Naperville Accounting, CPA and Tax Preparation

Variable Annuities and Your Retirement Strategy

2012-01-31T00:49:00.005-06:00

Retirement savers are generally wise to take full advantage of the tax benefits that apply to employer-sponsored retirement plans and IRAs. However, because these tax-deferred plans are subject to strict annual contribution limits, many higher-income individuals may not be able to set aside enough money in them to pursue a comfortable retirement lifestyle.

Because a variable annuity is not subject to federal contribution limits, it enables investors to invest more after-tax dollars to supplement the income they could receive from other plans. Taxes on earnings are deferred until withdrawn.

Not only does a variable annuity offer a way to pursue investment gains, but it may offer an opportunity for the contract holder to purchase guarantees (for an additional cost) to help protect against the downside risks of investing in the markets. Examples may include the guarantee of minimum fixed income payments or a guarantee to withdraw a specific amount over a lifetime, regardless of account value. Of course, any guarantees are contingent on the claims-paying ability of the issuing insurance company.

If you are looking for a way to supplement your retirement income and defer taxes on investment gains, a variable annuity could play a key role in your retirement portfolio.

Market Exposure with Potential Gains
A variable annuity is a long-term investment vehicle designed for retirement purposes. The contract holder agrees to make a single payment or a series of payments to an insurance company in exchange for a future income (typically in retirement). These payouts can be structured to last for the rest of the contract holder’s lifetime.

During the accumulation period, the contract holder invests in a variety of investment subaccounts according to his or her risk tolerance, long-term goals, and time horizon. In this way, the investor can participate in the growth potential of the stock market. Of course, the future value of the annuity and the amount of income available in retirement depend on the performance of the subaccounts selected.

Because variable annuity subaccounts fluctuate with changes in market conditions, the principal may be worth more or less than the original amount invested when the annuity is surrendered. The investment return and principal value of an investment option are not guaranteed.

There are contract limitations, fees, and charges associated with variable annuities, which can include mortality and expense risk charges, sales and surrender charges, investment management fees, administrative fees, and charges for optional benefits. Withdrawals reduce an annuity’s death benefit and values. Only the earnings portion of variable annuity withdrawals is taxed as ordinary income; withdrawals made prior to age 59½ may be subject to a 10% federal income tax penalty. Variable annuities are not guaranteed by the FDIC or any other government agency; they are not deposits of, nor are they guaranteed or endorsed by, any bank or savings association.

Variable annuities are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity contract and the underlying investment options, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent Naperville Brokerage Services advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

What Does a Naperville CPA Do?

2012-01-27T00:34:00.005-06:00

We live in an age that is overrun with acronyms – FBI, CIA, TCP/IP, CPA. There are so many to remember, that some people get confused over just what a certain acronym really means. One that is common is that of the CPA. Most people know that this acronym stands for Certified Public Accountant, but just what does a Naperville CPA do for a living? And does it make sense for people to hire just any financial firm or should they always hire a CPA?

Tax Preparation for the Often Dreaded Tax Day

Probably the most familiar thing that CPA's do is to help people and businesses prepare their tax returns. We all know that tax day rolls around every year, and that you have to put all your year's financial records in order to file successfully. But you also need to understand how the tax laws apply to your unique circumstances. A Naperville CPA understands the tax laws and works hard to help their clients get the most favorable results from their tax returns.

Financial Planning for the Future

In regard to long term financial goals, nothing is more important than planning. But the tax laws apply to your investments too, so having an accountant to help you plan your investments in accordance with the most current tax laws, helps people to plan for their financial futures the smart way.

We regularly hear from people who need help with their taxes or financial planning in the Naperville area. And we always recommend that these folks contact us at Lewis CPA. This accounting firm has experienced CPA's on staff to provide the best financial and tax services to people in Naperville.

Giving Strategies That Can Give Back

2012-01-23T07:54:00.004-06:00

A recent survey in 136 countries suggests that spending money to help others may be a universal source of personal happiness.1 Americans seem to take this to heart, giving more than $290 billion to charity in 2010, even with the slow economy.2

When making a substantial donation to a specific charity, you might consider trust strategies that may allow you to give generously while potentially benefiting yourself and your heirs. A good first step is to understand the basics.

Charitable Remainder Trust (CRT)

In a CRT, you (the grantor) can donate money, securities, property, or other assets to the trust and designate an income beneficiary — even yourself — to receive payments of a specified amount for a set period or your lifetime (or the lifetime of your surviving spouse or designated beneficiary). Payments must be made at least once a year and may be fixed or variable depending on the type of CRT you use. Upon your death (or the death of your surviving spouse or designated beneficiary), the assets in the trust go to the charity.

Although the annual trust income is usually taxable, you may qualify for an income tax deduction based on the estimated present value of the remainder interest that will eventually go to the charity. Once assets are in the trust, the trustee may be able to sell them and reinvest the proceeds without incurring capital gains taxes.

Charitable Lead Trust (CLT)

Assets placed by the grantor in a CLT pay income to the designated charity until the trust ends (typically, upon the death of the grantor). The remaining assets are then returned to the grantor or the grantor’s heirs. Not only could this strategy provide an income stream to your favorite charity, but it might help reduce, or in some cases eliminate, estate and gift taxes on appreciated assets that go to your heirs.

Both types of trusts are irrevocable, so assets cannot be removed from the trusts once they are donated. Not all charities are able to accept all possible gifts, so it would be prudent to check with your chosen organization before making a donation or establishing a charitable trust. The type of organization you select could also affect the tax benefits you receive.

The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced Naperville estate planning professional and your legal and tax advisors before implementing trust strategies.

1) National Bureau of Economic Research, 2010
2) Giving USA 2011, Giving USA Foundation

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Why Using Naperville Accountants Makes Good Sense

2012-01-19T00:09:00.004-06:00

It's time-honored advice for people, when they have financial questions or need financial help, to hire an accountant. But many folks just aren't sure about what it is that accountants do. If you live in the Naperville area and have been wondering what types of services the best Naperville accountants provide, here are just a few of the key tasks that they specialize in.

Book Keeping Services

Businesses have to keep a tight rein on their day to day accounting data. Unfortunately, we find that most people just aren't equipped with the time or skills needed to keep the books balanced and in good order. The top Naperville accountants help busy business owners with their daily bookkeeping tasks, to keep the finances of the company in order.

Tax Preparation Services

When tax season rolls around, the most valuable asset you can have on your side is a great Naperville accountant. These days, when every dollar counts more than ever before, it's essential that you have all your bases covered when the time comes to file your tax return. CPA's intimately understand the tax laws and can help you to lower your payments or possibly get a refund on your taxes.

These are just a few of the things that experienced, professional accountants help their clients with. In the Naperville area, Susan S. Lewis LTD. is the go-to accounting firm for small businesses and individuals who are looking for the most knowledgeable, experienced CPA's in the area. All of us can agree on the importance of our finances, so it makes good, fiscal sense to get the help of the best accountants in the area for your financial and tax needs.

To Roll or Not to Roll: It’s Your Choice

2012-01-15T00:48:00.002-06:00

It used to be common for employers to encourage (or require) departing employees to withdraw their money from the company’s retirement plan.1 Like most employee benefits, an employer-sponsored retirement plan is typically an expense for the employer.

Now that the baby-boom generation has started reaching retirement age (at the rate of about 10,000 per day), some employers are encouraging departing employees to leave their retirement savings in the company plan.2–3 These employers are finding that the loss of large employee accounts can diminish their leverage when negotiating with plan administrators, possibly making their retirement plans less attractive to current and prospective workers.4

If and when you leave your current job, either to retire or to take a new position, understanding the options for your retirement savings may help you make decisions that serve your interests and not those of a former employer.

Stay Versus Roll

Employees are under no obligation to leave money invested in a former employer’s retirement plan but are free to roll it over to a traditional IRA. A properly executed IRA rollover can help preserve the tax-deferred status of retirement assets and avoid unwanted tax consequences and penalties. However, there are some subtle differences between IRAs and employer plans to be aware of before you decide how to proceed.

Investment options. The investment options in an employer plan tend to be limited by the plan administrator. The investment options available in IRAs are nearly unlimited.

Early withdrawals. If you think you might tap your retirement assets early, you may want to leave them in the employer plan. Normally, a 10% federal income tax penalty applies to distributions from traditional IRAs and employer retirement plans before age 59½. However, you may be able to avoid this penalty with an employer plan if you sever employment during or after the year in which you turn 55. [The age 55 exception does not apply to IRAs, annuity contracts, or modified endowment contracts (MECs), nor does an exception for death apply to MECs.]

You may also be able to withdraw money from a former employer’s plan or an IRA and avoid the early-withdrawal penalty by taking a series of substantially equal periodic payments (based on life expectancy) that continue for at least five years or until age 59½, whichever occurs later.

Early withdrawals may be penalty-free in the event of death or disability. IRA exceptions to the penalty also include a first-time home purchase ($10,000 lifetime maximum), unreimbursed medical expenses that exceed 7.5% of adjusted gross income, and qualifying higher-education expenses. Withdrawals from traditional IRAs and employer-sponsored retirement plans are subject to ordinary income tax.

Keeping track of multiple accounts. Over the course of your career, you could accumulate several retirement accounts. Rolling them all into a single IRA may give you a better perspective of your retirement portfolio and help reduce the potential for losing track of your money.

Creditor protections. Employer plans have strong creditor protections enshrined in federal law. Money rolled into an IRA from an employer plan typically enjoys the same protections.

There is no one-size-fits-all solution. A careful evaluation of your circumstances could help you decide what to do with your Naperville retirement assets when you change jobs or retire.

1, 3–4) The Wall Street Journal, May 8, 2011
2) Pew Research Center, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Where Not to Look for an Accounting Firm in Naperville

2012-01-11T00:48:00.002-06:00

If you're like most, you think a lot about your financial security. Everything from investing, planning for the future and dealing with taxes can lead to a bit of frustration and anxiety for folks who aren't necessarily financial experts. Perhaps you've thought about getting professional accounting services, but weren't sure where to find a top notch accounting firm in Naperville.

Here are some tips on the types of financial or account firms that you need to avoid:

-    Accounting firms without a proven track record. If the accounting firm you're considering hasn't been doing great work for Naperville businesses and individuals for years, that's one firm that you'll want to pass on.
-    Accounting firms without CPA's on staff. To understand the most current tax laws, it takes a lot of training. Only CPA's are certified experts on the tax laws, and they're the only tax professionals you should trust with your finances.
-    Accounting firms without a local address. It's easy for sneaky financial companies to offer only online accounting services, but who knows where these companies are located. It's best to work with a local CPA that has an established location in or around the Naperville area.

If you keep these very basic tips in mind while you're searching for the best accounting firm in Naperville, you should be able to avoid the pitfalls of working with a sub-par financial company. Many of your neighbors in Naperville turn to Lewis CPA when they need an accountant. Lewis CPA has been serving the area for years, with CPA's on staff, so you'll know that your tax preparations and financial dealings are in good hands.

Understanding the Three New U.S. Trade Agreements

2012-01-07T00:43:00.005-06:00

On October 12, in a demonstration of bipartisan cooperation, Congress passed three separate trade agreements — with South Korea, Colombia, and Panama. They are the first trade agreements in four years. In terms of potential impact, the trade pact with South Korea is the most significant since the North American Free Trade Agreement (NAFTA) with Mexico and Canada in 1994.1

Proponents believe the agreements could boost exports by $13 billion annually and support tens of thousands of American jobs.2 The U.S. Chamber of Commerce claims that the pacts will prevent the loss of 380,000 jobs.3 However, labor organizations caution that the deals might lead companies to move more jobs and factories overseas.4 To address this concern, separate legislation extended financial and retraining benefits for workers who lose their jobs to foreign competition.5

It’s too early to know the outcome, of course, but the agreements represent a positive effort to stimulate economic activity at a time of congressional gridlock, slow GDP growth, and high unemployment. As an investor, you may find it helpful to consider how a more open trading relationship with these countries could impact the domestic economy.

Opening Markets

From the American point of view, the primary benefits could be to (1) eliminate or reduce tariffs on U.S. exports; (2) level the playing field for U.S. investors and businesses; (3) open service markets in areas like telecommunications; and (4) protect the environment, labor rights, and intellectual property rights.6 Although the fundamental concepts are the same for each of the three countries, the specific economic and political situations vary substantially.

South Korea

South Korea has the world’s thirteenth largest economy and is the seventh-largest U.S. trading partner.7 In 2010, the United States imported $48.9 billion in goods from South Korea and exported $38.8 billion. Automobiles accounted for about 75% of this $10 billion trade deficit.8 The agreement should help U.S. automakers narrow the gap by selling more vehicles in South Korea. It should also increase agricultural exports, which have been held back by high tariffs.9

U.S. textile manufacturers, who struggle to compete with lower-priced South Korean imports, have expressed some concern about a reduction in tariffs. To address this, the agreement allows the textile industry to petition the government to reinstate tariffs if cheaper Korean goods flood the market.10

Another concern is that Chinese products may enter the United States duty-free by passing through South Korea.11 Japanese officials fear that the agreement may make it more difficult for some Japanese goods to compete in the United States.12

Colombia

Although Colombia has a smaller economy than South Korea, it is the second-largest market for U.S. products in South America (after Brazil). The United States imported $15.7 billion from Colombia in 2010, mostly oil and other mineral fuels. In return, Colombia bought $12.1 billion in U.S. goods.13

The Colombian accord faced some stiff resistance due to a history of violence against labor organizers. However, Colombian President Juan Manuel Santos is a strong U.S. ally who signed a Labor Action Plan in April that committed the Colombian government to protect labor rights.14

Panama

Panama has a small economy with a trading relationship that heavily favors the United States. In 2010, Panama bought $6 billion in U.S. products while exporting only $381 million. The agreement should increase U.S. trade with Panama and make it easier for American companies to compete for contracts on the $5.25 billion expansion of the Panama Canal.15

Opposition to the agreement was that Panama has been (and still remains) a tax haven for wealthy Americans. However, last year the United States and Panama signed a tax information exchange agreement to provide more transparency.16

A Free-Trade Future?

With the passage of these accords, the United States now has free-trade agreements with 20 countries. The U.S.-led Trans-Pacific Partnership, currently being negotiated among nine nations, envisions a free-trade zone that would include more than 40% of world trade.17

Free trade seems to be the future of the global economy, and the United States is taking a strong leadership role, telling the world that we are open for business. The litmus test will be whether free trade aids the U.S. economic recovery and produces American jobs.

Investing internationally carries additional risks, such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country. This may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost.

1–2, 5, 7–8, 11, 13–16) Associated Press, October 12, 2011
3–4, 12) Bloomberg.com, October 12, 2011
6, 9) whitehouse.gov, 2011
10) The New York Times, October 11, 2011
17) Office of the U.S. Trade Representative, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent Naperville investment services advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Tips for Choosing the Right Accountant in Naperville

2012-01-03T00:51:00.001-06:00

We hear from lots of folks, especially small business owners, who want to know how to choose an accountant for their small business. Since the right approach to business taxes can literally make or break a small business, we put together a few tips to help small business owners choose the best Accountant in Naperville.

Here are a few helpful tips to help choose an accountant for your small business:

Look for a Naperville CPA

It's amazing, but many of the people we talk to don't know that not every person who calls themselves an accountant is necessarily a CPA. You wouldn't trust your personal health to a doctor who didn't have a medical license, would you? No, you sure wouldn't, so don't trust the finances of your small business to an accountant who is not a CPA.

Ask for References

A professional accounting firm should be able to offer you references and testimonials from their clients. If you are talking to an accountant and aren't able to get your hands on any references, you may want to part ways with that accounting firm and choose a firm with a demonstrated track record of success.

Additional Naperville Accounting Services

The accounting firm that people choose for their small business should be able to offer more than just tax preparation services. For example, the accountants from Lewis CPA offer additional accounting services, like business planning, to help small business owners as they get started or begin expansion plans. If your business is going to grow, doesn't it just make sense to have the right financial business advice?

Keep these things in mind when you choose your business tax accountant in Naperville.

Protection from a Range of Liability Claims

2011-12-30T00:56:00.004-06:00

It’s estimated that American companies will face $183 billion in tort costs in 2011, $152 billion of which will land on small businesses.1

Accidents happen no matter how well a business is run, and the expenses involved in defending a lawsuit can prove to be devastating, whether the organization is found to be at fault or not. Fortunately, there are several forms of liability insurance that may help offset unforeseen costs (up to the policy limits) that could consume your business’s profits or ruin its longer-term prospects.

The commercial general liability coverage offered with a business owner’s policy helps protect against risks associated with property damage, bodily injury, and personal and advertising injury. However, different kinds of coverage may be warranted for businesses exposed to special risks that may not be included in a standard policy.

Professional liability insurance (or errors and omissions coverage) could help with legal costs and damages related to wrongful practices by professional service providers such as doctors, lawyers, and various types of consultants. Typically, it is necessary to obtain coverage that is specific to the company or industry.

