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Don't Give Up Your Interest by Letting the IRS Hold Your Money

As in past years, an area of continued concern this tax season was the number of clients who either used the IRS as a bank to hold their “savings” during the year, or as a bank where they took out “loans” that came due on April 17. Many taxpayers let the IRS hold their money interest free all year and look forward to a significant refund with the filing of their tax return. Not only are these taxpayers giving up interest earnings during the year, they also often pay fees to a tax service for a “rapid refund”.

My advice is to complete a Form W-4 for your employer that reflects your actual filing status and number of dependents, this will result in tax withholding amounts during the year that are reasonable. If you are concerned about your ability to save money on your own, consider having a consistent amount transferred out of your paycheck or checking account into a savings or investment account rather that using a forced saving method with the IRS. Paying yourself first in a systematic manner is always a better approach than having the IRS sit on your money all year long. This approach may also keep you from being tempted to splurge the windfall that comes back at tax time.

On the flip side, many taxpayers remain in denial all year and do not have enough federal tax withheld from their paycheck, hoping for a miracle at tax time that will reduce their tax liability. When this “loan” from the IRS comes due, the taxpayer must often request an installment agreement with the IRS resulting in the assessment of interest and penalties until the liability is paid in full. Additionally, the IRS will assess an underpayment penalty if the taxpayer did not meet the minimum payment amount during the year. This is a very expensive and irresponsible approach to paying your taxes.

The IRS has some very good tools on their website to assist taxpayers in calculating their projected tax liability, go to www.irs.gov for further assistance or seek the advice of a tax professional during the year.

Taxpayers should keep the minimum tax payment threshold in mind during the year rather than scrambling at the last minute. In order to avoid a late payment penalty, taxpayers must pay the lesser of the prior tax liability or 90% of the current year tax liability by the April filing date.

While tax withholding amounts from a paycheck are considered by the IRS to be paid evenly throughout the year, this issue becomes more complicated for self-employed individuals. For the self-employed, the IRS expects payments to be made throughout the year on a quarterly basis, Business owners operating as a sole proprietorship or under a pass through entity structure such as an S Corporation, Partnership or LLC should consult with their tax advisor during the year to avoid underpayment penalties for insufficient tax payments throughout the year. Sending in a large payment in April, either with your tax return or extension, will not satisfy the IRS.

Although it may be painful to think about tax planning for 2007 so soon after the sting of paying your 2006 taxes, we already have a third of 2007 behind us. Start planning for your 2007 tax year now to avoid surprises in April 2008.

--CAROLYN L. MORA


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Normal Planning Advice Doesn't Work With AMT

A recent report to Congress given by Nina Olsen, the IRS’s National Taxpayer Advocate, indicates that the Alternative Minimum Tax (AMT) is currently the most serious problem encountered by taxpayers.

As I mentioned in my last column, the Working Families Tax Relief Act addresses the AMT on a temporary basis. The AMT exemption of $58,000 for married couples and $40,250 for single individuals has been extended for one year (through 2005). Unless further changes to the tax code are implemented, the exemption amounts will automatically revert back to the previously lower amounts of $45,000 for married couples and $33,750 for single individuals. It is anticipated that this add-on tax system will affect over 30 per cent of taxpayers by the year 2010.

The AMT is an alternative to the “regular” income tax. AMT rules require two sets of tax calculations. First, tax is calculated under the standard tax rules. Then a second calculation is prepared under the AMT rules. The two tax amounts are compared and the greater of the two tax amounts is due the IRS.

The AMT calculation excludes certain deductions, most notably state and local taxes, real estate and personal property taxes, miscellaneous itemized deductions (typically job related expenses), accelerated depreciation and depletion and personal exemptions. Although Texas residents rarely have a state or local tax deduction, all of the other deductions are very common among most taxpayers. In addition, certain non-taxable income items for regular tax purposes, such as tax-exempt interest income from certain bonds, must be added back for AMT purposes.

Congress originally enacted the tax 35 years ago as a tax on the wealthy who were avoiding taxes altogether. AMT is often called the “tax on loopholes”; however, I am finding that more and more of my clients are falling prey to AMT. The problem is that the original AMT provisions included a large exemption that generally offset any loss of deductions like those listed above. Unfortunately, the exemption amount was not indexed for inflation. As a result, a growing number of middle-income taxpayers are now hit with alternative minimum tax.

Planning to avoid AMT often results in following the opposite of normal tax planning advice. Consult you tax adviser for assistance with these projections. If it appears that AMT will apply, there are a few measures that should be considered:

  • Instead of accelerating deductions into the current year, defer them to a later year. For example, pay property taxes in January 2005 rather that December 2004.

  • The law allows certain elections to avoid AMT. A good example is eliminating the adjustment for accelerated depreciation by making the election to depreciate business equipment under a different method. These alternate methods allow the same amount of depreciation, but at a slower rate.

  • If you are subject to AMT, don’t forget to take the AMT credit in the following year. The AMT does not always produce a credit, but many times deferral items such as depreciation will produce a tax credit.

    --CAROLYN L. MORA


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    More People Should Consider Health Savings Accounts

    Over the past several years taxpayer concerns over rising medical costs have led Congress to pass laws that created the health reimbursement account (HRA) and the flexible spending account (FSA). With the Medicare Prescription Drug and Modernization Act of 2003, Congress has introduced yet another plan, the health savings account (HSA).

    Designed similarly to IRA’s, these new accounts can be used to build tax-sheltered nest eggs that can pay out-of-pocket medical expenses with tax-free dollars. In general, an HSA helps individuals who have high-deductible medical insurance policies. The HSA is used to pay the first layer of medical costs before your insurance coverage kicks in. Contributions to an HSA are tax deductible, and qualified withdrawals from the account are exempt from tax.

    To contribute to an HSA you must be covered by a high-deductible health plan. For self-only coverage, the policy must have an annual deductible of at least $1,000. For family coverage, the annual deductible must be at least $2,000. You cannot be covered by Medicare or another health plan (except plans that cover long-term care, dental, vision, and certain other specific medical costs). Additionally, you must be under age 65 to set up an HSA.

    Every year you may contribute the lesser of your insurance deductible or certain amounts set by law. For 2004 these amounts are $2,600 for singles and $5,150 for family coverage. For example, if you are a single person and your medical insurance deductible is $2,700, your deductible contributions for 2004 are limited to $2,600. On the other hand, if your policy’s deductible is $2,000, that is the maximum contribution amount you can make into an HSA. Also, those age 55 or older are allowed increased contribution limits; for 2004 this additional amount is $500. Again, the concept is to address the costs that your insurance policy doesn’t cover.

    It is easy to become confused about the features of the HSA, HRA, and FSA. An important consideration is that the HSA is portable. Much like an IRA, you can roll your current HSA into another qualified HSA plan. That is not true with either a HRA or FSA.

    Additionally, you can accumulate funds in an HSA indefinitely and your investment earnings are exempt from taxation. Withdrawals from an HSA for non-medical expenses are subject to income tax and an additional 10% penalty if withdrawn before age 65. Under an FSA, you cannot carry balances from year to year-you must use it or lose it.

    You can set up an HSA with a financial institution once you have made certain you meet the criteria discussed above, most importantly you must have a high-deductible health insurance policy in place. There are relatively few guidelines about how an HSA can be invested, so it is especially important to choose a reputable firm to handle your account.

    Although these plans don’t solve the issues related to the many un-insured citizens in our country, the HSA can be viewed as a step toward easing the pain of the countless consumers who have been stung by rising insurance costs and have converted to high deductible plans.

    --CAROLYN L. MORA


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    Take Steps to Stay in Control of Your Finances

    Now that the joy of the holidays has passed, many consumers are left with the burden of paying off excessive credit card debt. According to the latest figures from the Federal Reserve, America's consumer debt has topped $2 trillion for the first time, continuing what debt experts view as an alarming surge in recent years. Equally disturbing is the explosion of personal bankruptcies, which reached an all-time high of 1.6 million households in 2003.

    According to Robert D. Manning, a professor at the Rochester Institute of Technology and author of the book "Credit Card Nation: The Consequences of America's Addiction to Credit," the average household consumer debt translated into $1,700 a year in finance charges and fees in 2002. Manning also points out that many "new kinds of hybrid financial institutions and new loan products," such as those offered at rent-to-own stores, are excluded from the Federal Reserve figures. According to Manning's studies, interest rates at these institutions may come out to more than 200 percent a year.

    There are two important financial goals that I have mentioned in prior columns which I think are worth repeating. They are basic, but will help you to stay on top of your financial obligations.

    The first goal is to have a cash reserve of three to six months of your average living expenses in a savings account that is segregated from your normal checking account. This "emergency fund" should be kept in a savings or money market account, rather than invested in mutual funds or stocks that are subject to market fluctuation. Establishing this fund should be a priority; this cushion should be in place before you begin to start investing additional amounts in the stock market.

    A second and equally important goal is to evaluate where you are currently spending your money and to prepare a monthly budget based on that information. If you have a computer, you might want to evaluate one of the more popular software programs that are available to help you track your expenditures, many of these packages are very easy to use and relatively inexpensive. A manual tracking method can be just as effective; the key is to track your monthly expenses by major categories to see where your income is going.

    After you complete this exercise you will be ready to develop a budget. You may find that your spending has been consistently above your income level and that you need to cut back in a specific area. If you have existing debt you are trying to pay off, you will need to go through this process to determine where you can cut back in order to allocate more to your monthly payments.

    If you are juggling credit cards and feeling overwhelmed, there are steps you can take to make your life easier. Low credit card rate offers can be tempting, but this approach will help only if you are able to pay off balances quickly. My suggestion would be to approach your bank or credit union and find out whether they would be willing to extend you a consolidation loan at a reasonable rate with a manageable period of time to pay off your debts. Additionally, the YWCA provides an excellent credit counseling service (577-2530).

    --CAROLYN L. MORA


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    Tax Act Could Spur Earlier-than-Usual Filings

    I am anticipating a flood of early tax return filers, as many of my clients are eager to see the impact of the Jobs and Growth Tax Relief Reconciliation Act of 2003 on their individual tax returns. As I discussed in a previous column, some taxpayers are already enjoying the benefit of the tax law change. For example, the IRS automatically calculated and mailed the advance payments of the Child Tax Credit increase for most taxpayers who claimed this credit on their 2002 returns. Additionally, employers are using new tax withholding tables, reflecting lower tax rates and a higher standard deduction for married couples. For self-employed persons and taxpayers who have significant income from capital gains or dividends, the best method to get the tax benefits in advance of filing their 2003 returns may be to adjust the remaining estimated tax payment, due Jan. 15, 2004.

    The following tax law changes should be taken into account when using the worksheets with Form 1040-ES to calculate the final 2003 estimated tax payment due next month:

    A higher standard deduction for married persons: $9,500 for couples; $4,750 for those filing separate returns.

    Tax rate reductions: the 10% rate applies to the first $7,000 of taxable income for single persons, $14,000 for married persons filing jointly; the 15% rate for married couples covers up to $56,800 of taxable income; and all rates above 15% are lower. Use the new tax rate schedules to calculate your 2003 tax.

    Lower tax rates for long-term capital gains on assets sold after May 5, 2003, and for qualified 2003 dividend income: 5% for those that would have been taxed at a regular rate of 10% or 15%; 15% for most items that would have been taxed at a higher rate.

