AMT (A Miserable Tax)

I am passing on a notice that I received from one of my tax organizations. The AMT tax for 2007 taxes will be a nightmare for many people if Congress does not increase the AMT exemptions like we had in 2006. And even if they act soon (who knows if they even will) it could delay thousands of tax refunds because all the IRS forms would need to be changed. This is a prime example of the laziness and horribly inefficient Congress that we have in this country. Sorry to preach but this is so frustrating to me as a tax preparer and a taxpayer.

Judy


* AMT Update * *

The current situation concerning alternative minimum tax (AMT) is foremost on the minds of everyone from taxpayers to our Congressional leaders. The most recent statistics reveal that late enactment of the AMT fix would affect up to 50 million taxpayers and delay $75 billion in refunds, as many tax calculations flow through the AMT.

According to Acting IRS Commissioner, Linda Stiff, the IRS will need ten weeks after Congress enacts the AMT patch before it can process affected returns. Refunds could be delayed, she said. The 2008 filing season starts on January 14, 2008, leaving very little time for the IRS to react.

At present, both houses of Congress have proposed and passed bills containing legislation to increase the AMT exemptions for 2007. However, none of these bills have made it to the President's desk for signature. There is no way of knowing at this point what will pass, or when.

Affordable Financial Advice

As many of you know, I am a proud member of Cambridge Advisors and it is nice to see us mentioned in this article as one of the few financial planning groups that works with "real people" and offers affordable financial advice. The article also mentions NAPFA, the largest group of fee-only advisors and I have been a member of NAPFA since 1997. Remember--there is a HUGE difference between commissioned stock brokers and fee-only financial planners.

Judy Stewart

Affordable, more reliable financial advice

Wed Nov 14, 2007 9:58am EST

By Linda Stern

WASHINGTON (Reuters) - Here's some good news from the world of money: The quality of professional financial advice is getting better and more affordable, just in time for all the folks who are probably feeling overwhelmed by the myriad details of their own financial lives.

Advisers are increasingly eschewing commissions to give straightforward advice, boosting their use of technology to provide better services, and tailoring recommendations to the needs of their clients, mainly because the market demands it.

"Consumers are getting smarter and realizing there are a lot of advisers out there who are calling themselves planners, but are product focused," says Susan Black, director of financial planning at eMoney Advisor, a company that provides the technology that many advisers use. "They are more discerning about what types of advisers they wish to trust."

Which is not to say there aren't still some incompetent, fraudulent or compromised practitioners out there. But it may be easier to avoid them and get exactly the advice you need, if you hire a planner according to these guidelines.

-- Competence is still key. It's not good enough to have an honest adviser if he is not very bright or knowledgeable. Look for one who has been in the business long enough to have weathered a couple of bubbles and bursts. They should have decent credentials, such as a CFP (certified financial planner) or a CFA (chartered financial analyst), and state-of-the-art portfolio management tools. Not to mention an investment philosophy they can explain to you in a way that makes sense.

Some private advisory networks require their members to meet additional quality standards. Some to check are the Alliance of Cambridge Advisors (www.cambridgeadvisors.com) and the Paladin Registry (www.paladinregistry.com/).

-- You should be paying them, and they should be working for you as a fiduciary. That leaves out brokers who might be nice guys but who make their money selling investment products. There is a conflict inherent in that arrangement, and an ample amount of research demonstrating that it fails to result in good returns for customers.

The designation "fee-based" clouds the water. Only "fee-only" advisers eschew all payments for products. If a fee-only adviser wants to recommend a product that he can't find without a commission, such as a certain kind of insurance, he should then reduce your fee by exactly the amount of the commission. That removes his financial incentive for choosing that product. You can find fee-only advisers at the National Association of Personal Financial Advisors (www.napfa.org).

-- One adviser might not be enough. Even the best stock market guru won't know everything about taxes, or estate planning or college saving or retirement savings rules. A great financial plan includes all of those pieces, so that leaves consumers with a few choices: You can find a planning firm that is big enough to integrate all of these specialties, or you can parcel it out and hire different experts to advise on separate pieces. You might want a certified public accountant, an actuary, and a lawyer or two to tackle different pieces of your comprehensive plan. In that case, you might want a financial planner who will offer by-the-question advice, or suggest investments you could buy for yourself. You can find experts willing to pass on their smarts by the hour at the Garrett Planning Network (www.garrettplanningnetwork.com).

-- Bells and whistles are nice -- if you are willing to pay for them. A full-service financial advisory firm that manages all of your money (and extracts a percentage or so of it for that service) should do more. The most up-to-date, full-service advisers will give you on-the-road access to all of your accounts, consolidated in one place, says Black.

