Estate Planning

If You Want More Success Then Know the Difference Between Important vs Urgent

Important vs. urgent. Many people confuse the two, but if you want to be more successful, then you need to be able to discern between them. Important items have great significance or value while urgent items require our attention immediately. Here are some examples:

Important:  These are items that you need to do, but do not have to be done today, such as projects and assignments, planning, exercising, learning/training, saving for the future, etc.

Urgent: These usually have to do with grabbing your attention immediately, such as text messages, social media, doing dishes (our spouses may disagree with this one), interruptions, emails, most telephone calls, etc.

The problem arises when the urgent items seem to be important because they are pulling at us, and then we ignore all of the important items that we should have done. This is probably why many people say that they didn’t get anything done because their attention was diverted to urgent items. Even worse is when we procrastinate and make the important items both important and urgent.

What are some solutions? If an item is important, then you should set aside time either daily, weekly, or monthly to take care of it and actually put it on your calendar. Once an important item is scheduled there is a high probability it will get done. As for the urgent items, you can schedule these as well to take care of them at specified times or on a specific day. If you want to be bold then try this experiment for one week or even one month: shut off all of your alerts, emails, etc. while you are working, and designate a time to check them, say twice a day. Then, see if your productivity improves, and let me know what happens.

Muni Bonds or Taxable Bonds?

Investing in municipal bonds can be a benefit due to the fact that the interest income they provide is generally tax-exempt. In order to realize the full tax benefits of municipal bonds, you have to be careful not to make the following mistakes.

Low Interest Rates: Interest income from municipal bonds is usually much lower than corporate bonds, but since municipal bond interest is generally tax-exempt, your tax adjusted returns may be higher. The problem arises when you would have received a greater return by investing in corporate bonds than municipal bonds when adjusting your return for taxes. Generally, if you are in a low tax bracket, then municipal bonds may not make sense.

Purchasing Out of State Bonds: Municipal bonds are not subject to either Federal or state taxes if you purchase bonds from your home state. If you live in a high income tax state, such as California, New York, or New Jersey, then you should consider purchasing a bond from your state to reduce the overall tax exemption.

Alternative Minimum Tax: This dreaded tax, also known as the AMT, may make your tax-exempt municipal bonds taxable. If a bond is considered a private activity bond, then you may end up paying taxes on the bond interest.

You must be careful when selecting municipal bonds by doing your research. Otherwise, in the quest for tax-exempt income, you may end up overpaying taxes or unnecessarily receive a low interest rate.

Municipal Bond Investing Mistakes

Investing in municipal bonds can be a benefit due to the fact that the interest income they provide is generally tax-exempt. In order to realize the full tax benefits of municipal bonds, you have to be careful not to make the following mistakes.

Low Interest Rates: Interest income from municipal bonds is usually much lower than corporate bonds, but since municipal bond interest is generally tax-exempt, your returns may be higher when factoring in taxes. The problem arises when you would have received a greater return by investing in corporate bonds than municipal bonds when factoring in taxes. Generally, if you are in a low tax bracket, then municipal bonds may not make sense.

Purchasing Out of State Bonds: Municipal bonds are not subject to either Federal or state taxes if you purchase bonds from your home state. If you live in a high income tax state, such as California, New York, or New Jersey, then you should consider purchasing a bond from your state to reduce the overall tax exemption.

Alternative Minimum Tax: This dreaded tax, also known as the AMT, may make your tax-exempt municipal bonds taxable. If a bond is considered a private activity bond, then you may end up paying taxes on the bond interest.

You must be careful when selecting municipal bonds by doing your research. Otherwise, in your quest for tax-exempt income, you may end up overpaying taxes or unnecessarily receive a low interest rate.

Don’t Be a Co-Signer Unless You Want to Pay Someone Else’s Debts

Your friend, child, brother, or parent can’t get a mortgage or a car loan so they ask you to be a co-signer. Of course you will be a hero and co-sign for your loved one! But beware of the dangers before doing so.

