Blog Archives - PFwise.com

3 Creative Ways to Check Up Your Prospective Tenant

2/28/2015

Q. Are there any non-conventional ways to check up the rental applications I receive?

A. Here are three uncommon ways a landlord can use to check up the applicants:

1. Fake References
Most landlord skip reference follow ups, for good reasons as many such references are fake ones. However, you can make a "mistake" when you call the applicant's supervisor. For example, if the applicant says she has worked there fore one year, you can ask to confirm if she has worked there for 5 years and see if you are corrected.

2. Verify Income
While it is important to ask for the most recent pay stubs, it is also important to call the employer to verify. Because if you allow such a faker in now, you will have big trouble getting the person out later.

3. Rental History
While credit check is important, the longevity of the previous rental history is also a good indication - for example, if the tenant has lived in the previous apartment 3 years, it could be a good indication of responsibility.

5 Simple Strategies to Reduce Tax - Part V

2/27/2015

In our last blog post, we discussed personal tax exemptions. Now we will turn to the last tax-saving strategy - don't forget the popular tax credits.

Tax credits directly offset your tax liabilities, they reduce your tax bill dollar for dollar, therefore are a lot more valuable than tax deductions. Below is an incomplete list of some of the most popular tax credits:

Earned Income Tax Credit - This refundable tax credit is geared for low income individuals and families as way to relieve their tax burden. There are income requirements that must be met to receive this tax credit.
Child and Dependent Care Credit - This tax credit is for individuals and families who provided care for a qualifying person. Depending on your adjusted gross income, this credit can be used toward a maximum of 35% of qualifying expenses.
American Opportunity Credit - Worth up to $2,500 (and up to $1,000 is refundable) for certain higher education expenses.
Retirement Savings Contributions Credit - This tax credit is based on your contribution to qualifying retirement plans and your income.

5 Simple Strategies to Reduce Tax - Part IV

2/26/2015

In our last tax-reduction strategy discussion, we compared Standard with Itemized Deductions. Now we will look at Personal Exemptions.

What Are Legal Personal Exemptions?
Individuals are entitled to claim a personal exemption for themselves and any dependents they support.

The personal exemption acts just like a tax deduction - it reduces your taxable income, so you end up paying taxes on less income. The personal exemption amount is indexed annually for inflation. For tax year 2014, the personal exemption amount is $3,950.

Dependency Exemptions - 5 Tests
If you want to use dependency exemptions, you need to pass the following 5 tests:

Support test - over 1/2 support must be furnished
Relationship test - almost any blood relative qualifies except first cousins and aunts- or uncles-in-law
Gross income test: dependent’s gross income must be less than the exemption amount
Joint-return test
Citizenship/Residency test

In our next tax-reduction strategy discussion, we will focus on Tax Credits.

5 Simple Strategies to Reduce Tax - Part III

2/25/2015

In our last tax-reduction strategy discussion, we showed the list of AGI deduction items. Now we will focus on whether you should take Standard or Itemized Deduction.

What Are the Two Deductions
After computing your Adjusted gross income (AGI), you can itemize your deductions (from a list of allowable items) and subtract those itemized deductions (and any applicable personal exemption deductions) from your AGI amount to arrive at the taxable income amount. Alternately, you can elect to subtract the standard deduction for your filing status (and any applicable personal exemption deduction) to arrive at the taxable income. In other words, you may generally deduct the total itemized deduction amount, or the standard deduction amount, whichever is greater.

Factors to Consider
The choice between the standard deduction and itemizing involves a number of factors:

Standard Deduction is not available to nonresident aliens.
A comparison between the available standard deduction and allowable itemized deductions - the larger number is generally advantageous
Whether or not the taxpayer has or is willing to maintain the records required to substantiate the itemized deductions
If the total itemized deductions and the standard deduction are very close in value, whether the taxpayer would prefer to take the standard deduction to reduce the risk of change upon examination by the Internal Revenue Service (IRS). (The standard deduction amount cannot be changed upon audit unless the taxpayer's filing status changes.)
Whether the taxpayer is otherwise eligible to file a shorter tax form (like the 1040EZ or 1040A) and would prefer not to prepare (or pay to have prepared) the more complicated 1040 form and the associated Schedule A for itemized deductions.
If the taxpayer is filing as "Married, Filing Separately", and his or her spouse itemizes, then the taxpayer must itemize as well.

