Archive for the ‘Financial Planning’ Category

2011 Tax Filing Season – Things to know…

March 2nd, 2011 Vijaianand

It is march and lot of people are now staying late and spending good amount of time to reconcile their last year taxes. Whether you use tax softwares like TaxAct like me or Turbo Taxes or uses your favorite CPA to file taxes, it is going to be daunting task if you aren’t really prepared for it. But don’t worry, there are lot of help available to make your life easier like free softwares which is capable of taking you step by step to complete your tax returns with no time.



General Things to remember



1. This year last day to file tax  is Apr 18, 2011 (Monday) because in observation of Emancipation Day in the District of Columbia on April 15th this year. April 15th will still be the last day for state tax returns on all states.



2.  Before you start working on your tax return for 2010 by yourself or with your CPA or tax preparer, collect all the required documents like W2, 1099’s like 1099-DIV, 1099-MISC and so forth. You should have recieved them from the corresponding institutions if you have income, dividend or interest earned. Also gather all your receipts for medical expenses, losses clamied due to theft or natural disasters, property tax and state tax paid and other deductions related documents which you can use to try filing itemized.

3. If you are married last year or had a Baby last year, don’t forget to count them as dependent and change your martial status to take proper dependent exemptions and standard deductions on filing jointly.



4. If you lost your loved one last year and you are still unmarried, you are still eligible to file married jointly this year. So don’t forget to file with Married Joint status to make use of exemptions and all the favorable tax phaseouts.



5. Don’t hesitate to try out Itemized Deduction option if you are using any tax softwares. You can compare the outcome and finally chose whether to opt for standard deduction or itemized depending on the outcome.

6. Try filing yourself if its simple return and take advantage of free tax softwares like TaxAct.com where you can efile free as well.

What are some important Tax rules changes for 2011?



1. Kiddie Tax – The amount of taxable investment income a child can have without it being subject to tax at the parent’s rate remains at $1,900 for 2010


2. The standard deduction for taxpayers who do not itemize deductions on Schedule A, Form 1040, has increased for those filing as Head of Household. The standard deduction amounts for all the other filing statuses remain the same for 2010:


Married Filing Jointly or Qualifying Widow(er) $11,400
Head of Household $8,400
Single or Married Filing Separately $5,700
3. The amount each taxpayer can deduct for each exemption remains at $3,650 for 2010.



4. Some taxpayers who purchased a qualified motor vehicle after February 16, 2009, and before January 1, 2010, did not have to pay their new motor vehicle taxes (state or local sales or excise taxes) until 2010. In these instances, they may be eligible to deduct the amount paid on their 2010 income tax return.



5. Each personal casualty or theft loss is limited to the excess of the loss over $100 (instead of $500). This is in addition to the 10% of AGI limit that generally applies to the net loss



6. For 2010, the minimum amount of earned income needed to claim the additional child tax credit is $3,000.



7. For tax year 2010, in addition to the three direct deposits, taxpayers can now use their refund to request up to three U.S. Series I Savings Bonds registrations and receive a paper check for the balance of the refund



8. As part of the Affordable Care Act of 2010, the adoption tax credit was extended, increased, and made fully refundable in the year claimed. For 2010, the adoption tax credit may be claimed for qualified expenses up to $13,170 for both nonspecial and special needs adoptions. The amount of the credit begins to phase out for taxpayers whose modified AGI is more than $182,520.



9. No more exclusion of up to $2,400 in unemployment compensation from income.


10. Itemized deduction for state and local general sales taxes expired.

There are more rule changes for this year and you can learn everything by going to IRS.gov. Also check out the detail checklist for filing tax returns.

Happy Tax Filing!!

Posted in Financial Literacy, Tax Planning, Taxes Tags: No Comments »
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Gifting and Cost Basis

December 16th, 2010 Vijaianand

In the last post, we saw how tax plays a important role in gifting to charity or a family member. We saw the tax consequence like deductions and exclusion from donor’s perspective. After that post, I got a request to explain about cost basis in relation to gifting. At times we do recieve gifts or inherit properties from our family members so we need to look  at tax implications from donee’s perspective to declare gains or losses from those gifts. In order to report gain or loss from the gifts or inheritance, cost basis is an important factor needs to be considered.

What is Cost Basis?