Product liability insurance could help protect against financial loss resulting from a defective product that causes injury or harm. Companies that manufacture, distribute, or sell such products could potentially be held responsible for their safety.

Internet liability insurance could help protect firms that conduct business on the Web from risks related to computer hacking, spam, viruses, and other online perils.

Employee benefits liability endorsements could help pay costs that result from negligence related to the administration of employee benefits, even if they are managed by an outside professional benefits administrator.

As your business grows, you could encounter new risks and may want to expand coverage based on the size of your staff or the value of equipment and other assets. Reviewing your liability insurance on a regular basis could help protect you from the possibility of a lawsuit that could stifle your business or harm your personal financial situation.

1) U.S. Chamber Institute for Legal Reform, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent Naperville Insurance advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Accounting Services: What You Need to Know

2011-12-26T00:48:00.003-06:00

Having a professional accountant is only for the wealthiest of the wealthy or the top earning corporations, right? No, of course not. Look, we all have to deal with often complicated financial situations. Whether it's the small business owner looking for ways to improve the bottom line, or a family trying to make more informed financial decisions around tax time, it pays to have access to the best Naperville accounting services.

What types of Naperville Accounting Services are there?

Professional Tax Preparation

Tax laws change every year. And since these laws are already complicated to begin with, the plot really thickens when these changes take place. For people who are not used to dealing with the federal, state and local tax laws for a living, not understanding the changes to tax laws can lead to some unforeseen financial and legal problems.

We don't expect anyone who isn't a CPA to understand the tax laws on their own. The staff at Lewis CPA make it their business to know all the ins and outs of the latest tax laws. And that's why they are the preferred accounting firm in Naperville. Yes, there are lots of fly-by-night tax return operations out there, but who wants to trust something as important as their taxes to one of these places.

We always advise people to not try to decipher all the confusing tax laws on their own. It's much easier and more likely to cost you less when you work with experienced tax accountants, like the staff at Lewis CPA, to make sure that your taxes are filed the right way – to avoid penalties and potentially overpaying on your yearly tax returns.

Tax-Efficient Investments for the Tax-Averse

2011-12-21T00:15:00.004-06:00

Raising taxes is one of many ideas that have been proposed to help reduce mounting federal budget deficits. Yet some taxpayers are already facing the prospect of higher taxes as a result of health-reform legislation passed in 2009.

In 2013, single filers with modified adjusted gross incomes exceeding $200,000 ($250,000 for joint filers) will be subject to a 3.8% Medicare unearned income tax on net investment income. The Medicare payroll tax will increase by 0.9% on wages exceeding these thresholds.

If you are concerned about higher taxes in the future, it may be a good time to consider the tax advantages associated with municipal bonds and tax-exempt mutual funds.

Investing in Infrastructure

State and local governments sell bonds to finance public-works projects such as roads, sewers, schools, and stadiums. Because government entities have the power to raise taxes and fees to pay the interest, municipal bonds are generally considered higher-quality assets. However, they typically pay less interest than taxable debt.

On the plus side, municipal bond income is generally exempt from federal taxes and may not trigger the Medicare tax mentioned earlier. The interest on a bond issued outside the state in which you reside could be subject to state and local taxes, and some municipal bond interest could be subject to the federal alternative minimum tax.

Tax-Free Fund Options

Tax-exempt mutual funds earn interest from their underlying state and local bonds, so they share the same federal income tax exemption. However, if you sell a municipal bond or tax-exempt fund at a profit, you could incur capital gains taxes.

The tax benefits associated with these lower-yielding mutual funds may also make them more suitable for taxable accounts, as opposed to qualified retirement plans and IRAs that allow for tax-deferred growth until the assets are withdrawn. Withdrawals from tax-deferred plans prior to age 59½ may be subject to a 10% federal income tax penalty.

The return and principal value of bonds and mutual fund shares fluctuate with changes in market conditions. When redeemed, they may be worth more or less than their original cost. Bond funds are subject to the same inflation, interest-rate, and credit risks associated with their underlying bonds. As interest rates rise, bond prices typically fall, which can adversely affect a bond fund’s performance.

High Earners May Net More

Investors in the top tax brackets may find that the lower tax-free yields from muni bonds and tax-exempt funds are worth more to them than the after-tax yield from taxable bond investments. For example, a 3% tax-free yield is equivalent to a 4.62% taxable yield for an investor in the 35% federal income tax bracket.

Municipal bonds and tax-exempt funds can be a key component of the portfolios of investors with high incomes and/or a relatively low tolerance for risk. If you fall into these categories, you may want to learn more about tax-efficient investment opportunities that could be appropriate for your personal situation.

Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from a Naperville financial planner. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Naperville Tax Services: More Than Meets the Eye

2011-12-17T00:10:00.002-06:00

When it comes to Naperville Tax Services, some folks only think about tax return preparations. With so much stress and anxiety surrounding tax season, there are people who would just as soon forget about their taxes for the rest of the year. But it's important for everyone, regardless of their income, to be aware of the wide variety of tax services that can help to ease the pain before tax preparation time even arrives.

Here are some of the Naperville Tax Services that some folks we talk to have never considered, which can help to make tax season a bit less stressful:

- Bookkeeping. For businesses, keeping the books current and staying on top of income and expenditures is vital. Unfortunately, some companies simply can't have a full time accountant on the payroll. For companies, like these, professional tax help is still available, as we can still come advise and help with any bookkeeping tasks that need to be done to get finances organized and ready for tax season.

- Business planning. If you plan on growing your business, it takes more than just a great idea. There are financial concerns that simply have to be addressed as part of any reasonable business plan. We always advise anyone who is planning on starting or growing a business to get financial guidance from a trusted Naperville accounting firm. While business planning may not be a direct tax concern, preparing ahead of time for tax concerns can make the difference between success and failure.

We always advise people to remember that taxes aren't something that only needs to be considered in April. To avoid penalties, audits and anything less than the best tax preparation, it's essential to know which types of financial services your business needs, and to get that help from the Naperville tax experts at Lewis CPA.

New Opportunity Under the Federal Gift Tax

2011-12-13T00:51:00.005-06:00

The 2010 Tax Relief Act, which was noteworthy for some of the most favorable estate tax provisions in decades, opened up an opportunity to give more than ever to friends, family, and favored causes while avoiding the federal gift tax.

To make the most of tax-free gift transfers, a good first step is understanding the two types of federal exclusions (or exemptions) that apply to gifts.

Annual Gift Tax Exemption

You can transfer up to $13,000 in cash or certain types of property to as many people as you wish each year without any gift tax liability. (The exclusion is indexed annually for inflation.) Together, you and your spouse can give up to $26,000 annually. Your gift could be cash or income-producing assets such as stocks and bonds that have the potential to appreciate in value.

Some gifts may not be subject to the annual limit, including gifts to your spouse (as long as he or she is a U.S. citizen), donations to qualifying charitable or political organizations, and payments of tuition or medical expenses on behalf of another person that are paid directly to the educational or medical institution.

Lifetime Gift Tax Exemption

The 2010 tax law reunified the federal estate and gift tax exemption, increasing it to $5 million in 2011 and 2012 (the gift tax exemption was only $1 million in 2010). There are two caveats associated with this change:

The amount you apply to your lifetime gift tax exemption may reduce your estate tax exemption. For example, if you used $2 million of the gift tax exemption during your lifetime, your $5 million estate tax exemption would be reduced by this amount.

The $5 million estate and gift tax exemption applies only to gifts made in 2011 and 2012. In 2013, unless lawmakers take further action, the federal gift and estate tax exemption will revert to $1 million.

Because of the temporary nature of estate and gift tax laws, you may want to consult with Naperville Wealth Management advisor before you take any specific action.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Naperville Tax Return Preparation Tips

2011-12-09T00:42:00.003-06:00

We can probably all agree that it would be wonderful if technology was to a point where our tax returns would simply prepare themselves. But we need to get real, that's just not going to happen. So that means when the time comes for you to file your Naperville Tax Return, you'll need to have done a little bit of pre-planning. Here are some tips to help with your Naperville Tax Return Preparation.

- Checklist. Have a basic checklist on hand, so that you know you're prepared when you take your information to your accountant. On that checklist, include things like – last year's paperwork, W-2s, pay stubs and all the usual financial papers. By having a checklist of what you need, you won't feel like you're in a mad rush to get everything together.

- Get Help. Did you know that it's been estimated that 80% of people end up either paying too much on their taxes or not getting a big enough return? And that happens to people who have the best intentions of being thorough, but simply don't have an in depth understanding of the latest tax laws. It's always smart to at least have an accountant look over your returns; just to make sure that you're not leaving any money on the table.

To get your checklist together and the help you need, you can set up an appointment to talk to the accountants at Lewis CPA. We're known for being the go-to Naperville tax return preparation experts. And by taking the time to prepare and get the professional tax help that you need, you'll be less likely to overpay or get underpaid when tax season is over and done with for another year.

ETFs for the Conservative Investor

2011-12-05T00:36:00.001-06:00

Investment in exchange-traded funds (ETFs) has grown substantially since the first ETF was introduced in 1993. Total ETF assets exceeded $1 trillion in March 2011, up more than $200 million over the previous year.1

Until recently, conservative investors may have felt left out of the ETF marketplace because the available options were largely based on stocks. That is changing. There are now 140 bond-based ETFs with assets representing about 14% of the total ETF market.2 Bond ETFs generally track major fixed-income indexes that might focus on short-term, intermediate-term, or long-term bonds. They offer some appealing opportunities for the risk-averse.

Mutual Funds Meet Stocks

Like mutual funds, ETFs comprise a portfolio of securities assembled by an investment company. They typically track an index, market sector, or other group of securities and offer investors flexibility in structuring their portfolios to meet specific goals and risk tolerances, as well as a level of diversification that would be cost-prohibitive if the underlying securities were purchased separately. This is especially true of bonds, which typically carry face values of $1,000. Diversification does not guarantee against loss; it is a method used to help manage investment risk.

Unlike mutual funds, whose shares are generally bought from and sold back to the mutual fund and priced once a day at the close of business, shares of ETFs trade like stocks throughout the day. Supply and demand for the shares may cause them to trade at a premium or a discount relative to the value of the underlying shares.

The principal value of ETFs and mutual funds will fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Bond ETFs are subject to the same inflation, interest-rate, and credit risks associated with their underlying bonds. As interest rates rise, bond prices typically fall, which can adversely affect the performance of a bond ETF.

The attraction of ETFs over mutual funds comes from their trading flexibility, generally lower expense ratios, and greater tax efficiency. Be mindful, however, that you must pay a brokerage commission to purchase ETF shares. Given the growing availability of ETFs, there may be several to choose from that could be appropriate for your risk profile.

Exchange-traded funds and mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your Naperville Investment Advisor. Be sure to read the prospectus carefully before deciding whether to invest.

1–2) Investment Company Institute, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Why Businesses Rely on Corporate Tax Accountants

2011-12-01T00:57:00.003-06:00

Staying on top of a company's finances is a big job. Whether we're talking about a small businesses, or the largest corporations, all of these businesses need to have an experienced professional to take care of tax concerns. The most sought after financial professional for these types of business roles would be a Naperville Corporate Tax Accountant.

What are the duties of these financial professionals?

For starters, it's important to realize that a Naperville Corporate Tax Accountant does a whole lot more than simply taking care of the business' books. Yes, book keeping is a big part of corporate tax work, but it's not the be-all-end-all that businesses hire the best corporate accountants for.

Analyzing & Reporting

Every year businesses strive to do better on their taxes than they did the year before. That means that they need someone who can perform high level tax analysis and reporting. Let's face it, every company knows that next year's budget depends on the analysis from the previous year. So many corporate tax accountants lend their expertise toward taking care of doing the right kind of tax analysis to help plan for the next year's budget.

Some companies have large financial departments and even have accountants on staff. While others may not have any financial professionals on the payroll. Both types of businesses, however, can benefit from bringing in a professional. The experts know how to not only help with business bookkeeping, but how to analyze a company's finances and tax data to minimize taxation and avoid painful tax audits. To get the best results when the time comes for a business to pay taxes, Naperville companies know that they can depend on the corporate tax experts here at Lewis CPA.

Ways to Save More

2011-11-27T00:49:00.003-06:00

About two out of three American workers are saving for retirement, but less than half are confident that they will have enough money to live comfortably throughout their retirement years.1 However, even those who are confident may not have realistic expectations.

Consider that a $250,000 account earning a 5% annual return could provide an income of about $1,000 per month (without dipping into principal). Yet only 10% of workers have savings of $250,000 or more.2

Saving for retirement might seem daunting, but you may be able to increase the amount you are saving without making huge sacrifices. Taking some small steps today might make a big difference when you are ready to retire.

Save an extra 1% of your salary each year. Raising your retirement contribution in small increments may not have much effect on your take-home pay, but the long-term results could be significant. The IRS sets annual contribution limits for retirement plans, but the amount you can actually contribute will depend on your plan’s rules.

Give your retirement a raise. The next time you receive a pay increase, try to divert part or all of it toward your long-term financial goals. Recall the last time you received a raise and how quickly the extra money was absorbed by your spending. You might find it easier to save a raise if you don’t allow yourself to spend the extra money.

Make payments to yourself. When you pay off a debt, such as a car loan or a credit-card balance, consider pretending that you still owe the monthly payment — to yourself. Because the payment is already built into your budget, this could be a simple way to make additional progress toward your long-term goals.

Avoid credit-card debt. Some forms of debt, such as mortgages and auto loans, may be necessary for your basic lifestyle. The same usually cannot be said of credit-card debt. Before you put a major purchase on your credit card — one that you may not be able to repay in full when you receive the n

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ext statement — consider that the expense is likely to increase the amount of time it could take to reach your retirement goals.

Cut out a small expense. Life’s little pleasures — coffee drinks, bottled water, eating in restaurants — are important, but you might be surprised by their true cost. For example, saving $5 per day would equal $150 per month. If this amount were contributed to an account earning an 8% annual return, the balance could reach more than $140,000 after 25 years.

These hypothetical examples are used for illustrative purposes only and do not represent the performance of any specific investment. Fees, expenses, and taxes are not considered and would reduce the performance described if they were included. Actual results will vary.

If you don’t have a lot of money to devote to your long-term financial goals, you may have an equally important asset: time for your savings to grow. Finding small ways to save more today could help you enjoy a more comfortable lifestyle in retirement.

1–2) Employee Benefit Research Institute, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Navigating Tax Laws

2011-11-23T00:22:00.004-06:00

If you're not an expert on tax laws, trying to make heads or tails of all the legal jargon and financial speak can be almost impossible. Even folks who know a thing or two about finances, often defer to Naperville tax advisors when they need help figuring out how the latest tax laws apply to their own financial picture.

Avoiding Potential Legal Problems

As you know, making mistakes on your tax filings can lead to serious problems. For some folks, serious tax mishaps can even lead to jail time. Obviously, these are the worst case scenarios that lead to someone actually going to prison. But with the stakes being so potentially high, it's certainly easy to see why people who avoid tax troubles opt to get the help of the expert Naperville tax advisors .

A Tax Law Expert in your Corner

Remember, a tax advisor is someone who has advanced training and experience about tax laws. Our advisors do their best to not only help you to avoid potential tax legal problems, but also to help you minimize taxation. After all, none of us wants to pay any more taxes than we have to, but it takes an expert advisor to help you minimize your yearly taxation rates.

Preparing for Yearly Tax Law Changes

And since the federal and state tax laws change every year, it's essential to have a professional that you can trust to work on your yearly tax return. Who knows, you may even end up with a healthy return instead of paying a tax bill, when you have a trustworthy advisor to prepare this year's taxes for you.

Will Federal Reserve Tactics Help the Ailing U.S. Economy?

2011-11-19T00:13:00.001-06:00

After the Federal Open Market Committee (FOMC) met on August 9, the Federal Reserve announced that it anticipated the federal funds rate to remain “exceptionally” low until mid-2013, citing a slower-than-expected recovery, high unemployment, and increasing downside risks to the economy.1 Initially, stocks dropped in reaction to the Fed’s dismal outlook, but by the end of the day the Dow Jones Industrial Average rose nearly 4%, seemingly in response to anticipated future actions. Investor demand also pushed up bond prices, and yields on treasury bonds dropped before moving back up slightly.2

On September 21, the Federal Reserve decided to act further to help support the economic recovery by attempting to lower long-term interest rates. In a program dubbed “Operation Twist” by the media, the Committee plans to sell $400 billion in short-dated Treasuries (three years or less) and to purchase an equal amount of Treasuries with remaining maturities of six to 30 years.3 Immediately after the Fed’s announcement, the price of long-term Treasury securities increased and the 10-year Treasury yield fell to a record low.4 Stocks, however, did not react favorably.

Here’s a look at how the Fed’s policy decisions could affect the U.S. economy and financial markets, and some possible implications of a longer-term, low-interest-rate environment for investors, savers, and retirees.