The Bottom Line
It's easy to decide whether to itemize your deductions or take the standard deduction -- figure out what itemized deductions you can take and add them up. If the total is more than the standard deduction for your filing status, then itemize your deductions.

In our next blog post, we will discuss tax-reduction strategy #4 - Utilize Personal Exemptions.

2 Strategies to Reduce AMT Shocks - Part II

2/24/2015

In our last blog post, we discussed the main AMT triggers and AMT adjustments.

Now we will discuss two practical strategies one can use to reduce AMT shocks.

Strategy 1. Gradually exercise incentive stock options
Here is the rule of thumb: the smaller the difference between exercise and market prices, the less AMT impact.

It's advantageous to exercise during the beginning of the year, if the stock price goes up during the year, you can hold the stocks for more than 1 year, then sell them before the next year’s tax day. If the stock price goes down, sell all of the stocks and take the loss before year end.

Strategy 2. Invest in AMT-free products
The rule of thumb is to avoid municipal bonds – the tax advantage doesn’t apply to AMT payers, it’s one of AMT adjustments. Instead, you should invest in AMT-free funds (you can Google and find plenty of such funds from many major brokerage houses).

5 Simple Strategies to Reduce Tax - Part II

2/24/2015

In our first tax-reduction strategy discussion, we focused on the non-taxable income. Now we will look at your AGI deductions. If you can maximize your AGI deductions, you will see lower tax bill.

Below is a list of legal AGI deductions, please take advantage all of them whenever possible!

All allowable expenses incurred in a taxpayer’s trade or business, not including business expenses of an employee
Employee business expenses that are not reimbursed by the employer
Losses from the sale or exchange of trade, business, or investment property
Expenses attributable to the production of rent or royalty income
Moving expenses
Contributions to certain pension, profit-sharing, or retirement plan arrangements
Penalties paid to a bank or other savings institution because of the early withdrawal of funds from a certificate of deposit or time savings account
Alimony
Interest paid by certain individuals on qualified educational loans
Heath insurance costs of self-employed individuals
One-half of the self-employment tax paid by the taxpayer
Educator expenses
Health Savings Account

In our next blog post, we will discuss the third tax-reduction strategy - take the larger of Standard and Itemized Deduction.

5 Simple Strategies to Reduce Your Tax - Part I

2/23/2015

Q. How can I reduce my taxes?

A. Here are 5 simple strategies that everyone can and should try to lower your taxes:

Strategy 1. Earn More Non-taxable Income
You might think every dollar you receive is taxable, wrong! Below is a long list of non-taxable incomes, try to earn more such non-taxable incomes:

Gifts, bequests, and inheritances
Cash rebates (i.g. cash rebate from purchasing a new car or from a credit card)
Energy conservation subsidies provided by public utilities for purchase or installation of energy-saving devices in dwellings
Federal Employees' Compensation Act payments
Workers' compensation
Accident and health insurance benefits
Casualty insurance and other reimbursements for theft or casualty loss
Child support payments
Accelerated death benefits under a life insurance contract that are paid to a terminally or chronically ill person by the insurance company or a viatical settlement company
Government cost-of-living allowances for civilian employees stationed outside the continental U.S. or in Alaska
Foster-care payments, unless you are paid for care of more than five people age 19 or older, or you receive difficulty-of-care payments for more than five people age 19 or older, or more than 10 people under 19
Military allowances
Veterans' benefits
Supplemental Security Income (SSI) payments
Life or accident insurance proceeds, unless the policy was turned over to you for a price. However, if you cash in a policy, you must include in taxable income any amount that exceeds the total premiums you paid less any rebates, refunds, dividends, or unrepaid loans.
Living expenses paid by insurance, because of a casualty loss to your home, to the extent the payments compensate for extra expenses you would not have had if the casualty had not occurred
Long-term care insurance benefits from qualified plans, up to a certain amount per day or a certain amount per year (varies by year).
Medical savings account withdrawals, if used to pay for qualified medical expenses for you, yourself, or your dependents (withdrawals to pay for health insurance premiums are qualified expenses only if you are unemployed, buying COBRA continuation coverage, or buying long-term care coverage)
Welfare benefits, including disaster relief grants, mortgage assistance programs, and payments to reduce cost of winter energy

In our next blog post, we will discuss the second tax-reduction strategy - Maximize AGI Deductions.