    A higher alternative minimum tax exemption amount: $40,250 for a single person or a head of household; $58,000 for married persons filing jointly and qualifying widow (er) s; and $29,000 for married persons filing separately.

    Business owners should also consider changes to the first-year depreciation allowance and the Section 179 expensing deduction. Under the new law, qualified asset additions will be eligible for an additional first-year depreciation deduction equal to 50% of the adjusted basis of the property. The property must have been acquired after May 5, 2003 and before January 1, 2005 in order to qualify for this special depreciation adjustment. The new tax law also increases the current Section 179 deduction of $25,000 to $100,000 for property placed in service in 2003, 2004 and 2005. The Section 179 deduction allows a business owner to write off the cost of an asset on an accelerated basis rather than over several years.

    Consider making your estimated tax payments online or by phone through the Electronic Federal Tax Payment System. EFTPS is free, available 24/7 and you can set up your quarterly payments for the entire year in one visit. You can change or cancel your payment at any time. EFTPS sends you an electronic acknowledgement of your completed transactions and you can see 16 months of your EFTPS payment history.

    --CAROLYN L. MORA


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    Save Tax Return Checks or Pay Off Credit Cards

    As we gear up for the 2004 presidential election, commentary about the recently enacted tax law changes and suggested future changes abound. Many of the provisions of the Jobs and Growth Tax Relief Reconciliation Act of 2003 have sparked lively debate, but it is clear that the intent of these changes is to “jump start” our economic recovery by encouraging taxpayers to spend their tax savings. While I understand this logic and the importance of a rapid economic turnaround, I am challenged as a financial professional to ensure that my clients are making the most appropriate decision for their financial situation.

    The tax law change that was designed to immediately funnel money into the taxpayer’s pocket relates to the increase in the Child Credit from $600 to $1,000 for tax years 2003 and 2004. Advance payouts of the increased amount of the credit (up to $400) began in July 2003. The Internal Revenue Service is calculating these advance payment amounts by considering information contained in the taxpayer’s tax return for 2002. Just a reminder, you will not be seeing a check in the mail if you do not have dependent children.

    The retail industry is not shy about persuading consumers to spend their IRS windfall in their stores. Almost every major retail outlet I have visited this summer had signs posted in the store offering to cash child credit checks so that the customer could use the funds immediately. In other words, these stores don’t want to run the risk that these funds might get deposited into a customer’s account and not be spent, they are competing aggressively for this money. If taxpayers were unaware of the advance payment before hitting the mall, they received a quick tax lesson from their favorite store.

    Another possible source of increased cash flow relates to the decrease in the tax rates effective January 1, 2003. The new tax law increases the amount of taxable income to be taxed at the 10% bracket and accelerates the reductions in the tax rates that were originally scheduled for 2004 and 2006. For 2003 and later years the tax rates in excess of 15% are 25%, 28%, 33% and 35%. Employers were provided the new tax tables this summer and many employees are enjoying an increase in their take home pay.

    I fully understand the fiscal policy behind encouraging taxpayer spending as a means toward moving our economy into a speedy recovery; however, as a financial advisor I cannot ignore my obligation to help my clients determine the best use of their tax savings. Creating or adding to their emergency reserves rather than spending these funds would be a much wiser move for many of my clients. Additionally, many of my clients would be better served paying off credit card debt. There is no tax benefit gained from this type of interest expense, and working down these balances may be a great relief.

    In the midst of this appeal to spend, it is more important than ever to create and follow a sound budget and to focus on your specific financial goals.

    --CAROLYN L. MORA


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    Business Owners Can Get Last-minute Deduction

    For those taxpayers who filed for an automatic extension, the August 15 deadline is quickly approaching. While tax planning ideas this far after the 2002 yearend are practically non-existent, there is a retirement planning vehicle that allows business owners the opportunity to literally squeeze in a last minute deduction.

    The retirement plan I am referring to is a Simplified Employee Pension Plan, commonly known as a SEP. This type of plan can be established and funded up until the extension date of the tax return, i.e. prior to August 15 for sole proprietors or September 15 for corporate entities, and the deduction can be carried back retroactively to the prior year. This type of plan is available to businesses of any size, including sole proprietorships, as long as there is not another retirement plan in existence.

    There are definitely some pros and cons to be considered when investigating this retirement vehicle. I have already mentioned one of the key points above, the flexibility of establishing this plan after year-end. This feature is unique to the SEP; no other retirement plan can be established after the taxpayer’s yearend. Another important point to consider is that a SEP is typically very easy to establish and to operate. Administration costs are nominal for this type of plan.

    Probably one of the most important features of the SEP is that contribution requirements are flexible, which makes this an ideal plan for businesses with fluctuating cash flow. For example, a business owner may choose to fund the plan at the maximum allowable level in a year where profits and cash flow are very strong, but if operating results and cash flow decline in the following year, the business owner has the right to skip the SEP contribution for that year altogether.

    When considering arguments against creating a SEP, the most basic point is that the plan is completely employer funded. In other words, the deduction for plan contributions must be fully funded by the employer. This sometimes becomes a serious issue for businesses as the employee base begins to grow. Generally, all employees must be included in a SEP; however there are a few exceptions to this rule:

    Employees who have not worked for the company during three out of the last five years may be excluded.
    Employees who have not reached age 21 during the calendar year for which contributions are being made can be excluded.
    Employees covered by a collective bargaining agreement relating to benefits can be excluded.

    Beginning in 2002, the maximum funding amount for the SEP is the lesser of $40,000 or 25% of the employee’s pay. Discrimination rules apply to ensure that contributions are made at the same percentage across the board. If the business owner decides to fund his SEP account at 25% of his pay, this 25% finding level must be applied to all eligible employees.

    Another indication of the generous nature of this plan is that separate accounts are created for each eligible employee and the employee immediately becomes 100% vested in their account. For this reason, a SEP is not necessary the best means to apply “golden handcuffs” to you employees.

    While I have attempted to cover the key points related to the SEP, it is very important that you discuss your particular circumstances with your tax advisor and financial advisor prior to establishing a SEP.

    --CAROLYN L. MORA


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    Retirement Questions Face Many El Pasoans

    According to US Census Bureau projections, the senior population will more than double between now and the year 2050. By that year, as many as one in five Americans could be considered a senior citizen. This trend is evident in my practice, I find more and more of my clients challenged by retirement issues and living assistance issues, either for themselves or for their aging parents.

    I have discussed the importance of estate planning in previous columns, but there are many other critical issues that seniors or their loved ones should plan for.

    Retirement Income- Most financial experts agree that an individual will need about 70 to 80 percent of their pre-retirement income to finance a comfortable retirement. Social Security retirement benefits can be expected to replace only about 40 percent of the money an average wage earner makes. That means most people will need to provide for an additional 30 to 40 percent of pre-retirement earnings through pensions, 401(k) plans, IRAs and other investments. Since it began, Social Security has provided a strong foundation of income for most retirees; however, Social Security was never intended to be the sole source of income during a person's retirement years. In some cases, family members should be prepared to supplement the earnings of their parents if they are not sufficient.

    Long-term Care- Unfortunately, most senior citizens will reach a time when age or illness makes living without some type of assistance almost impossible. I have found that in our Hispanic culture, caring for loved ones in a home setting is a responsibility that is taken very seriously, many times an outside facility is not even considered to be an option. However, family caregivers must be conscious of their own physical or time limitations and realize that there will likely be a time when assistance in the home will be needed.

    There are many misconceptions about what home care costs are covered by Medicare, in many cases these costs must be covered by a supplemental insurance policy or be paid out of pocket. Many individuals are now considering long term care insurance, which is a specific policy designed to cover these types of costs. In order to be affordable, this insurance should be attained when the senior citizen is still fairly healthy.

    Retirement Communities- There may come a time when maintaining a home or providing home care is no longer a viable option, at which time older adults or their family members must consider choosing a retirement community. There are several types of retirement communities: (1) Standard retirement communities offer housing, recreation and some social services. (2) Service-oriented communities offer various levels of service, ranging from independent facilities, assisted care facilities or long-term medical care facilities. (3) Federally subsidized retirement housing is available for people who are financially eligible. Important considerations to keep in mind when choosing a retirement community are the level of care needed, the costs of the facility, proximity to friends and family, recreational and social services available, and most importantly, licensing and accreditation information.

    --CAROLYN L. MORA


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    Cashing Out Retirement Plan Fries Your Nest Egg

    During the month of June I consulted with several clients who were either offered an early retirement package or had made the decision to transfer retirement accounts out of their previous employer’s custody. These transactions can be somewhat tricky and can trigger significant tax liabilities and penalties if not handled properly.

    Although each retirement package is unique, most packages contain a lump sum distribution option. In some cases this lump sum relates to your 401k account balance, and in other cases there may be several lump sum distribution options combined with lifetime annuity payments. It may be tempting to collect the lump sum distribution and use the funds for short-term needs, but it is important to remember that retirement accounts are designed for the long-term needs of your retirement years.

    Most of my clients initially go through the thought process of wanting to pay off existing liabilities with a lump sum distribution in order to relieve the strain of these debts. It is my job to illustrate to them that eating into their nest egg prematurely may mean coming up short twenty or thirty years from now when they need these funds. Because life expectancies in the US continue to expand, retirement dollars must last longer than they have in the past. Another point to consider is the failing health of the Social Security system and whether aging “baby boomers” will deplete the assets available for distribution.

    Another very important consideration to keep in mind when determining the best treatment for your lump sum distribution is the tax impact of cashing in your lump sum option. Funds taken as a lump sum payment from a retirement account and paid directly to an individual are subject to a mandatory 20% withholding amount, but the tax liability doesn’t stop there. In many cases, receiving your full retirement account as a lump sum payment will push you into the highest tax bracket, currently 35%. Even after the 20% withholding made at the time of distribution, an additional 15% in federal taxes may be payable at the time you file your tax return. In addition to the income tax liability, taxpayers under age 59 ½ who opt to take a lump sum payment are subject to a 10% early withdrawal penalty.

    The transaction utilized to avoid taxation on the lump sum payment is referred to as a rollover. The account balance is rolled over into an Individual Retirement Account (IRA) or into a retirement plan offered by your new employer, if applicable. Rollover transactions ensure the tax-deferred treatment of retirement assets until withdrawal. Although there is a common misconception that IRA’s must be held at a banking institution, IRA’s can be established in a variety of structures with multiple investment options.

    For many, an emergency situation may necessitate drawing money out of the retirement account right away. In these cases, consider rolling the retirement plan assets into a traditional IRA, and then requesting regular withdrawals under the 72(t) election. This election allows for sheltering from the 10% early withdrawal penalty; however, distributions will be taxable as ordinary income. Rollover transactions and the 72(t) election present various important, and sometimes complex, options and should be discussed carefully with your financial advisor before any final decision is reached.

    --CAROLYN L. MORA


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    Tax Cuts Are Only Temporary

    Just as I was finally mastering the increasing levels of the unified tax credit leading up to the temporary repeal of the federal estate tax in 2010, the Jobs and Growth Tax Relief Reconciliation Act of 2003 presents a new set of confusing sunset provisions to study.