Powerful Words

The federal funds target rate, which is the central bank’s primary means of manipulating short-term interest rates, has been kept near zero since 2008. Signalling that interest rates would remain low for at least two more years was probably intended to help hold down longer-term rates, which could prompt households and businesses to increase spending and investment.5

For example, low interest rates on cash alternatives could spark businesses and investors to find more productive uses for their money. Lower borrowing costs might make large investments in factories, heavy equipment, and other expansion projects more affordable. The same incentive may apply to consumers, some of whom could benefit from lower borrowing costs for major purchases.
Voices of Dissent

Setting a specific, longer-term timeline for maintaining low rates was unprecedented. In fact, three committee members disagreed with both the August and September statements, suggesting some dissent.6

Critics believe the Fed’s action could actually provide an incentive for households to wait to borrow or spend if they are counting on rates to remain low for a long time. Cautious consumers seem reluctant to spend and are more concerned with paying down debt and strengthening their own financial positions.7

A weak housing market indicates that few people have been willing or able to take advantage of already low mortgage rates. Tight lending standards often make it more difficult for potential buyers to qualify for financing.8

Another concern is that long periods of loose monetary policy and low interest rates could weaken the dollar and lead to higher inflation.

An Expected Twist

Prior to the September meeting, there was already an expectation that the central bank would try “Operation Twist” in an attempt to flatten the yield curve, lower long-term interest rates, and stimulate the economy.9

There is often a great amount of speculation on the part of businesses, investors, and the media prior to any official FOMC announcement. To some degree, the odds of an expected action may already be “priced into” the financial markets before any decisions are made. Surprises, however, tend to have a more dramatic effect on stock and bond prices.
Prolonged Suffering for Savers

The prospect of low interest rates for several more years could continue to make it difficult for retirees and others who rely on fixed-income investments. Returns on interest-bearing accounts and other guaranteed or lower-risk investment vehicles are unlikely to keep pace with inflation, and some investors may decide to assume more risk in pursuit of higher yields.

The central bank’s assertion that interest rates would remain low for two more years was based on its economic forecast and is not necessarily a firm promise. The Fed could tighten its policy stance if inflation rises or there is a noticeable improvement in economic conditions.

All investments are subject to market fluctuation, risk, and loss of principal. When sold, investments may be worth more or less than their original cost. U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The performance of an unmanaged index is not indicative of the performance of any specific security. Individuals cannot invest directly in an index.

1) CNNMoney, August 9, 2011
2) The Wall Street Journal, August 10, 2011
3) Federal Reserve, 2011
4) CNNMoney, September 21, 2011
5) Los Angeles Times, August 10, 2011
6) The Washington Post, August 9, 2011
7–8) The New York Times, August 14, 2011
9) Reuters, September 7, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Starting an Investment Plan

2011-11-15T07:11:00.002-06:00

With the ups and downs of the stock market in recent years, many folks have been asking whether or not this is a smart time to get involved with investing. Truth be told, there's not a bad time to consider investing. Of course, there are times to be cautious, and having a Naperville Tax Accountant is the smart way to prepare for investing for the future.

Image by septuagesima via Flickr

Why a Tax Accountant?

If you think that you only need the services of a Naperville Tax Accountant during tax time, and not when you're preparing your investment plans, you may want to reconsider. You see, any type of investment plan, whether it's a 401K or a mutual fund, is going to have tax benefits or consequences to consider. And since most folks simply aren't up to date on all of the latest tax laws, as they apply to investment plans, it only makes sense to have a knowledgeable, skilled tax and investment professional on your side.

At Lewis CPA, we specialize in all things related to taxes and finances. We help people take the smart, safe approach to investing, while covering all the bases where tax breaks or penalties are involved. Of course, no accountant or financial professional can guarantee that you'll create the perfect investment portfolio, starting your planning off, with the advice of a seasoned accounting pro certainly beats jumping into your planning for your financial future on your own.

And even though there have been some turbulent financial times in recent years, it's still possible to build a solid financial future for you and your family. You can contact us to get the professional financial advice and services you need to get your planning underway.

Accounting Help When You Need it Most

2011-10-31T00:14:00.000-05:00

Running a business can mean a huge commitment. Of course, being your own boss is a pretty sweet reward for all of that sacrifice. But for some business owners, taking care of their day to day accounting tasks can prove to be a bit much. Let's face it, not every business owner has the time or inclination to do their own bookkeeping. And hiring a full-time employee to take care of your books can be too costly for many small businesses. That's where the Naperville Accounting Services you get from Susan Lewis Ltd can be so important. The accountants here are experienced in every aspect of financial assistance, and they can help to keep all of your business books balanced and in good order.

Being Prepared

One thing that can ruin any business owner's day is the thought of being audited by the IRS. No one wants to go through this process, yet many business owners will have to at some point in time. That's when having balanced books really matters the most. By hiring us to do your bookkeeping, you'll be getting the Naperville Accounting Services that you need to keep all of your records organized and ready, in case an audit should happen. And even if your business never gets audited, simply having financial records that are balanced and organized goes a long way in making your business more successful.

There's nothing like knowing that all of your business's financial records are organized. And when tax time comes around, you can even have the experts at Susan S. Lewis Ltd take care of your business and personal tax filing. We don't just do bookkeeping, we also handle Naperville Accounting Services, like business and personal tax filings too.

Professional Tax Services Make a Difference

2011-10-24T00:10:00.002-05:00

How do you feel when it gets close to tax day? Do you, like many others, feel anxious or even nervous about filing your own tax return? If you've had enough of dealing with that yearly anxiety, it may be time to give some serious consideration to using the Naperville Tax Services provided by Susan S. Lewis Ltd. We are recognized in the Naperville area as the most reliable, and knowledgeable tax professionals. And since we do personal tax returns, small business tax returns and corporate tax returns, you can be sure that we know the ever-changing tax laws better than any accountant office in Naperville.

Business Owners Rejoice

Things can get very complex when it comes to filing business taxes. Of course, if you've been running a business of your own for any length of time, this isn't news to you. And since business tax laws change a lot every year, it can be tough for even the most financially minded business owners to stay on top of all the complicated changes. Again, this is where the Naperville Tax Services you get from our office come into play. We are known for helping local businesses take care of their taxes and keeping business on track financially. You can even hire our accounting company to take care of your business bookkeeping to help keep the company's finances organized and ready for audits.

Whether you need a personal filing or a business tax filing, you now know the area's most trusted source for reliable, accurate and trustworthy Naperville Tax Services – Susan S. Lewis Ltd. So get prepared for tax time early this year, and set up a time to discuss how we can help you with all of your tax needs.

Naperville Tax Return Preparation

2011-10-17T00:07:00.001-05:00

You can almost set your watch by it, or at least your calendar... As tax day comes around each year, people become frenzied. It's really something to see business people, home makers and all sorts of everyday folks going a bit wild with trying to get their tax preparations completed. Some of these people will choose a tax program to do the dirty work for them. Which is fine for some, but it's important to know that some of these programs can miss a lot of deductions and savings that you could have coming to you when you file your tax return. If you don't want to miss out on those deductions, you owe it to yourself to work with the Naperville Tax Return Preparation experts at Susan S. Lewis Ltd.

Knowledgeable Staff

It's important to know that when you do get your Naperville Tax Return Preparation done by the experts at Susan S. Lewis Ltd, you are getting the assistance of real, financial professionals. There are lots of fly-by-night or seasonal tax preparation centers that pop up as we get closer to tax time. Unfortunately, though, many of the people preparing taxes for these centers simply don't have the professional knowledge and skills that you'll get when you get your taxes prepared by us.

Don't let tax preparation confusion cause you undue stress or anxiety this year. And – whatever you do – don't trust your taxes to someone who doesn't have a reputation and skills to get you the most favorable return possible. Instead count on the experts at Susan S. Lewis Ltd. You'll be amazed at how much easier it is to get through tax season when you have the pros on your side.

Taking Care of Business Taxes

2011-10-13T00:52:00.000-05:00

When you own your own business, tax time can be one of the worst times of the year. There's just so much to keep up with. You have to get all of your financial records in order and then try to figure out all the forms that you need to submit. Of course, tax time doesn't have to be this difficult. If you have a company operating out of the Naperville area, you owe it to your business' success to work with a Naperville Corporate Tax Accountant from Susan S. Lewis Ltd. They are the area's most knowledgeable experts when it comes to helping businesses with their pressing tax filing needs.

When you are responsible for the taxes of a corporation things get really complicated. As you know the tax laws related to large businesses are always changing, which makes filing taxes difficult, if not impossible for most people. Fortunately, though, the Naperville Corporate Tax Accountant experts at Susan Lewis Ltd have the skill set to help organized all o
f your corporate tax records. They can also help your company to navigate the confusing corporate tax laws; potentially saving your company quite a bit of money.

It's best to plan ahead and anticipate the confusion and stress that accompany tax season. Instead of going it alone, or leaving your corporate tax filing to people who don't understand all the intricacies of the Naperville corporate tax laws, get the help of the best Naperville Corporate Tax Accountant professionals at Susan Lewis Ltd. With their help you can focus your attention on other, more pressing business concerns and leave the tax filing to the people who are recognized as the experts in corporate taxes.

Where Do You Get Tax Assistance?

2011-10-10T00:39:00.001-05:00

Let's face it – tax season is never a fun time for millions of people and businesses. If you have a good income, property and investments, filing your taxes can get downright hairy. And the unfortunate thing is lots of people never reach out for professional help from the areas top Naperville Tax Advisors here at Susan S. Lewis Ltd. Imagine being in a medical emergency and not getting professional medical advice and services. You'd never do that, right? So don't leave something as important as your tax preparations to anyone less than the best tax professionals in Naperville.

Image by agrilifetoday via Flickr

Today's tax laws are tough to deal with. And you can be sure that tax laws will continue to become more complicated in coming years. That means filing your own taxes can be stressful and time consuming. Plus, it's very easy to make complicated mistakes that could cost you quite a bit of money. Let us help you, you will get the assistance of certified public accountants who know all the ins and outs of the complicated tax laws in your area. That means you don't have to deal with the stress and that costly mistakes just won't happen.

When you have us working on your tax return, you can rest assured that your tax filing is in good hands. And you don't have to worry about staying on top of the latest, confusing tax laws any more. You'll have the area's best tax specialists to do that for you. Take it from me, getting professional tax assistance sure makes tax season a lot easier to deal with.

Everyday Business Accounting Advice

2011-10-03T16:32:00.006-05:00

When you start your own business, you wind up being very protective of it. After all it takes a lot of hard work, money and sacrifice to get your business where it needs to be. Unfortunately, though, many Naperville business owners get a bit too protective and never seek out accounting or bookkeeping services from a Naperville Tax Accountant. And as your business continues to grow and change, it becomes more important than ever to have an accounting firm you can rely on.

Superior Organizational Skills

As you know, running a business means that you have to wear a lot of hats. If all of the different roles you are playing is leading to disorganized record keeping, it may be time to contact the Naperville Tax Accountant specialists at Susan S. Lewis Ltd. We are experts at keeping financial records organized. The more organized your financial records are, the better you'll be able to access crucial records when you need them most. And when the next tax payment comes due, you'll have all your records ready with less fuss and worry.

Your business is too important to leave financial bookkeeping tasks to chance. By taking time to let us pros get started on your bookkeeping now, you can concentrate on more pressing issues; all the while knowing that your financial record keeping is being performed by the area's most trusted accountants. With that kind of peace of mind, you'll be able to keep your business thriving and growing for years to come. And you'll never have to scramble again when tax time rolls around. Imagine what a relief that will be.

What Is a Required Minimum Distribution?

2011-09-29T02:50:00.001-05:00

A required minimum distribution (RMD) is the annual amount that must be withdrawn from a traditional IRA or a qualified retirement plan (such as a 401(k), 403(b), and self-employed plans) after the account owner reaches the age of 70½. The last date allowed for the first withdrawal is April 1 following the year in which the owner reaches age 70½. Some employer plans may allow still-employed account owners to delay distributions until they stop working, even if they are older than 70½. RMDs are designed to ensure that owners of tax-deferred retirement accounts do not defer taxes on their retirement accounts indefinitely.

You are allowed to begin taking penalty-free distributions from tax-deferred retirement accounts after age 59½, but you must begin taking them after reaching age 70½. If you delay your first distribution to April 1 following the year in which you turn 70½, you must take another distribution that year. Annual RMDs must be taken each subsequent year prior to December 31.

The RMD amount depends on your age, the value of the account, and your life expectancy. You can use the IRS Uniform Lifetime Table (or the Joint and Last Survivor Table, in certain circumstances) to determine your life expectancy. To calculate your RMD, divide the value of your account balance at the end of the previous year by the number of years you’re expected to live, based on the numbers in the IRS table. You must calculate RMDs for each account that you own. If you do not take RMDs, then you may be subject to a 50% federal income tax penalty on the amount that should have been withdrawn.

Remember that distributions from tax-deferred retirement plans are subject to ordinary income tax.

Waiting until the April 1 deadline in the year after reaching age 70½ is a one-time option and requires that you take two RMDs in the same tax year. If these distributions are large, this method could push you into a higher tax bracket. It may be wise to plan ahead for RMDs to determine the best time to begin taking them.

Lets talk, about your Naperville Asset Management Needs

Evaluating Life Insurance Needs

2011-09-26T02:40:00.001-05:00

Because life insurance typically becomes more expensive as we age, many people may believe they can’t afford to purchase coverage later in life. However, considering that life insurance is significantly less expensive today than it was a decade ago, you might be able to purchase new coverage and pay premiums comparable to those that were available when you were 10 years younger.

It’s a good idea to review your life insurance situation on a regular basis. Here are some reasons why your coverage may need to evolve to keep pace with your life.
Life Changes

If your income and/or net worth have increased significantly since you purchased your policy, ask yourself whether your current coverage would enable your survivors to maintain their current standard of living. Major life events such as birth, marriage, death, and divorce may also affect the amount of coverage you need.
Inflation

Because of inflation, a policy purchased years ago may no longer offer the same level of protection. For example, a 3% inflation rate can cut the purchasing power of a death benefit in half in about 24 years, based on the Rule of 72 (72 ÷ 3 = 24 years).

Estate Conservation
One popular reason for owning life insurance is to provide liquid funds to help heirs pay estate taxes and any other debts. Considering that the estate tax has changed several times over the past decade, it’s a good idea to review your coverage in light of current estate tax laws and your net worth.

As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable.

1) USA Today, December 3, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent Naperville Financial Planning advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Earning Income from Mutual Funds

2011-09-20T02:27:00.000-05:00

More than half of working Americans are concerned that they may not have enough money to live comfortably during retirement. For most retirees, income will come from multiple sources. It may be helpful to consider mutual funds as a potential source of retirement income.

Mutual funds enable you to invest in a portfolio of securities that are typically assembled and managed with a particular goal. In 2010, mutual funds were the most common type of investment held in IRAs and defined-contribution plans.1 Although you might think of mutual funds as a tool to increase savings, they can also generate income.

Understanding the different types of income-producing mutual funds may help you better evaluate the role they could play in your retirement portfolio.

Bond Funds
Bond funds invest in bonds and other debt instruments. The type of debt held typically varies according to the fund’s focus and stated objectives and may include debt issued by government agencies and private entities, with maturity dates ranging from 30 days to 30 years. These funds generally use the interest payments collected from their bond holdings to generate income for shareholders. Although there is risk with all investments, bonds are usually more stable than stocks but they may offer lower potential returns.

Bond funds are subject to the same inflation, interest-rate, and credit risks associated with their underlying bonds. As interest rates rise, bond prices typically fall, which can adversely affect a bond fund’s performance.
Equity or Stock Income Funds

Not all stock funds focus on capital appreciation. Many strive to generate income by investing in companies that have a history of issuing dividends to their common and preferred stockholders. Stock funds typically offer greater risk with greater potential return than bond funds, but income-producing stock and equity funds tend to own stable and well-established companies, such as blue chips and utilities.

The return and principal value of mutual funds fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.

Hybrid Funds
A hybrid fund (also called a balanced fund) may invest in a combination of stocks, bonds, and cash alternatives. Hybrid funds attempt to provide a mix of income and capital appreciation, with the fund manager adjusting the fund’s holdings based on economic conditions and in keeping with the fund’s stated objectives.

Income-producing mutual funds tend to be more appealing to investors with a conservative outlook and moderate to low risk tolerances. As you look to generate retirement income, consider mutual funds in the mix.

Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

1) Investment Company Institute, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent Naperville Wealth Manager. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

What is the Capital Gains Tax?

2011-09-13T02:12:00.003-05:00

Capital gains are the profits realized from the sale of capital assets, such as stocks, bonds, and property. The capital gains tax is triggered only when an asset is sold, not while the asset is held by an investor. However, mutual fund investors could be charged capital gains on investments in the fund that are sold by the fund during the year.

