Insurance

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.

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.

Smart Ways to Cut Your Expenses

11-01-16-scissors-1510198-639x841

A previous article was titled, “Don’t Cut Your Expenses,” and this time I am going to give examples of cutting expenses in a smart way.

Personal Expenses: With mortgage rates at record lows, now may be a good time to refinance your existing mortgage. You need to compare the savings with any upfront costs. If you can cut the length of the mortgage, this is the better way to go.

Delay major purchases, such as a new car or gigantic television. A car payment, along with insurance, gas, and maintenance can become a large percentage of a person’s income. If you can delay the purchase, you can save each month towards a larger down payment. The same applies to a TV, which should be paid for without having to use credit.

Business Expenses: Generally, if an expense can be reduced, without reducing quality or other necessary benefits, then it is worth investigating further. A perfect example is that you may be able to get a better deal by switching phone or Internet providers and save money.

Review insurance policies, such as health and liability coverage with your agent or broker. You want to make sure that you are receiving the coverage that you need with a good rate. As a caveat, make certain that you have the proper amounts and types of insurance so that you are covered adequately.

There are other advanced ways to save money and sometimes they even require upfront investments. This can include investments in technology, managing employees better, and even tax planning.

Should You Buy a Home or Rent?

Several years back when the real estate market was red hot, it was almost a no-brainer to buy a home. A year or two later your home appreciated by thousands of dollars and was worth much more than you paid for it. We all know that this is not true now, so does it make sense to be a homeowner or a renter?

Let’s start with the benefits of owning a home. First, home prices are much more affordable than in the past. Combine this with historically low interest rates, and it makes home ownership much more enticing. Over time real estate does generally appreciate and over time it usually becomes one of the largest assets a person owns, especially for the middle class. Also, the interest paid on your mortgage and property taxes paid are generally tax deductible.

The drawbacks of owning a home are several. First, you must be able to afford and qualify for a mortgage. The combined mortgage and property tax payments are usually much higher than renting. Although, over time theoretically your rent will increase while your mortgage payment stays constant with hopefully only a small increase of property taxes. Also, you are responsible for all of the upkeep, improvements and repairs, utilities and all other expenses.

Renting can be beneficial for a variety of reasons. First, the payments are usually lower than a mortgage and property taxes. You do not need a large down payment, except for a security deposit. It is easier to move because you do not have to worry about selling a home and can take a job much farther than where you currently live. You also may be able to save more money because your housing costs are lower.

Renting can present a problem in the long-term though because it may prove to be more expensive over time. You also do not build any equity or have the benefit of real estate appreciation. Also, when you rent you obviously are more restricted by the rules of your landlord.

Many factors should be weighed before purchasing a home or choosing to continue renting. Home ownership is the American dream, but one thing to keep in mind is that you want to make sure that your monthly payments do not cause a financial strain. This even applies to existing homeowners.

Bad Tax Planning

12-15-15 that-s-lame-bad-and-or-stupi-1537799-639x478

Tax planning can prevent you from overpaying taxes, but it has to be done before the year is over. Good tax planning takes a proactive approach, and bad tax planning includes either not planning, breaking the law, or taking it upon yourself without using a competent tax professional.

Without planning you may not be able to take advantage of the ever-changing tax laws. When we work with business clients throughout the year we are able to understand their business finances much better. By doing so we can suggest proactive ways to reduce taxes, run their businesses better, and help with cash flow and profitability. For example, if your business is doing well, it makes sense to review the current structure to make sure that it is tax-efficient. Our services are designed to save much more in taxes and produce more value than our fees.

A bad strategy is to pay for personal expenses through the business and take a deduction for it. Personal expenses should be kept separate and paid for personally. An IRS auditor can easily spot this, assess more taxes, and even assess penalties of 20% or more.  And of course, underreporting your income is not wise either and may result in criminal prosecution.

I know what I know and know what I don’t know. I use other qualified professionals when it comes to legal matters, insurance, and healthcare. If you take it upon yourself to do your own tax planning, you usually end up unknowingly paying more in taxes than the cost of using a professional. The key is to make certain that you choose the right professional and ask a lot of questions.

Taxable or Non-Taxable?

12-08-15 splatter-question-1171359-639x778

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.

What’s In Your Credit Report?

When we apply for loans, search for a job, or even take out an insurance policy, our credit report is used in the process. Your credit report shows all of your outstanding debts and lines of credit, including credit cards, mortgages, auto loans, and personal loans. Even accounts that have been closed or debts that have been paid off will be shown for years. All of this information is used to apply a credit score to you.

It is important to make sure that you pay all of your bills on time and don’t incur too much debt so that you maintain a healthy credit score. Sometimes, incorrect information may inadvertently be placed on your credit report, which will negatively impact your credit score. The higher your credit score generally means that you will pay a lower interest rate when applying for loans, which can save you hundreds or thousands of dollars each year.

Although there are a lot of companies that will provide you with your credit report for a fee, you are legally entitled to one free credit report per year by each of the three credit reporting companies. They are Equifax, Experian, and TransUnion. The website to obtain your free credit report is www.annualcreditreport.com, which is very user-friendly. I recommend obtaining one report every four months from a different credit reporting company so that you will never have to pay for them.

Once you have your report you should review it for accuracy. If there is a mistake, such as an account that shows that you have been late, you will need to contact the credit reporting company who issued the report to have it corrected. Most likely you will need to contact all three companies to have it straightened out.

One last note: According to the Federal Trade Commission (FTC), you should be skeptical of companies that claim they can repair your credit. Some of their business practices are fraudulent and many of the steps you can take yourself at little to no cost. You can go to this page: http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre13.shtm.

Affordable Care Act Provisions You Should Know

There are many provisions and rules to know about Obamacare so let’s start with some basics that you should know.

Individual Shared Responsibility: This provision requires you and your family to have qualifying health insurance, otherwise you will need to make a responsibility payment (really a tax) on your 2014 tax return. The payment is the greater of 1 percent of your household income that is above your tax return filing threshold or a flat dollar amount of $95 per adult and $47.50 per child, limited to a family maximum of $285.

Small Business Health Care Tax Credit: A small business, defined as having fewer than 25 employees who work full-time, may be eligible for a tax credit to reduce the health insurance premium cost. The maximum credit is 35% of premiums paid for health insurance as long as the employer pays at least 50% of the premiums. Also, the average annual wages of employees must be less than $50,000.

Premium Tax Credit for Individuals: If you qualify, you may be able to receive a credit for your health insurance. To be eligible, you must satisfy the following requirements: You need to purchase your health insurance through the Health Insurance Marketplace, you need to have household income between one and four times the federal poverty line (for a family of four the range is $23,550 to $94,200), and you can’t be eligible for other coverage, such as Medicare.