A Simple Home Office Tax Deduction Method

2/22/2015

Q. I have a small home office, I have not been deducting its expenses as I am worried about attracting the attention of IRS auditors. What should I do?

A. It's very typical for many people with a side job to use a portion of their homes as the office for the side businesses. However, most of such people opt to forgo the home office tax deduction, partly because no records of paperwork were kept and partly because of the red flags it may raise to IRS auditors.

A Simplified Home Office Write-off
Starting from 2014, IRS allows a simplified version of the write-off that your side business deserves - you can deduct $5 per square foot of the office space up to $1.500 with no documentation required.

Unlike the old method of calculation, no depreciation is taken on your home, which means when you sell the house, you don't have to worry about the complicated recaptured depreciation and recalculated capital gains.

If you use online tax filing software, when you set up your business reporting, you must report that you have a home office first, then it will guide you through the options.

2 Strategies to Reduce AMT Shocks - Part I

2/22/2015

Q. What can I do to reduce my AMT shocks?

A. If you want to reduce AMT shock, you need to be clear on the AMT triggers. Below is an incomplete list:

Incentive stock options, and large capital gains
Large numbers of personal exemptions
Large amounts of state and local taxes paid
Large amounts of miscellaneous itemized deductions
Large deductible medical expenses

Below is a list of common adjustments for AMT:

The medical expense deduction is computed using a 10% of AGI
No deduction is allowed for personal state and local income and real estate taxes, and miscellaneous deductions subject to the 2% of AGI
No deduction is allowed for personal exemptions and the standard deduction
No deduction for home mortgage interest unless loan is used to buy, build or improve taxpayer’s principal or second home

In our next blog post, we will discuss two practical strategies to reduce AMT shocks.

Resources for Older Job Seekers

2/21/2015

Q. I am about to retire and want to do something different. Where can I find such opportunities?

A. You can take advantage of many online resources, some of the better knowns are listed below:

Unretirement is a book about boomers working in retirement.

What Tax Forms To File If I Own Foreign Stocks?

2/21/2015

Q. I own foreign stocks, what tax forms should I file?

A. If you are in the U.S. and buys the foreign stocks via your stock brokers, you will need to file IRS Form 8938 to report these assets.

To avoid such paperwork, you have two alternatives to buy foreign stocks:

1. Buy ADRs
American Depositary Receipts (ADRs) are foreign stocks that are listed in US stock exchanges, any U.S. investors can buy and sell them, in U.S. dollars.

2. Buy ETFs/MFs
You can get foreign exposure via ETFs or Mutual Funds that invest in international stocks, such as the broadly diversified Vanguard FTSE All-World ex-US ETF (VEU).

6 Tips For Taxpayers With Foreign Incomes

2/20/2015

Q. I am an U.S. tax payer with foreign income, what should I do?

A. If you're a taxpayer with foreign income, here are 6 tips for you to consider:

1. Report Worldwide Income
The law requires U.S. citizens and resident aliens to report any worldwide income. This includes income from foreign trusts, and foreign bank and securities accounts.

2. Review the Foreign Earned Income Exclusion
Many Americans who live and work abroad qualify for the foreign earned income exclusion. This means taxpayers who qualify will not pay taxes on up to $99,200 of their wages and other foreign earned income they received in 2014.

3. Don't Overlook Credits and Deductions
Taxpayers may be able to take either a credit or a deduction for income taxes paid to a foreign country. This benefit reduces the taxes these taxpayers pay in situations where both the U.S. and another country tax the same income.

4. File Required Tax Forms
In most cases, affected taxpayers need to file Schedule B, Interest and Ordinary Dividends, with their tax returns. Some taxpayers may need to file additional forms with the Treasury Department such as Form 8938, Statement of Specified Foreign Financial Assets or FinCEN Form 114 (formerly TD F 90-22.1), Report of Foreign Bank and Financial Accounts ("FBAR").

5. Report Foreign Accounts and Assets
Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers need to fill out and attach Schedule B to their tax return. Certain taxpayers may also have to fill out and attach to their return Form 8938, Statement of Foreign Financial Assets.

Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the country in which each account is located.