They may even offer to track your frequent flyer, hotel club or credit card points. And they will call you, just to chat, during times like last week when many portfolios lost 4 percent or more in just a few days. Because the true value of a good adviser isn't just in the degree and the software, it's in the relationship that will see you through the kind of marketplace confusion that sent you for help in the first place.

(Linda Stern is a freelance writer. Any opinions in the column are solely those of Ms. Stern. You can e-mail her at lindastern(at)aol.com)

Beware of Email Scams

IRS Warns of New E-Mail Scam * *

The IRS is warning taxpayers to be on the lookout for a new e-mail scam that appears to be a solicitation from the IRS and the U.S. government for charitable contributions to victims of the recent Southern California wildfires.

In an effort to appear legitimate, the bogus e-mails include text from an actual speech about the wildfires by a member of the California Assembly. The scam e-mail urges recipients to click on a link, which then opens what appears to be the IRS website but which is, in fact, a fake. An item on the phony website urges donations and includes a link that opens a donation form which requests the recipient's personal and financial information.

The IRS also believes that clicking on the link downloads malware, or malicious software, onto the recipient's computer. The malware will steal passwords and other account information it finds on the victim's computer system and send them to the scamster.

The IRS does not send e-mails soliciting charitable donations. As a rule, the IRS does not send unsolicited e-mails or ask for personal and financial information via e-mail. The IRS never asks people for the PIN numbers, passwords or similar secret access information for their credit card, bank or other financial accounts.

Enjoying a Low-Cost Retirement

Enjoy a low-cost retirement

Your later years can be golden without being gold-plated. Most retirees are frugal by necessity, but they're no less happy.

By U.S. News & World Report

Having spent much of his career helping others with their finances, Don Peterson knew the importance of saving as much as possible before retiring. But when the stockbroker left the work force in 1988, he realized that retirement wasn't just about money.

In his case, Peterson, now 82, retired a bit sooner than he had planned -- and with less money in the bank.

But that was partly due to bad timing. Shortly after a few of his investments went bad in the 1987 market crash, his wife, Bobbie, decided it was time to retire from her career as a hospital laboratory administrator. Soon after that, one of the couple's daughters asked them to move from Eau Claire, Wis., to Nashville, Tenn., to be closer to her and the grandchildren.

So even though the Petersons had less than $100,000 in their accounts and just one pension between them -- hers, which paid out only around $500 a month -- they quit their 9-to-5 lives and shuffled off to Music City.

Their challenge was one that millions of older Americans are faced with every day: finding a way to lead a comfortable and, yes, happy retirement with only a modest nest egg.

For the vast majority of today's older workers, this is the reality of retiring in America. While financial planners and retirement experts debate how many millions of dollars families should save -- and how to invest that money to make it last -- most households are retiring on meager sums. Nearly two-thirds of workers 55 and older have less than $100,000 saved for their golden years, according to a recent study by the Employee Benefit Research Institute. And 56% of those workers who are already retired have less than $50,000 to last them for the rest of their lives.

Learning to cut back

Yet somehow, "people often find a way to get by," says Gayle Oboy, a financial planner in Marion, Ohio, who works with many middle- and working-class clients. "They adjust. They find ways to cut back but still be content."

In fact, studies show that more than 60% of seniors find retirement "very satisfying." Most say retirement is more satisfying than their working careers were.

Sometimes, it does take a bit of creativity. The Petersons, for instance, leveraged two assets they had -- time and a love of animals -- and started a pet-sitting business after "retiring" to Nashville. It wasn't a glamorous job -- "my wife jokingly says I have a Ph.D. in cat litter," Don Peterson says.

But the modest income they derived from dog- and cat-sitting "made all the difference in the world," he says. "It helped pay for the groceries and helped cover property taxes." It also gave the couple the freedom to retire on their own terms.

Those who don't want to or can't work during retirement are starting to take advantage of another asset: their homes. Thanks to the run-up in home values during this decade, some retirees are starting to downsize to cheaper digs and using the remainder of their home equity to finance retirement, says Jean Setzfand, the director of financial security for AARP, the nation's largest advocacy group for older Americans.

Others are choosing to relocate to less expensive parts of the country, which is what the Petersons did. "It's an insurance policy of sorts," Setzfand says.

What's more, a small but growing number of seniors are opting to supplement their retirement income through so-called reverse mortgages. By taking out this type of loan, you can receive a certain amount of your home equity in a lump sum, a line of credit or monthly annuity payments for life -- while still living in your home. And you don't have to repay the loan so long as you live in that house.

The catch is, when you die or move, the proceeds of the home sale will be used to repay the mortgage. And you have to be at least 62 and own a single-family residence to qualify for a government-insured reverse mortgage.

Because this involves the eventual sale of your home, Setzfand says, this strategy shouldn't be taken lightly. And keep in mind that like an annuity, the terms of the reverse mortgage will improve the longer you wait to take one out.