There are two types of capital gains: long term and short term; each has different tax rates. Long-term gains are profits on assets held longer than 12 months before they are sold. As a result of the 2003 tax law, the long-term capital gains tax was reduced from 20% to 15% (0% for individuals in the 10% and 15% tax brackets) through 2010; the 2010 Tax Relief Act extends the reduced tax rate through 2012. Short-term gains (on assets held for 12 months or less), on the other hand, are taxed as ordinary income at the seller’s marginal income tax rate.

The taxable amount of each gain is determined by a “cost basis”— in other words, the original purchase price adjusted for additional improvements or investments, taxes paid on dividends, certain fees, and any depreciation of the assets. In addition, any capital losses incurred in the current tax year or previous years can be used to offset taxes on current-year capital gains. Losses of up to $3,000 a year may be claimed as a tax deduction.

If you have been purchasing shares in a mutual fund over several years and want to sell some holdings, instruct your financial professional to sell shares that you purchased for the highest amount of money, because this will reduce your capital gains. Also, be sure to specify which shares you are selling so that you can take advantage of the lower rate on long-term gains. The IRS may assume that you are selling shares you have held for a shorter time and tax you using short-term rates.

Capital gains distributions for the prior year are reported to you by January 31, and any taxes that must be paid on gains are due on the date of your tax return. The reduced rates on long-term capital gains taxes may not be around much longer if Congress doesn’t extend the 15% reduced rate beyond 2012, so it may be wise to take advantage of the lower rates before they are scheduled to expire.

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek legal or tax advice from an accountant in naperville.

Rising Popularity of Roth IRA as Retirement Vehicle

2011-09-09T02:02:00.000-05:00

Roth IRAs are quickly catching up to their older counterpart, the traditional IRA. About 19.5 million U.S. households owned Roth IRAs in 2010, compared with 38.5 million households who owned traditional IRAs. But the Roth IRA has been in existence only since 1998, while the traditional IRA has been around since 1974.1

What’s fueling the growth of this retirement vehicle? Americans may be attracted not only by the tax advantages offered by the Roth IRA, but by the flexibility it may offer.

Consider the Trade-Offs

Taxes. The main difference between a Roth IRA and a traditional IRA is that Roth IRA contributions are made with after-tax dollars, whereas contributions to a traditional IRA may be tax deductible. The difference when you withdraw your money, however, is that qualified distributions from a Roth IRA are free of federal income tax if you’ve satisfied the requirements. By contrast, distributions from a traditional IRA are taxed as ordinary income. (Roth IRA distributions may be subject to state income taxes.)

Eligibility. Anyone under the age of 70½ with earned income is eligible to contribute to a traditional IRA. There are no age limitations associated with a Roth IRA, although you must have earned income in order to contribute.

Income eligibility restrictions are associated with both types of IRAs. Eligibility to contribute to a Roth IRA phases out at higher modified adjusted gross income levels: $107,000 to $122,000 for single filers and $169,000 to $179,000 for married couples filing jointly in 2011. Although there are no income limits to contribute to a traditional IRA, investors who are active participants in employer-sponsored retirement plans cannot deduct their contributions if th

Image by Curious Expeditions via Flickr

eir modified AGIs exceed $66,000 for single filers or $110,000 for joint filers.

Contribution limits. There is a $5,000 annual contribution limit to all IRAs combined in 2011. Investors age 50 and older may make an additional $1,000 catch-up contribution.

RMDs. Traditional IRAs are subject to annual required minimum distributions (RMDs) that must begin after you’ve reached age 70½ (the first distribution must be taken no later than April 1 of the year after you turn 70½). However, no RMD rules apply to Roth IRAs. Thus, if you don’t need the money, you can leave Roth IRA assets to your heirs, who can also benefit from tax-free distributions. Failing to take an RMD may result in a 50% tax penalty on the required amount that was not withdrawn. Beneficiaries of either type of IRA are required to take RMDs (based on their own life expectancies).

Withdrawal considerations. Withdrawals from either type of IRA prior to age 59½ may be subject to a 10% federal income tax penalty. Exceptions to the penalty include the owner’s death, disability, and a qualified first-time home purchase ($10,000 lifetime maximum). Regular Roth IRA contributions (not earnings) can be withdrawn at any time for any reason without any tax liability or penalty. For a tax-free and penalty-free withdrawal of earnings, qualified Roth IRA distributions must meet the five-year holding requirement and take place after age 59½.

If you are looking for a way to help manage your income tax liability in retirement and possibly leave a tax-free legacy to your heirs, you may want to consider a Roth IRA.

Call us today, we are your Naperville Retirement professionals.

1) Investment Company Institute, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

What Kind of Investor Are You?

2011-09-06T00:23:00.007-05:00

Most Americans seem to understand that to pursue financial gains through investing, they typically must assume some level of risk. For example, one survey of investors with household incomes above $150,000 found that 98% were willing to assume at least some risk in pursuit of investment gains.

When you assume investment risk, it means you should be willing to lose money in pursuit of investment gains. Although losing money is exactly the opposite outcome you hope to achieve through investing, risk is an inherent aspect of investing. Broadly speaking, the more risk you are willing to assume, the greater your potential for investment returns.

Understanding your risk tolerance is an important part of determining what kind of investor you are. At one end of the risk spectrum is the conservative investor, who is usually interested in preserving principal and earning a steady income. At the other end is the aggressive investor, who is typically more concerned with growing principal, even if it means sustaining some investment losses along the way. Not sure where you fit? These factors may help you decide.

Comfort Level
Everyone has a different comfort level when it comes to the potential for losing money on an investment. Although feelings are important and should be taken into consideration, making major decisions based on emotion could cause you to miss opportunities or take on too much risk. Remember that even the most conservative investments can lose value over time if they don’t keep pace with inflation.

Time Horizon
Your proximity to your financial goals can have a significant influence on your risk tolerance. In general, the more time you have to reach your goal, the more risk you may be able to assume. An individual who is 15 to 20 years from a major goal, such as retirement or sending a child to college, is typically in a better position to recover from investment losses than someone who is five years from a major goal. As you approach the date when you will need the money in your portfolio, it may be a good idea to begin shifting assets to more conservative vehicles to help avoid losses from which you may not have time to recover.

Net Worth
The size of your portfolio could also affect your risk tolerance. Consider two hypothetical investors: One has a $5 million portfolio and the other has $100,000 in a retirement account. Each makes a $50,000 investment in the same security. The millionaire is assuming far less risk because $50,000 represents only 1% of his portfolio. The other investor is facing a much larger risk by exposing half of his portfolio to the fate of a single security.

All investments are subject to market fluctuations, risk, and loss of principal. When sold, investments may be worth more or less than their original cost.

Determining how much risk may be appropriate for your portfolio typically requires you to consider more than just your feelings. Examining your overall situation may help you determine how much risk you want to assume to meet your long-term financial goals.

Allow us to help you meet your financial goals, we are your neighborhood Naperville Investment Advisor.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Managing Cash When Interest Rates Are Low

2011-09-01T06:29:00.017-05:00

The economy may be improving, but high unemployment and low inflation indicate that the Federal Reserve may keep interest rates low at least until 2012.1 It’s generally a good idea to keep three to six months of income in an emergency fund to help cover unexpected expenses or a sudden loss of income. But when interest rates are low, where should you keep your cash?

Savings Accounts
Perhaps the most appealing aspect of savings accounts is that they are insured and highly liquid. The Federal Deposit Insurance Corporation insures deposits up to $250,000 per depositor, per institution, in principal and interest. You can generally withdraw your money at any time, although you could be subject to a fee if you exceed the financial institution’s monthly limit on withdrawals or transfers.

One disadvantage is that savings accounts may offer lower interest rates compared with other cash alternatives. Although you are unlikely to lose money deposited in a savings account, you could lose purchasing power over the long run if the interest rate does not keep pace with inflation.

Certificates of Deposit
CDs may offer slightly higher interest rates than savings accounts, but you generally must commit your principal for a period of months or years. Early-withdrawal penalties vary by institution and may range from several days’ worth of interest to the loss of some principal.

Typically, the interest rate paid by a CD depends on the maturity date. The longer you are willing to commit your money, the higher the interest rate you may be able to earn. Some CDs also offer higher rates for larger deposits. However, if your principal is locked into a CD when interest rates increase, you may not be able to take advantage of the higher rates until your CD matures, and the early-withdrawal penalty may offset any gains from reinvesting at a higher rate. The FDIC also insures CDs (up to $250,000 per depositor, per institution), which generally provide a fixed rate of return.

Money Market Funds
Money market funds are mutual funds that invest in short-term debt. These funds typically pay dividends, which may be greater than the interest paid by a savings account or CD. Generally, there are no limits or penalties for redeeming shares from a money market fund.

Money market funds are neither insured nor guaranteed by the FDIC or any other government agency. Although money market funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in such a fund.

Mutual funds are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest. 1) MoneyRates.com, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from a Naperville Wealth Management advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Favorable Dividend and Capital Gains Tax Rates Extended — for Now

2011-08-29T06:24:00.014-05:00

Congress gave investors a break when it passed the 2010 Tax Relief Act. The act extended the 15% maximum tax rates on qualifying dividends and long-term capital gains for two more years. But like many congressional actions, it’s another temporary measure that is scheduled to expire on December 31, 2012. In 2013, unless lawmakers act, the favorable tax rates will return to their pre-2003 levels, and that’s the same year when higher-income taxpayers may be subject to a Medicare unearned income tax on net investment income to help pay for health-care reform.

Some investors may be tempted to sell stock and other investments to take advantage of the lower tax rates. Of course, taxes should not be the only consideration when deciding whether to sell an investment, but they can be an important part of the equation. Investors should also consider how an investment fits their time horizon, risk tolerance, and goals for growth and/or income.

Capital Gains: The Long and Short of It
Typically, you pay capital gains tax when you sell an investment, not while you own it. Tax rates depend not only on the holding period of the asset but also on your income tax bracket. Long-term capital gains are profits from investments held longer than 12 months. Currently, investors in the 10% and 15% income tax brackets pay 0% in capital gains tax, whereas higher-bracket investors pay 15%. In 2013, these tax rates are scheduled to rise to 20% (10% for taxpayers in the 15% income tax bracket; 23.8% for the highest two tax brackets). Short-term capital gains are profits from investments held for 12 months or less. They are taxed as ordinary income, which is not scheduled to change.

Dividends: The Qualified Kind
Dividend-paying stocks have historically been a way for investors to hedge against inflation. Taxes on qualified dividends are currently 15%, but they could reach 39.6% — that’s a 164% increase — if they revert to ordinary income tax rates in 2013, as they are scheduled to do. Because retirees often rely on dividends to supplement their retirement income, higher dividend taxes could hit them particularly hard.

Selling an investment before tax rates move higher may be a strategy to consider if the investment no longer meets your needs and tax situation. Fortunately, there’s plenty of time to reevaluate your mix of investments before higher tax rates return. Before you take any specific action, be sure to consult with your tax professional.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from a Naperville Investment Services advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Finding a Good Time to Invest

2011-08-25T18:16:00.018-05:00

When the Dow Jones Industrial Average closed above 12,000 in February 2011 — the first time since June 2008 — it broke an important psychological barrier. It seemed to confirm to many that the stock market could be recovering from the global financial crisis.1When a major index such as the Dow crosses a significant threshold, it can stir optimism among investors and those who have been sitting on the sidelines waiting for the markets to rally. Although there may indeed be good and bad times to invest, the problem is that such periods usually become apparent only in hindsight. Most investors have important financial goals and only a limited time to reach them. Waiting for the “right” moment to invest could prove to be a costly and ineffective strategy.

A Lesson Not Yet Learned
As a result of the 2008 financial crisis and turbulence of the past two years, a growing number of young investors have shunned the stock market. According to the Investment Company Institute, only 34% of people under age 35 say they’re willing to take substantial or above-average risks with their portfolios, down from 48% in 2005.2

The early market experiences of young investors were disappointing, and they learned a hard lesson in market risk — that their portfolios can take a big hit in an economic downturn. But they may not have the perspective of “time in the market” and staying power over the long term.

In fact, a bigger danger for young stock-shy investors could be missing out on potential long-term opportunities. For example, over the 41 10-year holding periods since 1960, stocks lost money in only two periods (see chart). Of course, past performance does not guarantee future results.

Post-2008 Bull Market
From the start of a bull market on March 9, 2009, to February 1, 2011, the Dow’s total return (assuming reinvestment of dividends) was 92%. Investors who purchased stocks mirroring the S&P 500, a broader measure of the stock market, would have nearly doubled their returns (assuming reinvestment of dividends).3
The rise in stocks did not erase all the damage caused by the Great Recession, but it helped many investors recoup a chunk of their losses. Investors who pulled money out of stocks and missed this upswing also missed out on potential gains.

It’s natural to be tempted to make investment decisions based on good news or bad news about the financial markets. But by sticking to a sound investing approach that considers your risk tolerance, time horizon, and long-term goals, you may be able to prevent emotions from taking your portfolio on a rollercoaster ride.
1) Yahoo! Finance, 2011, Dow Jones Industrial Average for the period 1/1/2008 to 2/1/2011. The performance of an unmanaged index is not indicative of the performance of any particular investment. Individuals cannot invest directly in an index. Rates of return will vary over time, particularly for long-term investments. Actual results will vary.
2) CNNMoney, January 6, 2011
3) CNSNews.com, February 1, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from a Naperville Brokerage Services advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Tips for Surviving the Estate Tax

2011-08-22T18:08:00.018-05:00

Although the federal estate tax is back after a one-year reprieve, the effect on Americans could be somewhat modest compared to what may be coming.

The federal estate tax was reinstated retroactively to January 1, 2010, by the 2010 Tax Relief Act. The good news is that the exemption amount has risen to $5 million, which excludes the majority of American households from being subject to the 35% estate tax. And because of the law’s “portability” provision, married couples may be able to shield up to $10 million from federal estate taxes.

The not-so-good news is that these tax-law provisions are scheduled to expire on December 31, 2012. Unless lawmakers extend or amend the law, the federal estate tax will roar back in 2013 with a reduced $1 million exemption amount and a 55% top tax rate. These days, individuals who own a home and large retirement accounts could easily leave behind more than $1 million.

If you are concerned about the future of estate taxes and want to leave your heirs a legacy and/or liquid assets to help cover any estate liabilities, you might consider survivorship life insurance.

How Survivors Can Benefit
A survivorship life insurance policy (second-to-die insurance) insures two people but pays the death benefit after the death of the second insured person. The proceeds can be used to replace liabilities owed by the estate — or amounts left to charity — potentially without reducing the beneficiaries’ inheritance. Having liquid funds could also help heirs keep inherited assets such as a home or a business without having to sell them to pay estate liabilities.

Because the premium is based on the joint life expectancy of the insured individuals, survivorship life insurance generally costs less than two individual policies. It also may be easier to qualify for than two single policies. Of course, the earlier in life that life insurance is purchased, the less expensive it may be over the long term, and it may eliminate the possibility that you will not qualify for insurance if you acquire a chronic health condition later in life.

Life insurance proceeds are generally considered to be part of your taxable estate. If your goal is to keep the death benefit out of your estate, you might consider an irrevocable life insurance trust. Trusts involve a complex web of tax rules and regulations, so you should consider consulting with an experienced estate professional as well as your legal and tax advisors for guidance.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable.

Survivorship life insurance offers a way to help cover estate liabilities without your heirs dipping into their inheritance. Even if your estate isn’t subject to estate taxes, the proceeds could provide them with a cash cushion for their futures.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from a Naperville Estate Planning advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Are Housing Troubles Standing in the Way of Growth?

2011-08-18T17:43:00.022-05:00

U.S. home prices (as measured by the Case-Shiller index) have declined 33% since they peaked in 2006. Overall, Americans have seen home values drop further and faster than they did during the Great Depression.¹

The housing industry has been credited with helping to boost economic activity after past recessions because residential construction requires the hiring of workers and creates demand for goods and services related to the formation of new households. However, the pace of the current recovery has been slower than expected, and many economists (including Federal Reserve Chairman Ben Bernanke) blame the housing sector for ongoing weakness in the economy.²

In previous economic recoveries, housing accounted for 15% to 20% of overall growth, but in 2009 and 2010 it added only 4% to gross domestic product (GDP).³ One reason why the industry has not played its former role is simply the large imbalance that currently exists between housing supply and demand.