In reality, the lender is assuming that the odds are fairly high that there will be a default on the loan, otherwise, why would they need someone else to co-sign on the loan? There are certainly many situations that the loan never goes bad, but why take such a chance? Consider this:

If the borrower defaults on the loan, then your credit will take a hit because you are personally responsible for the loan. The lender may also come after you for payments on a loan that you never benefited from. Actually, you had almost all of the risk without any real benefit.

If you are familiar with Murphy’s law, then you know that what can happen will happen. So, what if you are ready to obtain a mortgage or finance a car and then find out that the loan you co-signed went bad? You may not qualify for the loan for yourself or the terms may not be as favorable as they were originally.

One last item to consider is the damage to the relationship once a co-signed loan goes bad. As Polonius said over 400 years ago in Shakespeare’s Hamlet, “Neither a borrower nor a lender be; For loan oft loses both itself and friend . . .” Even thousands of years before Shakespeare numerous bible versus were also written to warn against co-signing such as Proverbs 22:26-27 and Sirach 29:16-18.

Simplify Your Home Office Deduction

The home office deduction is used by both small businesses and employees, which allows a deduction for using part of your home exclusively and regularly for business purposes. This allows a percentage of certain expenses to become tax deductible or at least more tax favorable such as mortgage interest, property taxes, rent, utilities, homeowners insurance, repairs and maintenance, and depreciation. The downside is that it can be both complex and time-consuming when taking this deduction.

The good news is that the you can use a simplified method for deducting home office expenses. This method allows taxpayers to deduct $5 per square foot of business use up to a maximum of 300 square feet for a total deduction of $1,500, as opposed to having to figure out all of your expenses.

Although this new method is simplified, you need to determine if it makes sense to use the simplified form or the traditional method of calculating home office expenses. You also want to make sure that you meet the criteria for having a qualified home office. Additionally, the rules for employees using a home office are more complex and need to be followed strictly.

Before You Buy a Business

Businesses are bought and sold each day and some make better investments than others. Before you buy a business, here are a few things to make sure you make the right move:

Why is the seller selling? There can be many reasons why a business is for sale, and some reasons are better than others. For example, if the business owner is retiring, that is a good reason, but if the owner is selling because they are not making much of a profit, then that is a negative sign.

Do you know the industry? If you worked for years as a general manager of a restaurant, then this would provide you with a good base of knowledge of how to run a restaurant. The same goes for any other industry.

Due diligence: You should not just take the seller’s word that the business is making a certain amount of money, as the seller should be able to substantiate it with information, such as bank statements and tax returns.

Seek the advice of a professional: Seeking legal, business, and tax advice can pay for itself over and over again. A good attorney will help to work out the legal agreements, while a CPA will help to advise on how to maximize the tax effectiveness of buying the business. I have seen business purchases after-the-fact whereas the new owner loses tens of thousands of dollars of deductions because it was not structured correctly. The agreements can be made so that both parties receive the benefits they are looking for.

The Hidden Retirement Asset

Financial advisors frequently mention the three main pillars of retirement, which are social security, pension plans, and personal savings. Yet, you rarely hear them speak about an asset that may prove to be an individual’s largest asset – their business.

Many business owners invest their money back into their business over the years, especially during the early year, which makes them appear to have minor savings at first. In reality, the returns of investing in a small business can potentially be far greater than any stock market returns. Of course, there are risks as well.

How valuable can a business be?  A business can be valued in several ways, such as a multiple of sales, profits, or the value of its assets, and each industry has its own ratios that it relies upon when coming up with a price. For example, if the net profit of a business is $200,000 and sells for 5 times profits, then the valuation would be $1,000,000. A part-time, home-based business may not be worth much at all, but a profitable restaurant, service business, medical practice or other well-managed business can be worth hundreds of thousands to millions of dollars.

Don’t Wait Until It’s Too Late: Selling your business at the right time will have a huge impact upon the selling price. For example, if you are nearing retirement and have health problems, then you may be forced to sell your business at a huge discount if you suddenly are not healthy enough to run the business. Worse yet, if you pass away suddenly, then the value of the business will usually drop even further.