Generally, U.S. citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on Form 8938 if the aggregate value of those assets exceeds certain thresholds:

If the total value is at or below $50,000 at the end of the tax year, there is no reporting requirement for the year, unless the total value was more than $75,000 at any time during the tax year
Taxpayers who do not have to file an income tax return for the tax year do not have to file Form 8938, regardless of the value of their specified foreign financial assets.

The threshold is higher for individuals who live outside the United States and thresholds are different for married and single taxpayers. In addition, penalties apply for failure to file accurately.

Separately, taxpayers with foreign accounts whose aggregate value exceeded $10,000 at any time during 2014 must file a Treasury Department FinCEN Form 114 (formerly TD F 90-22.1), Report of Foreign Bank and Financial Accounts ("FBAR"). An individual may have to file both forms, and separate penalties may apply for failure to file each form. This is not a tax form and is due to the Treasury Department by June 30, 2015.

6. Consider the Automatic Extension
U.S. citizens and resident aliens living abroad on April 15, 2015, may qualify for an automatic two-month extension to file their 2014 federal income tax returns. The extension of time to file also applies to those serving in the military outside the U.S. Taxpayers must attach a statement to their returns explaining why they qualify for the extension.

Resources for DRIP Investors

2/20/2015

Dripinvesting.org is a great resources for novice and seasoned DRIP investors

Hobby or Business? Part C

2/20/2015

In our last blog post, we discussed the key differences in deductions for a business and a hobby. Now we will discuss more the deductions if your activity is a hobby.

Deductions for hobby activities are claimed as itemized deductions on Schedule A, Form 1040. These deductions must be taken in the following order and only to the extent stated in each of three categories:

Deductions that a taxpayer may claim for certain personal expenses, such as home mortgage interest and taxes, may be taken in full.
Deductions that don't result in an adjustment to the basis of property, such as advertising, insurance premiums, and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.
Deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.

The Bottom Line
If your hobby is regularly generating income, it could make tax sense for you to consider it a business because you might be able to lower your taxes and take certain deductions.

Hobby or Business? Part B

2/19/2015

In our last blog post, we discussed the 9 factors to determine if a hobby is a business or not. Now we will discuss what can be deducted under Business and Hobby, respectively:

Deductions for a Business
If the activity is determined to be a business, you can deduct ordinary and necessary expenses for the operation of the business on a Schedule C or C-EZ on your Form 1040 without considerations for percentage limitations. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is appropriate for your business.

Deductions for a Hobby
If an activity is a hobby, not for profit, losses from that activity may not be used to offset other income. You can only deduct expenses up to the amount of income earned from the hobby. These expenses, with other miscellaneous expenses, are itemized on Schedule A and must also meet the 2 percent limitation of your adjusted gross income in order to be deducted.

In our next blog post, we will have an in depth look at what can be deducted for a hobby.

Is My Business Actually a Hobby? - Part A

2/18/2015

Q. I like sewing and sell some of products, I view it as a business, but could IRS treat it as a hobby?

A. Millions of Americans have hobbies such as sewing, woodworking, fishing, gardening, stamp and coin collecting, but when that hobby starts to turn a profit, it might just be considered a business by the IRS.

Why It Matters?
You must report and pay tax on income from almost all sources, including hobbies. But when it comes to deductions such as expenses and losses, the two activities differ in their tax implications.

Definition of a Hobby vs. a Business
The IRS defines a hobby as an activity that is not pursued for profit. A business, on the other hand, is an activity that is carried out with the reasonable expectation of earning a profit.

9 Tests to Determine If A Hobby Is Actually a Business
If you're not sure whether you're running a business or simply enjoying a hobby, here are nine factors you should consider:

Whether you carry on the activity in a businesslike manner.
Whether the time and effort you put into the activity indicate you intend to make it profitable.
Whether you depend on income from the activity for your livelihood.
Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
Whether you change your methods of operation in an attempt to improve profitability.
Whether you, or your advisors, have the knowledge needed to carry on the activity as a successful business.
Whether you were successful in making a profit in similar activities in the past.
Whether the activity makes a profit in some years, and how much profit it makes.
Whether you can expect to make a future profit from the appreciation of the assets used in the activity.

An activity is presumed to be for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training, or racing horses).

