The 50 states and the District of Columbia are currently holding at least $32 billion in unclaimed funds, just waiting to be reunited with the rightful owners.
"Good Morning America" has helped thousands of people find money held for them by the states.
There are simple searches you can do in ten minutes or less. Plus we've uncovered more unusual sources of unclaimed cash that few people know about.
"GMA" is here to help with the top 10 tips you can use today to find your unclaimed cash!
1. Miscellaneous Money
If you are searching for things such as forgotten apartment security deposits, uncashed overtime checks, lost insurance refunds or abandoned safe deposit boxes, your first stop is the states. The National Association of Unclaimed Property Administrators (NAUPA) has set up a free website at www.unclaimed.org that will link you to the appropriate department in your state that holds the funds. (IMPORTANT: this is a .ORG website, NOT a .com. If you mistakenly type in .com, you will be taken to a pay site. It is never necessary to pay a fee or a finder to help you find unclaimed money.)
2. Missing Money
If you would like to search several states at once, you can do so at another free, though commercially run site called www.missingmoney.com. When you first search, you are prompted to enter your home state. Be sure to search again and this time choose "all states and provinces" on the drop down menu. One last thing: it's not actually ALL states. On the site's home page you can view a map of which states are and are not included. If you have lived in states that do not participate in this site, be sure to go back to Unclaimed.org and search those sites individually.
3. Unclaimed Savings Bonds
It's easy for savings bonds to go unclaimed because they take 30 to 40 years to mature. That's why the Treasury Department has set up a simple search website, available HERE, where you can find forgotten bonds by typing in your social security number. Certain bonds are not listed online and require a hand search. You can read about them at the same Treasury link.
4. Federal Tax Refunds
Everybody looks forward to getting an income tax refund check, but if yours didn't arrive, what do you do? The IRS now provides a "Where's my Refund?" feature on its website. You can look up your missing check by entering the amount you are owed, plus your social security number.
5. Lost Life Insurance Policies
The proceeds of lost life insurance policies may turn up in your state search. If not, and you suspect you are the beneficiary of a loved one's lost life insurance policy, you can hire a company called MIB Solutions to search for you. MIB is a private company that houses life insurance application information for much of the industry. It costs $75 to search. Go to www.policylocator.com for more information.
6. Failed Accounts In a Bank If you didn't collect your money when your bank went under, chances are your account was insured by the Federal Deposit Insurance Corporation (FDIC). The good news, in that case, is that the FDIC is holding your money, and you can find it HERE.
7. Failed Accounts In a Credit Union
If your money was in a credit union as it failed, visit the National Credit Union Administration (NCUA) HERE to track down your money.
8. Misplaced Pensions
If your company still exists, or has been bought out, you need to approach the company directly. If you are owed a pension from a company that went under, there is a federal agency, the Pension Benefit Guaranty Corporation (PBGC), that safeguards private pensions. You can track down your pension HERE on the PBGC website.
9. Retirement Money
The Employee Benefits Security Administration (EBSA), is the federal agency charged with making sure retirement money is reunited with its rightful owners. The EBSA sometimes even sues to seize retirement money. You can utilize the agency's services by clicking HERE.
10. Lost 401(k)s
Sometimes when people leave a job, they leave behind a 401(k) as well. If the company goes out of business, that only compounds the confusion. Fortunately, companies that administer 401(k) plans have teamed up to create a search engine you can use to track down your 401(k).
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Wednesday, December 14, 2011
Friday, May 27, 2011
Dear Editor, The Diaporan Star
The Editor,
The Diasporan Star
I salute you and your newspaper for dedicating a whole page of your newspaper to a very important topic-finance, a thing many of us take for granted. I hope this is something that will stay and I hope that other African based and/ or focused papers will devote a good amount of time and space to this very crucial topic.
I read the piece titled Financial Check-up with Chuck Dikko; Investing For a Financially Secure Retirement on page 21 of your May 2011 edition and have some comments and/ or questions as follows.
ELIGIBILITY
It is true that the typical eligibility for a 401 K plan is usually 1 year but there are other requirements. The regulation requires that you are age 21 and meet at least 1 year of service with a minimum of 1000 hours worked. The law also requires that a company must not let one wait more than 6 months after eligibility before participation. Hence companies must have at least two entry Dates. If a company requires you to wait for 2 years (not an option for 401K but with other qualified plans) before participation, you become fully vested immediately upon such participation.
CONTRIBUTIONS
It is true that the most an employee can contribute towards his qualified plan (401K) in a year is $16500 for 2011. But note that the most that can be contributed to your plan in a year by a company is the lesser of $49000 or 100% of compensation. Contributions to your 401K can come from three sources (employee deferral $16500 max, Forfeitures and Employer contribution). The $16500 employee contribution is the max one can contribute in a year but if you work for many employers, each employer can contribute up to the lesser $49000 or 100% of your compensation in 2011.
VESTING
It is true that an employee’s contribution is immediately vested (100 % vesting) but the employers contribution to a 401K can only vest on a 2-6 graduated cliff (0%, 20%, 40%, 60%, 80% and 100%) or 3 year vesting schedule not the 7 year reported by your paper.
A 7 year vesting schedule only applies to a Defined Benefit plan. For example a Defined Benefit plan can vest on a 3 to 7 year graduated cliff or a 5 year cliff.
An employer can offer a more favorable vesting schedule but cannot offer one that is longer than the time frame required by regulation.
LOANS / WITHDRAWALS
It is true that loans are allowed in a 401K plan but a proof of financial hardship as reported by your paper is not a requirement. The loan may not exceed the lesser of (a) $50000 or (b) ½ of the participant’s vested account balance. Exception to this loan amount is when vested account balance is less than $20000. In this situation, the maximum loan is limited to the lesser of (A) $10000 or (B) the vested account balance. It should be noted that the loan amount is reduced by the highest outstanding loan balance within the last 12 months period even if such loans have been paid off.
While withdrawals are taxed and are hit with a 10% penalty, the 10% penalty can be avoided if the employee meets one of the following requirements; age 59 and half, death, disability, substantially equal periodic payment-section 72t, medical expenses in excess of 7.5 % of AGI Adjusted Gross Income and Federal Levy Tax.
CASHING OUT
Upon termination of employment with a company you can cash out your 401K tax free if there is a direct transfer to an IRA or another qualified plan. An indirect transfer to you will be hit with a 20 % tax withholding. For example, assuming your account balance was $10000, the employer will issue you a check in the amount of $8000. You will have up to 60 days to deposit that amount plus the amount withheld into an IRA or a qualified plan to avoid the 20 % withholding. That is, you must deposit the full $10000. When next you file your taxes, Uncle Sam will then reimburse you the $2000 that was withheld by your former employer.
MANDATORY WITHDRAWALS
You are required by law to start withdrawing (RMD-Required Minimum Distributions) from your 401K by April 1 following the year you turn 70 and half. All other distributions must be done by December 31st of the year. You will be hit with a 50% penalty (of the amount you were supposed to withdraw) if you fail to do a required minimum distribution.
An exception to not withdraw is only available if you are still employed by the plan sponsor. This exception is not available to anyone who is a 5% or more owner of the said company.
DIASPORAN ANGLE
You reported that “for the Africans in the Diaspora, saving for retirement is three times as hard compared to the general population…” Is this number compiled from statistics or is this a “journalistic opinion?” I am just curious to know if there have been studies done to substantiate this conclusion.
Once again, I applaud your effort to educate the African on this crucial topic. I hope that your paper will be kind enough to share my comments with your readers and I welcome any feedback from you and your editorial team. I can be reached via email at reuel02@gmail.com or by phone at 973-223-4059.
Thanks
Reuel
The Diasporan Star
I salute you and your newspaper for dedicating a whole page of your newspaper to a very important topic-finance, a thing many of us take for granted. I hope this is something that will stay and I hope that other African based and/ or focused papers will devote a good amount of time and space to this very crucial topic.