Too Much Supply

Falling home prices, the financial crisis, and high unemployment have resulted in a large number of borrower defaults and foreclosures. It’s estimated that 4.5 million households are either three months behind on their mortgage payments or officially facing foreclosure proceedings. The historical average for mortgage delinquencies is around 1 million households. Economists have warned that prices may not hit bottom until this large “shadow inventory” of distressed homes is cleared out.⁴

In recent months, the pace by which lenders are taking back homes and reselling them has slowed due to court backlogs and other legal issues. A number of federal and state officials have also charged that loan servicers did not always follow foreclosure procedures required by law and are currently demanding reforms and negotiating a potential settlement with the nation’s largest banks. Foreclosures are likely to hit the real estate market at a faster rate once the legal issues are resolved.^5–6

Too Little Demand

Buyers have not returned in large numbers despite historically low interest rates and greater affordability. In the wake of the financial crisis, stricter underwriting standards and larger down-payment requirements have made it more difficult to qualify for mortgages. Employment uncertainty, a lack of consumer confidence, and fear that prices will fall further are also reasons why many potential buyers have stayed out of the housing market.⁷

Demand was also affected by the fact that fewer new households (which includes renters and buyers) were formed during and after the recession. The number of new households dropped from 2 million in 2005 to 578,000 in 2008. Many couples have postponed marriage or divorce, and young people are living with parents or sharing housing with roommates to reduce their living expenses.⁸

Home Building Slowed

Faced with lower prices overall and deeper markdowns on distressed sales, home builders are unable to compete with the available supply of existing homes. Government statistics show that housing starts dropped to an annual pace of 477,000 units in April 2009 from a peak of nearly 2.3 million in January 2006. Even though housing starts rose to 546,000 for the 12 months ending in May 2011, the rate is still far below the 1.2 million homes per year that is generally considered healthy.⁹

Relatively little new home construction is also the main reason why the housing industry has failed to contribute significantly as a component of GDP. When $300,000 is spent on land, labor, and materials to build a new home, it adds $300,000 to GDP, whereas the sale of an existing home adds only about 5% to 6% of the purchase price (in brokers commissions and other sales-related costs).¹⁰

The Key to Progress

Roughly 950,000 new households were created in 2010, and Moody’s Analytics has forecasted an average of 1.2 million annually over the next decade.¹¹ If the employment situation and wage growth continue to improve in the broader economy, more people may have the financial means and the confidence to move out on their own. That could drive up rent prices and make home purchases more desirable, which could eventually help strengthen the housing market.

It’s possible that modest economic growth will continue despite the headwinds created by the housing crisis. However, high-profile economists have cautioned that more robust growth could be out of reach until the housing industry gets back on its feet.

1, 4) CNBC.com, June 14, 2011
2, 7) USA Today, June 23, 2011
3, 9) The Associated Press, June 16, 2011
5) The New York Times, June 19, 2011
6) CNNMoney, June 16, 2011
8, 11) The Wall Street Journal, June 4, 2011
10) CNNMoney, May 31, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

How Much Money Can I Put into My IRA or Employer-Sponsored Retirement Plan?

2011-08-15T05:38:00.016-05:00

All types of IRAs and employer-sponsored retirement plans are subject to annual contribution limits set by the federal government. The limits are generally adjusted periodically to compensate for inflation and the increase in the cost of living.

IRAs
For the 2011 tax year, you can contribute up to $5,000 to all IRAs combined, the limit will be adjusted for inflation annually. For instance, if you have a traditional IRA as well as a Roth IRA, you can only contribute a total of the annual limit in one year, not the annual limit to each.

If you are age 50 or older, you can also make an annual $1,000 “catch-up” contribution.

Employer-Sponsored Retirement Plans
Employer-sponsored retirement plans, such as 401(k)s and 403(b)s, have a 2011 contribution limit of $16,500; individuals aged 50 and older can contribute an extra $5,500 as a catch-up contribution.

If you are currently contributing to an IRA or an employer-sponsored retirement plan, it may be wise to check the contribution limit each year in order to put aside as much as possible.

Distributions from traditional IRAs and most employer-sponsored retirement plans are taxed as ordinary income and may be subject to an additional 10% federal income tax penalty if taken prior to reaching age 59 ½. If you participate in both a traditional IRA and an employer-sponsored plan, your IRA contributions may or may not be tax deductible, depending on your adjusted gross income.

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to advice from an accounting firm in Naperville.

What Is the Gift Tax?

2011-08-11T05:33:00.010-05:00

The federal gift tax applies to gifts of property or money while the donor is living. The federal estate tax, on the other hand, applies to property conveyed to others (with the exception of a spouse) after a person’s death.

The gift tax applies only to the donor. The recipient is under no obligation to pay the gift tax, although other taxes, such as income tax, may apply. The federal estate tax affects the estate of the deceased and can reduce the amount available to heirs.

In theory, any gift is taxable, but there are several notable exceptions. For example, gifts of tuition or medical expenses that you pay directly to a medical or educational institution for someone else are not considered taxable. Gifts to a spouse who is a U.S. citizen, gifts to a qualified charitable organization, and gifts to a political organization are also not subject to the gift tax.

You are not required to file a gift tax return unless any single gift exceeds the annual exclusion amount for that calendar year. The exclusion amount ($13,000 in 2011), is indexed annually for inflation. A separate exclusion is applied for each recipient. In addition, gifts from spouses are treated separately; so together, each spouse can gift an amount up to the annual exclusion amount to the same person.

Gift taxes are determined by calculating the tax on all gifts made within the tax year that are above the annual exclusion amount, and then adding that amount to all the gift taxes from gifts above the exclusion limit from previous years. This number is then applied toward an individual’s lifetime applicable exclusion amount. If the cumulative sum exceeds the lifetime exclusion, you may owe gift taxes.

The 2010 Tax Relief Act reunified the estate and gift tax with a $5 million exclusion and 35 percent tax rate in 2011 and 2012. This enables individuals to make lifetime gifts up to $5 million (up from $1 million in 2010) before the gift tax is imposed. These changes are only in effect through 2012.

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from a Naperville tax advisor.

What Is the Estate Tax?

2011-08-08T00:28:00.042-05:00

The estate tax is a tax on property that transfers to others upon your death. Estate taxes are due on the total value of your estate — your home, stocks, bonds, life insurance, and other assets of value. Everything you own, whatever the form of ownership, regardless
of whether the assets have been through probate, is subject to estate taxes.

Also referred to as the “death tax,” the estate tax was first enacted in this country with the Stamp Act of 1797 to help pay for naval rearmament. After several repeals and reinstatements, the Revenue Act of 1917 put the current estate tax into place. Despite its
long history, this tax remains controversial.

The IRS calculates the estate tax due on your gross taxable estate by adding the value of your assets and then subtracting any applicable exemptions.

The most common exception to the federal estate tax is the unlimited marital deduction. The government exempts all transfers of wealth between a husband and wife from federal estate and gift taxes, regardless of the size of the estate. Of course, the surviving spouse must be a U.S. citizen to qualify for this exemption. When the surviving spouse dies, the estate will be subject to estate taxes and, unless the appropriate preparations have been made, only the surviving spouse’s applicable credit can be used. Other exemptions include mortgage and other debt, administration expenses of the estate, and losses during estate administration.

The Economic Growth and Tax Relief Reconciliation Act of 2001 gradually increased the federal estate tax exemption, until finally repealing the federal estate tax altogether for the 2010 tax year only. The 2010 Tax Relief Act reinstated the federal estate tax with a $5 million exemption through December 31, 2012.
Unless Congress acts to amend or extend this latest tax law, the estate tax will revert to pre-2001 tax law rates, with a $1 million exemption and a top tax rate of 55%.

Check with your tax advisor to be sure that your estate is protected as much as possible from estate taxes upon your death.

* Executors for estates of decedents who died in 2010 have the option of electing to use the 35 percent rate, $5 million exemption, and "stepped up" basis of inherited assets for income tax purposes or zero estate tax liability with "carry over" basis of inherited assets for income tax purposes.

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from a Naperville CPA.

Using a Variable Annuity for Guaranteed Income

2011-07-28T01:20:00.003-05:00

One of the recommendations from the White House Task Force on Middle Class Working Families was for retirees to purchase annuities to help reduce the risks of outliving their savings or experiencing lower living standards because of inflation and investment losses.1

The White House is not a common source of retirement information, but its recommendation addressed a common concern: running out of money in retirement. Although the task force wasn’t talking about variable annuities in particular, one of the benefits offered by variable annuities is the potential for a guaranteed lifetime income.

If you have wondered whether your retirement portfolio will be able to go the distance, you might want to learn more about variable annuities.

An Investment in Insurance

A variable annuity is an insurance contract that is typically funded with either a lump sum or a series of premium payments. The term variable derives from the variable return potential. During the accumulation period, the contract holder can direct his or her premiums to be invested among a variety of subaccounts, which pursue returns in the financial markets. The subaccounts offer varying degrees of risk, allowing contract holders to pursue investment returns according to their risk tolerance, long-term goals, and time horizon.

When the contract holder is ready to begin receiving a retirement income, the amount of income available depends on the contract value, which is determined in part by how the investment subaccounts performed during the accumulation period.

A lifetime income is one of several payout options. Contract holders may also select an income that lasts for a specific number of years or for the lifetimes of two people. For an additional cost, contract holders may be able to purchase guarantees, such as a guarantee of minimum fixed income payments or a guarantee to withdraw a specific amount over a lifetime, regardless of the account value.

There are contract limitations, fees, and charges associated with variable annuities, which can include mortality and expense risk charges, sales and surrender charges, investment management fees, administrative fees, and charges for optional benefits. Withdrawals reduce annuity contract benefits and values. Variable annuities are not guaranteed by the FDIC or any other government agency; they are not deposits of, nor are they guaranteed or endorsed by, any bank or savings association. Withdrawals of annuity earnings are taxed as ordinary income and may be subject to a 10% federal income tax penalty if made prior to age 59½. Surrender charges may also apply if the annuity is surrendered in the early years of the contract. Any guarantees are contingent on the claims-paying ability of the issuing company. The investment return and principal value of an investment option are not guaranteed. Because variable annuity subaccounts fluctuate with changes in market conditions, the principal may be worth more or less than the original amount invested when the annuity is surrendered.

Variable annuities are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity contract and the underlying investment options, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

1) Kiplinger’s Personal Finance, May 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

The Difference Between the Debt and the Deficit

2011-07-23T01:15:00.001-05:00

In this age of stimulus spending and bailouts, “debt” and “deficit” are often used to describe the federal government’s financial situation. Many people use these words interchangeably, yet they have significantly different meanings. This explanation may help you understand the conversation.

Budget deficit. When the federal government spends more money in a fiscal year than it collects in tax revenue, it creates a budget deficit. In the rare instances when government expenditures are less than tax revenues, the result is a budget surplus. Budget deficits have been the norm in recent decades. For example, in the past 28 fiscal years (1982 to 2010), there were only four years in which the federal government ran budget surpluses.1

National debt. How can the government spend more than it collects? By borrowing money. The total amount owed by the federal government is called the national debt. Because the federal government guarantees the timely payment of principal and interest, many individuals, corporations, state and local governments, foreign governments, and others are willing to lend their money. Although Treasury securities pay relatively low interest rates, they tend to appeal to investors seeking lower risk.

There’s also quite a bit of borrowing between federal agencies. For example, Congress has long been in the habit of borrowing excess Social Security revenues. As a result, the national debt is divided into two categories: debt held by the public and intragovernmental holdings.

As you can imagine, there’s considerable debate over how long the government can keep borrowing to finance spending. Regardless of how you feel about government spending, you might benefit from understanding the terminology.

1) Haver Analytics, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax advice from Susan S. Lewis CPA. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Deciding When to Begin

2011-07-18T01:08:00.000-05:00

A presidential commission has recommended increasing the early retirement age for Social Security to 64 and the full retirement age to 69. Fortunately, the plan, if adopted, would be phased in slowly and wouldn’t be fully implemented until 2075.1

Currently, most Americans can choose to start collecting benefits at full retirement age, which ranges from 65 to 67 depending on the year they were born, or to receive a reduced benefit as early as age 62. This is an important decision, so it’s a good idea to consider all the factors involved.

It’s About Monthly Income

If you claim benefits at age 62, the amount you receive each month would be about 70% of your full retirement benefit. Each month you wait to claim benefits after age 62, your monthly benefit increases slightly, so that at full retirement age you would be entitled to 100% of your full retirement benefit. For each month you wait to claim Social Security after full retirement age, your monthly benefit will continue to increase until you reach age 70, when you could be entitled to about 132% of your full benefit.

If you live an average life expectancy, you will collect the same amount in lifetime benefits regardless of whether you begin benefits at age 62, full retirement age, or 70. Benefits are reduced at younger ages because, in theory, you will be collecting them for a longer period of time.

It’s important to consider your current financial situation and health as you decide when to begin collecting benefits. If you expect to keep working while collecting early benefits, a portion of your benefit will be withheld if your annual earnings exceed the earnings limit. No earnings limit applies after you reach full retirement age.

If you are healthy and don’t need the money, it might be a good idea to wait to claim your benefits so you can lock in a higher monthly income. Calculating your breakeven age may help you decide. This is the age at which the total amount you collect by claiming early benefits would equal the amount collected if you waited until full retirement age. If your breakeven age is later than your probable lifespan, you might be better off taking early benefits.

There may be other factors to consider depending on your circumstances. Deciding when to collect benefits is a big decision that should be considered carefully.

1) The New York Times, November 10, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek Naperville Retirement Planning advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

Understanding the Appeal of Mutual Funds for High-Income Households

2011-07-13T01:51:00.001-05:00

Although 44% of U.S. households own mutual funds, the rate of ownership is much higher among households with incomes above $100,000

What is it about mutual funds that attracts affluent investors?

Professional Management

When you purchase shares in a mutual fund, to some extent you are also buying the expertise of the fund manager and the fund management company, which are tasked with buying and selling investments to give shareholders the highest possible return consistent with the fund’s objectives. Fund managers carefully research the assets held by their funds, often by poring over financial statements and meeting with a prospective company’s management to discern whether it would be an appropriate addition. Although you may have a certain dollar amount riding on the fund’s performance, it’s likely the fund managers have an even bigger stake: their reputations.

Flexibility

Regardless of your financial goals — retirement, college, a wedding, a rainy day — it’s likely that there is a mutual fund that may be appropriate for your situation and risk tolerance. Mutual funds enable you to customize your portfolio and make adjustments when your market outlook or investment goals change. If you decide you need to redeem some of your shares, your assets could be available as early as the following day. Some funds allow you to write checks against your account.

Diversification

Of all the strategies recommended for managing risk, diversification is near the top. Mutual funds can invest in a wide range of asset classes, industries, and securities. In fact, some mutual funds invest in hundreds of securities, providing a level of diversification that could be cost-prohibitive even for high-income and high-net-worth investors. Diversification does not guarantee against loss; it is a method used to help manage investment risk.

The return and principal value of mutual funds fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.

Mutual funds are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your Naperville Investment Services professional. Be sure to read the prospectus carefully before deciding whether to invest.

1) Investment Company Institute, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

Tips and Pointers from Sue

2011-07-10T00:33:00.000-05:00

Hello Readers,

Just taking a moment to update you on some changes that may affect you. Hope you are enjoying your summer....

1) IRS Notice: FUTA tax rate for 2011. The FUTA tax rate will remain at 6.2% through June 30, 2011. The tax rate is scheduled to decrease to 6.0% beginning July , 2011.

2) Labor Law Posters: If you run a business and have employees, you are required to post the federal and state labor laws by hanging a “labor law poster” in your employee work room or break room. You can order these posters through many on-line companies or through the department of labor. Contact our office if you have any questions about this requirement.

Sue Lewis

Tax Law Keeps S Corporations Attractive

2011-07-06T18:51:00.009-05:00

One fortunate outcome of the 2010 Tax Relief Act is that it keeps the top individual income tax rate almost 5 percentage points lower than the statutory U.S. corporate tax rate. The difference between individual and corporate tax rates is one of the incentives for organizing as an S corporation.

Taxes are really the primary consideration when deciding whether to organize a small business as an S corporation. But some businesses may find that the costs of complying with Subchapter S of Chapter 1 of the Internal Revenue Code could offset the tax advantages. It’s important to weigh the cost of these requirements against the potential benefits of incorporating.

Tax Returns, but No Taxes

S corporations are rarely subject to a corporate income tax; rather, their profits (and losses) are passed through to shareholders, who are taxed at the lower individual income tax rates. (A recent decision in Japan to cut the corporate tax rate by five percentage points means that the United States could have the highest effective corporate tax rate in the world.)1–2

Despite their potential lack of tax liability, S corporations must still file tax Image by agrilifetoday via Flickr

returns. They must also file certain legal documents and maintain a board of directors, who must meet on a regular basis and approve the company’s major transactions. Some states impose additional requirements, fees, and taxes on S corporations.

Separate but Shared

An S corporation is usually treated as a separate entity from its shareholders. This means the shareholders generally cannot be held liable for the corporation’s debts (except in cases of misconduct). Shares can be exchanged between existing, new, or even deceased shareholders without disrupting operations or dividing the firm’s assets (the number of shareholders is limited to 100).

S corporations also may have access to attractive benefit plans, which could help remove some of the disadvantages of competing against larger corporations in the job market. Reorganizing as an S corporation could offer some appealing tax benefits, but it also has the potential to be time-consuming and expensive. Weighing the trade-offs may help you decide whether incorporating would be a smart move.