    I presented an overview of the new tax act in my last column, but I didn’t have enough space to address some of the quirks of the new law. It is clear that the new tax act is an attempt to give the economy a quick “jump start”, but many of these tax cuts will be phased out in the short term due to budgetary constraints and in order to avoid increasing our federal deficit to an unmanageable level.

    One example of a short-term phase out relates to the increase in the child tax credit from $600 to $1,000. Enjoy this increase while you can in 2003 and 2004, because the credit will be reduced to $700 in 2005. The credit is scheduled to eventually increase to $1,000 by 2010, but will be reduced to $500 in 2011. These increases and decreases may seem illogical to most of us, but there has been some serious number crunching performed in Washington to arrive at these amounts.

    Relief from the “marriage penalty” is also temporary. The new tax law increases the standard deduction for a married couple to twice that of a single person for 2003 and 2004; however, prior law becomes effective again in 2005. The deduction will be ratcheted up again to double the standard deduction for a single taxpayer by 2010, but this relief is eliminated in 2011 as a result of budgetary constraints.

    The new tax law increases the size of the 15% tax bracket for joint filers to double the size of the 15% tax bracket for single taxpayers for 2003 and 2004, but similar to other phase-outs, this benefit goes away in 2005. Even though increases through 2010 will be helpful to taxpayers, this benefit is completely eliminated in 2011.

    I commented in my prior column that business owners have the potential for significantly increased write offs related to capital expenditures under the new tax law. One capital asset that clients love to spend money on is a company vehicle. As if the countless 0% interest offers from auto dealers weren’t enticing enough, the new tax law makes this temptation even harder to resist by increasing the first year depreciation limits on luxury vehicles, as defined by the code, from $4,600 to $9,200. In the midst of this appeal to spend, I believe it is my job to remind my clients that a deduction today is not worth the stress and financial strain that excessive debt can place on their business. Decisions related to capital expenditures should be made carefully after reviewing the cash flow and debt service capabilities of the business.

    It is not practical, nor is it necessary, to memorize all the peculiarities of the new tax law. My advice is to base your personal and business financial decisions on sound data and a long-term plan; don’t try to make your actions fit into what appears to be an ever changing tax environment.

    --CAROLYN L. MORA


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    Tax Changes Double Work, Ease Some Headaches

    Tax Changes Double Work, Ease Some Headaches The long awaited Jobs and Growth Tax Relief Reconciliation Act of 2003 has finally been signed into law. After much debate in the House and Senate, the resulting Conference Agreement for a $350 billion tax cut is less than half of what the President originally requested. There are significant tax breaks included in the Act, business owners and investors will realize the most significant savings.

    The change that will have the most immediate effect is the increase in the Child Credit from $600 to $1,000 for tax years 2003 and 2004. The increased amount of the credit (up to $400) will be paid in advance beginning in July 2003, based on information contained in the taxpayer’s return for 2002. I am anticipating a flood of phone calls from clients asking why the IRS is sending them money.

    Another notable change is the acceleration of marriage penalty relief. The standard deduction for couples filing a joint return is now double the standard deduction for a single taxpayer. Under prior law, many taxpayers were “penalized” by filing a joint return because the standard deduction was lower on a joint tax return than if the couple remained single and filed separately.

    Additionally, the new tax law accelerates the reductions in the tax rates that were originally scheduled for 2004 and 2006. For 2003 and later years the tax rates in excess of 15% are 25%, 28%, 33% and 35%.

    Under the new law, business owners have the opportunity for significant tax savings as they relate to capital expenditures. Qualified asset additions will be eligible for an additional first-year depreciation deduction equal to 50% of the adjusted basis of the property. The property must be acquired after May 5, 2003 and before January 1, 2005 in order to qualify for this special depreciation adjustment. This should make those yearend depreciation calculations interesting.

    The conference agreement also increases the current Section 179 deduction of $25,000 to $100,000 for property placed in service in 2003, 2004 and 2005. The Section 179 deduction allows a business owner to write off the cost of an asset on an accelerated basis rather than over several years. As always, I will encourage my clients to take advantage of these deductions, but not at the expense of incurring unreasonable liabilities.

    I have saved the best for last; that is if you are an investor. The conference agreement reduces the current capital gains rates of 10% and 20% to 5% and 15%, respectively. These rates apply to assets held longer than one year and to sales and exchanges on or after May 6, 2003 and before January 1, 2009.

    The new tax law also reduces the tax rate on dividends to the revised capital gains rate, generally 15%. This is a significant change for those taxpayers in the top tax bracket who previously had dividends taxed as ordinary income. I have no doubt that investors will begin to shift more bond holdings into tax deferred accounts and equity positions into taxable accounts in order to avoid having the bond interest taxed as ordinary income.

    As a tax consultant, I must admit that this tax law change provides an increased level of job security. The instruction manual for Form 1040 has doubled in length since the Tax Reconciliation Act of 1987. Although taxpayers yearn for tax simplification, we seem to be going in the opposite direction.

    --CAROLYN L. MORA


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    Women Save Less Money Than Men

    I was honored to serve as a panelist at the women’s conference sponsored by the Hispanic Chamber of Commerce last week. The event was a huge success, and I believe all the attendees, myself included, found the investment of time to be of great benefit. I shared many financial “war stories” with women and heard some incredible stories as well. With these stories fresh in my mind, my focus now turns to the specific financial planning needs of women.

    Traditionally, women haven’t had as much experience as men in managing money. Until about 30 years ago, most married women did not work outside the home. As a rule, they didn’t get involved in the family’s financial decisions. Many women, even those with their own incomes, were raised to expect that the men in their lives would take care of investing. Obviously, this environment has changed over the last several decades. Whether or not a woman has her own income, she should know how her family’s money is being managed and invested. Studies conducted by the National Center for Women and Retirement Research indicate that 80-90% of women will have to manage their money sometime in their lifetimes. This is clearly a reflection of the statistical information that indicates women live longer than men.

    Because women live longer, their money has to last longer. Even though women, on average, live 7 years longer than men, the average woman actually accumulates less money for retirement than the average man. Reasons for these discrepancies include the following:

    Fewer women have pensions. More women work part-time or for service and retail businesses that don't offer such plans. Less than half of working women participate in a pension plan.

    Women earn less. According to recent Census Bureau data, full-time working women earn an average of 75% of the salary of men. Even if a woman puts the same percentage of her salary away for retirement as a male colleague, the dollar amount is lower.

    Women have fewer years in the workforce. Taking time out to have children means fewer years to build up retirement funds in a 401(k) or other plan. It also may mean lower social security payments upon retirement.

    Additionally, studies show that men consistently put more away for retirement at a younger age than do women. Many working wives have smaller salaries than their husbands do; as a result, there isn’t much of a surplus to set aside for retirement. For many women, especially those with children, there are many other priorities to consider, such as medical costs, education needs or saving money to buy a home. With all the pressures women face today-to excel at work, manage our homes, be loving wives and mothers, and participate in our communities-it’s difficult to take on additional responsibilities.

    Somehow, we have to make investing a priority. Developing a road map through a comprehensive financial plan is a key element in financial success. Half the battle is just getting started, and the sooner you begin, the easier it will be to work toward your financial goals.

    --CAROLYN L. MORA


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    Laws Make Divorce Tough For Tax Accountants

    Many of my clients experienced significant life changes during 2002, most of which had significant tax implications. The most common of these events involved retirement, the death of a spouse and divorce. I find divorce among my client base becoming more prevalent, which isn’t surprising based on The National Center for Health Statistics’ recently released report which found that 43 percent of first marriages end in separation or divorce within 15 years.

    On top of the emotional strain, the tax implications of divorce can be very unsettling, especially because of community property laws. In Texas and other community property states, communal assets are distributed equally, regardless of who earned more, or spent more during the marriage. The courts typically allow the couple a certain amount of flexibility in deciding how specific assets should be allocated. One important point to consider is that even if assets are split equally in dollar amount, certain assets may have less favorable tax treatment than others. The two largest assets most couples hold are typically a house and retirement plan assets. In most cases a residence can be sold with no tax impact, whereas the liquidation of retirement plan assets is a taxable transaction. If the retirement plan assets are sold before the account holder reaches age 59 ½, the Internal Revenue Service assesses an additional penalty of 10%. Stocks and bonds held in taxable accounts could generate capital gains or capital losses for the recipient upon sale of the assets.

    One approach to an equitable distribution of assets would be to segregate assets by categories, for example, cash and money market accounts, retirement assets, taxable stocks and bonds, personal property and real estate. Then assets in each category could be split evenly. This approach may not be appropriate if one spouse wants to keep the house; if the home represents a large portion of the total assets this will skew the distribution. In this case, it may be best to retain the services of a financial professional to assess the tax impact of various allocation approaches.

    Another important area to consider in a divorce settlement is the allocation of debt between husband and wife. Divorce courts typically allocate the couple’s debts evenly, however many creditors ignore this allocation and hold both parties liable. A common example of this is the Internal Revenue Service taking collective action against both spouses for prior year tax liabilities, regardless of what the divorce decree calls for. In some cases, there may be protection under the IRS Innocent Spouse provisions, but this protection is sometimes difficult to qualify for. I have seen many cases of a remarried individual using the married filing separately status, which is typically less advantageous than filing married filing jointly, in order to protect their new spouse’s refund from being allocated to unpaid tax liabilities incurred in their previous marriage.

    The best approach would be to pay off all joint liabilities before dividing asset accounts and close all joint accounts in order to avoid having problems with creditors in the future. In most cases mortgage debt can be assigned to the spouse who will be keeping the house. Although divorce proceedings are difficult, taking these extra planning steps during the divorce process will eliminate having to address financial problems after the divorce, when an amicable settlement is less likely to be reached.

    --CAROLYN L. MORA


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    Compounding Effect Makes Owning IRA's Wise

    One of my favorite last minute planning tips is to have clients fund an Individual Retirement Account (IRA) by April 15. A Traditional IRA allows the taxpayer to set aside a maximum amount of $3,000, ($6,000 per couple) in a tax-deferred account. New tax law provides a catch up provision for individuals age 50 and over which allows these taxpayers an additional $500 funding opportunity.

    The dividends, interest and capital gains in an IRA accumulate tax-free until they are withdrawn. This compounding effect can create an account that outperforms a typical taxable account. If neither you nor your spouse is covered by an employer sponsored retirement plan, your entire IRA contribution is deductible. If you or your spouse participates in an employer’s plan, a portion of your contribution may be deductible if you fall below specified income levels. New tax legislation has lifted the 10% penalty on early withdrawals from Traditional IRA’s for first-time home purchases (up to $10,000) and withdrawals to cover higher education costs.

    There is nothing more disappointing than a client losing out on an available deduction related to an IRA contribution because they don’t have the cash available to fund the IRA by April 15. I typically recommend that clients fund their IRA’s through a monthly automatic investment program so that the investment is spread evenly throughout the year and is less of a strain on cash flow.

    The Roth IRA is also a very effective tax planning tool. The Roth IRA allows an investor to completely eliminate federal taxes related to their investment earnings. Although contributions to a Roth IRA cannot be deducted from taxable income, withdrawals are tax-free if the account has been opened for at least five years and the distribution is made (1) after age 59 ½ or, (2) on or after your disability or death or, (3) for the purchase of a first time home (up to $10,000).