I read the piece titled Financial Check-up with Chuck Dikko; Investing For a Financially Secure Retirement on page 21 of your May 2011 edition and have some comments and/ or questions as follows.
ELIGIBILITY
It is true that the typical eligibility for a 401 K plan is usually 1 year but there are other requirements. The regulation requires that you are age 21 and meet at least 1 year of service with a minimum of 1000 hours worked. The law also requires that a company must not let one wait more than 6 months after eligibility before participation. Hence companies must have at least two entry Dates. If a company requires you to wait for 2 years (not an option for 401K but with other qualified plans) before participation, you become fully vested immediately upon such participation.
CONTRIBUTIONS
It is true that the most an employee can contribute towards his qualified plan (401K) in a year is $16500 for 2011. But note that the most that can be contributed to your plan in a year by a company is the lesser of $49000 or 100% of compensation. Contributions to your 401K can come from three sources (employee deferral $16500 max, Forfeitures and Employer contribution). The $16500 employee contribution is the max one can contribute in a year but if you work for many employers, each employer can contribute up to the lesser $49000 or 100% of your compensation in 2011.
VESTING
It is true that an employee’s contribution is immediately vested (100 % vesting) but the employers contribution to a 401K can only vest on a 2-6 graduated cliff (0%, 20%, 40%, 60%, 80% and 100%) or 3 year vesting schedule not the 7 year reported by your paper.
A 7 year vesting schedule only applies to a Defined Benefit plan. For example a Defined Benefit plan can vest on a 3 to 7 year graduated cliff or a 5 year cliff.
An employer can offer a more favorable vesting schedule but cannot offer one that is longer than the time frame required by regulation.
LOANS / WITHDRAWALS
It is true that loans are allowed in a 401K plan but a proof of financial hardship as reported by your paper is not a requirement. The loan may not exceed the lesser of (a) $50000 or (b) ½ of the participant’s vested account balance. Exception to this loan amount is when vested account balance is less than $20000. In this situation, the maximum loan is limited to the lesser of (A) $10000 or (B) the vested account balance. It should be noted that the loan amount is reduced by the highest outstanding loan balance within the last 12 months period even if such loans have been paid off.
While withdrawals are taxed and are hit with a 10% penalty, the 10% penalty can be avoided if the employee meets one of the following requirements; age 59 and half, death, disability, substantially equal periodic payment-section 72t, medical expenses in excess of 7.5 % of AGI Adjusted Gross Income and Federal Levy Tax.
CASHING OUT
Upon termination of employment with a company you can cash out your 401K tax free if there is a direct transfer to an IRA or another qualified plan. An indirect transfer to you will be hit with a 20 % tax withholding. For example, assuming your account balance was $10000, the employer will issue you a check in the amount of $8000. You will have up to 60 days to deposit that amount plus the amount withheld into an IRA or a qualified plan to avoid the 20 % withholding. That is, you must deposit the full $10000. When next you file your taxes, Uncle Sam will then reimburse you the $2000 that was withheld by your former employer.
MANDATORY WITHDRAWALS
You are required by law to start withdrawing (RMD-Required Minimum Distributions) from your 401K by April 1 following the year you turn 70 and half. All other distributions must be done by December 31st of the year. You will be hit with a 50% penalty (of the amount you were supposed to withdraw) if you fail to do a required minimum distribution.
An exception to not withdraw is only available if you are still employed by the plan sponsor. This exception is not available to anyone who is a 5% or more owner of the said company.
DIASPORAN ANGLE
You reported that “for the Africans in the Diaspora, saving for retirement is three times as hard compared to the general population…” Is this number compiled from statistics or is this a “journalistic opinion?” I am just curious to know if there have been studies done to substantiate this conclusion.
Once again, I applaud your effort to educate the African on this crucial topic. I hope that your paper will be kind enough to share my comments with your readers and I welcome any feedback from you and your editorial team. I can be reached via email at reuel02@gmail.com or by phone at 973-223-4059.
Thanks
Reuel
Friday, May 20, 2011
5 Easy Steps to Becoming a Millioniare
5 Easy Steps to Becoming a Millionaire
Erin Joyce
Wednesday, May 18, 2011Share
retweet
EmailPrintMore from7 Real-Life Ways to Become a Billionaire
at Investopedia.com
Why You Don’t Want to Be a Millionaire
at Investopedia.com
5 Billionaire Finance Moves You Can't Make
at Investopedia.com
Who wouldn't want to be worth a million dollars? Many of us dream of achieving this goal, more often than not for the sake of the freedom financial stability would bring. So how can we get there? The answers are actually much easier than you might expect. Here are several easy steps to get you into the millionaires' club. (With a little discipline and the help of some powerful savings vehicles, anyone can hit this mark.)
1. Only Marry Once
According to "The Millionaire Next Door" by Thomas J. Stanley, Ph.D and William D. Danko, Ph.D, the average millionaire is married with three children. The wives of these millionaires are good budgeters and most often described as even more frugal than their husbands. Interestingly, according to Stanley and Danko's survey, half of these wives do no work outside the home and of those who do, they are most likely teachers.
One upside of only marrying once is avoiding the costs of divorce and of subsequent weddings. The cost of a divorce depends on many factors including income, attorney fees, court fees, and the assets a couple has and how they are divided. The average wedding cost in the United States in 2010, according to The Wedding Report.com, was $24,070.
2. Live Off One Income
One of the advantages of having a life partner is the potential to pull in two incomes. If you are able, consider structuring your set expenses based on only one income, and save what comes in from the other income. Doing so strengthens your financial position in two ways: In case of an emergency or if one partner loses their job, you will not only have less set expenses to cover, but you will also have built up your net worth as a safety measure.
3. Choose the Right Career
According to The Millionaire Next Door, "self-employed people make up less than 20% of the workers in America but account for two-thirds of the millionaires." The book goes on to list an average of 45 to 55 hours spent working per week, so by no means is this the self-employed fantasy of playing golf while your business grows.
The idea of the "right" career can encompass a myriad of factors. Ideally, this would be a career you enjoy, otherwise you likely won't be putting in the dedication required to be successful. The right career would also coincide with overall working trends, or at least not work directly against them. For example, starting a career in typewriter manufacturing may be something you are passionate about, but it would likely suffer due to the current technological trends.
4. Put Your Money in Appreciating Assets
According to Stanley and Danko, the millionaires in their survey invested nearly 20% of their realized household income each year. Nearly 20% of the household's wealth is held in "transaction securities such as publicly traded stocks and mutual funds" and the millionaires tended to rarely sell their equities. Only a very small number of the millionaires surveyed had ever leased a car; few even drove the current year model. Half of those surveyed had lived in their homes for more than 20 years, which, as the authors point out, means they have likely enjoyed "significant increases in the value of their homes."
The end result? These people put a financial priority on assets that will make them money, from their homes to their businesses.
5. Don't Live the Millionaire Lifestyle
Warren Buffett's frugal lifestyle (especially relative to his net worth) is the go-to example for this point. The average value of the surveyed millionaires' homes was $320,000. The bottom line is, those who spend their money on non-appreciating assets cannot put that same money in an asset that will net them a return and increase their wealth. If it is important to you to build your financial worth, stop spending it on new cars, toys and clothes. (The Oracle of Omaha has a net worth in the billions, but his lifestyle is not as rich as you may think.)
The Bottom Line
Becoming a millionaire is easier than ever. While this is a dream that will take work and discipline to achieve, it isn't as far out of reach as you might think. Be smart with your money and before you know it, you'll be able to count yourself among the world's wealthier citizens.
This article is part of a series related to being Financially Fit
Erin Joyce
Wednesday, May 18, 2011Share
retweet
EmailPrintMore from7 Real-Life Ways to Become a Billionaire
at Investopedia.com
Why You Don’t Want to Be a Millionaire
at Investopedia.com
5 Billionaire Finance Moves You Can't Make
at Investopedia.com
Who wouldn't want to be worth a million dollars? Many of us dream of achieving this goal, more often than not for the sake of the freedom financial stability would bring. So how can we get there? The answers are actually much easier than you might expect. Here are several easy steps to get you into the millionaires' club. (With a little discipline and the help of some powerful savings vehicles, anyone can hit this mark.)