1) The New York Times, December 13, 2010
2) The Wall Street Journal, December 29, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek an Accountant in Naperville or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

Current Economic Conditions and the Prospect of Inflation

2011-07-01T18:23:00.000-05:00

The Consumer Price Index (CPI), a common measure of inflation, grew at a 3.2% annual rate in April, the fastest rate since October 2008.1 For more than two years, the U.S. economy has experienced relatively low inflation, and the current rate remains below the 50-year average.2 Yet anyone who has been to a gas station or a grocery store recently may feel that prices are going up faster than the CPI suggests.

The CPI measures price changes in a market basket of consumer goods and services. Because prices for food and energy are generally more volatile than other prices, a narrower index called the “core CPI” excludes them. Core inflation, which is used by policymakers as an indicator of long-term inflation trends, grew at an annual rate of just 1.3% in April.3 This suggests that the recent increase in general inflation is due mainly to rising food and oil prices, wh

Image via Wikipedia

ich have yet to work their way fully into prices for other goods and services.

A Slow-Growth Economy

Inflation is typically a by-product of economic growth. When an economy is growing, more people are working, spending money, and competing for a limited supply of goods and services, which can cause upward pressure on prices.

But things are a little different right now. Prices are rising during a period of slow economic growth. Political unrest in oil-producing nations in the Middle East and Africa has contributed to rising oil prices. Because oil is needed to produce most goods and services, higher oil prices can drive up the cost of doing business, which can cause companies to cut spending and payroll, pass higher costs on to their customers, accept lower profits, or some combination thereof. By one estimate, a $10 increase in the price of a barrel of oil reduces gross domestic product growth by 0.2 percentage points.4

Prices for important food crops have surged over the past year — corn was up 88%, wheat was up 76%, and soybeans were up 37% — not only because of growing demand from economies that are recovering faster than the U.S. economy, but also because higher oil prices are spurring demand for ethanol made from corn. These three grains are used in a multitude of food products, which could be why the U.S. Department of Agriculture estimates that food prices will jump between 3% and 4% in 2011 — whereas food inflation in 2010 was at its lowest rate since 1962.5 Food may play an even more critical role in the economy than oil. There are ways to cut back on energy use, but everyone needs to eat.

And then there are the problems in Japan, the world’s third largest economy.6 While this wealthy and productive nation struggles to recover from an earthquake, a tsunami, and a nuclear crisis — estimated to be the costliest natural disaster on record — the world will struggle to get by without Japanese exports (including 25% of the world’s silicon chips) and cope with reduced consumer demand from Japan’s citizens until they get their lives back on track.7 Although there may be a construction boom in Japan, it will likely consume resources that supported other industries. One bright side is that Japan may use less oil in the near future, which could help bring down prices.

Limited Means

Unfortunately, when inflation is caused by something other than economic growth, policymakers may have limited means to combat it. The Federal Reserve’s typical response to inflation is to raise interest rates, in effect putting a brake on economic growth. But higher oil and food prices can also slow the economy, so raising interest rates might only make matters worse.

If you lived through the 1970s, you may recall the term stagflation, which was coined by economists to describe an unprecedented period in which the economy was experiencing a combination of slow growth, high inflation, and rising unemployment. The stagflation of the 1970s may have been caused by extreme oil price increases in the early 70s. It wasn’t until the Federal Reserve raised interest rates into the double digits that the cycle of stagflation was broken, but the Fed was blamed for causing a deep recession in the process.8

How Does Inflation Affect You?

It’s not clear whether the U.S. economy is entering a period of higher inflation. There are signs that the rise in energy and food prices may be slowing. The 3.3% rise in gas prices in April was the smallest increase since November 2010, and the 0.4% increase in food prices was half that of March.9 A drop in energy and food prices might free up more income for discretionary consumer purchases, which could help stimulate the economy.

But even a low inflation rate can pose risks to your finances over long periods. Consider that a 3% inflation rate could cut the spending power of a dollar in half in 24 years, according to the Rule of 72. Failing to account for inflation when projecting how much income you expect to need in retirement could cause you to set aside too little of your current income or invest too conservatively. By the time you reach retirement age, it could be too late to fix the problem.

The relatively low inflation rate the United States has enjoyed over the past few years may have lulled you into believing that inflation does not pose a long-term risk. If your long-term outlook doesn’t account for the risk of inflation, it may be time to consider adjustments that may help your portfolio keep pace with rising prices.

1, 3) Bureau of Labor Statistics, May 13, 2011
2) Thomson Reuters, 2011 (Consumer Price Index for the period 12/31/1960 to 12/31/2010)
4, 7) The Wall Street Journal, March 24, 2011
5) The Wall Street Journal, February 25, 2011
6) International Monetary Fund, 2011
8) Investopedia, 2011
9) msnbc.com, May 13, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek Naperville Financial Planning an/or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

Debating the Debt Ceiling

2011-06-28T01:30:00.002-05:00

Over the past few months, there has been substantial debate in Congress over raising the ceiling on the national debt. This is an important discussion, but it is hardly new — Congress has raised the debt ceiling 74 times since 1962.1

Image via Wikipedia

The debt ceiling is actually more of a legislative formality than a barrier to government spending. The current debate may be driven in part by the fact that the national debt is approaching the psychologically important milestone of 100% of gross domestic product for the first time since World War II. In contrast, 10 years ago, the debt was less than 60% of GDP.2

Government spending and borrowing affect all taxpayers, so it’s worthwhile to keep track of what happens in Washington. Although many Americans could be adversely affected if Congress decided not to increase the debt ceiling, this is unlikely to happen.

Why Does the Government Have a Debt Limit?

The debt ceiling is the federal government’s legal limit for borrowing money. It was established in 1917 to help finance America’s involvement in World War I. Up to that time, federal borrowing and debt limits were usually tied to specific projects.3

Why have a debt ceiling if Congress just raises it every time the national debt approaches the limit? Checks and balances. The U.S. Constitution gives Congress the power to appropriate money and the executive branch the power to spend it. The debt ceiling is one way for Congress to control the amount of money the U.S. Treasury — an arm of the executive branch — can borrow by selling bonds to investors. Each time the national debt reaches the debt ceiling, Congress and the president must have a public debate over the need to spend more than the government collects in tax revenues. Sometimes the debate takes place quietly; at other times, it captures national attention.

What Happens If the Debt Ceiling Is Not Raised?

Once the national debt hits the debt ceiling, the Treasury can no longer borrow. Because most federal budgets require deficit spending, the government might not be able to pay all of its obligations. This has never happened in the United States, so it’s unclear how the Treasury would be required to prioritize its bill payments.

If the government were unable to pay its obligations, investor confidence in U.S. government debt could be reduced and the government would probably have to pay higher interest rates to compensate for the perceived additional risk. The federal budget is already tight (as evidenced by the need to borrow in excess of tax revenues), so higher interest payments could displace other federal spending priorities and require additional borrowing. Because the interest rates offered by the federal government influence other interest rates, a rate increase could translate to higher borrowing costs for state and local governments, businesses, and consumers.

Among the many people in the United States who rely on the federal government for income are Social Security beneficiaries, civilian and military employees, and federal contractors and their employees. If payments to these individuals were to cease, they may be forced to curtail their spending, which could ripple through the private sector.

U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest, which is why they tend to appeal to investors seeking income and preservation of principal. A significant portion of the federal debt is held by foreign investors, so if the Treasury were unable to honor its obligations, it could have a global effect.

Of course, there could be some benefits to a reduction in federal borrowing: Capital that previously went to finance government spending could be freed up for investment in the private sector. The percentage of the federal budget consumed by interest payments could fall. The less the government has to borrow, the less reason it may have to justify tax increases. However, although simply capping the federal debt limit might seem like an easy way to stop Washington from spending more than it collects in tax revenues, a federal government that is unable to pay its bills is more likely to cause hardship than reform.

Obviously, the federal government cannot continue to borrow indefinitely, but we can expect Congress to keep raising the debt ceiling until longer-term fiscal challenges are addressed. The debt ceiling is important, but don’t let it distract you from pursuing your own fiscal health and long-term financial goals.

The principal value of Treasury securities fluctuates with market conditions. If not held to maturity, they could be worth more or less than the original amount paid.

1–3) Congressional Research Service, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent Accounting firm in Naperville. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Fixed for Life

2011-06-23T01:24:00.002-05:00

More than 40% of Americans ages 36 and older are at risk of running out of money in retirement, according to a retirement readiness study.

Researchers divided working Americans into four groups, ranging from the lowest to the highest income levels. They found that, even though the risk of running out of money decreases with a higher pre-retirement income, almost one-third of people with upper-middle incomes and 13% with high incomes may not be able to pay for basic retirement expenses and uninsured health-care costs after two decades in retirement.1

The risk of running out of money doesn’t appear to be reduced for people who h

Image by Jason Michael via Flickr

ave more time to prepare for retirement: Baby boomers and Generation Xers are almost equally at risk.2

Fortunately, it’s possible to purchase an insurance product that could pay an income for a specified period, including your lifetime or the lifetimes of you and another person. The guaranteed retirement income available from a fixed annuity could be just the fix you’re looking for.

Fund Your Future Income

A fixed annuity is a contract with an insurance company that guarantees a fixed rate of return during the life of the contract. The type of annuity that may be appropriate for you will depend on your situation.

An immediate annuity is typically funded with a lump-sum premium. Payments start soon thereafter and continue for the duration of the contract. This type of annuity is often purchased at the beginning of retirement.

A deferred annuity can be funded with either a lump-sum premium or a series of payments over time. Payments start at some point in the future at a rate that reflects any tax-deferred growth during the accumulation period. The income amount depends on the amount of the initial contract, the contract’s rate of return, the age of the contract holder, and the number of years over which payments will be received.

Annuity Trade-Offs

Generally, annuities have contract limitations, fees, and expenses. They tend to offer more conservative rates of return than the financial markets because the insurance company is responsible for paying the contract’s stated return, regardless of market conditions. Of course, any guarantees are contingent on the claims-paying ability of the issuing insurance company.

Most annuities have surrender charges that are assessed during the early years of the contract if the annuity is surrendered. Distributions of annuity earnings are taxed as ordinary income. Withdrawals prior to age 59½ may be subject to a 10% federal income tax penalty.

If you are concerned about running out of money in retirement, it might be time to consider a fixed annuity. A stable source of income could be a welcome addition to your portfolio.

1–2) Employee Benefit Research Institute, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek a Naperville Accountant or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Giving the Gift of Knowledge

2011-06-17T01:17:00.001-05:00

Image via Wikipedia

If you’re wondering whether a college education is still a good investment, consider this: The overall unemployment rate reached as high as 9.9% in 2010, but for workers with a bachelor’s degree (or higher), it did not exceed 5.1%.1 Workers with a bachelor’s degree earn more, too — an average of 66% more over a lifetime than workers who completed only high school.2

But a college education can be expensive. For the 2010–11 school year, the average cost of tuition, fees, and room and board at public four-year colleges ranged from $16,140 to $28,130, depending on whether the student qualified for in-state tuition. At private four-year colleges, the average cost was close to $37,000.3 Because these are current costs, you can expect the price tag to be higher in the future. Over the past decade, the cost of attending a public college grew almost 6% faster than the rate of inflation.4

Accumulating assets to pay for college can be a daunting task. A Section 529 plan offers a tax-advantaged way to accumulate money for a child’s or grandchild’s education.
Smart Savings

Section 529 plans are state-sponsored or college-sponsored plans designed to help families save for higher-education costs. Investment earnings accumulate on a tax-deferred basis, and withdrawals are tax-free as long as they are used for qualified higher-education expenses. For withdrawals not used for qualified higher-education expenses, earnings are subject to ordinary income taxes (at the donor’s tax rate) plus a 10% federal income tax penalty.
Big Plan on Campus

Enjoying rising popularity, Section 529 savings plans have grown from an estimated 300,000 accounts in 2000 to nearly 9 million in 2009, the latest year for which figures are available.5

Donors are not restricted by income limits and may contribute up to $13,000 ($26,000 for married couples) per student in 2011 without triggering gift taxes. It’s also possible to contribute up to $65,000 ($130,000 for married couples) in a single year, as long as the donor doesn’t make any other gifts to the student for five years.

As with other investments, there are generally fees and expenses associated with participation in a 529 savings plan. In addition, there are no guarantees regarding the performance of the underlying investments. The tax implications of a 529 savings plan should be discussed with your legal and/or tax advisors because they can vary significantly from state to state. Also be aware that most states offer their own 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers.

If you want to help a loved one attend college, you might consider a 529 savings plan. It’s a gift that may offer lasting value.

Before investing in a 529 savings plan, please consider the investment objectives, risks, charges, and expenses carefully. The official disclosure statements and applicable prospectuses, which contain this and other information about the investment options and underlying investments, can be obtained by contacting your financial professional. You should read this material carefully before investing.

1) Bureau of Labor Statistics, 2010
2–4) The College Board, 2010
5) Investment Company Institute, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent Naperville Education Planning tax advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Help an Inheritance Help You

2011-06-13T01:01:00.021-05:00

Americans may be changing their attitudes following the Great Recession. When asked what they would do with a large inheritance, 48% of Americans said they would save it. Only 8% would spend it on things they’ve always wanted.1

These findings might seem surprising, but bear in mind that most of the respondents were probably not actually handling an inheritance at the time of the survey. An inheritance can often be accompanied by a mix of emotions that can be difficult to imagine or anticipate. Grief, excitement, and gratefulness are understandable feelings, but emotion is a frequent enemy of sound decision making.

If you expect to receive, or have already received, an inheritance, it’s usually a good idea not to act right away but to spend some time deciding how to use it to pursue your long-term goals. This may help reduce the role that emotions play in your decisions. Here are some options to consider.

Invest It

Investing represents an opportunity to grow an inheritance and potentially make it last for years. But it’s important to view any potential investment in light of your overall financial situation. If you inherit a large sum, consider how it could influence your overall investment strategy. Depending on your circumstances, a large sum could affect your risk tolerance.
Pay Down Debt

Credit cards can be useful to rent a car or book an airline flight, but carrying large balances on high-interest accounts can harm your financial health. If you have a large balance on a credit card or a vehicle loan, consider paying it off with the inherited money and use the increased cash flow to begin making “payments” toward your retirement or other long-term goals.

Of course, some types of debt, such as a home mortgage, may offer tax advantages. Whether it would be wise for you to pay off your mortgage depends on your individual circumstances and goals.

Give Some Away

Under current law, you can make gifts of up to $13,000 per beneficiary per year without incurring gift taxes. A gift of that size could help fund a college education for a child or grandchild, help a family member get out of debt, or give a young worker in your family a head start on retirement savings. Also, you can give an unlimited amount to your spouse without gift taxes as long as he or she is a U.S. citizen.

Save for Emergencies

It’s usually wise to have an emergency fund that can be used in the event of a sudden loss of income or unexpected expenses. Having three to six months’ worth of income in an emergency fund could help you avoid going into debt or selling investments at an inopportune time to cover unanticipated or sudden expenses.

Inheriting money represents an opportunity. But it may help to view it as a responsibility, too. Managing your inheritance with sound financial strategies could help you preserve it for your future and your family.

1) Gallup, 2010

The information in this article is not intended as Naperville estate planning or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Never Retire? Don’t Count on It

2011-06-08T00:55:00.003-05:00

If there is anyone who shouldn’t have to worry about retirement, one might assume it would be the wealthy. But in a recent survey, just 40% of wealthy individuals “completely agree” that they are “totally confident” they will have enough money for retirement.1

And the rest? Apparently, most of them have decided they aren’t going to worry about it: 60% said they will shun traditional retirement and work as long as possible. The percentage rises to 70% among those ages 45 and younger.2

Of course, there’s nothing wrong with wanting to work for your whole life. Work can be a source of satisfaction and other benefits. It’s been shown that people who work later in life may be less likely to suffer cognitive decline than people who retire early.3 And for people concerned about their finances, working longer may make sense: The amount of time to accumulate money increases, while the duration of retirement decreases.

But it can be dangerous to believe that you can overcome a retirement income shortfall by telling yourself that you will work past the traditional retirement age or never re

Image via Wikipedia

tire at all. Here’s why.

Since 1991, the median retirement age has remained at or near 62.4 The percentage of workers who expect to retire after age 65 has tripled over the past two decades — from 11% in 1991 to 33% in 2010.5 But the ages at which most people retire haven’t changed as dramatically. In 1991, 79% of retirees left the workforce before age 65; in 2010, it was 61%.6

Many people are forced to retire early. In 2010, 41% of retirees stopped working earlier than they expected to. This is not unusual. Since 2000, the percentage of people who retired earlier than planned in a given year has varied between 36% and 51%. Certainly, some people (24%) retire early because they can afford to, but just 5% gave only positive reasons for doing so. The most common reasons for retiring ahead of schedule were poor health (54%), work-related reasons including downsizing and closure (37%), and the need to care for a spouse or family member (19%).7

Working in retirement is not as common as you might think. In 2010, 70% of workers were expecting to work for pay in retirement. Despite this high level of determination, only 23% of retirees were actually working.8

Believing that you will work forever or retire late in life could lull you into a false sense of security. You may be tempted to save less and spend more today because there is no urgent need to prepare for tomorrow. But if something unfortunate happens — or you change your mind when you get older — you could find yourself retired anyway, possibly with less money than you need.