    The Roth IRA has higher income limits for eligibility than the Traditional IRA. Single and joint taxpayers earning income in excess of the Traditional IRA’s deductibility limits may still be eligible to make a full Roth IRA contribution. The full $3,000 ($3,500 for those age 50 and over) contribution to a Roth IRA may be made by single taxpayers with modified adjusted gross incomes of less that $110,000 and married taxpayers filing jointly with incomes below $160,000.

    There is no age restriction related to the Roth IRA, you could continue to contribute to the Roth IRA as long as you have earned income. Unlike the Traditional IRA, there are no required minimum withdrawals required from a Roth IRA account upon reaching age 70 ½.

    Many clients have asked about the option of converting a Traditional IRA to a Roth IRA. IRA investors with adjusted gross incomes of less than $100,000, single or joint filing status, can convert all or a portion of their investment in a Traditional IRA to a Roth IRA. This decision can be fairly complicated and may have significant tax consequences; it is important to consult your financial advisor regarding the many factors to be considered when making this decision.

    --CAROLYN L. MORA


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    Estate Planning Resolves Issues Before Death

    A recent and very disturbing rash of health problems among my client base has reminded me of the importance of my role as a financial coach in their lives. Often, I am one of the first to be notified about a serious illness or death in the family. I take this role very seriously, and I don’t shy away from communicating with my clients about planning ahead for emergencies.

    Thoughtful estate planning is crucial so that your property is transferred according to your wishes, but a comprehensive estate plan will also help manage your tax bill and the tax bill of your beneficiaries. It is much more desirable to plan ahead and address the sometimes complex choices involved in estate planning in a non-emergency setting rather than at an emotionally-charged time. Although we don’t enjoy thinking about our mortality, facing up to these issues and approaching them in a proactive manner is an important gift to your family.

    In drafting your will, you will want to give careful consideration to the choice of your executor. This person should be somebody that has proven to be responsible in the past, as this individual will be handling many of the financial and legal details after your death. Another important area to be addressed in your will is the determination of a guardian for your minor children. This guardianship issue is sometimes a sticking point with many couples; don’t let this difficult decision slow down your estate planning process.

    In addition to wills and trust documents, estate planning also involves the execution of Durable Powers of Attorney and advance Health Care Directives. These documents are very important as they identify who you want to handle financial, legal and health related decisions in the instance you become incapacitated.

    Communicate with your family and make sure they are aware of what you have outlined in these documents. Ideally this communication will prevent problems between family members at the time of your illness or death. Keep the will and related documents in a location you have discussed with your family and give copies to your attorney and another responsible person. A safe deposit box is not the ideal location for your will and estate planning documents as banks often freeze the contents of the box upon your death and will not allow your family members to retrieve them without proper documentation.

    It is also important that you give your family the names and phone numbers of your accountant, financial consultant and insurance agent. I have found that many of my aging clients find comfort in bringing in their family members to meet with me so that an introduction can be made at an early stage, rather than at the distressful time of death. It is also important that you make a list and communicate to family members what employee benefits would become available upon your death. It is very important that you keep organized files with all retirement plan statements and insurance policies offered through your employer.

    I can assure you that completing the estate planning process will help you sleep better at night, and who knows, it may even increase your life expectancy by removing this burden from your shoulders!

    --CAROLYN L. MORA


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    Situations Determine Need For Tax Professional

    Taxpayers can benefit greatly by hiring a tax professional to provide tax and business consulting services and to prepare their tax return. Some of the basic expectations a taxpayer may have when retaining a tax professional is that the professional will help to reduce the amount of tax paid to the IRS and help with tax planning projections during the year in order to implement tax-saving strategies before yearend.

    There are certain instances that signal when a taxpayer should hire a CPA or other tax professional.

    Business Start Up- Any taxpayer starting a new business would be wise to consult with a tax professional in the early stages of their business planning. CPA's and other tax professionals can advise the client as to the most advantageous entity structure for tax purposes (i.e., sole proprietorship, corporation, partnership or LLC). I often consult with clients who are under the impression that it is critical that they incorporate immediately, but in many cases the client is better off saving the incorporation fees at the front end when capital is scarce, and incorporating at a more appropriate time in the future. Of course, specific issues make it necessary to address this decision on a case-by-case basis. A tax professional can also help a new business owner budget and project business activity in order to develop a realistic cash flow plan. It is a well-known fact that one of the leading causes of small business failure is under-capitalization. In many cases I have advised clients to maintain their current employment or their spouse's employment during the start-up phase of the business in order to ensure an income stream.

    In addition to providing tax consulting to new business owners, most financial professionals can also assist with establishing a logical record-keeping system to record and monitor daily business transactions. A financial professional can also provide advice on the most appropriate hardware and software systems for business accounting purposes.

    Problems With the IRS- Taxpayers who have been notified of an upcoming IRS audit or taxpayers who have historically had problems with the IRS should undoubtedly retain the services of a tax professional. CPA's and other tax professionals have specific expertise in working with the IRS and in many cases, have developed relationships within the local IRS offices. In certain instances, it may be necessary for a taxpayer to consult a professional who specializes in "offers in compromise" arrangements in which the IRS may agree to negotiate with the taxpayer regarding the amount of tax to be paid.

    Complex Tax Returns- Taxpayers with complex tax returns involving business holdings, K-1's from investments in partnerships or S corporations, rental property transactions, heavy securities trading and filing requirements in more than one state would be wise to consult a tax professional to assist with their tax return in order to maximize tax savings and ensure the proper preparation of their tax return.

    --CAROLYN L. MORA


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    Update Your Finances

    The last month of the year is the time I typically spend helping clients with yearend tax planning, but there are several other actions that should be taken on an annual basis in order to get your financial house in order. You will be doing you and your family a favor by taking the following steps on a proactive basis rather than having to scramble for this information in an emergency situation.

    Update or prepare a personal financial statement. List out all your assets (what you own, either out right or via a loan) and any liabilities that you may have (mortgage debt, auto loans, credit card debt, etc.). Your assets less your liabilities indicates your net worth, hopefully you will determine that this is a positive rather than a negative figure. If you determine that your liabilities exceed your assets, now is a good time to start doing some serious budgeting to determine how you can reduce those debts in the coming year and perhaps change your spending patterns. There are several credit counseling services available if you find you need some outside assistance. Keep an extra copy of this personal financial statement offsite, perhaps with a trusted friend or family member who might also serve as your executor.

    Review your investment assets and determine whether you have an investment strategy or if you're investing in an inconsistent manner. Determine whether your current holdings are properly aligned with your goals. The market volatility we have experienced in 2002 makes a consistent and intelligent approach to investing more important than ever before. If necessary, start making changes now.

    Review your company benefits and determine how they can best benefit your situation. If you are married and your spouse also has company benefits, review benefits for overlaps or gaps. Make sure your choices are the most cost-efficient and are appropriate in addressing your family needs. Don't get caught at the last minute of your enrollment period and default to last year's choices, take full advantage of your benefits.

    Check your Social Security earnings history. Social Security automatically sends a history statement a few months prior to your birthday each year. If you have not received your report, you should request one. The Social Security Administration has a very informative web site at www.ssa.gov. Also, follow up every three years by requesting and reviewing this statement for errors or omissions. It is much easier to correct a problem within a three-year time period than to recognize and correct a mistake made 30 years ago.

    Check your credit report at least annually. Determine who is requesting credit information about you. A few of the primary credit reporting agencies to check with are Equifax (1-800-685-1111), Experian (1-888-397-3742) or TransUnion (1-888-567-8688). Don't wait until you need a mortgage or other major loan to identify problems or mistakes in your credit report. You can also call these credit agencies to request removal of your name from credit bureau mailing lists and stop unsolicited pre-approved credit card offers.

    --CAROLYN L. MORA


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    Start Now to Line Up Deductions

    As the weather finally begins to cool, it is evident that yearend is quickly approaching. This is traditionally the time of year I begin to encourage clients to focus on tax planning strategies.

    One idea that can be easily implemented in the next two months is the concept of bunching expenses that are eligible as itemized deductions. The IRS allows taxpayers a standard deduction that can be taken in lieu of all other itemized deductions. Taxpayers with eligible expenses that are consistently lower than the standard deduction should attempt to bunch as many of these deductions into one year as possible and exceed the standard deduction amount.

    Examples of yearend expense bunching would be making the January 2003 mortgage payment in December 2002 and pre-paying the following year's property tax in December 2002 rather than waiting for the due date in January 2003.

    Another area that should be reviewed are medical expenses. Because medical expenses can only be deducted after they exceed 7.5% of a taxpayer's adjusted gross income, many of my clients go years without being able to deduct a dime of their medical expenditures.

    In many cases a taxpayer can control the timing of these expenditures, for example, elective surgery or dental work could either be scheduled in December or January, depending on the year the deduction is needed.

    The volatile financial market we have been experiencing can also create tax planning opportunities. Now is a good time to consider weeding out poor performers in your portfolio with little hope of market recovery. Capital losses can be used to offset taxable gains plus up to $3,000 of ordinary income. Remaining capital losses can be carried forward for use in future years.

    Taxpayers with excess stock losses might consider selling some stronger performers by December 31 to offset those losses. These gains will be entirely tax-free to the extent of the capital losses.

    For example, let's say you own two stock mutual funds, one that has increased in value and one that has lost money since you bought it. In a situation like this, you might want to realize both your gain and loss in the same tax year, offsetting one with the other. Or, you might want to take only your loss.

    Another important issue regarding mutual fund holdings is the capital gains distribution that typically occurs in the fourth quarter. Shareholders must pay tax on their share of the distribution even though they receive no actual cash. Taxpayers should request an estimate from the mutual fund company of these 2002 capital gain distribution amounts rather than waiting for their Form 1099-DIV. Allowing adequate time for tax planning is much smarter than being surprised at the last minute.

    Finally, wage earners who have historically received large refund checks from the IRS or had to pay a large balance at tax time should review their current withholding levels now rather than waiting until April. The IRS offers on-line help in this area via a "Withholding Calculator" at www.irs.gov; assistance is also available through IRS Publication 919, "How Do I Adjust My Tax Withholding".

    --CAROLYN L. MORA


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    Financial Review Even More Important in Times of Instability

    As the stock market continues to decline and economic indicators are still somewhat discouraging in many parts of the country, many of my clients are becoming more and more concerned about their financial health. These feelings of concern are not limited to individuals and businesses, many of the non-profit organizations I am involved with are also feeling the squeeze on revenue sources due to declines in charitable giving.

    Our natural tendency is to get discouraged and claim that there is nothing that can be done about our current situation, but that is not the approach I suggest. I am a strong believer that these economic set backs are temporary. Unfortunately I don't have a crystal ball that allows me to predict when our economy will turn around. Until it does, I suggest taking a few proactive steps to ensure your financial future remains secure.

    The most obvious step to take for individuals, business owners and non-profit organizations alike, is to assess your current spending levels. If your revenue sources are declining, the unpopular but necessary action is to evaluate what expenditures can be reduced or eliminated. Don't fall into the common trap of using credit cards or other loan sources to cover you "temporary" shortfall, this is a destructive pattern that will only increase your financial headaches.