1. Only Marry Once
According to "The Millionaire Next Door" by Thomas J. Stanley, Ph.D and William D. Danko, Ph.D, the average millionaire is married with three children. The wives of these millionaires are good budgeters and most often described as even more frugal than their husbands. Interestingly, according to Stanley and Danko's survey, half of these wives do no work outside the home and of those who do, they are most likely teachers.
One upside of only marrying once is avoiding the costs of divorce and of subsequent weddings. The cost of a divorce depends on many factors including income, attorney fees, court fees, and the assets a couple has and how they are divided. The average wedding cost in the United States in 2010, according to The Wedding Report.com, was $24,070.
2. Live Off One Income
One of the advantages of having a life partner is the potential to pull in two incomes. If you are able, consider structuring your set expenses based on only one income, and save what comes in from the other income. Doing so strengthens your financial position in two ways: In case of an emergency or if one partner loses their job, you will not only have less set expenses to cover, but you will also have built up your net worth as a safety measure.
3. Choose the Right Career
According to The Millionaire Next Door, "self-employed people make up less than 20% of the workers in America but account for two-thirds of the millionaires." The book goes on to list an average of 45 to 55 hours spent working per week, so by no means is this the self-employed fantasy of playing golf while your business grows.
The idea of the "right" career can encompass a myriad of factors. Ideally, this would be a career you enjoy, otherwise you likely won't be putting in the dedication required to be successful. The right career would also coincide with overall working trends, or at least not work directly against them. For example, starting a career in typewriter manufacturing may be something you are passionate about, but it would likely suffer due to the current technological trends.
4. Put Your Money in Appreciating Assets
According to Stanley and Danko, the millionaires in their survey invested nearly 20% of their realized household income each year. Nearly 20% of the household's wealth is held in "transaction securities such as publicly traded stocks and mutual funds" and the millionaires tended to rarely sell their equities. Only a very small number of the millionaires surveyed had ever leased a car; few even drove the current year model. Half of those surveyed had lived in their homes for more than 20 years, which, as the authors point out, means they have likely enjoyed "significant increases in the value of their homes."
The end result? These people put a financial priority on assets that will make them money, from their homes to their businesses.
5. Don't Live the Millionaire Lifestyle
Warren Buffett's frugal lifestyle (especially relative to his net worth) is the go-to example for this point. The average value of the surveyed millionaires' homes was $320,000. The bottom line is, those who spend their money on non-appreciating assets cannot put that same money in an asset that will net them a return and increase their wealth. If it is important to you to build your financial worth, stop spending it on new cars, toys and clothes. (The Oracle of Omaha has a net worth in the billions, but his lifestyle is not as rich as you may think.)
The Bottom Line
Becoming a millionaire is easier than ever. While this is a dream that will take work and discipline to achieve, it isn't as far out of reach as you might think. Be smart with your money and before you know it, you'll be able to count yourself among the world's wealthier citizens.
This article is part of a series related to being Financially Fit
Saturday, February 26, 2011
9 Ways To Build Wealth in 2011
9 Ways to Build Wealth in 2011
by Dana Dratch
Thursday, February 24, 2011
ShareretweetEmailPrintWant to build some wealth in 2011? Revisit those New Year's resolutions.
You probably haven't thought about your pledges in more than a month. But odds are at least one of them involves getting rid of debt, increasing your income or building some financial security.
More from Bankrate.com:
• 6 Money Habits That Are Illegal
• 7 Ways to Save Money on Groceries
• Marrying For Richer Rather Than Poorer
To help you out, nine experts in the fields of money, debt, real estate and consumer affairs have shared their best wealth-building tips for 2011.
1. Funnel That FICA Cut Into a Retirement Windfall
David Bendix, CPA/PFS, CFP, president of The Bendix Financial Group:
Take the money you won't pay in FICA, or Federal Insurance Contributions Act, taxes this year and redirect it to your 401(k). "It's a great concept that you're taking that 2 percent and using it to fund your retirement," he says. "It's one great technique for the coming year."
[Click here to check savings products and rates in your area.]
Tip for success: For the maximum impact, talk with human resources ASAP and change your deductions, Bendix says. One hopes the habit of saving a little more will stick with you through next year, too, he says.
2. Look For Low-Cost Mutual Funds and Watch Those Fees
Jill Gianola, CFP, owner of Gianola Financial Planning, LLC, and author of "The Young Couple's Guide to Growing Rich Together":
"One of my favorite ways to build wealth is to pay close attention to the cost of investing and stick to low-cost, no-load mutual funds," she says.
One example: "If you invested $10,000 in small-cap, value funds with a commission and higher-than-average operating expenses and earned 7 percent a year for 10 years, your balance would be $16,005 and you would have paid a sales charge of $575 and $1,890 in operating expenses," she says.
"Compare that to investing the same amount for the same time period earning the same return in a no-load, small-cap, value fund with low operating expenses," she says. "Your balance would be $19,128 and you would have paid $408 in operating expenses." The difference: $3,123.
Tip for success: Calculate cost and differences with Bankrate's mutual fund fees calculator.
[How to Ruin a Real Estate Listing]
3. No Shortcuts: Year After Year of Consistent Savings
Ric Edelman, chairman and CEO of Edelman Financial Services LLC, and author of "The Truth About Money":
"The best way to build wealth remains unchanged: Invest as much money as you can (which is usually more than you think you can) into a diversified set of low-cost mutual funds and exchange-traded funds -- and keep doing this for many years, no matter what."
4. Get Rid of High-Interest Card Debt
David Jones, president of the Association of Independent Consumer Credit Counseling Agencies:
"For most people, building wealth is not about what to do with excess disposable income," he says, but "how to keep more of the money that they earn."
"The best way to do that: Reduce the amount of money spent on interest payments -- especially high-interest payments attached to credit card purchases," Jones says. "If a consumer can work to pay off just one high-interest credit card and not overcharge it again, then the money saved after it is paid off can go to a building-wealth plan. This may not be easy, and it may take time, but it's a realistic goal for just about every consumer."
Tip for success: Find a certified credit counselor to help you draft your own personal spending plan for free. To find one, visit either the AICCCA or the National Foundation for Credit Counseling.
"If the consumer sticks to that plan, it will be their best chance to begin a systematic process for building wealth," Jones says. "It may be modest at first, but with diligence, everyone can have a chance to improve their financial circumstances."
5. Buy a Home
Ron Phipps, president of the National Association of Realtors and principal broker for Phipps Realty in Warwick, R.I.:
Want to build wealth in 2011? Buy a home, Phipps says. Mortgage rates are low, selection is great, prices are about one-third lower than five years ago, "and, by the way, you can live in the investment," he says.
Homeownership remains a long-term vehicle to financial independence and wealth, Phipps says.
Tip for success: Even though it sounds "pretty elementary," it's especially vital to "use common sense when buying and selling," Phipps says. "Price at the market to sell. Buy what you need and can afford."
[Ways Your Appearance Helps Your Pay]
6. Balanced, Diversified Portfolio Plus Education
Karen Altfest, CFP, principal adviser and executive vice president of client relations at Altfest Personal Wealth Management, a fee-only financial planning firm based in New York:
"Have a balanced portfolio," Altfest says. "So many people think that as they get older, money will come from interest. The secret is (keeping) a well-balanced, diversified portfolio and learning what it all means."
Too many times, people take the "set it and forget it" approach with their retirement accounts, she says. But you shouldn't "let it get cobwebs because you can't deal with it," Altfest says. "Get help." Your goal for the year: Get educated about what's in your retirement accounts and why.
Tip for success: You don't solely want only fixed-rate instruments such as bonds and CDs, she says, because it takes more than compounding interest to build a retirement fund.