Getting Top Dollar: Ideally, you should prepare for the sale of your business 3 to 5 years ahead of time. This will allow you to be in more control of cleaning up the finances and improving profitability. You will obtain a much higher selling price if your business is doing well and you don’t need to sell it in a hurry.

Taxable or Non-Taxable?

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Which items do you think are taxable and which are not? The answers are below.

  1. Workers compensation
  2. Educational assistance
  3. Cancelled debt
  4. Expense reimbursements
  5. Fringe benefits
  6. Bartering
  7. Hosting a party and receiving payment (such as a candle party)
  8. Life insurance proceeds
  9. Unemployment benefits
  10. Federal income tax refund

Taxable: cancelled debt (there are exceptions), fringe benefits, bartering, hosting a party, and unemployment benefits

Non-taxable: Workers compensation, education assistance of $5,250, expense reimbursements, life insurance proceeds, and federal income tax refund

There are always exceptions and the rules are constantly changing. If you ever have a question about the taxability of an item, do not hesitate to contact our office.

Estate Planning Basics

No one wants to think of the inevitable, but there are some basic points regarding estate planning we should all know. There are complex trusts and gifting strategies that can be incorporated, but let’s talk about first things first. Do you have a will? How do you own your assets? Are your beneficiaries updated in your insurance policies or retirement plans?

A will is your last will and testament, which spells out your wishes when you become deceased. With a properly set-up will, your assets will transfer to the beneficiaries you desire. Without a will your assets will be distributed according to state law, and your spouse or children may not receive all of your assets.  Additionally, if you have children you will need to appoint a guardian to take care of them. It is important to see a qualified attorney to handle this for you. Do not attempt this yourself. We can refer you to an attorney that best fits your needs.

The way you own assets also affects the way assets are distributed upon death, such as your house. The two ways are tenants in common and joint tenancy. As tenants in common, your share of the house is passed to your heirs designated in your will. With joint tenancy, your share is passed to the surviving joint tenant, regardless of what your will states. It is important to make sure your assets are owned in the way that best suits your needs.

Life insurance is separate from your will. You will need to designate a beneficiary when purchasing a policy, and the same applies to your retirement accounts. Upon death the proceeds will be automatically transferred to your beneficiaries. This is why it is critical to update your beneficiaries periodically. Can you imagine if you are divorced and never changed your life insurance beneficiary who is now your ex-spouse? The answer is obvious – your ex-spouse will be very happy!

Many people tend to think that estate planning is only for the wealthy or they don’t need an estate plan. It can be a costly mistake to feel this way, especially since simple wills are not very expensive, and it doesn’t cost money to change your beneficiaries of your life insurance or retirement plans.

Estate Planning Mistakes

You don’t have to be wealthy to make sure your financial affairs are in order nor is estate planning just about minimizing taxes. Estate planning insures that your loved ones are taken care of and your intentions are carried out.

Not Having a Will: A will not only spells out how your assets will be distributed, but also spells out who will take care of your children should you pass away.  If you don’t choose a guardian, then one will be appointed for you by the court. Each state has different laws regarding who inherits your assets when you pass away, and it probably will not be who you would have chosen.

Choose Your Executor Wisely: The executor of your estate is supposed to handle the distribution of your assets and carry out your last wishes per your will after you pass away. The individual you choose should not have financial issues, such as gambling problems, debt problems, or tax problems. The executor does not have to be financially savvy, but should be trustworthy and knows when to seek legal, tax, and financial advice from qualified professionals.

Assets that Pass Outside of Your Will: Some assets are distributed through your will, but a surprising number of assets are passed outside of your will. These can include life insurance, IRA’s and retirement accounts, transfer on death accounts, trusts, and assets owned as joint tenants, such as real estate. This is why it is important to make sure that your beneficiary selections are up to date and you have property titled correctly.

Other issues to consider are living wills, healthcare proxies, and appointing a power of attorney. Estate planning is a sensitive subject, but should not be delayed until it is too late.