The IRS says that it looks at all facts when determining whether a hobby is for pleasure or business, but the profit test is the primary one. If the activity earned income in three out of the last five years, it is for profit. If the activity does not meet the profit test, the IRS will take an individualized look at the facts of your activity using the list of questions above to determine whether it's a business or a hobby.

In our next blog post, we will discuss what are deductible for a business and for a hobby.

Free Accelerated Benefit Rider For Ohio National's Whole Life Policies

2/17/2015

Q. Does Ohio National's Whole Life policy include free accelerated benefit rider?

A. Yes, the ABR is simple, effective and exceedingly useful, with the addition of the ABR to a whole life policy, it creates significant financial flexibilities for Whole Life policy holders as they age.

The Details
The Accelerated Benefit Rider allows insureds to accelerate a portion of the policy death benefit should they qualify as either chronically or terminally ill.

With the baby boom generation either in, or or fast approaching, retirement there is considerable need to plan for insurance protection - of all kinds. The difficulty for many people is a perceived lack of ability to pay for all the protection products they might want. With the addition of the ABR to an Ohio National whole life policy, now consumers can have the ability to cover multiple risks, with one policy.

No Cost to Add the Rider
There is no cost to add the rider. Instead, the cost is incurred when the benefit is exercised, and a lien is created against the final death benefit payable. The payments are intended to qualify as tax free under Section 101(g) of the Internal Revenue Code.

HourlyNerd is Great for Skilled MBA Students and SMBs

2/16/2015

HourlyNerd is an online marketplace that connects small and mid-sized businesses with MBA students who can provide part-time and freelance work.

Legal Funding vs Contingency Lawyer

2/16/2015

Legal funding is a lot like hiring a contingency lawyer.

When a litigant hires a contingency attorney, she essentially sells a percentage of her case to an attorney in exchange for the attorney’s time working on the case. And if the case fails, then the contingency attorney gets nothing.

With legal funding, a litigant sells a small percentage of her case in exchange for money, which is usually used to pay for expenses related to physical, economic or emotional injuries related to the underlying lawsuit.

You can search your local directory listing for contingency attorneys, for legal funding, you can check out LegalFundingCentral.com.

Buy and Sell Used Furniture Online - MoveLoot

2/16/2015

MoveLoot makes buying and selling used furniture online very easy - unlike peer-to-peer or classified ads, MoveLoot takes the burden off sellers by picking up their furniture and selling it on their behalf.

Buyers can find great quality furniture at deep discounts.

The drawback? It's currently only available for CA and NC areas.

How to Claim an Elderly Parent as a Dependent - Part B

2/16/2015

In our last blog post, we described the 4 tests one must pass in order to claim an elderly parent as a dependent. Now we will discuss the details of the dependent care credits.

What Are the Dependent Care Credits?
You may be able to claim the child and dependent care credit if you paid work-related expenses for the care of a qualifying individual. The credit is generally a percentage of the amount of work-related expenses you paid to a care provider for the care of a qualifying individual. The percentage depends on your adjusted gross income. Work-related expenses qualifying for the credit are those paid for the care of a qualifying individual to enable you to work or actively look for work.

In addition, expenses you paid for the care of a disabled dependent may also qualify for a medical deduction (see next section). If this is the case, you must choose to take either the itemized deduction or the dependent care credit. You cannot take both.

How to Claim the Medical Deductions?
If you claim the deduction for medical expenses, you still must provide more than half your parent's support; however, your parent doesn't have to meet the income test.

The deduction is limited to medical expenses that exceed 10 percent of your adjusted gross income (7.5 percent if either you or your spouse was born before January 2, 1949), and you can include your own unreimbursed medical expenses when calculating the total amount. If, for example, your parent is in a nursing home or assisted-living facility. Any medical expenses you paid on behalf of your parent are counted toward the 10 percent figure. Food or other amenities however, are not considered medical expenses.

What If I Share Caregiving Responsibilities?
If you share caregiving responsibilities with a sibling or other relative, only one of you - the one proving more than 50 percent of the support - can claim the dependent. Be sure to discuss who is going to claim the dependent in advance to avoid running into trouble with the IRS if both of you claim the dependent on your respective tax returns.

If neither caregiver pays more than 50 percent, then you'll need to fill out IRS Form 2120, Multiple Support Declaration, as long as you and your sibling both provide at least 10 percent of the support towards taking care of your parent.