7. If You Have an HSA, Max It Out
Eric Tyson, author of "Investing for Dummies" and "Personal Finance for Dummies":
"I'm a very big fan of (health savings accounts) because they offer better potential tax benefits than a traditional retirement fund," Tyson says. With HSAs, investors receive an upfront tax break, compounding investment earning, and pay no tax on the money that is withdrawn "as long as its use is for health expenses," he says.
But the device might not work for everyone. "Obviously, you have to have a high-deductible health plan," he says.
Before 65, if you pull money from your HSA for nonhealth expenses, you'll pay income tax and a 20 percent penalty on the withdrawal. After 65 (or in cases of death or disability), such withdrawals are taxed as income -- without the 20 percent penalty.
The maximum you can put into an HSA in 2011 is $3,050 for an individual account (plus an extra $1,000 if you're 55 or older), and $6,150 for a family account, he says.
8. Do Your Due Diligence
John Breyault, director of the National Consumer League's Fraud Center:
To build wealth that you can rely on, vet the adviser and the investment thoroughly, Breyault recommends. Some red flags:
• Guaranteed returns. "There's no such thing as a guaranteed return," he says.
• Pressure. "If it's a good investment opportunity today, it will be a good investment opportunity tomorrow."
• Nothing in writing or a reluctance to share information you could present to a third-party. "If it's a significant sum of money, I wouldn't hesitate to run it by an attorney," Breyault says.
• A significant upfront sum. "You shouldn't have to invest more than you're comfortable with," he says.
Also, "you should be able to get your money out easily," Breyault says.
Tip for success: Run investments and their representatives past state protection agencies such as the office of consumer protection and the state attorney general's office, he says. Also check with business sources such as the Chamber of Commerce and the Better Business Bureau.
Check with regulating authorities such as the Financial Industry Regulatory Authority, or FINRA, BrokerCheck, the Federal Communications Commission and the Securities and Exchange Commission. And verify any degrees and accreditations directly with the bodies that offer them.
And run a Google search on the company name, principals and basics of the investment.
9. Start Your Own Side Business
Robert Pagliarini, CFP, president of Pacifica Wealth Advisors and author of "The Other 8 Hours: Maximize Your Free Time to Create New Wealth and Purpose":
"Start a business in your free time," he says. "I'm a big proponent of having a side venture, something you are passionate about that you can work on after your 'day job.'
"I think this is the best advice to give someone now -- especially for those who are unemployed," Pagliarini says. "And starting a business doesn't have to cost much, if any, money."
___
by Dana Dratch
Thursday, February 24, 2011
ShareretweetEmailPrintWant to build some wealth in 2011? Revisit those New Year's resolutions.
You probably haven't thought about your pledges in more than a month. But odds are at least one of them involves getting rid of debt, increasing your income or building some financial security.
More from Bankrate.com:
• 6 Money Habits That Are Illegal
• 7 Ways to Save Money on Groceries
• Marrying For Richer Rather Than Poorer
To help you out, nine experts in the fields of money, debt, real estate and consumer affairs have shared their best wealth-building tips for 2011.
1. Funnel That FICA Cut Into a Retirement Windfall
David Bendix, CPA/PFS, CFP, president of The Bendix Financial Group:
Take the money you won't pay in FICA, or Federal Insurance Contributions Act, taxes this year and redirect it to your 401(k). "It's a great concept that you're taking that 2 percent and using it to fund your retirement," he says. "It's one great technique for the coming year."
[Click here to check savings products and rates in your area.]
Tip for success: For the maximum impact, talk with human resources ASAP and change your deductions, Bendix says. One hopes the habit of saving a little more will stick with you through next year, too, he says.
2. Look For Low-Cost Mutual Funds and Watch Those Fees
Jill Gianola, CFP, owner of Gianola Financial Planning, LLC, and author of "The Young Couple's Guide to Growing Rich Together":
"One of my favorite ways to build wealth is to pay close attention to the cost of investing and stick to low-cost, no-load mutual funds," she says.
One example: "If you invested $10,000 in small-cap, value funds with a commission and higher-than-average operating expenses and earned 7 percent a year for 10 years, your balance would be $16,005 and you would have paid a sales charge of $575 and $1,890 in operating expenses," she says.
"Compare that to investing the same amount for the same time period earning the same return in a no-load, small-cap, value fund with low operating expenses," she says. "Your balance would be $19,128 and you would have paid $408 in operating expenses." The difference: $3,123.
Tip for success: Calculate cost and differences with Bankrate's mutual fund fees calculator.
[How to Ruin a Real Estate Listing]
3. No Shortcuts: Year After Year of Consistent Savings
Ric Edelman, chairman and CEO of Edelman Financial Services LLC, and author of "The Truth About Money":
"The best way to build wealth remains unchanged: Invest as much money as you can (which is usually more than you think you can) into a diversified set of low-cost mutual funds and exchange-traded funds -- and keep doing this for many years, no matter what."
4. Get Rid of High-Interest Card Debt
David Jones, president of the Association of Independent Consumer Credit Counseling Agencies:
"For most people, building wealth is not about what to do with excess disposable income," he says, but "how to keep more of the money that they earn."
"The best way to do that: Reduce the amount of money spent on interest payments -- especially high-interest payments attached to credit card purchases," Jones says. "If a consumer can work to pay off just one high-interest credit card and not overcharge it again, then the money saved after it is paid off can go to a building-wealth plan. This may not be easy, and it may take time, but it's a realistic goal for just about every consumer."
Tip for success: Find a certified credit counselor to help you draft your own personal spending plan for free. To find one, visit either the AICCCA or the National Foundation for Credit Counseling.
"If the consumer sticks to that plan, it will be their best chance to begin a systematic process for building wealth," Jones says. "It may be modest at first, but with diligence, everyone can have a chance to improve their financial circumstances."
5. Buy a Home
Ron Phipps, president of the National Association of Realtors and principal broker for Phipps Realty in Warwick, R.I.:
Want to build wealth in 2011? Buy a home, Phipps says. Mortgage rates are low, selection is great, prices are about one-third lower than five years ago, "and, by the way, you can live in the investment," he says.
Homeownership remains a long-term vehicle to financial independence and wealth, Phipps says.
Tip for success: Even though it sounds "pretty elementary," it's especially vital to "use common sense when buying and selling," Phipps says. "Price at the market to sell. Buy what you need and can afford."
[Ways Your Appearance Helps Your Pay]
6. Balanced, Diversified Portfolio Plus Education
Karen Altfest, CFP, principal adviser and executive vice president of client relations at Altfest Personal Wealth Management, a fee-only financial planning firm based in New York:
"Have a balanced portfolio," Altfest says. "So many people think that as they get older, money will come from interest. The secret is (keeping) a well-balanced, diversified portfolio and learning what it all means."
Too many times, people take the "set it and forget it" approach with their retirement accounts, she says. But you shouldn't "let it get cobwebs because you can't deal with it," Altfest says. "Get help." Your goal for the year: Get educated about what's in your retirement accounts and why.
Tip for success: You don't solely want only fixed-rate instruments such as bonds and CDs, she says, because it takes more than compounding interest to build a retirement fund.
7. If You Have an HSA, Max It Out
Eric Tyson, author of "Investing for Dummies" and "Personal Finance for Dummies":
"I'm a very big fan of (health savings accounts) because they offer better potential tax benefits than a traditional retirement fund," Tyson says. With HSAs, investors receive an upfront tax break, compounding investment earning, and pay no tax on the money that is withdrawn "as long as its use is for health expenses," he says.
But the device might not work for everyone. "Obviously, you have to have a high-deductible health plan," he says.
Before 65, if you pull money from your HSA for nonhealth expenses, you'll pay income tax and a 20 percent penalty on the withdrawal. After 65 (or in cases of death or disability), such withdrawals are taxed as income -- without the 20 percent penalty.
The maximum you can put into an HSA in 2011 is $3,050 for an individual account (plus an extra $1,000 if you're 55 or older), and $6,150 for a family account, he says.
8. Do Your Due Diligence
John Breyault, director of the National Consumer League's Fraud Center:
To build wealth that you can rely on, vet the adviser and the investment thoroughly, Breyault recommends. Some red flags:
• Guaranteed returns. "There's no such thing as a guaranteed return," he says.