    If you have not prepared a comprehensive financial plan for yourself, or had a financial planner prepare a plan for you, this is the perfect time to address this need. Your financial advisor can take a "big picture" view of your financial situation and make financial planning recommendations that are appropriate for you and your family. This process should address a broad scope of financial needs, including budgeting and saving, tax planning, investments, insurance needs and retirement planning.

    If you have gone through the financial planning process in the past but have determined that current market and economic conditions affect the assumptions made in your plan, now is a critical time to revisit your plan and make certain that any necessary adjustments are made in a swift manner so that you will stay on the right path toward achieving your financial goals.

    For example, if your financial plan assumes an average annual return of 20% on your investment portfolio in order to be able to retire at age 65 and you have experienced significant declines in these asset values over the last two years, now would be the time to adjust your return to something more realistic and possibly increase your saving levels or your retirement age. A common error made in establishing a financial plan is making projections based on unrealistic returns on investments. Our current Bear market should serve as a reminder that returns should be based on averages over time and not be based solely on your most impressive historical performance.

    Very frequently, individuals don't set measurable financial goals. As with other areas of our lives, goals must be specific for us to be able to gauge whether or not we are on the right track.

    --CAROLYN L. MORA


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    Charitable Giving Has Bonus of Tax Savings

    As we approach the fourth quarter of 2002, I am reminding clients that our tax planning window is beginning to close. There are many proposed tax changes on the horizon; one important piece of proposed legislation is the Charity Aid Recovery and Empowerment Act, which among many other important provisions, would allow taxpayers who do not itemize their deductions on Schedule A to claim a deduction for charitable donations as an adjustment to income directly on Form 1040. Certainly not all donation decisions are made based on whether or not a deduction is available, most donors are passionate about the organizations and causes they have chosen to support and the tax deduction is a minor factor in their planned giving decision.

    I realize that charitable giving is a very personal and individual choice. As a CPA, my role is to illustrate the tax benefits of charitable giving, but as a comprehensive financial advisor and coach, my role is expanded to include discussing the tremendous satisfaction derived form charitable giving.

    At a recent estate and financial planning seminar at which I was a co-presenter, a participant asked at what estate level an individual should consider creating sophisticated charitable trusts. I think most estate planning professionals would agree tax planning strategies are tailored on a case by case basis, but obviously, the larger the estate, the more sophisticated the tools become.

    Additionally, the type of assets held in an estate may make certain charitable trust structures particularly useful. For example, an individual holding real estate or securities that have appreciated in value might be concerned with the significant capital gains that would be triggered if these assets were sold. In this situation, the individual might consider creating a Charitable Remainder Trust (CRT) in order to avoid capital gains upon liquidation of these assets.

    To give a very simple example, we'll assume that a husband and wife are holding real estate that was purchased for $100,000 and has appreciated to $1,000,000 over a long-term holding period. They want to sell this asset, but are concerned about the 20%, or $180,000 capital gains tax that would become due based on this $900,000 capital gain.

    The creation of a CRT could help them to avoid the capital gains and create a lifetime income stream by following the following steps: 1) Create a CRT and transfer the appreciated asset into the trust. 2) The trustee of the CRT sells the asset, pays no capital gains tax, and reinvests the proceeds of the sale, $1,000,000 in this case, in assets that produce income. 3) The CRT would pay the couple a lifetime income stream generated from the income producing assets purchased in step 2. 4) The couple claims a charitable tax deduction based on certain actuarial assumptions in the year the asset is transferred to the CRT. 5) Upon the couple's death, the assets are passed to the selected charity, in this example, $1,000,000 would pass to their charity of choice.

    Of course, this planned giving scenario requires in depth legal and tax advice. The scope of this column does not allow for a full discussion of all planning considerations, and is not intended to give specific tax or legal advice.

    --CAROLYN L. MORA


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    IRS Office Good About Installment Payments

    Occasionally I have people call my office for assistance who have delayed the filing of their tax return because they know they will have a balance due and they do not have the funds to pay the tax liability due to the IRS.

    Delaying the filing of your return is not the right answer, if your tax return is not filed in a timely manner, you may have to pay a "failure-to-file" penalty, a "failure-to-pay penalty," and interest for the period from the due date of the tax liability (typically April 15) through the date the taxes are finally paid. Taking a more proactive approach in these situations could save significant penalty and interest dollars.

    Although the IRS has made it fairly easy to charge a tax liability to a credit card, I typically advise my clients to avoid this strategy unless they can utilize a low interest credit card and pay the balance off in a short period of time. Another funding alternative to be considered is approaching your bank or credit union for a short-term loan to cover the tax bill. Interest rates are at an all time low, which makes borrowing from a lending institution much more attractive that high interest credit card advances or the combination of interest and penalties imposed by the Internal Revenue Code.

    My recommendation to clients who can't pay their tax balance in full at the filing date and have no other funding sources is to file their tax return on time and request an extended payment plan from the IRS. This request is made by completing IRS Form 9465, Installment Agreement Request, and submitting this form along with the tax return. The IRS is very liberal in approving these requests, as long as the taxpayer does not have any prior year tax liabilities outstanding. Also attractive is the fact that the IRS will allow you to specify the amount you can pay and the day you wish to make your payment each month. Of course, you should pay as much as you can with the return in order to lower the interest and penalty charges.

    If you have already filed your return and have received a notice, or bill, requesting payment, you may attach a completed Form 9465 to the notice and mail it in the envelope provided. The IRS will let you know, usually within 30 days, whether your request is approved, denied, or if additional information is needed. If approved, a one-time user fee of $43 will be charged. Keep in mind, penalties and interest will be added to the balance due even if an installment agreement is approved.

    It is very important that you take action on any IRS notice received in the mail. If you neglect or refuse to make payment or other arrangements to pay the amount you owe in full, the IRS may take enforced collection action such as filing a notice of federal tax lien or serving a notice of levy.

    Some taxpayers are consistently one year behind, borrowing money to pay the prior year liability and failing to make estimated tax payments for the current year. Just as in addressing other types of debt management issues, strict budgeting and spending discipline should be implemented in order to develop a healthier approach to paying taxes.

    --CAROLYN L. MORA


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    Even experts can make mistakes

    As I reach a fairly significant milestone in my life, turning 40, my thoughts turn to what I have done well in my life and what I would like to do better.

    Although I wish I could say that all my past financial decisions have been good ones, I have been guilty of making many of the mistakes that I have discussed in previous columns. On a positive note, I always learn from my mistakes, and I follow my own advice on financial planning.

    One of the mistakes I made while working in a corporate setting was under-funding my 401(k) plan. I don't believe I ever reached the maximum deferral limit, and I have no logical explanation for not having allocated more of my earnings to my retirement account, probably because I was young and didn't even think of retirement planning as an important goal at that stage of my life. I missed out on an opportunity to defer more of my taxable income and limited the growth in my account by not taking advantage of my employer's matching contributions.

    In our current economic environment, it is more important than ever to take advantage of retirement plan benefits offered by your employer. In addition, the earlier in life we start saving for retirement, the longer this account has to grow and appreciate.

    To make matters worse, I exercised very poor judgment in handling my 401(k) account balance when I left my first employer. I committed one of the big no-no's that I am constantly counseling clients about; I did not roll over my 401(k) balance and took a cash payout when I left my job. Fortunately, the account balance was not very large, but the results were still disastrous: I carved out about a third of my retirement account and gave it back to the IRS in the form of taxes and an early withdrawal penalty.

    Many clients who have made this same mistake come to me after the fact and tell me that their employer never explained the tax consequences to them. Don't rely on your employer to give you tax advice; this decision should be discussed with your tax consultant. Actually, the disposition of your retirement account should be a fairly easy decision unless you have a significant financial hardship. Nine times out of 10, my advice to clients is to roll over their retirement plan account into an IRA rather than cash out.

    Among the solid financial decisions I have made, the most important has been saving consistently and investing wisely. I have strictly adhered to the practice of dollar-cost averaging for almost 12 years and have increased my monthly investment amount as my financial situation improved.

    Dollar-cost averaging is the practice of investing consistently, most commonly monthly. Studies have shown that this investment approach produces better performance than "market timing," or trying to anticipate market changes so that you buy low and sell high. Instead, I have made solid investment choices and hold fast to a long-term investment approach.

    In spite of a few poor retirement planning decisions early in my adult life, I am now on a solid financial path.

    --CAROLYN L. MORA


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    Windfall merits tax plans

    Without a doubt, one of the most difficult tasks in my job is to call a client and tell them that they have a significant tax liability. In many cases, proper tax planning throughout the year or prior to a major taxable transaction could have prevented the last minute "surprise" and saved me from having to make a tough phone call.

    A very common taxable transaction that is easy to address is the sale of stock or mutual funds at a sizable capital gain. Several of my clients had very isolated capital gain transactions during the 2001 tax year. By isolated, I mean that these clients were not buying and selling stocks and mutual funds throughout the year at varying gains and losses, but rather, they conducted very few stock sales, all of which resulted in large capital gains. In these cases, I place part of the burden of communicating the potential tax liability on the broker or financial planner; a solid financial consultant should be advising you of the tax implications of these transactions. I encourage clients to contact me when they experience some type of windfall during the year so that we can address the tax liability at that point, rather than after yearend when it is too late to do any strategizing and I am in the heat of the battle trying to get returns finalized by April 15.

    Tax deductions can be budgeted and planned for as well. Tragically, some taxpayers are unable to maximize their IRA and retirement plan funding because of cash flow constraints. In several cases during this tax season, I calculated available tax deductions related to IRA or retirement plan funding and eagerly called the client ready to rejoice in their significant tax savings. Unfortunately, some of those clients were unable to take advantage of the available deductions because they did not have the necessary cash resources to fully fund these retirement vehicles. I commend the clients who budgeted for their retirement plan contribution along with their other operating expenses and remitted contributions on a monthly basis.

    Every tax season I look back and ask myself what I could have done better throughout the year to avoid having to make these "bad news" phone calls prior to April 15. The answer is always the same, better communication with my clients. This year I will be conducting mid-year "financial check-ups" with all of my clients. For some clients, it may be a brief phone call, for other clients, an in-depth consultation will be necessary.

    I would like to shift some of the burden onto the taxpayer well, I encourage my clients, and all taxpayers, to call their tax advisor whenever they suspect a transaction may result in a large tax liability. If possible, call before the transaction is completed; at a minimum, call after the transaction is completed so that you and your tax consultant can make a reasonable estimate of the tax liability early on and consider other transactions that may offset some of the liability. Sometimes the taxes cannot be avoided, but at least the situation is assessed early on and you are not subjected to the dreaded call from your CPA at the midnight hour.

    --CAROLYN L. MORA


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    Spending, budgeting problems prevalent

    There are weeks where I encounter the same issue so many times in my practice that I feel it important to address this issue in my column. Regrettably, the issue that I have felt the need to discuss is that of personal debt management, or said another way, credit card abuse. I have seen many reasons for the mismanagement of credit cards, the most upsetting are when clients use credit to replace lost income due to job loss or divorce. Of course, in many cases the problem is simply overspending

    There are two important financial goals that I have mentioned in prior columns which I think are worth repeating. They are basic, but will help you to stay on top of your financial obligations if a major life change were to occur.

    The first goal is to have a cash reserve of three to six months of your average living expenses in a savings account which is segregated from your normal checking account. This "emergency fund" should be kept in a savings or money market account, rather than invested in mutual funds or stocks that are subject to market fluctuation. Establishing this fund should be a priority, this cushion should be in place before you begin to start investing additional amounts in the stock market.