Cost basis is the original cost paid for the property including any commission or fees involved to acquire the proeprty whether its tangible(home, equipments) or intangible (stocks, bonds). If a property is purchased, the cost basis is the cost associated with the property including all the expenses related to the purchase.   In this post we will see more about the cost basis involved with gifting or inheritance.

Why cost basis important?


When you inherit/get gifts of property, starting cost basis is set according to the acquired method. When those properties are sold, the selling price is usually different from the original purchase price. Either a capital gain or a capital loss is realized during this transaction which needs to be reported to the IRS by the taxpayer. In order to calculate the amount of capital gains and losses the cost basis of the stock must be determined.


It can be a short term or long term capital gain depends on the holding period of the property. For gifted property, holding period various depending up on the length property owned by donor and donee. If you are using stepped up basis for inheritance property, it is always long term holding period.

Cost basis – Gifted Property

If the property is received as a gift then the basis is various depending on the FMV of the gift at the date of gift  or original cost of the property bought by the donor.

The donee’s starting cost basis is the lesser of either:


cost basis of the person who gifted the property which is called carryover basis, or the market value of the stock on the date the gift which is called  stepped up basis. It depends on the property value at the time of gift and property sale value by the donee.

If the FMV of the property gifted is more than original cost, donee should use the cost basis of the donor. That means donee carry’s over the donor’s cost basis. On the other hand if the FMV of the property is less than original cost, then dual basis rule comes in to play depending on the sale price. That is, if the donee sells above donors cost basis, then donee takes donor basis and report gain. If the donee sells below of the donors cost basis, then donee takes the FMV as the cost basis. If the donee sales between FMV and donors cost basis, no gain or loss need to be reported. I know its bit confusing but look at the example below and it will be clear. 

Example

An example of basis in which a gift results in a gain would be as follows:


Anna gives Sara a  painting. Ronald paid $10,000 for the painting, and the fair market value (FMV) of the painting is $20,000 at the date of the gift. If Sara sells the painting for $20,000 she will use Anna’s cost basis of $10,000 is used to report the capital gain. Thats carryover basis.



However, the example above does not apply if Anna had gifted his painting to Sara when its FMV was $8,000, which is less than his original basis of $10,000. The capital gain or loss reported by Sara depends on whether she subsequently sells the stock for a gain or a loss.



Let’s look another example in which the same gift could result in a loss:



If Sara sold the painting for $15,000 then Sara would report a capital gain of $5,000 using Anna’s original basis of $10,000 to calculate her gain. However, if Sara sold the painting for $5,000 she would report a loss of $3,000 using the stock’s FMV basis of $8,000 to determine her loss. Note that if Sara sold the stock for $9,000 she would not report a gain or a loss in this situation.


Cost Basis – Inherited Property

If you inherit a property, the cost basis will depend on when you inherited it and who you inherited it from.  In general, if you inherit it before 1/1/2010, the cost basis is “stepped up” from the  original cost paid by the deceased owner to the fair market value on the date it was bequeathed to you. This is called a stepped-up basis. Stepped basis is when the donee(who recieves the stocks) gets the  FMV (fare market value) as their starting basis instead of donor’s original basis.

You can use the free calculator available at costbasis.com



Costbasis Reporting

You might have recently received an email or mail from your broker about Cost basis reporting. It was part of the “Bailout Bill” signed in 2008. This bill is $11 billion cost basis reporting.  Starting from 2011, every broker or agent should track the cost basis of the investments and report at the end of year to help the investors to easily track their cost basis and fill the taxes properly. For more details, you can check out the article at WSJ. It will surely save you time and money for the government.

source: www.costbasis.com

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How much insurance do I need?

December 14th, 2010 Vijaianand

There are different ways to determine this number. Many insurance companies use Needs Approach which takes your annual income, your expenses and number of years to accumulate earning into account. They put altogether and come up with figure.

Usually 10-16 times of your annual salary would be most you need for your family to manage when you are gone. It can go up or down depending on the number kids waiting to go to college and so forth. 

Meet with you CFP and talk about it. If you talk to the insurance carrier they will talk you to buy more than what you need. If you don’t have any insurance at this point, I strongly recommend to start considering term life policy which is cheaper and protects your family. Then you can think about Whole life or Universal life which has saving component to save/invest money with insurance for future.

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