The tax rules for claiming an elderly parent or relative are complex, make sure consult with your CPA before taking any actions.

Tax Records Retention Guidelines

2/15/2015

Q. How long should I keep my business documents for tax purposes?

A. Federal law requires you to maintain copies of your tax returns and supporting documents for three years. This is called the "three-year law" and leads many people to believe they're safe provided they retain their documents for this period of time.

However, if the IRS believes you have significantly underreported your income (by 25 percent or more), or believes there may be indication of fraud, it may go back six years in an audit. To be safe, use the following guidelines.

Business Documents To Keep For One Year

Correspondence with Customers and Vendors
Duplicate Deposit Slips
Purchase Orders (other than Purchasing Department copy)
Receiving Sheets
Requisitions
Stenographer's Notebooks
Stockroom Withdrawal Forms

Business Documents To Keep For Three Years

Employee Personnel Records (after termination)
Employment Applications
Expired Insurance Policies
General Correspondence
Internal Audit Reports
Internal Reports
Petty Cash Vouchers
Physical Inventory Tags
Savings Bond Registration Records of Employees
Time Cards For Hourly Employees

Business Documents To Keep For Six Years

Accident Reports, Claims
Accounts Payable Ledgers and Schedules
Accounts Receivable Ledgers and Schedules
Bank Statements and Reconciliations
Cancelled Checks
Cancelled Stock and Bond Certificates
Employment Tax Records
Expense Analysis and Expense Distribution Schedules
Expired Contracts, Leases
Expired Option Records
Inventories of Products, Materials, Supplies
Invoices to Customers
Notes Receivable Ledgers, Schedules
Payroll Records and Summaries, including payment to pensioners
Plant Cost Ledgers
Purchasing Department Copies of Purchase Orders
Sales Records
Subsidiary Ledgers
Time Books
Travel and Entertainment Records
Vouchers for Payments to Vendors, Employees, etc.
Voucher Register, Schedules

Business Records To Keep Forever
While federal guidelines do not require you to keep tax records "forever," in many cases there will be other reasons you'll want to retain these documents indefinitely.

Audit Reports from CPAs/Accountants
Cancelled Checks for Important Payments (especially tax payments)
Cash Books, Charts of Accounts
Contracts, Leases Currently in Effect
Corporate Documents (incorporation, charter, by-laws, etc.)
Documents substantiating fixed asset additions
Deeds
Depreciation Schedules
Financial Statements (Year End)
General and Private Ledgers, Year End Trial Balances
Insurance Records, Current Accident Reports, Claims, Policies
Investment Trade Confirmations
IRS Revenue Agents' Reports
Journals
Legal Records, Correspondence and Other Important Matters
Minute Books of Directors and Stockholders
Mortgages, Bills of Sale
Property Appraisals by Outside Appraisers
Property Records
Retirement and Pension Records
Tax Returns and Worksheets
Trademark and Patent Registrations

Personal Documents To Keep For One Year

Bank Statements
Paycheck Stubs (reconcile with W-2)
Canceled checks
Monthly and quarterly mutual fund and retirement contribution statements (reconcile with year end statement)

Personal Documents To Keep For Three Years

Credit Card Statements
Medical Bills (in case of insurance disputes)
Utility Records
Expired Insurance Policies

Personal Documents To Keep For Six Years

Supporting Documents For Tax Returns
Accident Reports and Claims
Medical Bills (if tax-related)
Property Records / Improvement Receipts
Sales Receipts
Wage Garnishments
Other Tax-Related Bills

Personal Records To Keep Forever

CPA Audit Reports
Legal Records
Important Correspondence
Income Tax Returns
Income Tax Payment Checks
Investment Trade Confirmations
Retirement and Pension Records

Special Circumstances

Car Records (keep until the car is sold)
Credit Card Receipts (keep with your credit card statement)
Insurance Policies (keep for the life of the policy)
Mortgages / Deeds / Leases (keep 6 years beyond the agreement)
Pay Stubs (keep until reconciled with your W-2)
Property Records / improvement receipts (keep until property sold)
Sales Receipts (keep for life of the warranty)
Stock and Bond Records (keep for 6 years beyond selling)
Warranties and Instructions (keep for the life of the product)
Other Bills (keep until payment is verified on the next bill)
Depreciation Schedules and Other Capital Asset Records (keep for 3 years after the tax life of the asset)

How to Claim an Elderly Parent as a Dependent - Part A

2/15/2015

Q. My mom is 70 years old and lives with me, I take care of her by driving to doctor appointments and handling personal finances. Can I claim her as a dependent?