• Pressure. "If it's a good investment opportunity today, it will be a good investment opportunity tomorrow."
• Nothing in writing or a reluctance to share information you could present to a third-party. "If it's a significant sum of money, I wouldn't hesitate to run it by an attorney," Breyault says.
• A significant upfront sum. "You shouldn't have to invest more than you're comfortable with," he says.
Also, "you should be able to get your money out easily," Breyault says.
Tip for success: Run investments and their representatives past state protection agencies such as the office of consumer protection and the state attorney general's office, he says. Also check with business sources such as the Chamber of Commerce and the Better Business Bureau.
Check with regulating authorities such as the Financial Industry Regulatory Authority, or FINRA, BrokerCheck, the Federal Communications Commission and the Securities and Exchange Commission. And verify any degrees and accreditations directly with the bodies that offer them.
And run a Google search on the company name, principals and basics of the investment.
9. Start Your Own Side Business
Robert Pagliarini, CFP, president of Pacifica Wealth Advisors and author of "The Other 8 Hours: Maximize Your Free Time to Create New Wealth and Purpose":
"Start a business in your free time," he says. "I'm a big proponent of having a side venture, something you are passionate about that you can work on after your 'day job.'
"I think this is the best advice to give someone now -- especially for those who are unemployed," Pagliarini says. "And starting a business doesn't have to cost much, if any, money."
___
Friday, February 4, 2011
Qualifying Child Versus Qualifying Dependent
Education is NOT filling a Basket but LIGHTING the Fire.
One must pass the following test in order to meet the Qualifying Child test
1) Relationship Test
2) Abode test
3) Support Test
4) Age Test
In order to meet the requirement of Qualifying Dependent, one must meet the following test
1) Relationship Test (Not a Qualifying Test)
2) Support Test
3) Citizenship Test
4) Joint Filing Test
5) Gross Income Test
Note: Relationship and Support Tests are applicable in both scenarios.
Disclaimer: This information may be general in nature and my advice is for you to consult your Financial Adviser, your accountant or your attorney for your specific situation. Also laws may vary from state to state
One must pass the following test in order to meet the Qualifying Child test
1) Relationship Test
2) Abode test
3) Support Test
4) Age Test
In order to meet the requirement of Qualifying Dependent, one must meet the following test
1) Relationship Test (Not a Qualifying Test)
2) Support Test
3) Citizenship Test
4) Joint Filing Test
5) Gross Income Test
Note: Relationship and Support Tests are applicable in both scenarios.
Disclaimer: This information may be general in nature and my advice is for you to consult your Financial Adviser, your accountant or your attorney for your specific situation. Also laws may vary from state to state
Friday, January 14, 2011
2011 Tax Changes
Tax Changes for 2011: A Checklist---Courtesy Wall Street Journal
By Tax Report
Friday, January 14, 2011
Provided by
It's customary for this column to start the year with a roundup of what's new for taxpayers. Given last December's theatrics in Congress, some items on our list may seem familiar unless you were out mapping the tributaries of the Amazon.
[Click here to check savings products and rates in your area.]
But keeping tax details straight is tough—even for tax reporters. Our mailbox is full of queries from bewildered readers trying to sort out issues such as which Roth IRA conversion rules expired last year, how the new payroll tax cut works, or at what income level the zero rate on long-term capital gains ends.
The most important point to remember is that last year's 11th-hour tax changes, though favorable for most, are temporary. After 2012, many provisions are set to snap back to what they were before 2001, and a few even expire this year.
[See 6 Sources for Free Tax Help]
That raises the dreary possibility that in less than two years we will be in a replay of last year's tax debates, but in the middle of a presidential campaign. Once again tax rates on both pay and investment income will be set to spike, especially for those at the bottom, and the estate tax will revert to a $1 million-per-individual exemption and a 55% top rate.
Tax strategists like Robert Gordon of Twenty-First Securities in New York see this year as a lucky reprieve for those who didn't get around to planning for higher taxes earlier, especially on investments with long-term gains and stock options. "It's not a question of whether investment tax rates are going up, but when," he says. He already is meeting with clients who escaped a 2011 increase but are determined to get ready for 2013.
Meanwhile, here are important changes for this year:
Income Taxes
This year's rates carry over from last year, but the brackets are a bit higher than last year's due to inflation adjustments (see table). Expires: end of 2012.
'Stealth' Income Taxes
Affluent taxpayers won't have deductions clipped by the so-called Pease and PEP limitations. The Pease limit cut 3% of itemized deductions and PEP eroded the personal exemption, which is $3,700 for 2011. Expires: end of 2012.
Investment Taxes
Rates continue at historic lows for both long-term capital gains and dividends. For taxpayers in the 15% income tax bracket and below, the rate is zero. For those in the 25% bracket and above, the rate is 15% (see table). Expires: end of 2012.
Estate and Gift Taxes
The system has been overhauled, with a top rate of 35% and one exemption of $5 million per individual for estate, gift and generation-skipping taxes alike. For those who can stand to part with assets, it's now possible to shift large amounts of wealth. Expires: end of 2012.
The annual exclusion for tax-free gifts remains $13,000 per donor. A giver may make an unlimited number of $13,000 gifts, as long as they are to different individuals. Gifts of tuition and payments for medical care also are exempt.
Payroll Taxes
Last year's big surprise was a temporary two-percentage-point cut in the employee's share of Social Security taxes, saving a maximum of $2,136 per worker. There is no phase-out, and each partner of a married couple can get the rebate. Expires: end of 2011.
[See the New Tax Deal: What's in It for You?]
For most workers, this cut will come as an automatic adjustment to withholding. For the self-employed (whose tax rate falls to 10.4% from 12.4%), it will be built into a quarterly withholding worksheet the IRS hopes to release soon, says IRS spokesman Eric Smith.
Alternative Minimum Tax (AMT)
The "patch" enacted by Congress sets the AMT exemption at $47,450 for single filers and $74,450 for married couples, slightly higher than for 2010. Expires: end of 2011.
Roth IRA Conversion
The income limit for conversions has been permanently removed, so this year all taxpayers may still convert ordinary IRAs into Roth IRAs. But taxpayers who convert to Roth IRAs in 2011 no longer have the option of deferring conversion income into later years, as was true for 2010 conversions. Those who converted in 2010 do have until next Oct. 17 to decide whether to use this deferral.
Foreign-Account Reporting
A little-noticed provision enacted last year imposes a new IRS reporting requirement on those with foreign financial assets above $50,000 in 2011. This form is different from the foreign asset report known as the FBAR. It will also apply to some, such as hedge-fund investors, who have been exempt from the FBAR filing, according to Michelle Koroghlanian of the American Institute of CPAs. Details remain unclear, as the IRS hasn't yet issued regulations.
Medical Expenses
Workers with Flexible Spending Accounts (FSAs) may no longer use pretax funds to pay for many over-the-counter medicines—aside from insulin—without a prescription. But FSA funds may still be used for other, nonprescription medical items such as crutches, contact-lens solution or a wig after chemotherapy, if the individual plan allows it, notes Melissa Labant of the AICPA. For a list of what is allowed by law, see IRS Publication 502.
Cost-Basis Reporting by Brokers
As of 2011, brokers must track clients' purchases of stock, real-estate investment trusts and foreign securities, and then report the original cost to the IRS when the asset is sold. This is an effort to improve tax compliance by investors. The rules for investments in mutual funds, bonds, options and many exchange-traded funds don't kick in until after 2011.
Energy Tax Credits for Homeowners
As part of the December changes, lawmakers extended the "25(C)" credit for energy-efficient improvements, but in a way that will be useful to few. The amount of the credit has shrunk to a maximum of $500 per taxpayer per lifetime, so those who took last year's $1,500 credit under this provision don't qualify. The current version expires at the end of 2011, and builders and remodelers may push either to expand it or drop it altogether.
