Are you an Active Participant?

January 16, 2012

Are you an active participant in your employer's retirement plan?

A "yes" answer can affect your federal income tax deduction for contributions to your traditional IRA.

For 2011 and 2012, the maximum contribution to a traditional IRA is $5,000 (plus an additional $1,000 when you're over age 50). When you're an active participant in your employer's plan, how much of that you can deduct may be limited.

Not sure of your status?

Look at the middle box on line 13 of Form W-2 — the one labeled "Retirement plan." When the box is checked, you're considered an active participant.

The next question — should the box be checked? — can cause confusion for both employers who prepare Form W-2 and employees who use Form W-2 to file tax returns.

That's because the rules differ for different types of plans. For example, when you're eligible to participate in a defined benefit plan, you're an active participant even if you choose to not take part. Your eligibility is enough to trigger "active" status.

For 401(k) plans, you're an active participant when you elect to make contributions. If you decide not to contribute, you may still be considered an active participant, depending on what other amounts were allocated to your account during the year.

Please call us at (949) 453-1521 or email us at taxinfo@maxwellcompany.com if you need more information about the meaning of active participation. We're ready to help$$

Tips for building wealth

September 2011

Some wealthy folks hail from a long line of aristocrats and industrial magnates. A lucky few win the lottery. But about 80% of the millionaires in America are "first generation" rich. They're the first in their families to have attained a high net worth through traditional means. How did they do it? Many of these folks developed small businesses over decades; others earned advanced degrees in demanding fields. Most followed simple principles that the rest of us can apply, including the following.

Avoid debt. If you can pay cash for an item, do so. Only take out loans for items that will likely generate a return on investment, like a house or an education. Paying interest leaves less money in your pocket for building wealth.
Invest in equities. With the volatility of the stock market in recent months, many people are pumping their money into bank accounts, certificates of deposit, and Treasury notes. If you have a long term horizon (say, five years or more until you'll need the funds), a well-diversified portfolio of stock mutual funds is still likely to be a wise choice.
Value education. Especially in certain professional fields (such as business, engineering, healthcare, and law), you can expect a college degree to pay off over time.
Live within your means. As the old saying goes, "You can't get ahead if you're always behind." Curbing your spending habits requires discipline. Watching your neighbor park his latest toy in the driveway (often purchased on the installment plan) may be irritating. But building long-term wealth isn't about keeping up with the Joneses.
Pay yourself first. If your company offers a 401(k) plan, contribute as much as possible directly from your paycheck. If you're in business for yourself or work for a company that doesn't offer a retirement plan, investigate other retirement plan options and make annual contributions.
Work hard. Never underestimate the value of your own labor. Life isn't always fair, and some lazy people have risen to the top. But most folks who have developed profitable businesses or found success in their professions have earned that position by focusing their energies over long periods.
Don't give up. Along the way, you're certain to encounter obstacles — unanticipated expenses, job losses, market setbacks, unappreciative bosses. Don't let them sidetrack you from your financial goals.

Please call us at (949 453-1521 or email us at taxalert@maxwellcompany.com if you would like further information$

Buying A Business Creates Tax Issues

August 15, 2011

Since there are no federal income taxes imposed on the purchase of a business, as the buyer of an existing company your focus may be on other areas, such as obtaining credit or valuing inventory.

Yet tax issues can impact your to-buy-or-not decision. Here are two examples.

Outstanding tax liabilities. It's generally true that when you buy the assets of a business (as opposed to the capital stock), you're not liable for prior debts. However, depending on the laws of your state, you could be responsible for unpaid sales, excise, or payroll tax.

Steps to protect yourself include a signed statement by the seller about pending or ongoing tax disputes, notifying the appropriate state office of the purchase, and requesting a certificate or other verification from the state regarding investigations or delinquencies.

You can also ask the seller to provide Form 8821, "Tax Information Authorization," so you can check tax records with the IRS.
Allocating the cost of assets. When you buy the assets of a business, you may be required to file Form 8594, "Asset Acquisition Statement," in the year of the purchase. Form 8594 shows how the sales price is split up between various types of assets.

Why does it matter? Because different assets are treated differently on your new business's tax return. For instance, inventory can be written off as you sell goods, while noncompete agreements have a longer life.
Give us a call at (949) 453-1521 or email us at taxalert@maxwellcompany.com before you finalize that business purchase. We can help you structure the deal to your best advantage$

Add to your retirement plan vocabulary

Add to your retirement plan vocabulary
The definition of retirement may be in flux, but the vocabulary describing your retirement plans remains the same. Here are three common terms.

Catch-up contributions. When you're age 50 or older, you can choose to make additional contributions to your retirement plans above the usual annual limits.

For 2011, maximum catch-up contributions are:
$5,500 when you participate in a 401k, 403b, 457b or SARSEP.
$2,500 for your SIMPLE IRA or SIMPLE 401(k).
$1,000 for traditional or Roth IRAs.
Hardship withdrawals. The IRS defines a hardship as an immediate and heavy financial need such as medical or funeral expenses, and your retirement plan spells out if and when you can take hardship withdrawals.

Remember, the amount you withdraw is not a loan, so you won't be able to pay the money back into your account. Instead, hardship distributions are income to you, and can be subject to a 10% early withdrawal penalty. In addition, you may be barred from making contributions to your account for six months after taking a hardship distribution.
Rollover. A rollover is a transfer of assets from one retirement plan to another. To keep the transaction tax-free, you generally must deposit the assets into the second plan within 60 days.