Of course, the simplest solution for some retirees is to find ways to limit spending --without sacrificing their retirement experience.

Take Gary Hutson. After retiring in 2001 following two decades as a railroad union leader, the 65-year-old now spends his time in far less stressful circumstances. Hutson and his wife, Kathy, are both artists in Spokane, Wash., and they use their free time -- and the serene backdrop of eastern Washington -- to paint wildlife scenes, carve wooden and metal sculptures, and do beadwork.

When the Hutsons aren't creating artwork, they find plenty of other low-cost activities. For example, "we love garage sale-ing," says Kathy. And they also take frequent trips to a cabin they inherited on a lake 45 miles away.

Watching expenses go down

The good news for cost-conscious retirees: "All the numbers show that you don't need the same amount of money in retirement as you needed before," says Alicia Munnell, the head of the Center for Retirement Research at Boston College.

Once you retire, you stop saving for retirement. Your taxes are often lower because your income is likely to drop. "And you don't need to buy work clothes or take transportation to work," Munnell says.

Workers making $40,000 to $90,000 a year need to replace about 75% to 80% of their pre-retirement income, on average, according to a 2004 analysis by Georgia State University and insurance giant Aon. So if you earned $40,000, you would need to generate about $32,000 in annual income to live as comfortably in retirement as you did during your working career.

And for the current generation of retirees, Social Security still covers around a third to more than half that amount, depending on income. So if you earned $40,000, you may need to generate only about $11,600 a year on your own -- or through a pension, if you have one -- to maintain your standard of living in retirement.

OK, but what if you still fall short?

"The answer with the biggest payoff is employment," Munnell says. Not only does finding work boost your current income, but it also delays having to tap your personal resources. And the longer that you can keep money in tax-deferred accounts like 401(k)s and IRAs, the better. Plus, by working a bit longer, says Rande Spiegelman, the vice president for financial planning at the Schwab Center for Investment Research, you may be able to wait before drawing your Social Security benefits.

That's what Marlene Adams did. A decade ago, the Torrance, Calif., resident was all set for a traditional retirement when the utility company where she worked offered her a modest buyout package. Adams was then 55 and thinking of funding her retirement with private savings first, followed by early Social Security benefits.

But after talking to a financial planner, she took a temp job instead, and it eventually turned into a full-time position working in customer service for an air-freight company. By doing so, Adams was able to hold off on taking Social Security until her full retirement age of 65 (that age has been pushed back to 67 for those born in 1960 and later). And that increased her Social Security payments from around $1,200 a month to $1,650.

Now, after paying her rent, she still has about $500 left over each month, and that's not counting her personal savings. "I feel like I'm blessed," says Adams, who is close to retiring for good.

To be sure, not everyone can find full-time work later in life as Adams did. In fact, many workers mistakenly assume they'll be able to keep working to cover any financial gaps. A recent Employee Benefit Research Institute survey indicated that most workers plan to retire at 65 or older. But in reality, nearly two in three Americans wind up leaving the work force before they reach 65, often because of unexpected health problems or layoffs.

Working for spending money

But even if you can't work full time, small jobs can help. Just ask Roy Walls, another Californian. Walls, a former equipment manager for an aerospace company, retired in 1999 at 62 with an early-retirement package. Between his pension and Social Security, he and his wife, Loretta, lead a relatively comfortable retirement. Still, Walls decided to take a part-time job as a crossing guard for a nearby school district. During the school year, Walls helps kids cross the streets near his home for about an hour and 15 minutes each morning and 45 minutes in the afternoon.

The job pays less than $5,000 a year. But that money helps cover the cost of dinners out and movies on the weekend, Walls says. And it allowed him to recently help a son out financially, without having to dip into his savings.

For those without pensions to fall back on, earning even a few thousand dollars a year can be the difference between outliving your money and your money outliving you. Academic research shows that you probably can't afford to withdraw more than 4% or 5% of your nest egg each year. That means if you saved $250,000, you could withdraw no more than $12,500 annually.

But what if you needed $17,500 a year -- in addition to Social Security and other benefits -- to maintain your lifestyle? Well, says Schwab's Spiegelman, instead of tapping 7% of your account, which might deplete it too quickly, why not get a part-time job paying $5,000? That way, you can keep your withdrawal rate at the safe 5% level and still meet your income needs.

It's one of the ironies of retirement, Spiegelman says. Workers are taught that to retire well, they need to save huge amounts of money. "Yet small amounts of money can still make all the difference," he says. And that's what a new generation of retirees is finding out.

This article was reported and written by Paul J. Lim and Emily Brandon for U.S. News & World Report.

Published May 24, 2007

Year End Tax Tips

Here are some tax tips to think about before year end. If you have any questions, please don't hesitate to contact us.


