For children under age 24 without earned income, the first $1,000 of income will not be taxed and the next $1,000 will be taxed at the child’s lower tax rate. Any amount of income above $2,000 is taxed at the parents’ rate. Therefore, instead of gifting to a child’s custodial account, put cash into a 529 plan. Earnings in a 529 plan are never taxed if used to pay for college, graduate school or post high school vocational education.

18. Consider Roth IRA contributions or rollovers 

See our comments earlier in this letter. A Roth IRA is one of the few items in the tax law that is too good to be true. Monies put in a Roth accumulate tax-free. No taxes must be paid on future earnings or withdrawals as long as distributions are made more than five years after the first contribution and after the individual has reached the age of 59.. An individual with earned income may make a nondeductible contribution to a Roth IRA of up to $5,500 plus a $1,000 “catch-up” contribution if you are at least 50 in 2013 (reduced by any amount contributed to a regular IRA). Unfortunately, married taxpayers with adjusted gross incomes (“AGI”) over $188,000 (singles over $127,000) can’t make a contribution to a Roth. Under those amounts you can make at least a partial contribution.

19. Start your child’s savings with a tax-smart Roth IRA 

If your child earns income from babysitting, an after-school job, a summer job or from helping out in your office, he or she is eligible for a Roth IRA. Although your teenager is probably not thinking about retirement, a Roth IRA is perfect for a child in a low tax bracket who has many years to let their account grow tax-free. You can contribute for your child as long as you don’t exceed the annual gift tax limits. This is a great savings strategy.

20. Consider your family’s total tax bill. Shift income to your children. Consider making gifts to family members. Put your kids on the payroll! 

Income taxes can be saved by shifting income-producing assets from parents or grandparents who are in a high income tax bracket to their children and grandchildren who are in lower tax brackets.

Planning considerations include asset protection (accomplished through the use of trusts) and the “kiddie tax” for beneficiaries under age 24.

Therefore, any assets should not be sold until your child reaches these ages. For children under age 24 without earned income, the first $1,000 of income will not be taxed and the next $1,000 will be taxed at the child’s lower tax rate. Any amount of income above $2,000 is taxed at the parents’ rate. Therefore, instead of gifting to a child’s custodial account, put cash into a 529 plan. Earnings in a

529s plan are never taxed if used to pay for college, graduate school or post high school vocational education.

See the important discussion regarding gifting in our first letter.

Anyone is permitted to make gifts of up to $14,000 per year to an unlimited number of people without having to pay gift taxes. Married couples can make combined gifts of up to $28,000. A married couple wishing to make gifts to two married children and four grandchildren can make gifts of up to $224,000 per year ($28,000 to each child, grandchild and child’s spouse) without paying any gift taxes. This is a simple way to reduce the size of one’s future taxable estate. There are a number of other ways to reduce your taxable estate. Please contact us for further insight. Planning Tip: Income can also be shifted upwards. For example, a high-earning professional can make the gift to his/her elderly parents who are in a lower tax bracket. The additional income can be used to help pay for medical and/or assisted living expenses. After the parents die, the assets can go to the original donor’s children (if the “kiddie tax” does not apply) for additional income shifting.

Be aware that direct payments of tuition and medical expense for another individual are not subject to gift tax. There is an unlimited exclusion of amounts paid directly to educational organizations for tuition and to health care providers for medical expenses.

If you own your own business, you can hire your kids and fully deduct their pay. And, if your business is unincorporated and your children are under the age of 18, you won’t owe any payroll taxes on their wages.

21. Let Uncle Sam pay part of your kid’s college tuition bill

Don’t pay your children’s college tuition bill by selling appreciated securities you own. Rather, give your children the shares of appreciated stock or mutual fund and have them sell the shares to pay for school. Assuming they have limited income, neither of you may have to pay any capital gains tax at all. That’s letting your Uncle Sam pay part of the tuition bill!

This is one of my favorites and makes so much sense if grandma or grandpa have sizeable estates and are facing a large estate tax bill. They should be paying your child’s college tuition! Payments made directly to the school are not counted towards the $14,000 annual gift limit. This is a great way to reduce estate taxes!

College Tuition Credit. If you have kids in college listen up. The American Opportunity Tax Credit expanded and renamed the old Hope Credit. The credit can be claimed for qualified undergraduate education expenses paid for an eligible student.