There’s nothing wrong with ignoring tradition and choosing a life path that keeps you always engaged and challenged. But recognizing that you may not always be able to work and earn an income might help you make decisions that keep more of your options open.

1–2) Financial Planning, September 27, 2010
3) The New York Times, October 11, 2010
4–8) Employee Benefit Research Institute, 2010

The information in this article is not intended as retirement planning or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Building A Business Versus Building Wealth

2011-06-03T00:40:00.003-05:00

The market for small businesses has been less than ideal over the past few years. In the third quarter of 2010, just 1,117 small businesses were sold in the United States. That’s equal to the number sold in the same period in 2009 but down from the 1,462 that sold in the third quarter of 2008. Half of businesses sold during the third quarter of 2010 were listed for more than $245,000, but the average sales price was about $140,000 – a 6% decline from the same period in 2009.1

Many of the reasons for the lackluster market may be due to external forces: Weak economic conditions mean many businesses are earning less than in years past. Tighter lending standards have reduced the pool of eligible buyers. Qualified buyers may be waiting for a stronger economy before they assume additional risk.

In other words, your efforts to build a successful business may not always translate to an increase in personal wealth.

One way to help insulate your personal financial situation from the fluctuating small-business market is by investing outside your company. Doing so can have some important benefits.

If you were forced to sell unexpectedly, perhaps because of an illness or a partner’s departure, your post-business lifestyle wouldn’t fully depend on the sales price.

You might be better able to withstand low-ball offers or a buyer’s market if you are in a position to wait for the right buyer.

Think of it as diversification. Allocating too much of your personal wealth to one company — even your own — is a risky proposition. Diversification does not eliminate the risk of investment loss; it is a method used to help manage investment risk.

It’s natural to want to believe that the effort and dedication you pour into your business will help increase the selling price, but there’s always the risk that it won’t. Call today to learn more about how to help insulate your financial future from the risks facing your business.

(1) The Wall Street Journal, October 14, 2010

The information in this article is not intended as Naperville Accounting or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Protect Your Business with a Disaster Readiness Plan

2011-05-30T00:50:00.001-05:00

Prepare for Disruptions — Even from Faraway Events

About a year ago, a volcano erupting in Iceland virtually shut down air travel in Europe. Thousands of flights were canceled, stranding travelers and grounding the 11,000 tons of goods that are normally flown daily between Asia and Europe.1 Businesses suddenly faced shortages of goods and materials because of a faraway natural disaster — a reminder of the need to prepare for a range of emergencies.

Your company may have been unaffected by the Icelandic volcano, but the risk of disaster is always looming. Most people think of hurricanes, tornados, and earthquakes, but a fire in the break room or a flood in the warehouse can also cause operations to come to a grinding halt. By one estimate, one-quarter of businesses never reopen after a major calamity.2 Taking some basic steps now could help you avoid a similar fate.

Stay covered. Even though you probably have insurance, it’s important that your coverage keeps pace with company changes. Updating your policy as you add equipment and other capital expenditures may help you reduce uninsured losses.

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Point and shoot. Taking photographs of premises and property may help speed up the claims process and reduce the risk of disputes with the insurer. Backing up the photos online can help protect them from loss, as well.

Back up and protect. In this electronic age, it’s likely that you already have arrangements to back up important files off-site, preferably 50 or more miles away, with the ability to view them online. But what about records that you keep on-site containing sensitive customer and employee information? Take steps to prevent looters from gaining access to these records in the event you must evacuate.

Keep in touch. Even if your company never suffers a disaster, it may still be vulnerable to disruptions in the supply chain. Arranging for back-up suppliers, deliveries, and other important services may help prevent someone else’s bad fortune from becoming your own. It’s also a good idea to prepare a list with contact information for your employees, Naperville accounting advisor,vendors, Naperville Investment advisor and others with whom you do business. Make sure your managers have copies of the list and keep them at home.

1–2) The Wall Street Journal, April 16, 2010; September 11, 2009

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

How Interest Rates Can Influence Financial Decisions

2011-05-25T00:43:00.000-05:00

Few Aspects of Economy Have as Much Effect on Spending, Saving

Throughout much of the past decade, the Federal Reserve has relied on its control of short-term interest rates to influence economic activity. Some would even say that it has made some fairly unconventional moves: Like cutting the federal funds rate 11 times in 2001. Or keeping rates under 2% for much of the decade. Or taking them almost to zero in response to the 2008 credit crisis, along with other monetary moves designed to push down long-term rates.1–2

On the surface, adjusting interest rates might seem to be an overly simple solution for steering the world’s most powerful economy: Growing slowly or not at all? Cut interest rates. Growing too fast? Raise interest rates. Economy seems fine? Leave rates alone.

The reality is that there are few mechanisms in any economy that can influence behavior more effectively than interest rates. Consider how low interest rates can affect important financial decisions.
Decisions About Spending and Saving

Image by RambergMediaImages via Flickr

Low interest rates create incentives for people and businesses to spend money, especially on purchases that may require financing. Interest rates directly affect borrowing costs, so lower rates may help increase the affordability of big-ticket items, such as automobiles and real estate. For example, home sales tend to be higher when mortgage rates are 5% than when they are 10%.3

The Fed’s primary motivation for cutting interest rates is usually to stimulate spending. Lowering rates may help encourage businesses to purchase capital goods and durable equipment; households may find that they are able to purchase items that were previously out of reach.

By contrast, higher interest rates reduce incentives to spend and increase the potential benefits of saving. In theory, higher interest rates dampen consumer demand. If the supply of goods and services remains the same, then the result should be less upward pressure on prices — in other words, less inflation.
Decisions About Debt Maturities

When short-term interest rates are low relative to long-term rates, it raises the risk that institutions and individuals seeking to own debt may overinvest in bonds with longer maturities in an attempt to increase yields. If interest rates rise, the value of existing bonds can be expected to fall. The longer the maturity, the greater the effect may be on the value of the bond. The principal value of bonds fluctuates with market conditions. Bonds redeemed prior to maturity may be worth more or less than their original cost.
Decisions About Risk

When rates are low, investors may turn to higher-risk investments in pursuit of greater return potential. Over longer periods, more investors may be lured to riskier positions until an unhealthy percentage of economic resources is exposed to too much risk. The more economic resources that are pursuing speculative investments, the greater the risk that a financial crisis could occur.

We’re likely to see low interest rates persist for the foreseeable future. When it comes to your portfolio, it’s important to strike a balance between making decisions based on your long-term interests and making decisions based on the current influence of interest rates.

1, 3) Federal Reserve, 2010
2) The Wall Street Journal, November 4, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an accountant in Naperville or a Naperville Financial Planning advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Dispelling Umbrella Insurance Myths

2011-05-19T00:03:00.004-05:00

It’s easy to tell yourself that you’ll probably never need to purchase extra liability insurance. After all, your chances of being hit with a multimillion-dollar lawsuit may be fairly slim. And besides, wouldn’t the liability coverage on your standard homeowners and auto insurance policies be enough to protect you against a claim or a lawsuit?

Before you make such an assumption — and underestimate the importance of having enough liability protection — consider that between 2001 and 2007, the average jury award for all liability cases increased by almost 62%.1 If you had liability coverage, how much did it increase during this period?

Unfortunately, there are a number of misconceptions about umbrella liability insurance that could cause you to be underinsured.

“My other policies should provide enough coverage.” Standard auto and homeowners insurance policies typically offer between $300,000 and $500,000 in liability coverage. If you’re ever found liable for an amount greater than these limits, you may need to use your home, financial assets, and even your future earnings to satisfy a legal judgment. An umbrella policy acts as an additional layer of protection above the limits of your primary coverage. To qualify for an umbrella liability insurance policy, you generally must purchase the maximum liability coverage available on your auto and homeowners policies, which serve as the deductible for the umbrella policy.

“I’m not at risk of being sued.” If you have a swimming pool, have teenagers living at home, employ workers in your home, own a dog, or entertain frequently, you may have a higher risk of becoming the target of a personal liability lawsuit. Dog bites alone accounted for more than one-third of all homeo

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wners insurance liability claims in 2009. More than 50% of dog bites occur on the dog owner’s property.2

“It’s too expensive.” Umbrella policies typically charge a few hundred dollars a year for $1 million of coverage. The benefits can be used to pay jury awards, plaintiff medical expenses, and legal fees, up to the policy limits. The appropriate amount of coverage for your situation will depend on personal factors, but it’s generally recommended that you have liability coverage at least equal to your net worth.

Omitting umbrella liability insurance from your risk-management strategy could be a costly mistake. The cost is low relative to the additional coverage it may offer.

1–2) Insurance Information Institute, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from a Naperville CPA or a Naperville Asset Management professional. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Making Money Market Funds Work for You

2011-05-16T00:53:00.001-05:00

Some investors turn to money market funds when they are concerned about market volatility. At the start of 2009, in the wake of the 2008 global financial crisis, the amount of cash held in money market funds exceeded the money in stock mutual funds for the first time in more than a decade.1

Money market funds may carry less risk than stocks, but investing in them as a reaction to market volatility also carries risk: You could miss out on any potential gains when the market begins to recover.

Meet the Money Market

Money market funds are mutual funds that invest in cash-alternative assets, usually short-term debt. They seek to preserve a value of $1 per share.

Investors may use money market funds on a temporary basis to hold proceeds from the sale of assets while they determine where to reinvest the funds. Because money market funds aim to maintain liquidity and may offer higher yields than bank savings accounts, they can also provide a place to hold your emergency fund. It’s always a good idea to have enough cash saved to carry you through a financial emergency.

Less Risk May Mean Low Returns

Money market funds may have a place in your portfolio, but it’s usually not a good idea to keep the bulk of your wealth in low-yielding cash instruments because you are concerned about market volatility. As you can see in the chart, trying to choose the appropriate moment to flee or reinvest in stocks can be a costly practice that may cause you to miss out on market gains.

Low rates of return may also make money market funds less ideal for long-term investing. Any time the after-tax yield is lower than the rate of inflation, your investment may be losing purchasing power.

When considering money market funds, it’s important to remember that lower risk usually translates to lower returns. Before you invest in money market funds, be sure to evaluate whether or not they may help you reach your long-term goals.

Money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money market funds seek to preserve the value of your inv

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estment at $1 per share, it is possible to lose money by investing in such a fund.

Mutual funds are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your Naperville financial services professional. Be sure to read the prospectus carefully before deciding whether to invest.

1) The New York Times, January 10, 2009

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from a Naperville Accounting firm. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Consider Your Retirement Needs, but Don’t Forget Your Retirement Wants

2011-05-11T00:23:00.002-05:00

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You might have read or heard that you need to replace about 80% of your pre-retirement income to maintain your standard of living in retirement. Although some research validates this guideline, consider that half of today’s retirees say their spending is higher or about the same as it was when they were working.1–2

The idea that you may need less income in retirement considers that your income tax burden may be lower when you quit working and that you probably are not contributing a large chunk of your salary to retirement plans. Variables that can influence the replacement ratio — positively or negatively — include your living expenses, overall debt level, health-care costs, and whether you will receive an employer-provided pension.

Rather than focusing on how much money you’ll need to get by in retirement, take some time to envision a retirement lifestyle that you can really get excited about. Unless you plan to spend retirement being frugal, there’s a good chance that you could need more than 80% of your pre-retirement income to fund the lifestyle you seek.

More Time, More Money?

Retirement may be the first time in your life when you are free to travel, play golf, go back to school, focus on hobbies, and pursue other interests that you simply didn’t have time for during your working years.

What a disappointment it would be to retire and finally have the time, but not the money, to do as you please. If you would find it difficult to afford your ideal retirement lifestyle on your current income, it could be an indication that you are underestimating how much income you’ll need in retirement.
Changing Needs

As we grow older, what once may have been considered a luxury can become a necessity. In their list of “basic needs,” more than half of baby boomers include an Internet connection, special occasion gifts, and pet care. Many baby boomers would add family vacations, dining out, professional haircuts/coloring, movies, and their children’s or grandchildren’s education to the list of basic needs.3 And for 98% of baby boomers, health-care coverage is not a luxury but a basic need, one that they are extremely concerned about being able to afford.4

Underestimating Costs and Spending

The danger of underestimating how much you expect to spend in retirement is that it could lead you to save too little or invest too conservatively during your working years. Among the 46% of workers who have attempted to calculate how much money they will need for retirement, 44% made changes to their retirement savings strategies as a result, with the majority of changes involving saving or investing more.5

To prepare for a retirement that you can truly look forward to, consider the luxuries that your retirement-needs calculation may not account for. It could mean the difference between living well and just getting by.

1) CNNMoney, October 8, 2009
2, 5) Employee Benefit Research Institute, 2010
3) MarketWatch, August 6, 2010
4) Society for Human Resource Management, 2010

The information in this article is not intended as Naperville tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent Naperville Retirement Planning professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Eye on Japan's Recovery Within a Recovery

2011-05-06T00:35:00.000-05:00

Just days before the Great Tohoku Earthquake, Japan’s central bank was expressing optimism that the nation’s economy was returning to a moderate growth path after a bout with chronic deflation that has dragged on for two decades.1

Now the Japanese government is estimating that the damage caused by the 9.0 temblor and the resulting tsunami and nuclear accident that devastated Japan’s northeast coast on March 11, 2011, may surpass $309 billion. That price tag — more than double the damage from Hurricane Katrina, which ravaged the U.S. Gulf Coast in 2005 — would make this the costliest natural disaster on record.2

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Although Japan has been in the economic doldrums since the early 1990s, suffering from an aging population (it was the only major nation not to experience a baby boom after World War II), the country plays a critical role in global commerce. Its nearly $6 trillion economy is the third largest, behind China and the United States, and accounts for nearly 9% of global economic output.3–4

The human toll of the disaster is heartbreaking, with perhaps 10,000 confirmed dead, nearly twice that number still missing, and hundreds of thousands displaced.5 Yet this event could serve as a turning point for Japan’s economy. Rebuilding could create investment opportunities, help break the cycle of deflation, and provide a paradigm-shifting jolt that may help a new Japan emerge from the rubble.

But in the near and medium term, Japan will face many challenges that could send ripples through the global economy.

Stabilizing the Yen

In the days after the quake, the Japanese yen surged in chaotic trading, hitting an all-time high on March 16. Two days later, the G-7 nations staged an unusual intervention to help bring the yen’s value down against other currencies.6

A similar currency spike occurred after the 1995 Kobe earthquake, when insurance companies had to buy yen to pay claims, driving up the value. This recent surge may have been driven by speculators who anticipated the yen would rise in the aftermath.7

A strong yen is seen as harmful to Japan’s export-driven economy. Prices for Japanese goods are expected to rise because they have been made more scarce by the country’s lost productivity. The combination of a strong yen and higher prices could cause Japan’s exports to lose market share to lower-priced competitors.
Supply-Chain Interruptions

Japan is a key supplier of equipment, mainly related to transportation and machinery. It supplies 14% of the world’s automotive exports and is an important source of parts for U.S. car makers.8 A shortage of just a few parts can bring an assembly line to a halt. This could lead to temporary plant closings while new supply chains are established. If Japan can’t restart production on key exports, it could create openings for its competitors.

Japan is the world’s biggest steel exporter. A drop in production is anticipated but unlikely to affect the world steel market because there is still slack capacity from the Great Recession. Major mills in 64 nations are operating at 82% capacity.9 Again, this could create an opening for Japan’s steel-making competitors.

Japan is the source of 60% of the world’s silicon wafers, a building block for computer chips. Two factories wiped out in the disaster accounted for 25% of world supply.10 Japan also supplies 90% of a special resin used to make printed circuit boards.

The risks associated with investing on a worldwide basis include differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country. These risks may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost.

High Saving Rate

Japan may be in prime shape to pay for rebuilding. It has an abundance of yen-denominated assets, as evidenced by its high personal saving rate, which has averaged almost 17% since 1980.12 The high saving rate may be due to the nation’s persistent economic woes, which have wrought low wages and deflation. (Deflation in particular creates an incentive to save because goods become cheaper over time.) This means that reconstruction may commence regardless of the near-term prospects for Japan’s economy, which is likely to slump.

Tragedies like the one unfolding in Japan may be unpredictable, but they are inevitable. It’s important not to overreact to such events, but to position your portfolio to withstand — and perhaps benefit — when they strike.

1, 4, 6–11) The Wall Street Journal, February 28, 2011; March 25, 2011; March 19, 2011
2) Associated Press, March 23, 2011
3, 12) Haver Analytics, 2011
5) NHK World, March 24, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from a Naperville Accountant or Naperville Investment Services advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Another Economic Stimulus

2011-04-30T01:58:00.007-05:00

Temporary Incentives Could Affect Naperville Businesses of All Sizes

Although Congress was unable to tackle the controversial issue of future income tax rates before the 2010 midterms, it quietly passed a little-noticed tax package: the Small Business Jobs Act of 2010 (H.R. 5297). Here’s a roundup of some of the bill’s major provisions.