[See 6 Tax Breaks That Anyone Can Claim]
Other Changes
Also renewed at the last minute were the $250 deduction for teacher classroom expenses; a deduction for state sales taxes in lieu of the state income tax deduction; and the tax-free donation of IRA proceeds to charity. They expire at the end of 2011. The American Opportunity Tax Credit of up to $2,500 for education expenses was renewed for 2011 and 2012.
—Email: taxreport@wsj.com
By Tax Report
Friday, January 14, 2011
Provided by
It's customary for this column to start the year with a roundup of what's new for taxpayers. Given last December's theatrics in Congress, some items on our list may seem familiar unless you were out mapping the tributaries of the Amazon.
[Click here to check savings products and rates in your area.]
But keeping tax details straight is tough—even for tax reporters. Our mailbox is full of queries from bewildered readers trying to sort out issues such as which Roth IRA conversion rules expired last year, how the new payroll tax cut works, or at what income level the zero rate on long-term capital gains ends.
The most important point to remember is that last year's 11th-hour tax changes, though favorable for most, are temporary. After 2012, many provisions are set to snap back to what they were before 2001, and a few even expire this year.
[See 6 Sources for Free Tax Help]
That raises the dreary possibility that in less than two years we will be in a replay of last year's tax debates, but in the middle of a presidential campaign. Once again tax rates on both pay and investment income will be set to spike, especially for those at the bottom, and the estate tax will revert to a $1 million-per-individual exemption and a 55% top rate.
Tax strategists like Robert Gordon of Twenty-First Securities in New York see this year as a lucky reprieve for those who didn't get around to planning for higher taxes earlier, especially on investments with long-term gains and stock options. "It's not a question of whether investment tax rates are going up, but when," he says. He already is meeting with clients who escaped a 2011 increase but are determined to get ready for 2013.
Meanwhile, here are important changes for this year:
Income Taxes
This year's rates carry over from last year, but the brackets are a bit higher than last year's due to inflation adjustments (see table). Expires: end of 2012.
'Stealth' Income Taxes
Affluent taxpayers won't have deductions clipped by the so-called Pease and PEP limitations. The Pease limit cut 3% of itemized deductions and PEP eroded the personal exemption, which is $3,700 for 2011. Expires: end of 2012.
Investment Taxes
Rates continue at historic lows for both long-term capital gains and dividends. For taxpayers in the 15% income tax bracket and below, the rate is zero. For those in the 25% bracket and above, the rate is 15% (see table). Expires: end of 2012.
Estate and Gift Taxes
The system has been overhauled, with a top rate of 35% and one exemption of $5 million per individual for estate, gift and generation-skipping taxes alike. For those who can stand to part with assets, it's now possible to shift large amounts of wealth. Expires: end of 2012.
The annual exclusion for tax-free gifts remains $13,000 per donor. A giver may make an unlimited number of $13,000 gifts, as long as they are to different individuals. Gifts of tuition and payments for medical care also are exempt.
Payroll Taxes
Last year's big surprise was a temporary two-percentage-point cut in the employee's share of Social Security taxes, saving a maximum of $2,136 per worker. There is no phase-out, and each partner of a married couple can get the rebate. Expires: end of 2011.
[See the New Tax Deal: What's in It for You?]
For most workers, this cut will come as an automatic adjustment to withholding. For the self-employed (whose tax rate falls to 10.4% from 12.4%), it will be built into a quarterly withholding worksheet the IRS hopes to release soon, says IRS spokesman Eric Smith.
Alternative Minimum Tax (AMT)
The "patch" enacted by Congress sets the AMT exemption at $47,450 for single filers and $74,450 for married couples, slightly higher than for 2010. Expires: end of 2011.
Roth IRA Conversion
The income limit for conversions has been permanently removed, so this year all taxpayers may still convert ordinary IRAs into Roth IRAs. But taxpayers who convert to Roth IRAs in 2011 no longer have the option of deferring conversion income into later years, as was true for 2010 conversions. Those who converted in 2010 do have until next Oct. 17 to decide whether to use this deferral.
Foreign-Account Reporting
A little-noticed provision enacted last year imposes a new IRS reporting requirement on those with foreign financial assets above $50,000 in 2011. This form is different from the foreign asset report known as the FBAR. It will also apply to some, such as hedge-fund investors, who have been exempt from the FBAR filing, according to Michelle Koroghlanian of the American Institute of CPAs. Details remain unclear, as the IRS hasn't yet issued regulations.
Medical Expenses
Workers with Flexible Spending Accounts (FSAs) may no longer use pretax funds to pay for many over-the-counter medicines—aside from insulin—without a prescription. But FSA funds may still be used for other, nonprescription medical items such as crutches, contact-lens solution or a wig after chemotherapy, if the individual plan allows it, notes Melissa Labant of the AICPA. For a list of what is allowed by law, see IRS Publication 502.
Cost-Basis Reporting by Brokers
As of 2011, brokers must track clients' purchases of stock, real-estate investment trusts and foreign securities, and then report the original cost to the IRS when the asset is sold. This is an effort to improve tax compliance by investors. The rules for investments in mutual funds, bonds, options and many exchange-traded funds don't kick in until after 2011.
Energy Tax Credits for Homeowners
As part of the December changes, lawmakers extended the "25(C)" credit for energy-efficient improvements, but in a way that will be useful to few. The amount of the credit has shrunk to a maximum of $500 per taxpayer per lifetime, so those who took last year's $1,500 credit under this provision don't qualify. The current version expires at the end of 2011, and builders and remodelers may push either to expand it or drop it altogether.
[See 6 Tax Breaks That Anyone Can Claim]
Other Changes
Also renewed at the last minute were the $250 deduction for teacher classroom expenses; a deduction for state sales taxes in lieu of the state income tax deduction; and the tax-free donation of IRA proceeds to charity. They expire at the end of 2011. The American Opportunity Tax Credit of up to $2,500 for education expenses was renewed for 2011 and 2012.
—Email: taxreport@wsj.com
Tuesday, December 21, 2010
12 Audit Triggers
Coutesy kiplinger.com
Education is NOT filling a Basket but LIGHTING the Fire
Here are 12 hot spots on your return that can raise the chances of scrutiny by the IRS.
Ever wonder why some tax returns are audited by the IRS while most are ignored? Well, there's a whole host of reasons to this age-old question. The IRS audits only about 1% of all individual tax returns annually. The agency doesn't have enough personnel and resources to examine each and every tax return filed during a year. So the odds are pretty low that your return will be picked for an audit. And of course, the only reason filers should worry about an audit is if they are cheating on their taxes.
However, the chances of you being audited or otherwise hearing from the IRS can increase depending upon various factors, including whether you omitted income, the types of deductions or losses claimed, certain credits taken, foreign asset holdings and math errors, just to name a few. Although there's no sure way to avoid an IRS audit, you should be aware of red flags that could increase your chance of drawing some unwanted attention from the IRS. Here are the 12 most important ones:
1. Failure to report all taxable income. The IRS receives copies of all 1099s and W-2s that you receive during a year, so make sure that you report all required income on your tax return. The IRS computers are pretty good at matching these forms received with the income shown on your return. A mismatch sends up a red flag and causes the IRS computers to spit out a bill. If you receive a 1099 for income that isn't yours or the income listed is incorrect, get the issuer to file a corrected form with the IRS.
2. Returns claiming the home-buyer credit. First-time homebuyers and longtime homeowners who claimed the homebuyer credit should be prepared for IRS scrutiny. Make sure you submit proper documentation when taking this credit. First-time homebuyers have to attach a copy of their settlement statement to the return, and longtime homeowners should also attach documents showing prior ownership of a home, including records of property tax and insurance coverage. All claims for this credit are being screened. As of May 2010, more than 260,000 returns had been selected for correspondence audits (examinations done by mail rather than face-to-face) because filers did not attach the necessary documents to their tax returns. And those numbers will continue to grow.