A. You may be able to claim your elderly relative as a dependent, if you meet certain criteria.

Who qualifies as a dependent?
The IRS defines a dependent as a qualifying child or relative. A qualifying relative can be your mother, father, grandparent, stepmother, stepfather, mother-in-law, or father-in-law, for example, and can be any age.

There are four tests that must be met in order for a person to be your qualifying relative:

1. Not a Qualifying Child Test
Your parent or relative cannot be claimed as a qualifying child on anyone else's tax return.

2. Member of Household or Relationship Test
He or she must be U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico; however, a parent or relative doesn't have to live with you in order to qualify as a dependent.

If your qualifying parent or relative does live with you, you may be able to deduct a percentage of your mortgage, utilities and other expenses when you figure out the amount of money you contribute to his or her support.

3. Gross Income Test
To qualify as a dependent, income cannot exceed the personal exemption amount, which in 2014 is $3,950. In addition, your parent or relative, if married, cannot file a joint tax return with his or her spouse unless that joint return is filed only to claim a refund of withheld income tax or estimated tax paid.

4. Support Test
You must provide more than half of a parent's total support for the year such as costs for food, housing, medical care, transportation and other necessities.

In our next blog post, we will share the details of how to claim the dependent care credits.

Tax Rules for Children with Investment Incomes

2/15/2015

Q. My child has investment income in 2014. What are the tax rules I need to follow?

A. Children who receive investment income are subject to special tax rules that affect how parents must report a child's investment income. Some parents can include their child's investment income on their tax return, in other situations the children may have to file their own tax returns. If a child cannot file his or her own tax return for any reason, such as age, the child's parent or guardian is responsible for filing a return on the child's behalf.

Here's what you need to know about tax liability and your child's investment income.

What Are the Investment Incomes?
Investment income normally includes interest, dividends, capital gains and other unearned income, such as from a trust.

If The Child's Investment Income is Less Than $10,000
Special rules apply if your child's total investment income in 2014 is more than $2,000 (same as 2013). The parent's tax rate may apply to part of that income instead of the child's tax rate.

If your child's total interest and dividend income is less than $10,000 (same as 2013), then you may be able to include the income on your tax return. If you make this choice, the child does not file a return. Instead, you file Form 8814, Parents' Election to Report Child's Interest and Dividends, with your tax return.

If The Child's Investment Income is More Than $10,000
If your child received investment income of $10,000 or more in 2014 (same as 2013), then he or she will be required to file Form 8615, Tax for Certain Children Who Have Investment Income of More Than $2,000, with the child's federal tax return for tax year 2014.

Starting in 2013, a child whose tax is figured on Form 8615, Tax for Certain Children Who Have Unearned Income, may be subject to the Net Investment Income Tax. NIIT is a 3.8 percent tax on the lesser of either net investment income or the excess of the child's modified adjusted gross income that is over a threshold amount.

Is Rebalancing Worth It?

2/14/2015

Q. Is it really worth it to rebalance a portfolio once a while?

A. Rebalaning a portfolio is one of the justifications of money managers use to charge the portfolio management fee. It typically applies to asset classes rather than individual stocks. For example, you keep certain balance between growth and value stocks, or stocks versus bonds. In theory, rebalancing forces you to "sell high and buy low" which is good for every investor, because behavior finance has found investors tend to do the opposite - chase the highs and sell the lows.

However, there are two arguments against rebalancing and it appears to be valid.

Argument 1. Not Good for Two Assets with Different Returns
Here is the first argument, using two asset classes as the example -

Rebalancing works well for the two asset classes, if both classes have the same long term average returns. However, if one asset class, for example, stocks, tends to have much higher average return than the other asset class, for example, bonds, then rebalancing frequently will drag down the average return of the overall portfolio.

Argument 2. Not Good for a Prolonged Bear Market
The second argument against rebalancing is that in a prolonged bear market, rebalancing means average down and getting terrible results.

The chart below illustrates the effect of rebalancing, it certainly made things worse in a bear market.

If you want to know more, there is an article with in depth discussion of rebalancing.