1. You can contribute to your IRA or Roth IRA for 2007 as long as you do it by April 15, 2008. If your income is too high to make a contribution to your IRA or Roth IRA, you can always contribute to a non-deductible IRA. Your contribution may be as much as $4,000 + an additional $1,000 if you're over 50 years of age. If you participate in a retirement plan at work, deductible IRAs are limited and phaseouts apply to Roth IRAs.

2. Saver’s Credit – if you contribute to your retirement plan at work (e.g. 401(k)) and your income is lower than the income thresholds (less than $25,000 to less than $50,000 depending upon your filing status), you qualify for the Saver’s Credit. Even if you don’t qualify for the credit, make sure you’re saving for retirement little by little each and every pay period.

3. The sales tax deduction is back through December 31, 2007. If you itemize your deductions, we'll deduct the larger of the two deductions (sales taxes or state income taxes). If you purchased a car or boat or RV, the amount you paid in sales taxes is added to the published IRS Table amount. This doesn't apply to sales tax paid on business items because those taxes are already deductible to you.

4. If you’re covered by Medicare and you’re considered high income, you can expect a Medicare Part B surcharge in 2007 and it can triple by 2009. The surcharge is based upon 2005 income. The surcharge begins at adjusted gross income of over $80,000 if you’re single and $160,000 if you’re married. If your income has decreased since 2005, you can dispute the surcharge.

5. 529 Plans have been made permanent. As you recall, 529 Plans allow you to contribute to a college account and if the funds are used for higher education, any amount you pull out is tax free.

6. The lower 15% tax rates on long-term capital gains (held over 1 year + 1 day) and qualified dividends have been extended through 2010.

7. Do you remember the Kiddie Tax where kids were taxed at their parent’s income tax rate if they were over 14. Congress changed the age to over 18.

8. The gift tax limit increased from $11,000 to $12,000.

9. As of August 17, 2006, non-cash charitable deductions require more details. You cannot simply say “3 bags of clothing.” A list of what you contributed is required. If you have not received my Deduct It! book, please let me know.

10. Beginning in 2007, cash charitable contributions require a receipt from the charity. This means that if you attend church on Sunday and put $10.00 in the collection plate, you cannot take a deduction without a receipt from your church. If you pay by check, your cancelled check is your receipt. This also applies to cash you contribute to the Salvation Army Kettle at your local market, so get a receipt! This is also new: the receipt from any charity should state that “no goods or services were provided in consideration of the gift.”

11. Charitable travel – you can still deduct local charitable mileage at 14 cents per mile, but you can no longer deduct charitable travel unless there is “no significant element of personal pleasure.” If you travel for a charity (a chorus, symphony, fraternal organization, etc.), you cannot deduct your expenses unless you can prove that all or most of that trip was directly related to the charitable work.

12. Use Tax: this is an area that is under more scrutiny. If you purchased something on the Internet and did not pay sales tax, you are required to pay sales tax to your state when you file your tax return. Let me know if this is the case with you.

13. Home equity interest – unless you substantially improve your home with the money from a home equity loan, the mortgage interest deduction may be limited. Don’t forget home equity debt is generally limited to $100,000 to be able to deduct the interest.

14. Office in Home – if you have an office in home, your office must be used exclusively for your business (very little personal use), and regularly for your business. Also, the 1st trip of the day from your qualified home office is not deductible. It is considered part of your commute. The trips after that 1st stop of the day are deductible business miles if the stop is business related.

15. Telephone expense: if you have a business that you operate in your home, you must have a separate business telephone line to deduct your telephone. If you have a personal phone from which you make business calls, you may deduct only the business long-distance amount as telephone expense.

16. There is a new Domestic Production Deduction for businesses that construct or manufacture. This would include contractors who build or do substantial renovation of a property. Remodels qualify. Repairs do not.

17. “Listed Property Deductions” – this is a category that includes cell phones, home computers, auto expenses, etc. The IRS looks at each expense separately and measures the time you use these items (personal versus business use) and the business purpose of each before you may deduct it. For example, I have a cell phone that is used a large percentage of time for business but also used for personal use so I cannot deduct 100%. Home computers are a problem, also. How much of the time do you spend on your computer that is personal use as opposed to business use?

18. Travel and Meal & Entertainment Expense: make sure you keep a log noting the name of the client, the purpose of the meeting, the cost, and how many people attended. Your American Express statement is not considered substantiation.

19. Business travel expense: keep a log of your business mileage. Without a mileage log, no deduction is allowed. Again, keep track of the name of the client and business purpose of the miles.

20. Forms 1099-MISC: if you paid more than $600 to a business or individual, you are required to issue Form 1099-MISC no later than January 31, 2008. If you do not issue the forms and you are audited, your deduction will not be allowed.

21. Section 179 increased to $108,000 in 2006. It’s $112,000 in 2007. California still allows only $25,000.