Unlike the Hope credit, which was only available for qualified tuition and fees for just the first two years college, the new credit includes related expenses such as books and other required course materials. Additionally, the credit can be claimed for those qualified expenses paid for any of the first four years of post-secondary education.

The credit is equal to 100% of the first $2,000 spent and 25% of the next $2,000 per student each year. The maximum $2,500 credit is possible for a taxpayer who pays $4,000 or more in qualifying expenses. The credit is available to individual taxpayers who make less than $80,000 or $160,000 for married couples. Above those levels, sorry, it’s phased out.

The Lifetime Learning Credit of up to $2,000 (20% of tuition of up to $10,000) applies to graduate classes as well as undergraduate. It is also subject to phase out at higher income levels.

Although we’ve done our best to keep our annual letter as short as possible, it is again considerably lengthier than we would have liked, and it is far from complete. We wish we could summarize

in just a couple of pages, but the tax law keeps changing. We hope it proves to be more than just good bedtime reading. Please devote some time before the end of the year to review your tax situation and call us for analysis and recommendations. 

As always we are available to help you with any tax, accounting, bookkeeping, investment, insurance or estate planning needs. But don’t wait until mid-December! If you are not a client of our office and wish to consider implementing any of these strategies, or just want to talk about your particular situation, please call us for a free consultation.

Our best wishes to you and to your family for the holidays. 

Sincerely,

Paul S. Herman,

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Investment Risk FAQs

Scarsdale CPA Paul Herman has all the answers to your personal finance questions! The following are frequently asked questions our Westchester CPA firm regularly receives regarding risks involved with investing.
 What should I take into account when I start investing?

  • Risk vs. Return
  • Asset Allocation
  • Diversifying
  • Monitoring Progress
► Risk vs. Return

The first step in the investment process is to figure out what sort of Return on Investment (ROI) that you are seeking.

► Asset Allocation

Asset Allocation is the selection of assets from across the asset classes.

► Diversification

Diversification is similar to asset allocation, but within the asset class.

► Monitoring Progress

You can start by examining your trading records and ensuring that all of the trades went through at the prices that you instructed.

Keep tabs on how your assets are performing.

Investment Risk FAQs from Scarsdale Accountant

Get to know the risks involved with building your nest egg.

If they seem to be underperforming, you may want to change your investments to some that may be more lucrative. You may want to also check to make sure that the investments that you own are in line with your current investment strategy. Your strategy may change over time. Be sure to compare your investments to your current situation.

▼ What risks will I be exposing myself to by investing?

There are definite risks to investing, but educating yourself can drastically limit your exposure to these risks.

  • When the rate of return is great, the risk usually is as well. Depending on the situation, you may put yourself at risk to lose all of your initial investment.
  • There is a great difference in the liquidity of assets. Some can be sold in moments, and some may take quite a bit of time – take this into consideration when buying. Some may also have penalties for selling early or maturation dates.
  • Investing in a company with little or no history is much riskier than those with a proven track record.
  • The previous performance of a stock doesn’t necessarily mean that the stock will follow that pattern.
  • Pay attention to news that pertains to the companies that you hold, information that is released about the companies in the news can seriously affect the values of the investments you hold.
▼ How can I avoid taking unnecessary risks?

  • Always trade through your brokerage firm.
  • Never make purchases from phone solicitations offering the next hot stock.
  • Never send personal checks to a sales rep, always to the company.
  • Always receive your monthly statements to double check that everything is correct and that there are no irregular charges.
  • If any sales representatives attempt anything that seems out of place, contact the branch manager of the company.

Scarsdale accountant Paul Herman is here to help you with all your personal finance needs. Please contact us for all inquiries and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Scarsdale NY, Rye Brook NY, Armonk NY, Tarrytown NY, Purchase NY, Stamford CT and beyond.

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Bonds FAQ

▼ What is a Bond?

A bond is simply a certificate which the borrower promises to repay within a certain time period. Bonds FAQ for retirement from Scarsdale accountantFor the privilege of using the money, the government entity, municipality or company will agree to pay a certain amount of interest per year, usually an exact percentage of the amount loaned.

Bondholders do not own any part of the companies they lend to – they do not receive the benefits of dividends or the privilege to vote on company matters as stockholders would, and the success of the investment isn’t related to that company’s record in the market either. A bondholder is entitled to receive the amount that was agreed upon, as well as the principal of the bond.