    A second and equally important goal is to evaluate where you are currently spending your money and to prepare a monthly budget based on that information. If you have a computer, you might want to evaluate one of the more popular software programs which are available to help you track your expenditures, many of these packages are very easy to use and relatively inexpensive. A manual tracking method can be just as effective, the key is to track your monthly expenses by major categories to see where your income is going.

    After you complete this exercise you will be ready to develop a budget. You may find that your spending has been consistently above your income level and that you need to cut back in a specific area. If you have existing debt you are trying to pay off, you will need to go through this process to determine where you can cut back in order to allocate more to your monthly payments.

    You may find that you have excess income which is being wasted on non-essential items. I often suggest to my clients that they authorize a direct debit to their checking account which transfers money to a savings or investment account on a consistent basis. This concept is referred to as dollar cost averaging.

    If you are juggling credit cards and feeling overwhelmed, there are steps you can take to make your life easier. Low credit card rate offers can be tempting, but this approach will help only if you are able to pay off balances quickly. My suggestion would be to approach your bank or credit union and find out whether they would be willing to extend you a consolidation loan at a reasonable rate with a manageable period of time to pay off your debts. Additionally, the YWCA provides an excellent credit counseling service.

    --CAROLYN L. MORA


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    Consumers Make IRS Their Bank

    Every year I am amazed at the number of clients who choose to use the IRS as their bank during the year, either by creating a "savings account" with the IRS due to excess tax withholdings made by their employer or by taking out a "loan" with the IRS by not withholding enough from their paycheck or not making adequate estimated tax payments. Neither of these approaches makes good financial sense.

    Receiving a sizable refund from the IRS is not always the best use of a taxpayer's savings throughout the year. There are definitely opportunity costs in letting your money sit with the IRS. Although interest rates dropped significantly in 2001, it doesn't make sense to leave excess funds in a non-interest bearing account. In some cases, that money could have been used to pay off debts that you were paying interest on during the year (for example, credit card debt). If appropriate to your financial profile, you could have taken advantage of the great bargains in the stock market during 2001.

    Many taxpayers may say that they are not disciplined enough to save during the year and that is why they let the IRS hold their excess funds. My advice would be to make systematic transfers into a savings account or investment account on a monthly basis. Most banks will do an automatic sweep into a savings account upon your instruction, and the minimum investment levels of most mutual fund companies keep dropping lower and lower to make it easier for virtually anybody to set up an investment account and have amounts automatically debited from a checking account.

    Unfortunately, many taxpayers do not perform proper planning throughout the year and owe significant balances with their tax return. As a general rule, if withholdings on salary amounts are adequate, the taxpayer should be able to avoid penalties even if an unusual tax event arises during the year. I make it a point of reminding my clients that the minimum amount of taxes that must be deposited for the tax year is the lesser of 100% of the prior tax year liability (112% of your prior year tax liability for a joint return with taxable income of $150,000) or 90% of the tax liability for the current year.

    For example, if a taxpayer had a "normal" tax year in 2001 which resulted in a tax liability of $15,000 and then in 2002 he sold stock which generated a $10,000 capital gains tax on top of his average income tax of $15,000, he would not be penalized at the time of the 2002 filing as long as he had paid in at least $15,000 in taxes during the year (100% of the prior tax year liability) and paid the additional $10,000 tax due by April 15. Whether I would advise this taxpayer to send an estimated tax payment to the IRS using Form 1040-ES at the time of the stock sale or to pay the taxes upon the timely filing of the 2002 tax return would depend on my confidence in their money management skills. As I have suggested many times, the best approach is to keep an open line of communication with your tax consultant during the year in order to avoid any surprises or penalties.

    --CAROLYN L. MORA


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    Charitable Donations Should Be Considered in Tax Planning

    April is not the time for tax planning. Obviously, the biggest problem with this approach is that the year has already ended. Secondly, expecting your accountant to spend time on tax planning projects during the heat of tax season is unrealistic, tax professionals are so bogged down in trying to complete tax returns and meet deadlines that there is minimal time for tax planning. Now is the best time to get organized and plan for yearend.

    Last week I discussed timing your itemized deductions and bunching them in certain periods where they might be needed most. One very common itemized deduction I didn’t discuss is charitable contributions. Generally, cash donations are a dollar for dollar deduction and are a great opportunity for lowering your tax bill. As a result of the terrorist attacks on September 11, opportunities for charitable giving are more abundant then ever. Choose your organizations carefully, but don’t ignore this tax planning idea.

    One type of charitable deduction that is often overlooked relates to the mileage driven in connection with charitable activities. If you are involved as a volunteer or board member for charitable organizations, keep track of the mileage related to your charitable activities, a deduction of 14 cents per mile is available for the 2001 tax year.

    Also, don’t overlook those times that you may have cleaned out your closets or the garage and donated clothing, furniture, toys or other items to needy organizations. Although you cannot deduct your original purchase price for these items, there are several methods that are accepted by the IRS for estimating the current value of those items. The receiving organization is not responsible for assigning a value to these items. You should always ask for a receipt when making non-cash donations and be certain the receipt has a detailed list of the items that you donated. This receipt is not only important for your tax records, but also to help you to remember what items were donated when you begin to pull your records together for your tax return.

    Another very valuable method of making non-cash donations is to donate appreciated stock that could trigger significant capital gains if you were to sell the stock. When making charitable donations of this nature, you not only avoid taxable capital gains, but you are able to deduct the appreciated fair market value of the stock. For example, if you paid $2,000 for stock which is now worth $10,000, you can avoid capital gains tax on the appreciation of $8,000 and deduct the full $10,000 contribution which only cost you $2,000.

    In certain cases where an estate holds significant appreciated property, it may be beneficial to consider forming a Charitable Remainder Trust or Charitable Lead Trust. These trusts are very sophisticated forms of charitable giving and a description of these trust arrangements is beyond the scope of this column. Although these trust instruments can be somewhat complex, there are certainly significant tax savings opportunities if the proper circumstances exist.

    --CAROLYN L. MORA


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    Economy is on Brink of Recovery

    In a meeting arranged by New York Stock Exchange Chairman Richard Grasso held earlier this month, congressional and business leaders joined forces for the purpose of developing an economic stimulus package in order to revive the slumping economy of our nation. Top representatives from the House Ways and Means Committee discussed with corporate leaders a proposed package of up to $75 million consisting of tax cuts and additional spending to help displaced workers.

    President Bush has suggested speeding up many of the tax-cuts that were to be phased in over a ten-year period, or sending out another tax rebate check in order to get more money into the hands of the taxpayers more rapidly. For lower-income taxpayers, the administration and members of Congress are discussing a potential tax credit, focusing on taxpayers whose income levels were too low to qualify for the recent tax rebate checks, but who pay Social Security payroll taxes. The most significant business credit being considered involves the accelerated depreciation of capital improvements, in other words, allowing businesses to write off the cost of computers, business vehicles, machinery and other new equipment more quickly. In order for this strategy to work, these attractive write-off benefits would have to be available for a limited time, perhaps a year or two, in order to encourage businesses to make these expenditures now rather than waiting until a future period.

    While these tax cuts and incentives might increase spending by businesses and lower-income individuals, many economists predict that most of the individual tax reductions would be saved rather than spent. As I have mentioned in previous columns, our national savings rate is in dire need of improvement, but increased saving at this time does nothing to battle our short-term economic challenges. Another important consideration is that many Americans have been operating in slow motion since the attacks on September 11 and frankly, are not in the mood for shopping or vacations.

    There is an upside to all the "doom and gloom"; we shouldn't lose sight of the fact that the economy has already been injected with many fiscal and monetary incentives:

  • The Federal Reserve has reduced its target for short-term rates by 4 percentage points since the beginning of the year in response to stalled economic growth.
  • Congress has already authorized significant increases in defense and anti-terrorist spending, in addition to the approval of $40 billion in domestic spending, $20 billion of which is being ear-marked for rebuilding and helping victims of the attacks.
  • The major tax bill approved by Congress earlier this year will lower taxes by approximately $70 billion in the fiscal year that began this month.
  • Energy prices are falling and the US is experiencing virtually zero inflation.


  • Our economy is poised for recovery; my prediction is that the economic stimulus package ultimately approved, in whatever form that may be, will be the final push we need.

    --CAROLYN L. MORA


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    Divorce can be Taxing

    Many of the life changes we encounter have significant tax implications, the most obvious being retirement, the death of a spouse and divorce. We've all heard variations of national divorce statistics, most of which fall close to the Bureau of the Census projection in 1993 that 4 of 10 first marriages will end in divorce.

    On top of the emotional strain, the tax implications of divorce can be very unsettling, especially because of community property laws. In Texas and other community property states, communal assets are distributed equally, regardless of who earned more, or spent more during the marriage. The courts typically allow the couple a certain amount of flexibility in deciding how specific assets should be allocated. One important point to consider is that even if assets are split equally in dollar amount, certain assets may have less favorable tax treatment than others. The two largest assets most couples hold are typically a house and retirement plan assets. In most cases a residence can be sold with no tax impact, whereas the liquidation of retirement plan assets is a taxable transaction. If the retirement plan assets are sold before the account holder reaches age 59 ½, the Internal Revenue Service assesses an additional penalty of 10%. Stocks and bonds held in taxable accounts could generate capital gains or capital losses for the recipient upon sale of the assets.

    One approach to an equitable distribution of assets would be to segregate assets by categories, for example, cash and money market accounts, retirement assets, taxable stocks and bonds, personal property and real estate. Then assets in each category could be split evenly. This approach may not be appropriate if one spouse wants to keep the house; if the home represents a large portion of the total assets this will skew the distribution. In this case, it may be best to retain the services of a financial professional to assess the tax impact of various allocation approaches.

    Another important area to consider in a divorce settlement is the allocation of debt between husband and wife. Divorce courts typically allocate the couple's debts evenly, however many creditors ignore this allocation and hold both parties liable. A common example of this is the Internal Revenue Service taking collective action against both spouses for prior year tax liabilities, regardless of what the divorce decree calls for. In some cases, there may be protection under the IRS Innocent Spouse provisions, but this protection is sometimes difficult to qualify for. I have seen many cases of a remarried individual using the married filing separately status, which is typically less advantageous than filing married filing jointly, in order to protect their new spouse's refund from being allocated to unpaid tax liabilities incurred in their previous marriage.

    The best approach would be to pay off all joint liabilities before dividing asset accounts and close all joint accounts in order to avoid having problems with creditors in the future. In the case of the mortgage debt, in most cases the mortgage can be assigned to the spouse who will be keeping the house. Although divorce proceedings are difficult, taking these extra planning steps during the divorce process will eliminate having to address financial problems after the divorce, when an amicable settlement is less likely to be reached.

    --CAROLYN L. MORA


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    Divorced Can Get Tax Relief

    When a married couple asks whether they should file a joint return or separate return, most tax professionals consider the tax impact and almost always recommend filing a joint return. One issue that we often forget to consider is that both taxpayers are jointly and individually responsible for the tax and any interest or penalty due on the return, even if they later divorce. This is true even if a divorce decree states that a former spouse will be responsible for any amounts due on previously filed joint returns. The Internal Revenue Service views this issue differently than the divorce courts; one spouse may be held liable for all the liability even if the other spouse earned the income.