Also, the IRS has ways of policing the recapture of the homebuyer credit. Generally, the credit is required to be recaptured if the home is sold within three years for homes bought in 2009 or 2010 and within 15 years for homes bought before 2009. The IRS is checking public real estate databases for sales of homes in which the credit was taken.
3. Claiming large charitable deductions. This comes up again and again because the IRS has found abuse on audit, especially with those taking larger deductions. We all know that charitable contributions are a great write-off and help you to feel all warm and fuzzy inside. However, if your charitable deductions are disproportionately large compared to your income, it raises a red flag. That's because the IRS can tell what the average charitable donation is for a person in your tax bracket. Also, if you don't get an appraisal for donations of valuable property or if you fail to file Form 8283 for donations over $500, the chances of audit increase. Be sure you keep all your supporting documents, including receipts for cash and property contributions made during the year, and abide by the documentation rules. And attach Form 8283 if required.
4. Home office deduction. The IRS is always very interested in this deduction, primarily because it has a pretty high adjustment rate on audit. This is because history has shown that many people who claim a home office don't meet all the requirements for properly taking the deduction, and others may overstate the benefit. If you qualify, you can deduct a percentage of your rent, real estate taxes, utilities, phone bills, insurance, and other costs that are properly allocated to the home office. That's a great deal. However, in order to take this write-off, the space must be used exclusively and on a regular basis as your principal place of business. That makes it difficult to claim a guest bedroom or children's playroom as a home office, even if you also use the space to conduct your work. Exclusive use means a specific area of the home is used only for trade or business, not also where the family watches TV at night. Don't be afraid to take the home-office deduction if you're otherwise entitled to it. Risk of audit should not keep you from taking legitimate deductions. If you have it and can prove it, then use it.
5. Business meals, travel and entertainment. Schedule C is a treasure trove of tax deductions for self-employed. But it's also a gold mine for IRS agents, who know from past experience that self-employed tend to claim excessive deductions. Most under-reporting of income and overstating of deductions are done by those who are self-employed. And the IRS looks at both higher-grossing sole proprietorships as well as smaller ones.
Big deductions for meals, travel and entertainment are always ripe for audit. A large write-off here will set off alarm bells, especially if the amount seems too large for the business. Agents know that many filers slip in personal meals here or fail to satisfy the strict substantiation rules for these expenses. To qualify for meals or entertainment deductions, you must keep detailed records generally documenting the following for each expense: amount, place, persons attending, business purpose and nature of discussion or meeting. Also, receipts are required for expenditures over $75 or any expense for lodging while traveling away from home. Without proper documentation, your deduction is toast.
6. Claiming 100% business use of vehicle. Another area that is ripe for IRS review is use of a business vehicle. When you depreciate a car, you have to list on Form 4562 what percentage of its use during the year was for business. Claiming 100% business use for an automobile on Schedule C is red meat for IRS agents. They know that it's extremely rare that an individual actually uses a vehicle 100% of the time for business, especially if no other vehicle is available for personal use. IRS agents are trained to focus on this issue and will closely scrutinize your records. Make sure you keep very detailed mileage logs and precise calendar entries for the purpose of every road trip. Sloppy recordkeeping makes it easy for the revenue agent to disallow your deduction. As a reminder, even if you use the IRS' standard mileage rate to deduct your business vehicle costs, ensure that you are not also claiming actual expenses for maintenance, insurance and other out-of-pocket costs. The IRS has found filer noncompliance in this area as well and will look for this.
7. Claiming a loss for a hobby activity. Your chances of "winning" the audit lottery increase if you have wage income and file a Schedule C with large losses. And, if your Schedule C loss-generating activity sounds like a hobby -- horse breeding, car racing and such -- the IRS pays even more attention. It's issued guidelines to its agents on how to sniff out those who improperly deduct hobby losses. Large Schedule C losses are audit bait, but reporting losses from activities in which it looks like you might be having a good time is just asking for IRS scrutiny.
Tax laws don't allow you to deduct hobby losses on Schedule C. However, you do have to report any income earned from your hobbies. In order to claim a hobby loss, your activity must be entered into and conducted with the reasonable expectation of making a profit. If your activity generates profit three out of every five years (or two out of seven years for horse breeding), the law presumes you're in business to make a profit, unless the IRS establishes to the contrary. If audited, the IRS is going to make you prove you have a legitimate business and not a hobby. So, make sure you run your activity in a business-like manner and can provide supporting documents for all expenses.
8. Cash businesses. Small business owners, especially those in cash-intensive businesses -- taxi drivers, car washes, bars, hair salons, restaurants and the like -- are an easy target for IRS auditors. The agency is well aware that those who primarily receive cash in their business are less likely to accurately report all of their taxable income. The IRS wants to narrow the tax gap, and history has shown that cash-based businesses are a good source of audit adjustments. It has a new guide for agents to use when auditing cash intensive businesses, telling how to interview owners and noting various indicators of unreported income.
9. Failure to report a foreign bank account. The IRS is intensely interested in people with offshore accounts, especially those in tax havens. U.S. tax authorities have had some recent success in trying to get foreign banks (such as UBS in Switzerland) to disclose information on U.S. account holders. Also, the IRS had a voluntary compliance program where people came in and reported their foreign bank accounts and foreign assets in exchange for lesser penalties than they would have otherwise been subject to. The IRS has learned a lot from these probes.
Failure to report a foreign bank account can lead to pretty severe penalties, and the IRS has made this issue a top priority. Make sure that if you have any such accounts, you properly report them when you file your return. Keep in mind, though, that if you have never previously reported the foreign bank account on your return, and you decide to do so for the first time in 2010, that might also look suspicious to the IRS.
10. Engaging in currency transactions. The IRS gets many reports of cash transactions in excess of $10,000 involving banks, casinos, car dealers and other businesses, plus suspicious activity reports from banks and disclosures of foreign accounts. A recent report by Treasury inspectors concluded that these currency transaction reports are a valuable source of audit leads for sniffing out unreported income. The IRS agreed and it will make greater use of these forms in its audit process. So if you are a person who makes large cash purchases or deposits, be prepared for IRS scrutiny. Also, beware that banks and other institutions file reports on suspicious activities that appear to avoid the currency transaction rules (such as persons depositing $9,500 cash one day and an additional $9,500 cash two days later).
11. Math errors. One of the biggest reasons that people receive a letter from the IRS is because of mathematical mistakes they make on their tax returns. If you make an error in your favor, you are going to hear from the tax man, and there is a greater risk of the IRS pulling the whole return for audit. So take time to ensure all your calculations are correct. Even though math errors may not lead to a full-blown audit, it's always best to remain under the radar of IRS computers.
12. Taking higher-than-average deductions. If deductions on your return are disproportionately large compared to your income, the IRS audit formulas take this into account when selecting returns for examination. Screeners then pull the most questionable returns for review. But if you've got the proper documentation for your deduction, don't be scared to claim it. There's no reason to ever pay the IRS more tax than you actually owe.
Disclaimer: This information may be general in nature and my advice is for you to consult your Financial Adviser, your Accountant or your Attorney for your specific situation. Also laws may vary from state to state.
Education is NOT filling a Basket but LIGHTING the Fire
Here are 12 hot spots on your return that can raise the chances of scrutiny by the IRS.
Ever wonder why some tax returns are audited by the IRS while most are ignored? Well, there's a whole host of reasons to this age-old question. The IRS audits only about 1% of all individual tax returns annually. The agency doesn't have enough personnel and resources to examine each and every tax return filed during a year. So the odds are pretty low that your return will be picked for an audit. And of course, the only reason filers should worry about an audit is if they are cheating on their taxes.
However, the chances of you being audited or otherwise hearing from the IRS can increase depending upon various factors, including whether you omitted income, the types of deductions or losses claimed, certain credits taken, foreign asset holdings and math errors, just to name a few. Although there's no sure way to avoid an IRS audit, you should be aware of red flags that could increase your chance of drawing some unwanted attention from the IRS. Here are the 12 most important ones:
1. Failure to report all taxable income. The IRS receives copies of all 1099s and W-2s that you receive during a year, so make sure that you report all required income on your tax return. The IRS computers are pretty good at matching these forms received with the income shown on your return. A mismatch sends up a red flag and causes the IRS computers to spit out a bill. If you receive a 1099 for income that isn't yours or the income listed is incorrect, get the issuer to file a corrected form with the IRS.