Corporate bonds are generally issued in the denominations of $1000. This price is referred to as the face value of the bond – this is the amount that is agreed to be paid by the company at the time that it matures. Bond prices can differ from their face values, because the prices of the bonds are correlated to the current market rates. When these rates change, the value of the bond will as well. If one were to sell the bond before the time that it matures, the bond may be worth less than was initially paid. A callable bond is one that the issuer may choose to buy back at full face value before the maturity date.

There are three major features of bonds:

  • Issuing Organization
  • Maturity
  • Quality

Short Term Bonds mature in two years or less and long term bonds mature in ten or more. Intermediate is between two and ten years.

▼ What is Bond Quality?

Bond quality is the rating of the creditworthiness of an issuing organization. There are organizations that specialize in judging bond quality. The higher the rating, the lower the risk of the investment. The rating system uses letters A through D. The only bond considered to be risk free is the U.S. Treasury Bond.

▼ How Does the Bond Rating System Work?

Highest Quality Moody’s Standard & Poor’s
High Quality Aaa AAA
Good Quality Aa AA
Medium Quality Baa BBB
Speculative Elements Ba BB
Speculative B B
More Speculative Caa CCC
Highly Speculative Ca CC
In Default D
Not Rated N N

▼ How do Interest Rates Affect Bond Prices?

Generally bond prices and interest rates have an inverse relationship – as interest rates drop, bond prices rise and vice versa.

▼ How does Maturity Affect Bond Prices?

Bond prices are heavily influenced by maturity – the longer the maturity, the greater the change in price for a change in interest rates. If interest rates rise, it would make a larger difference in the 20 year bond, as opposed to a 10 year bond. Because of this, bond fund managers will attempt to change the fund’s average maturity to anticipate changes in interest rates.

▼ What is a Bond Call Provision?

A “call” is when the issuer of the bonds has an opportunity to redeem the bonds after a certain specified amount of time has passed. This doesn’t guarantee a continuation of a high yield after the call date – it limits the appreciation of the bonds, and it makes the investment more risky. These call provisions can be complex, so it is best for investors that don’t have strong knowledge to avoid bonds with a call feature.

▼ Should I Buy Bond Funds Directly or go Through a Mutual Fund?

A bond mutual fund has within it multiple bonds, and for that reason it is impossible to lock in the payment rate or the principal, which you would be able to do if you were directly buying a fund.

A bond mutual fund is an investment company which manages a portfolio of individual bonds. The investors buy ownership in the company, and each share represents ownership in all of the company’s holdings. Managers will use these investments to buy and sell bonds that align with the objective of the fund.

Because a bond fund manager has more resources to deal with, they can invest in a vast array of bonds – many more than could any individual investor. There are also certain investments that cost tens of thousands of dollars a share – a bond fund costs far less.

Liquidity plays a major role in bond buying. If you purchase a bond individually and wish to sell it, you must find a buyer for your bond, but if you are invested in a bond fund, that fund has to buy your shares back at any time you wish.

▼ What are the Different Issuing Organizations?

  • Municipal bonds are offered by local governments, states and cities. The interest of these bonds is not subject to federal income tax, and if the bondholder lives in the jurisdiction of the governing authority, the interest is exempt from state and local tax. Because of all of these tax advantages, the interest rates paid on these bonds is usually lower than others.
  • Like municipal bonds, the U.S. government also issues these securities. Since they are issued by the U.S. Government, they are considered to have the best safety of all bonds.
  • Treasury bills can be bought through a broker or directly from the Federal Reserve.

Scarsdale tax preparers at Herman & Company CPA’s are here to help you with all your personal finance needs. Please contact us for all inquiries and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Bedford NY, Scarsdale NY, Mount Kisco NY, North Salem NY, South Salem NY, Rye NY, Larchmont NY and beyond.

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Mutual Funds and Stock FAQs

Scarsdale tax preparers at Herman & Company CPA’s have all the answers to your personal finance questions! Mutual funds and stocks faqs from scarsdale cpa paul hermanThe following are our most popular FAQs regarding mutual funds and stocks:

Mutual Funds FAQ

▼ How are mutual funds taxed?

All mutual funds distributions should be reported as income, whether you reinvest or not. Taxable distributions come in two forms, ordinary dividends and capital gains. The distributions of ordinary dividends represent the net earnings of the fund and are paid out periodically to the shareholders. Since these payments are considered to be dividends to you, they must be accounted for accordingly.