    In some cases, a spouse will be relieved of the tax, interest and penalties on a joint return. Three types of relief are available:

    1. Innocent Spouse Relief

    2. Separation of Liability

    3. Equitable Relief

    Innocent Spouse Relief

    In order to apply for relief under this option, you must have filed a joint return that has an understatement of tax due to an erroneous item related to your spouse’s income or deductions. Additionally, you must establish that at the time you signed the joint return, you did not know, and had no reason to know, that there was an understatement of tax. Finally, it must be unfair to hold you liable for the understatement of tax taking into account all the facts and circumstances. In considering whether it is unfair to hold a taxpayer responsible for the understatement of taxes, the IRS typically reviews whether the taxpayer received any significant benefit from the understatement of tax or whether the taxpayer was later divorced from or deserted by his/her spouse.

    Separation of Liability

    To be considered for tax relief under Separation of Liability, you must have filed a joint return that has an understatement of tax due that, in part, related to an item of your spouse. You must be no longer married, legally separated, or have not been a member in your spouse’s household for an entire year prior to filing for relief. If the IRS establishes that you actually knew of the item giving rise to the understatement, then you are not entitled to relief to the extent of the actual knowledge. The IRS will not grant relief if it is proven that a taxpayer and spouse transferred assets as part of a fraudulent scheme or if property was transferred to a spouse or former spouse for the purpose of avoiding tax.

    Equitable Relief

    If the criteria for Innocent Spouse Relief or Separation of Liability are not met, you may still be able to qualify for tax liability relief under the Equitable Relief option. To qualify under these rules, the IRS must determine that it is unfair to hold you liable for the underpayment or understatement of tax taking into account all the facts and circumstances.

    A taxpayer must file Form 8857 with the IRS in order to request relief under the options discussed above. You must attach a statement to the form explaining why you believe you qualify for relief. The IRS will review your Form 8857 and let you know if you qualify.

    You must file Form 8857 no later than 2 years after the date on which the IRS first attempted to collect the tax from you after July 22, 1998 (the effective date of the IRS Innocent Spouse Relief rules).

    --CAROLYN L. MORA


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    Developing a Sound Financial Plan

    The recent volatility in the stock market has been a sobering experience for many investors. The healthy bull market that dominated the 1990’s made investing look easy, it seemed that anybody could make money in the stock market. Many investors are now realizing that they needed comprehensive financial advice years ago, but their strong investment returns over the past few years fooled them into thinking they were doing fine without an advisor.

    You have probably heard the term financial planner or seen this term in various financial publications, but you may have wondered exactly what a financial planner does. A financial planner is someone who uses the financial planning process to help you determine how to meet your life goals. The planner can take a "big picture" view of your financial situation and make financial planning recommendations that are appropriate for you and your family. This process should address a broad scope of financial needs, including budgeting and saving, tax planning, investments, insurance needs and retirement planning. This comprehensive approach to addressing your financial goals sets the planner apart from other financial advisers, many of who have been trained to focus on a particular area of your financial life.

    According to the Certified Financial Planner Board of Standards, the financial planning process should consist of the following six steps:

    1. Establishing and defining the client-planner relationship. The financial planner should clearly explain or document the services to be provided to you and define both his and your responsibilities. The planner should explain fully how he will be paid and by whom. You and the planner should agree on how long the professional relationship should last and on how decisions will be made.

    2. Gathering client data, including goals. The financial planner should ask for information about your financial situation. You and the planner should mutually define your personal and financial goals, understand your time frame for results and discuss, if relevant, your risk tolerance. The financial planner should gather all the necessary documents before giving you the advice you need.

    3. Analyzing and evaluating your financial status. The financial planner should analyze your information to assess your current situation and determine what you must do to meet your goals. Depending on what services you have asked for, this could include analyzing your assets, liabilities and cash flow, current insurance coverage, investments or tax strategies.

    4. Developing and presenting financial planning recommendations and alternatives. The financial planner should offer financial planning recommendations that address your goals, based on the information you provide. The planner should go over the recommendations with you to help you understand them so that you can make informed decisions. The planner should also listen to your concerns and revise the recommendations as appropriate.

    5. Implementing the financial planning recommendations. You and the planner should agree on how the recommendations will be carried out. The planner may carry out the recommendations or serve as your "coach," coordinating the whole process with you and other professionals, such as your attorney and accountant.

    6. Monitoring the financial planning recommendations. You and your financial planner should agree on who will monitor your progress towards your goals. If the planner is in charge of the process, she should report to you periodically to review your situation and adjust the recommendations, if needed, as your life changes.

    In my next column I will address common errors consumers make when approaching the financial planning process and will also suggest a list of questions you should ask financial planning professionals during the initial “interview” process.

    --CAROLYN L. MORA


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    U.S. tries to boost retirement savings

    A recent study released by the Consumer Federation of America found that 56 percent of American households would not accumulate adequate resources to maintain their current standard of living in retirement. Many other surveys confirm these findings. In response to these concerns, the Committee on Finance of the U.S. Senate (the “Committee”) is recommending the passage of the Retirement Security and Savings Act of 2000, which includes a variety of provisions to encourage more aggressive savings patterns by working Americans. This follows the overwhelming affirmative vote of 401-25 on the same bill by the U.S. House of Representatives in July.

    One provision of the bill allows for a long overdue increase in Individual Retirement Account (IRA) annual contribution limits. IRA contribution limits have not been increased since 1981. The bill increases the maximum annual dollar contribution limit for IRA contributions from $2,000 to $3,000 in 2001, $4,000 in 2002 and $5,000 in 2003. The limit would be indexed in $500 limits in 2004 and thereafter.

    Another important provision of the bill affecting IRA’s is the allowance of catch-up IRA contributions for individuals who have attained age 50. The otherwise maximum contribution limit for an individual who has attained age 50 before the end of the year would be increased by 50%. That is, eligible individuals would be able to make a $7,500 IRA contribution in 2003, rather than a $5,000 contribution.

    The bill would increase the dollar limit on annual elective deferrals under 401(k) plans and 403(b) annuities from $10,500 to $11,000 in 2001. In 2002 and thereafter these limits would increase in $1,000 annual increments until the limits reach $15,000 in 2005, with indexing in $500 increments thereafter.

    Also relating to 401(k) plans, the bill includes a provision that would create a “Roth 401(k)”, allowing employees to contribute after tax dollars to their 401(k) plan and withdraw the funds upon retirement tax free, similar to the Roth IRA.

    A very important provision in the bill provides for a tax credit for low- and middle- income savers. As I mentioned earlier, the rate of private savings in the United States is low; in particular many low- and middle-income individuals have inadequate savings or no savings at all. The Committee believes providing an additional tax incentive to these families will enhance their ability to save more aggressively for retirement. The bill provides for a temporary nonrefundable tax credit for contributions made by eligible taxpayers to a qualified plan. The tax credit rate would depend on the adjusted gross income (AGI) of the taxpayer. Only taxpayers filing joint returns with AGI of $50,000 or less, taxpayers filing head of household returns with AGI of $37,500 or less and taxpayers filing single returns with AGI of $25,000 or less would be eligible for this credit.

    Although I usually try to keep my political views to myself, I would encourage readers to contact their Senators as soon as possible and urge them to vote in favor of this bill. There are two easy ways to contact your Senators: (1) On the Internet, go to www.congress.org where you can automatically send e-mail communications or obtain the mailing address to write a letter (2) Call the Capitol switchboard in Washington D.C. at (202) 224-3121 and ask to be transferred to your Senators’ offices.

    --CAROLYN L. MORA


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    Financial Planners Necessary

    The recent volatility in the stock market has been a sobering experience for many investors. The healthy bull market that dominated the 1990’s made investing look easy, it seemed that anybody could make money in the stock market. Many investors are now realizing that they needed comprehensive financial advice years ago, but their strong investment returns over the past few years fooled them into thinking they were doing fine without an advisor.

    You have probably heard the term financial planner or seen this term in various financial publications, but you may have wondered exactly what a financial planner does. A financial planner is someone who uses the financial planning process to help you determine how to meet your life goals. The planner can take a "big picture" view of your financial situation and make financial planning recommendations that are appropriate for you and your family. This process should address a broad scope of financial needs, including budgeting and saving, tax planning, investments, insurance needs and retirement planning. This comprehensive approach to addressing your financial goals sets the planner apart from other financial advisers, many of who have been trained to focus on a particular area of your financial life.

    According to the Certified Financial Planner Board of Standards, the financial planning process should consist of the following six steps:

    1. Establishing and defining the client-planner relationship. The financial planner should clearly explain or document the services to be provided to you and define both his and your responsibilities. The planner should explain fully how he will be paid and by whom. You and the planner should agree on how long the professional relationship should last and on how decisions will be made.

    2. Gathering client data, including goals. The financial planner should ask for information about your financial situation. You and the planner should mutually define your personal and financial goals, understand your time frame for results and discuss, if relevant, your risk tolerance. The financial planner should gather all the necessary documents before giving you the advice you need.

    3. Analyzing and evaluating your financial status. The financial planner should analyze your information to assess your current situation and determine what you must do to meet your goals. Depending on what services you have asked for, this could include analyzing your assets, liabilities and cash flow, current insurance coverage, investments or tax strategies.

    4. Developing and presenting financial planning recommendations and alternatives. The financial planner should offer financial planning recommendations that address your goals, based on the information you provide. The planner should go over the recommendations with you to help you understand them so that you can make informed decisions. The planner should also listen to your concerns and revise the recommendations as appropriate.

    5. Implementing the financial planning recommendations. You and the planner should agree on how the recommendations will be carried out. The planner may carry out the recommendations or serve as your "coach," coordinating the whole process with you and other professionals, such as your attorney and accountant.

    6. Monitoring the financial planning recommendations. You and your financial planner should agree on who will monitor your progress towards your goals. If the planner is in charge of the process, she should report to you periodically to review your situation and adjust the recommendations, if needed, as your life changes.

    In my next column I will address common errors consumers make when approaching the financial planning process and will also suggest a list of questions you should ask financial planning professionals during the initial “interview” process.

    --CAROLYN L. MORA


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    Hire Family Members, Get Some Tax Deductions

    Hiring your children to work in your business will not only provide them with spending money, but your business will obtain a deduction for their wages as well. Children’s salaries are taxed at their lower tax rate, and the earned income of children under the age of 14 is not subject to the “kiddie tax”, which taxes their investment income at their parents’ higher tax rate. Creating earned income for your child will also make them eligible for the funding of a Roth IRA, which can provide tax-free investment returns over the course of their lives.

    Additionally, if you operate the business as a sole proprietorship and the child employed by the business is under 18 years of age, no Social Security or Medicare tax (FICA) or federal unemployment tax is due on the child’s wages. This arrangement results in employment tax savings as well as income tax savings for the business. The Tax Court has allowed wage expense deductions for children as young as seven years old for tasks such as office cleaning and clerical work It is important to ensure that the compensation paid is reasonable for the type of work performed. The holiday season may be a perfect opportunity to have children provide assistance in the business; this strategy will also help squeeze in an additional tax deduction at yearend.