Note that not all withdrawals are eligible for a rollover. Hardship withdrawals are an example of rollover-ineligible funds.
Are you uncertain of the meaning of some of the terms in your retirement plan documents? Give us a call at (949) 453-1521 or email us at taxalert@maxwellcompany.com We're here to answer your questions with plain-English explanations$

Should I buy or rent a house?

August, 2011
From articles in respected financial journals to spots on late-night television, real estate hawkers and investment gurus have touted the benefits of homeownership. "Don't throw your money away on rent," they admonish. "Interest rates are headed up. Now's the time to buy." "After all," they suggest, "buying a house is a surefire way to build wealth."

Unfortunately, millions of Americans whose homes are now in foreclosure have learned — the hard way — that in the real world, nothing is surefire. While it's true that buying a house has been a great way to build wealth for many people, homeownership isn't for everyone. For some folks, continuing to rent an apartment or house may be the wiser choice. Renting isn't always a bad idea.

Here are three questions to consider when evaluating whether to rent or to buy a home.

How long will I live there? If flexibility is an important consideration, think twice before taking on a mortgage. As a rule of thumb, expect to live in a home for at least five years to break even. Of course that calculation depends on the term of the mortgage, closing costs, and the size of your down payment. But if your short-term plans include moving — even across town — renting may be a better option.
How much can I offer as a down payment? If at all possible, you want to avoid the requirement for private mortgage insurance or PMI. To get that break, you'll need a down payment of at least 20% of the purchase price. If that percentage isn't feasible for you, shoot for a down payment of at least 10%. The higher the down payment, the smaller the mortgage, the faster you build equity.
Can I afford the monthly payments? Some lenders, especially prior to the housing meltdown of 2008, were notorious for offering mortgages at the very limits (and sometimes beyond) of a family's ability to pay. If you're considering homeownership, take a hard look at whether you can cover the costs — month in and month out — of mortgage principal and interest, utilities, maintenance, taxes, insurance, and all the other costs for which you'll be responsible. In general, expect about 80% of your monthly payments to cover interest alone in the first five years of a 30-year fixed rate mortgage. That's money you'll never see again, like rent.
Contact our office at (949) 453-1521 or taxalert@maxwellcompany.com if you'd like more details about this or other financial planning matters$

Charitable contribution reminders

December 20, 2010

Are thoughts of charitable contributions dancing in your head this holiday season?

If you itemize, you may also be thinking of tax deductions. Here are tips to make the most of your generosity.

Choose a qualified charity. To be eligible for a deduction, the organization you contribute to must be qualified. In general, that means charities established for religious, charitable, scientific, literary, or educational purposes. For example, nonprofit hospitals and volunteer fire departments are qualified organizations, while your homeowner's association generally is not.
Decide what to give. You can donate cash (including checks and charges to your credit cards), stocks, and other financial assets. Noncash contributions such as vehicles, real estate, or artwork are also deductible.
Keep records. When you make cash contributions of any amount, a bank record, pay stub, or written acknowledgement from the charity is required to support your tax deduction. If you donate via text message, keep a copy of your phone bill showing the amount you gave, the organization you gave it to, and the date of your donation.

The greater your contribution, the more paperwork you need. As an example, for noncash donations over $500, you'll need to file Form 8283, and for donations of $5,000 and up, a qualified appraisal is required.
Contact our office at (949) 453-1521 or taxalert@maxwellcompany.com if you'd like more details about charitable giving tax rules.

October, 2010

Learn to cope with financial stress
These are stressful times. Economic uncertainty has touched everything from corporate earnings to pension plans to the livelihoods of American workers. People are worried about the stability of their retirement plans, company layoffs, and dwindling home values. In one study, eight out of ten people cited the economy as a significant source of turmoil in their personal lives. Another survey found that a majority of Americans are dealing with high or moderate levels of financial stress.

Because financial stress is a normal part of life for most people, learning to cope with money worries is important — vital, in fact — for maintaining positive relationships, job productivity, and personal health. Fortunately, proven strategies for coping with stress (and financial stress in particular) can provide relief for a wide variety of people. If you're dealing with excessive anxiety about your finances, consider implementing the following three policies:

Don't sweat things you can't control. If you've been laid off from your job, for example, don't spend time mulling over the idiosyncrasies of your old boss, the shortcomings of the guy who took your job, or anything else that's beyond your ability to change. Putting aside those emotions may be difficult, but looking ahead can relieve stress now. You might need to expand your job search, network with long-forgotten colleagues, even retool for a new career. Don't waste your energy by dwelling on the past.
Take charge. When dealing with personal finances, uncertainty can generate stress. Preparing a written budget can bring your money worries into focus and provide a starting point for action. You may find that cutting out a few unnecessary luxuries can provide breathing room. Getting the debt monkey off your back may take time, but watching your credit card balances decline for a few months can provide relief and hope for the future.
Broaden your perspective. Remember that life is a lot more than money. If you're burdened with financial worries, take time to consider the many blessings you do enjoy: health, family, nature, whatever gives you pleasure and a sense of well-being apart from your checkbook. Relax and smell the daisies.
Sometimes talking to a trusted advisor also helps. If you'd like additional suggestions, give us a call at (949) 453-1521 or email us at taxalert@maxwellcompany.com.