Capital Gain Distributions are the net gains of the sales of securities in the fund’s portfolio and will be taxed at a different rate than that of ordinary dividends. Yearly, your mutual form will send you a form, called the 1099-DIV, which will have a detailed breakdown of all of these.

▼ Can I avoid tax by reinvesting mutual fund dividends?

Funds will generally give you the opportunity to automatically reinvest in the fund. This does not prevent you from paying tax on your assets, but this reinvestment will prevent you from paying more “buy” fees to get into the fund, so it is advantageous.

▼ What taxes apply to my return-of-capital distributions?

Mutual funds sometimes will distribute back to shareholders monies that haven’t been attributed to the funds earnings. This is a non-taxable distribution.

Stock FAQ

▼ How does stock trading work?

Stocks are traded in quantities of 100 shares, called round lots. Any quantity of stock under 100 shares will be considered an odd lot.

▼ What is the difference between Preferred and Common Stock?

Most stocks are common stocks. However, there is another type (known as preferred) which gives certain advantages regarding dividends. Generally, preferred stock holders do not have the same voting rights that the holders of common shares do. Common stocks are based on company performance, while preferred stocks will usually have a stated dividend.

▼ How can I invest in foreign stocks?

It is fairly easy to invest in foreign corporations, because these corporations need to register these securities with the SEC. These companies are subjected to the same rules as U.S. companies.

Scarsdale CPA Paul Herman is here to help you with all your personal finance needs. Please contact us for all inquiries and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Rye NY, Larchmont NY, Scarsdale NY, Katonah NY, Chappaqua NY, Bronxville NY, Dobbs Ferry NY and beyond.

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Tax Impact of Investment Strategies

Scarsdale tax preparers at Herman & Company CPA’s have all the answers to your personal finance questions! 

Higher 2013 income and capital gains rates and the new 3.8% net investment income tax (3.8% NIIT) may cause high-income investors to reexamine their investment strategy. Investment and taxes that accompany them from Scarsdale accountant

The type of account, taxable or tax deferred (e.g., qualified retirement plan), could affect the investment strategy in a number of ways. Qualified retirement plans, because of their tax-deferred nature, tend to favor the following strategies:

  • More frequent turnover (securities transactions within the portfolio) can be tolerated. Recognition of gains is not an issue in a qualified plan account; therefore, a strategy that allows frequent buying and selling (turnover) of the underlying investments would not have a detrimental effect because of associated tax liabilities.
  • More active management might be appropriate for a qualified plan, whereas passive investments such as index funds, might be held in taxable accounts.
  • Large-cap investments, which are more likely to be dividend-paying companies, may be better suited for qualified plan accounts because the income is not currently taxed.
  • Portfolio rebalancing (e.g., shifting funds from small cap to large cap stocks) is better accomplished using assets in a qualified plan to minimize the recognition of taxable income.

Taxable accounts tend to favor the following strategies:

 

  • Buy-and-hold strategies are appropriate to limit gain recognition and to limit gains to assets that qualify for preferential long-term gain treatment.
  • Passive investments, particularly index funds that have minimal taxable distributions, are more appropriate for taxable accounts.
  • International funds, which frequently have associated foreign tax payments, are more appropriate for taxable accounts so the foreign tax credit can be claimed.
  • Small-cap growth stocks are more appropriate because of the minimal dividend income generally associated with these types of investments.

A topic of continuing discussion among investment professionals is where to hold fixed-income investments and where to hold equity investments. Generally, sufficient fixed-income investments need to be in taxable accounts to provide liquidity. Those investments could be, for example, either tax-free or taxable bonds, depending on the after-tax yield as determined by your marginal tax rate. The need for current income will also affect whether additional fixed-income investments are held outside of qualified plans. Beyond the liquidity amount and provision for current income, the remainder of the fixed-income portfolio can be held in a qualified plan.

Similarly, for stocks, that part of the portfolio that is intended to be long-term, low-turnover, passively managed investments can be held in the taxable accounts. More aggressive parts of the portfolio that call for active management and potentially high turnover can be held in qualified plans.

Scarsdale accountant Paul Herman is here for all your financial needs. Please contact us for all inquiries and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Purchase NY, Larchmont NY, White Plains NY, Harrison NY, Pound Ridge NY, Scarsdale NY and beyond.

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Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.