    There are additional tax benefits to consider in hiring other family members as employees. If you have a legitimate job offering, consider placing your spouse on the payroll. His or her wages are exempt from federal unemployment taxes, and as an added benefit, he or she will be able to earn Social Security credits for the year.

    Self-employed individuals who provide an accident and health plan to all employees may be able to deduct 100% of their own health premiums. If your spouse is a bona fide employee and you are covered under your spouse’s policy, the entire expense of providing the plan is deductible as a business expense. Since all employees must be covered, this may be too costly if you have other employees besides your spouse.

    Another tax consideration related to the hiring of a spouse as an employee is the opportunity for the accumulation of retirement plan benefits and the related tax deduction for the business. Couples who work in a family business can now receive two full pensions, which translates into a larger tax deduction. Under old law, benefits were aggregated for the business owner and spouse and the combined contribution that could be made on their behalf to a defined contribution plan was limited to the individual limit amount of $30,000. Congress has repealed these aggregation rules, allowing the business owner and spouse to each receive contributions to their retirement accounts of $30,000.

    If you have not established a retirement plan for your business to date, there is still an opportunity to implement a plan before yearend and fund the contributions in 2001. Contributions can be made up to the due date of your tax return, including extensions. For example, as a sole proprietorship reporting business activity on Schedule C of the Form 1040, you could establish a retirement plan in December 2000, then file an extension for your Form 1040 and extend the required contribution date to August 15, 2001. This approach allows for a tax deduction on your 2000 tax return, with a funding period seven and a half months after yearend.

    --CAROLYN L. MORA


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    Long-term Effects of Tax Law are Explored

    Clients have been asking me for months how the long-awaited estate tax repeal would affect their tax situation. Although The Economic Growth and Tax Relief Reconciliation Act of 2001 (the Act) approved by President Bush earlier this month does answer many questions, there remains much uncertainty as to what the long-term effects of the estate tax reform provisions included in the Act will be.

    The definitive provisions of the estate tax reform are the sections regarding the lowering of estate tax rates and the increase in the amounts exempt from estate tax. The Act lowers the top estate tax rate from 55% to 50% in 2002, the top rate then decreases by one percentage point in each of the next five years, falling to 49% in 2003, 48% in 2004, 47% in 2005, 46% in 2006 and remaining at 45% in 2007, 2008 and 2009. In 2010, the estate tax is fully repealed.

    Under prior regulation, the estate tax exemption, that portion of an estate exempt from estate taxes, was $675,000 for 2001 and was scheduled to be increased to $750,000 in 2002 with a gradual increase to $1 million by 2006. The Act accelerates the increase in the estate tax exemption to $1 million in 2002 and 2003, $1.5 million in 2004 and 2005, $2 million in 2006, 2007 and 2008 and $3.5 million in 2009.

    Also eliminated with estate taxes is the step-up in basis that heirs have historically received upon inheriting appreciated property. Under current tax rules, if a decedent paid $10 per share for a stock that is currently valued at $100 per share, heirs get a step-up in basis to the market value at date of death and would pay no tax on capital gains if they sold the stock at the appreciated price. Under the new tax rules, the heirs would inherit the stock with a $10 per share basis and would have to pay tax on the $90 per share of capital gains triggered if the stock was sold at the appreciated market value of $100 per share.

    This change creates the difficult task of proving what a decedent paid for an asset. As I’ve witnessed year after year in my tax practice, clients have a difficult enough time finding the records to support asset purchases in their own lifetime, imagine the executors’ challenge of determining the asset purchase price for assets that may have been purchased decades ago. To help alleviate part of this problem, a basis increase of $1.3 million will be allowed for all taxable estates, and an additional basis adjustment will be permitted for property that one spouse leaves to another.

    There is a provision of the Act that has not received much publicity from the media, and that is the “sunset” clause. In a nutshell, this clause states that every provision in the new tax law expires on December 31, 2010. The Act may bring peace of mind and clarity to many taxpayers, but for those individuals who are likely to live beyond the December 31, 2010 date specified in the sunset clause, we may be back to square one.

    --CAROLYN L. MORA


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    Be ready to handle finances

    One of the best things about tax season is that I get a chance to catch up with clients who I normally see only once or twice a year. I enjoy hearing about joyous occasions that my clients have experienced throughout the year: new children and grandchildren, marriages, new jobs and new business ventures. Unfortunately, this year I have also counseled several clients who have experienced significant life changes of a tragic nature: divorce, the death of a loved one, financial hardships. Several times I have mentioned to these clients a column I wrote last year, and I thought it might be helpful to repeat that column.

    I have had many experiences in my practice of women coming to me for assistance after a crisis occurs-often it is the death of a spouse, divorce or unemployment. Most of these women had not been involved in the family's investment decisions; their husbands had typically handled these decisions. In extreme cases, I have consulted widows who were uncertain of assets available and existing liabilities and an extensive and expensive "fact-finding " process was necessary. These women were confronted with financial realities during one of the most emotionally turbulent times of their lives, and obviously, this was not the ideal environment for financial planning.

    The key is to be prepared. Our culture is changing, more women than ever before are remaining single, are getting married later in life or are experiencing divorce. Studies show that women, on average, will outlive their spouses by about seven years. This translates into the fact that most women will have to be responsible for their own finances at some point in their lives. How you plan today will greatly impact the way you live tomorrow. It is critical that you focus on your finances now.

    MAKE FINANCIAL PLANNING A PRIORITY

    It's understandable that many women find it difficult to set aside time to focus on financial planning. With all the responsibilities we face today -work, managing our homes, being loving wives and mothers, community activities -it's difficult to imagine taking on additional tasks. Somehow, we have to make charting our financial course a priority. That might mean discussing an existing financial plan with your husband and educating yourself further on your current situation, or if you have not established a financial plan, making it a priority to start organizing your financial life.

    TAKE ACTION

    The most important step is to take action. It can take a lot less money than you think to start investing. Many mutual fund companies have expanded access to professional money managers by lowering traditional minimum investment levels. The longer you have to invest, the greater the chance that you will have to achieve your investment goals.

    SEEK HELP AND EDUCATE YOURSELF

    You don't have to determine your investment strategy alone. A financial advisor can help you to assess your needs and develop a financial program that will help you to meet your financial goals. Use your financial advisor as a resource to educate yourself about your financial concerns-don't be afraid to ask questions! Also, have your financial advisor recommend books or brochures to help you develop a better understanding of investment issues.

    Getting your financial affairs in order is one of the most responsible things you can do for yourself and your family. I would be remiss if I didn't point out the importance of estate planning as well. Estate planning is not only important for tax purposes, but to ensure that your estate is handled according to your wishes and in the most efficient manner possible.

    --CAROLYN L. MORA


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    Memory fades if you wait too long to file

    As much as I hate to admit it, my own tax return is included in the list of returns I had to file extensions for. On the positive side, I try to do enough personal tax planning throughout the year so that my return preparation is really a confirmation of the figures I have projected (in other words, I typically owe very little additional tax with my final tax return). Unfortunately, that is not the case with many of the tax returns I will be preparing during this extension period.

    As I mentioned in my prior column, an automatic four-month extension can be obtained from the IRS by filing Form 4868 by the due date of the return. With adequate reason, a taxpayer can request and be approved for an additional two-month extension after the first extension period by filing Form 2688. Remember, these are extensions to file, not to pay the tax due. Even when clients request an extension, I discourage them from waiting too long to bring me their tax information for 2000. If they have had significant tax events during the year that may have created a large tax liability; waiting until August 15, 2001 or worse, October 15, 2001, to file their tax return means paying interest and penalties on any tax due with the final return.

    Additionally, in many cases taxpayers may have a tax liability based on a simple withholding mistake (for example, claiming one or two allowances on their Form W-4 when a couple has no children). If this error is discovered in August, that mistake not only adversely affected their 2000 tax return but has created an under withholding of taxes for eight months of 2001.

    Many of my clients make quarterly estimated tax payments to the IRS either because they are self-employed or have additional sources of income that are not subject to tax withholding during the year. The first estimated tax payment for 2001 was due April 17, and following payments are due June 15, September 15 and January 15, 2002. These estimated tax payments are typically calculated based on the prior year tax liability, that is, estimated tax payments for 2001 are based on the tax liability for 2000. When taxpayers delay preparing their tax returns because of extensions, the payments made in April and June may not be adequate and this creates the need to catch up with increased tax payments in September 2001 and January 2002. Estimated tax payments should be made evenly throughout the year, and the IRS may impose penalties if a taxpayer does not make adequate estimated tax payments

    Another important reason for preparing your 2000 tax return as soon as possible is to avoid letting procrastination take over again. You may have had a good reason for filing for an extension, but probably 80% of the extensions I filed for clients were probably due to procrastination issues. Remember, the longer you wait, the fainter the facts will become related to 2000, the more paperwork you are likely to have to wade through to find your 2000 records, and the less motivated you will be to try to search for every deduction.

    I have mentioned in prior columns the importance of planning and being proactive in avoiding tax problems rather that hoping those problems will solve themselves. Filing an extension and preparing your 2000 tax return in the summer or fall of 2001 leaves very little time to do much tax planning for 2001.

    --CAROLYN L. MORA


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    Most need help from financial advisors

    I was in a trendy Los Angeles bookstore this afternoon browsing through the Business section, and was amazed at the number of "How to Become a Millionaire in the Stock Market" books. One book title boldly instructed the reader "Fire Your Broker…" Investors must be careful to wade through these loud messages and be certain not to put their financial assets at risk by taking on more investment management responsibility than they are comfortable with or is reasonable.

    In the current environment, many investors have forgotten what the role of a financial consultant is. Primarily, a financial consultant should make it a priority to learn more about who you are, where you are with your investment strategy and what your ultimate goals are. The result of this process is a financial plan, or blueprint for achieving your financial goals. I find that the completion of this cycle of planning typically relieves a great deal of anxiety for my clients because we create a specific plan to follow and goals to measure their progress against.

    After developing an overall financial plan, your financial consultant can help you determine the type of investments that best fit your needs. Understanding the various investment vehicles can be confusing. Often, this step scares many investors working without a consultant into doing nothing.

    Your financial consultant can help you assess how much risk you should assume in order to meet your financial goals. A well-trained financial consultant will also assist you in deciding how to allocate your assets between various investment types. Owning one type of stock or mutual fund isn't always the best strategy. Diversifying your investments among a number of mutual funds or investment types can reduce your overall risk.

    Developing a personalized investment program, monitoring your investment performance and keeping track of all the appropriate paperwork may require more time than your busy schedule allows for. A financial consultant should offer a professional approach to your investment program that is efficient and your consultant should bring a level of knowledge and expertise to the investment management process that may be difficult for you to achieve on your own.

    One of the most important roles of the financial consultant is to bring discipline to the investment process; this means helping you to follow a systematic investment process. A competent financial consultant will also assist the investor in focusing on long-term goals and controlling unreasonable changes in the investment strategy. A financial advisor should help take the emotion out of investment decisions and help you to avoid "panic selling". many studies illustrate that following a consistent investment discipline is the best approach to achieving superior results over time.

    An intelligent approach to finding a financial consultant would be to talk to friends, relatives or business associates who you know have a good relationship with their financial consultant. This is a very important professional relationship, be certain you invest the proper amount of time and attention to this process.

    --CAROLYN L. MORA


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