2. Returns claiming the home-buyer credit. First-time homebuyers and longtime homeowners who claimed the homebuyer credit should be prepared for IRS scrutiny. Make sure you submit proper documentation when taking this credit. First-time homebuyers have to attach a copy of their settlement statement to the return, and longtime homeowners should also attach documents showing prior ownership of a home, including records of property tax and insurance coverage. All claims for this credit are being screened. As of May 2010, more than 260,000 returns had been selected for correspondence audits (examinations done by mail rather than face-to-face) because filers did not attach the necessary documents to their tax returns. And those numbers will continue to grow.
Also, the IRS has ways of policing the recapture of the homebuyer credit. Generally, the credit is required to be recaptured if the home is sold within three years for homes bought in 2009 or 2010 and within 15 years for homes bought before 2009. The IRS is checking public real estate databases for sales of homes in which the credit was taken.
3. Claiming large charitable deductions. This comes up again and again because the IRS has found abuse on audit, especially with those taking larger deductions. We all know that charitable contributions are a great write-off and help you to feel all warm and fuzzy inside. However, if your charitable deductions are disproportionately large compared to your income, it raises a red flag. That's because the IRS can tell what the average charitable donation is for a person in your tax bracket. Also, if you don't get an appraisal for donations of valuable property or if you fail to file Form 8283 for donations over $500, the chances of audit increase. Be sure you keep all your supporting documents, including receipts for cash and property contributions made during the year, and abide by the documentation rules. And attach Form 8283 if required.
4. Home office deduction. The IRS is always very interested in this deduction, primarily because it has a pretty high adjustment rate on audit. This is because history has shown that many people who claim a home office don't meet all the requirements for properly taking the deduction, and others may overstate the benefit. If you qualify, you can deduct a percentage of your rent, real estate taxes, utilities, phone bills, insurance, and other costs that are properly allocated to the home office. That's a great deal. However, in order to take this write-off, the space must be used exclusively and on a regular basis as your principal place of business. That makes it difficult to claim a guest bedroom or children's playroom as a home office, even if you also use the space to conduct your work. Exclusive use means a specific area of the home is used only for trade or business, not also where the family watches TV at night. Don't be afraid to take the home-office deduction if you're otherwise entitled to it. Risk of audit should not keep you from taking legitimate deductions. If you have it and can prove it, then use it.
5. Business meals, travel and entertainment. Schedule C is a treasure trove of tax deductions for self-employed. But it's also a gold mine for IRS agents, who know from past experience that self-employed tend to claim excessive deductions. Most under-reporting of income and overstating of deductions are done by those who are self-employed. And the IRS looks at both higher-grossing sole proprietorships as well as smaller ones.
Big deductions for meals, travel and entertainment are always ripe for audit. A large write-off here will set off alarm bells, especially if the amount seems too large for the business. Agents know that many filers slip in personal meals here or fail to satisfy the strict substantiation rules for these expenses. To qualify for meals or entertainment deductions, you must keep detailed records generally documenting the following for each expense: amount, place, persons attending, business purpose and nature of discussion or meeting. Also, receipts are required for expenditures over $75 or any expense for lodging while traveling away from home. Without proper documentation, your deduction is toast.
6. Claiming 100% business use of vehicle. Another area that is ripe for IRS review is use of a business vehicle. When you depreciate a car, you have to list on Form 4562 what percentage of its use during the year was for business. Claiming 100% business use for an automobile on Schedule C is red meat for IRS agents. They know that it's extremely rare that an individual actually uses a vehicle 100% of the time for business, especially if no other vehicle is available for personal use. IRS agents are trained to focus on this issue and will closely scrutinize your records. Make sure you keep very detailed mileage logs and precise calendar entries for the purpose of every road trip. Sloppy recordkeeping makes it easy for the revenue agent to disallow your deduction. As a reminder, even if you use the IRS' standard mileage rate to deduct your business vehicle costs, ensure that you are not also claiming actual expenses for maintenance, insurance and other out-of-pocket costs. The IRS has found filer noncompliance in this area as well and will look for this.
7. Claiming a loss for a hobby activity. Your chances of "winning" the audit lottery increase if you have wage income and file a Schedule C with large losses. And, if your Schedule C loss-generating activity sounds like a hobby -- horse breeding, car racing and such -- the IRS pays even more attention. It's issued guidelines to its agents on how to sniff out those who improperly deduct hobby losses. Large Schedule C losses are audit bait, but reporting losses from activities in which it looks like you might be having a good time is just asking for IRS scrutiny.
Tax laws don't allow you to deduct hobby losses on Schedule C. However, you do have to report any income earned from your hobbies. In order to claim a hobby loss, your activity must be entered into and conducted with the reasonable expectation of making a profit. If your activity generates profit three out of every five years (or two out of seven years for horse breeding), the law presumes you're in business to make a profit, unless the IRS establishes to the contrary. If audited, the IRS is going to make you prove you have a legitimate business and not a hobby. So, make sure you run your activity in a business-like manner and can provide supporting documents for all expenses.
8. Cash businesses. Small business owners, especially those in cash-intensive businesses -- taxi drivers, car washes, bars, hair salons, restaurants and the like -- are an easy target for IRS auditors. The agency is well aware that those who primarily receive cash in their business are less likely to accurately report all of their taxable income. The IRS wants to narrow the tax gap, and history has shown that cash-based businesses are a good source of audit adjustments. It has a new guide for agents to use when auditing cash intensive businesses, telling how to interview owners and noting various indicators of unreported income.
9. Failure to report a foreign bank account. The IRS is intensely interested in people with offshore accounts, especially those in tax havens. U.S. tax authorities have had some recent success in trying to get foreign banks (such as UBS in Switzerland) to disclose information on U.S. account holders. Also, the IRS had a voluntary compliance program where people came in and reported their foreign bank accounts and foreign assets in exchange for lesser penalties than they would have otherwise been subject to. The IRS has learned a lot from these probes.
Failure to report a foreign bank account can lead to pretty severe penalties, and the IRS has made this issue a top priority. Make sure that if you have any such accounts, you properly report them when you file your return. Keep in mind, though, that if you have never previously reported the foreign bank account on your return, and you decide to do so for the first time in 2010, that might also look suspicious to the IRS.
10. Engaging in currency transactions. The IRS gets many reports of cash transactions in excess of $10,000 involving banks, casinos, car dealers and other businesses, plus suspicious activity reports from banks and disclosures of foreign accounts. A recent report by Treasury inspectors concluded that these currency transaction reports are a valuable source of audit leads for sniffing out unreported income. The IRS agreed and it will make greater use of these forms in its audit process. So if you are a person who makes large cash purchases or deposits, be prepared for IRS scrutiny. Also, beware that banks and other institutions file reports on suspicious activities that appear to avoid the currency transaction rules (such as persons depositing $9,500 cash one day and an additional $9,500 cash two days later).
11. Math errors. One of the biggest reasons that people receive a letter from the IRS is because of mathematical mistakes they make on their tax returns. If you make an error in your favor, you are going to hear from the tax man, and there is a greater risk of the IRS pulling the whole return for audit. So take time to ensure all your calculations are correct. Even though math errors may not lead to a full-blown audit, it's always best to remain under the radar of IRS computers.
12. Taking higher-than-average deductions. If deductions on your return are disproportionately large compared to your income, the IRS audit formulas take this into account when selecting returns for examination. Screeners then pull the most questionable returns for review. But if you've got the proper documentation for your deduction, don't be scared to claim it. There's no reason to ever pay the IRS more tax than you actually owe.
Disclaimer: This information may be general in nature and my advice is for you to consult your Financial Adviser, your Accountant or your Attorney for your specific situation. Also laws may vary from state to state.
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