Lending support — A $30 billion lending fund was created to make inexpensive credit available to small businesses. The loans will be made available through community banks.1

Bonus depreciation — The 50% first-year bonus depreciation, which expired at the end of 2009, was extended through 2010. It allows 50% of the cost of a depreciable item to be deducted as an expense in the first year of ownership. The additional year of bonus depreciation for equipment with a recovery period of 10 years or longer, and for tangible property used to transport people or equipment, was extended through 2011.2

Maximum first-year depreciation caps for new vehicles increased to $11,060 for passenger automobiles purchased and put into service in 2010. The maximum deduction for light trucks and vans remains at $11,160.3

Section 179 expensing — The maximum deduction related to qualified Code Sec. 179 property doubled to $500,000 for tax years beginning in 2010 and 2011. The law also temporarily modified the definition of qualified Section 179 property to include up to $250,000 of qualified real property (qualified leasehold improvement property, restaurant property, and retail improvement property).4

Small-business income tax credits — The law extended the carryback period on general business tax credits to five years, and they can be applied to both regular tax liability and AMT tax liability.5

Start-up expense deduction — In 2010 only, start-up costs related to the creation of a new business can be expensed instead of having to be amortized. The maximum expense that can be claimed is $10,000.6

Self-employed tax break — In 2010 only, self-employed people are allowed to deduct their health insurance premiums before computing their payroll taxes.7

1) U.S. Small Business Administration, 2010
2–7) CCH, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from a Naperville accountant. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

The Tax Year Calendar

2011-04-25T01:51:00.001-05:00

Here are some important dates for the 2011 Tax Year:

January

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    18 –     Fourth quarter 2010 estimated tax due. Use Form 1040-ES.
    31 –     Deadline for employers to provide copies of Forms W-2 and 1099 for 2010 to employees.
February
    15 –     If you claimed exemption from income tax withholding last year on the Form W-4 you gave your employer, you must file a new Form W-4 by February 15 to continue your exemption for another year.
    28 –     Deadline for farmers and fishermen who have a balance due on their taxes to file their 2010 individual income tax returns and pay the balance due without penalties.
March
    15 –     Deadline for 2010 Naperville corporate tax returns (Forms 1120, 1120-A, and 1120-S) or to request an extension using Form 7004.
April
    18 –     Deadline to file 2010 Naperville individual income tax returns (Form 1040, 1040A, or 1040EZ) and any taxes owed, or to file for an automatic 6-month extension.
    18 –     Last day to contribute to a traditional IRA, Roth IRA, or SEP-IRA for the 2010 tax year.
    18 –     First quarter 2011 estimated tax due. Use Form 1040-ES.
    18 –     Deadline to file 2010 trust tax returns (Form 1041) or to request an automatic extension.
    18 –     Deadline to file 2010 partnership tax returns (Form 1065) or to request an automatic extension.
June
    15 –     Deadline for U.S. citizens living abroad to file individual tax returns and pay any tax, interest, and penalties due, or to request a 4-month extension (Form 4868).
    15 –     Second quarter 2011 estimated tax due. Use Form 1040-ES.
September
    15 –     Third quarter 2011 estimated tax due. Use Form 1040-ES.
October
    1 –     Deadline for existing employers to establish a SIMPLE IRA plan.
    17 –     If you were given a 6-month extension to file your income tax return for 2010, file Form 1040, 1040A, or 1040EZ and pay any tax, interest, and penalties due.
    17 –     Final deadline to file 2010 partnership tax return if you were given a 6-month extension.

Roth IRA Conversion Mistakes Can Be Costly

2011-04-20T02:03:00.001-05:00

Roth IRAs have experienced a spike in popularity over the past decade. Between 2000 and 2009, the number of households owning Roth IRAs increased by an average of 6.3% per year, the fastest-growing rate of ownership among all types of IRAs.1

What distinguishes a Roth IRA from other types of IRAs — and what may be responsible for its rise in popularity — is its ability to provide a tax-free income in retirement and its exemption from required minimum distribution rules.

Although contributions to a Roth IRA are made with after-tax dollars (income eligibility limits apply), qualified distributions are free of federal income tax as long as all conditions are met and regardless of how much growth the account experiences (under current tax law).

One popular way to fund a Roth IRA is by transferring assets from a traditional IRA or an employer-sponsored retirement plan. This type of transaction, called a Roth IRA conversion, is simple in theory but can be complicated in practice. If you make any of these mistakes, you could lose some key advantages.

Paying the conversion taxes with funds from the account you are converting. When tax-deferred assets are converted to a Roth IRA, you must report them as income on your tax return for the year in which the conversion takes place and pay the taxes owed.

Unless you’re older than 59½, it’s generally not advisable to pay the income taxes using money from the account you are converting. Withdrawing money from a tax-deferred plan to pay the conversion taxes before age 59½ would be considered an early distribution and thus may be subject to a 10% early-withdrawal penalty. Consider paying the taxes from a non-tax-deferred account.

Even if you are older than 59½, it could take years before the conversion begins to pay off. If you use some of the tax-deferred assets you are converting to pay the income taxes, you are reducing the amount of money available to pursue potential investment returns.

Failing to consider a “recharacterization” if the account loses value. If the value of the converted assets declines after the conversion, you may be able to “undo” the conversion using a process called recharacterization. This enables you to amend your tax return and obtain a refund of the conversion taxes that you paid. The deadline to recharacterize is October 15 of the year after the year in which the original Roth IRA conversion took place.

You can reconvert the assets to a Roth IRA later at the presumably lower value (which may result in a smaller tax liability) as long as you wait 30 days after the recharacterization date or until the calendar year following the year in which you made the initial Roth IRA conversion, whichever is longer.

Violating the five-year rule. To qualify for a tax-free and penalty-free distribution of earnings and converted assets, Roth IRA distributions must meet the five-year holding requirement and take place after age 59½ or result from the owner’s death, disability, or a first-time home purchase ($10,000 lifetime maximum). The rules governing the five-year holding requirement for converted assets are complex. Before you take any specific action, be sure to consult with your Naperville tax professional.

1) Investment Company Institute, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Protecting What May Be Your Most Valuable Asset

2011-04-15T01:58:00.009-05:00

If you are young and healthy, you might think your chances of becoming disabled are fairly slim. And you wouldn’t be alone in your belief: 64% of workers believe they have only a 2% (or less) risk of suffering a disability that could sideline them for three months or longer.1

But statistics tell a different story: 43% of 40-year-olds will suffer at least one long-term disability (90 days or longer) before age 65.2 Despite this risk, 38% of working Americans say they would be able to pay their living expenses for only three months or less if their incomes were interrupted; 65% would not be able to cover expenses for one year. These findings become all the more alarming when you consider that the average long-term disability lasts for two and a half years.3

If you wouldn’t think of going without insurance coverage for your home, health, or car, it doesn’t make much sense not to protect what may be your most valuable asset: your ability to earn an income.

A Policy That Can Protect

An individual disability income insurance policy can help replace a percentage of your salary, up to the policy limits, if you should suffer an illness or injury that makes it impossible for you to continue working. The benefits can continue until you recover or for a predetermined number of years, whichever comes first. If you pay the premiums yourself, the benefits usually are not taxable. Some policies will pay if you can’t perform your current occupation, whereas others will pay only if you cannot perform any type of job.

Many workers have some type of short-term group disability coverage through their employers. Group plans rarely cover as much as the 70% to 80% of income that individual policies typically offer, and the benefits from group plans are taxable to the extent that the employer pays the premiums.
Your Future Could Be at Stake

In the absence of an adequate, long-lasting source of disability income, you could be forced to use your retirement assets to pay living expenses and medical costs. If you have to withdraw assets fr

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om a tax-deferred retirement account, the withdrawals may be subject to a 10% federal income tax penalty if you are younger than 59½ (depending on the severity of the disability), as well as ordinary income taxes. Even worse, tapping your retirement assets could interfere with progress toward your retirement goals, creating the possibility that you might not be able to attain the retirement lifestyle you envisioned.

The appropriate disability income strategy may help reduce the financial consequences if you lose your income because of an illness or injury.

1, 3) Council for Disability Awareness, 2010
2) 2010 Field Guide, National Underwriter

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Help Keep Your Estate Out of Probate

2011-04-11T01:23:00.000-05:00

If you’ve ever seen an estate go through probate, you know that it’s the legal equivalent of having a tooth pulled — an unpleasant procedure to be avoided whenever possible. And just like tooth decay, probate may not be entirely avoidable, but you may be able to reduce the risk through preventive care.

Probate is a costly and sometimes lengthy procedure wherein a court oversees the distribution of property to a decedent’s heirs. During probate, courts can freeze assets until the process is completed. Probate also risks a loss of privacy, because court records are open to the public. Perhaps the biggest drawback is the price tag — probate costs can eat up 4% to 5% of the total value of an estate, depending on its size, complexity, and the state in which probate occurs.1

One way to help shield assets from probate is by placing them in a trust. As you’ll see, trusts offer other benefits as well.

Meet the Key Players

Although trusts involve a complex web of tax rules and regulations, the concept behind them is fairly simple. The grantor places ownership of his or her assets in the trust, which holds the property for the benefit of the beneficiaries. The trust is typically overseen by a trustee who must distribute the assets based on instructions outlined in the trust. Even though a trust is a legal document, it enjoys a level of privacy not available with a will because it may never see the inside of a courtroom.

There are several types of trusts, but most fit into one of two categories.

Revocable trusts allow the grantor to modify the terms, add or remove assets, and even revoke the trust entirely during the grantor’s lifetime, after which the trust becomes irrevocable. This type of flexibility is popular for grantors who want to control how their assets are managed and distributed. Revocable trusts can be used to place limits and conditions on beneficiaries, help married couples segregate community assets from individual assets, and establish rules and guidelines for management of the trust assets during and after the grantor’s lifetime.

Irrevocable trusts don’t offer the same flexibility, but they excel when it comes to reducing exposure to creditor claims and estate taxes. The grantor is essentially required to surrender control of any assets that are placed in the trust. Transferring ownership of assets to the trust means they are no longer considered part of the grantor’s estate. Although the grantor can specify how the assets will be distributed, he or she is generally prohibited from benefiting from the trust assets once they are in the trust.

A properly structured trust can be a valuable estate conservation tool, but it is not something you should set up yourself. Before implementing any trust strategies, you should consider the counsel of an experienced estate planning professional.

1) 2010 Field Guide, National Underwriter

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

The Federal Estate Tax Is Back and May Be Here to Stay

2011-04-05T01:09:00.003-05:00

Despite the fact that 65% of taxpayers believe the federal estate tax is unfair, it’s back after a one-year repeal, and it could be here to stay.1

Some form of estate tax has been a part of the political landscape since 1797. Although it’s been repealed and reinstated many times, the federal estate tax appears to be as American as baseball and apple pie.

The 2010 Tax Relief Act reinstated the federal estate tax, imposing a 35% tax rate on estates that exceed the $5 million exemption through 2012. By taking specific steps, married couples may be able to pool their exemptions to shield up to $10 million. But these parameters — the most generous in decades — are temporary. After 2012, the federal estate tax is scheduled to revert to pre-2001 tax law levels, with a 55 percent top tax rate on estates valued at more than $1 million, unless lawmakers extend or modify the current law.

In addition to the federal estate tax, many states tax inheritances. Twenty-two states and the District of Columbia have estate or inheritance taxes that could apply to estate assets that are considerably lower than $5 million.2

A Matter of Trusts

If you are concerned that your estate may be subject to estate taxes, you might consider setting up a trust. When properly structured, an irrevocable trust may help you reduce or avoid the fees and estate taxes that may be imposed upon your death, control the distribution of your assets, and avoid probate. Trust assets are also protected from creditors.

A trust is a separate legal entity under which the grantor (or trustor) places assets in the trust, and a trustee administers the trust and eventually distributes assets to the beneficiaries according to the terms of the trust. Once property is placed in an irrevocable trust (which cannot be modified or terminated once set up), the assets are removed from the grantor’s taxable estate. Essentially, the grantor relinquishes ownership of the assets to the trust.

Irrevocable trusts can be used for specific purposes, such as to keep life insurance proceeds out of the taxable estate for the trust beneficiaries, and to benefit charitable groups.

An irrevocable life insurance trust can be used to replace assets in an estate left to charity (so beneficiaries will still receive an inheritance) and/or to keep life insurance proceeds out of the taxable estate. The grantor works with an attorney to set up the trust document, and the trustee uses money funded by the grantor to purchase a life insurance policy that is owned and controlled by the trust. When the insured individual dies, the life insurance proceeds are paid to the trust and distributed to the beneficiaries according to the terms of the trust. With this type of trust, the grantor cannot serve as the trustee, and the life insurance premiums must be paid by the trust.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable.

With a charitable remainder trust, you transfer assets to the trust and name a charitable group as the eventual beneficiary. This strategy preserves the appreciated value of the assets placed in the trust because they

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won’t be subject to capital gains tax. The assets are typically sold by the charitable group and placed in an investment portfolio that can provide you (or your designated income beneficiaries) with a specified income that can last for your lifetime or a specific period of time; this income is generally taxable. Upon your death (or the death of your designated income beneficiaries), the charitable organization receives the “remainder” assets. By gifting the assets to a charitable trust, you can preserve the full value of your gift to charity.

A charitable lead trust offers a way to donate income from your gift while retaining ownership of the assets. The grantor places assets into an irrevocable trust on behalf of a designated charitable organization, and any income generated from those assets goes to the charitable group for the duration of the trust period. Upon termination of the trust, the remaining assets pass to the grantor or to the chosen beneficiaries. This could help reduce, or in some cases even eliminate, estate taxes on appreciated assets that eventually go to the grantor’s heirs.

You should bear in mind that not all charitable organizations are able to use every possible gift, so it would be prudent to check first. The type of organization you select can also affect any tax benefits you might receive.

A properly structured trust may help shield your assets from estate taxes, but you must relinquish ownership of them to the trust. The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional and your legal and tax advisors before implementing such strategies.

1) Tax Foundation, 2009
2) American Family Business Foundation, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Why You Want to Know How Much Your Business Is Worth

2011-03-30T00:48:00.001-05:00

Business Valuation Can Be Valuable Even When No Sale Is Planned

If you have no plans to sell your business, an up-to-date valuation may seem like an unnecessary expense. But you might be surprised at how important the current value of your business can be to achieving your long-term goals. The current value of your business can affect how you approach everything from retirement to estate conservation and your succession strategy.
Your Retirement Lifestyle

The typical business owner has 50% to 70% of his or her net worth in the business.1 If you expect your business to help fund your retirement, a significant change in value might mean you need to adjust the amount of income you are investing for retirement. A shift in value might also affect the date at which you expect to retire, which could influence the timing of your decisions about the kinds of preparations you expect to make to get the business ready to sell or pass on.

Estate Conservation and Succession

It’s understandable if you would rather not spend too much time thinking about whether your business has lost value, but there could be an upside to knowing. If you are expecting to transfer ownership to the next generation, lower asset values may help you transfer a larger share of the business without tax consequences.

If your business has a buy-sell agreement that values the business too highly, a more reasonable valuation may help the survivors or successors take over without paying more than the business is actually worth.

If you discover that your business is responsible for more of your net worth than you realized, it could indicate that it’s time to diversify away from the business. It’s rarely a wise move to let your financial future hinge on the fate of a single asset — even if it is your own business.

Given the events of the past few years, you may be more inclined to focus on today’s problems than on what could happen years from now. But a precise valuation may provide you with valuable information that you didn’t realize you needed.

1) Financial Advisor, August 27, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent Naperville business advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Financial World Relies on Key Groups to Track the Economy

2011-03-25T00:40:00.003-05:00

Over the years, the closely watched “yield curve” has been fairly adept at signaling the onset of U.S. economic recessions. When short-term Treasury yields exceed long-term yields, an economic slowdown often results. When such a yield “inversion” occurred in late 2005, some economists pointed to it as an indication that a recession was approaching. Some two years later, the economy indeed fell into recession.

A yield curve inversion would seem to be a fairly straightforward method for ascertaining the direction of the economy, but more often than not, matters are not so simple. This is evidenced by the committees and teams who join forces to study the economy and weigh in with predictions and forecasts. Here’s a look at some of the key organizations that bring together the world’s most powerful and influential economists.

Beyond the Curve

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The Federal Reserve’s Federal Open Market Committee is ground zero for information about the possible future of interest rates. The committee is composed of the seven members of the Federal Reserve Board and five of the 12 Federal Reserve Bank presidents. They meet nine times a year to set monetary policy. Even though the FOMC announces its decisions immediately after each meeting, the announcements are couched in sterile language that does little to indicate what really happens during the meetings. It’s a bit like hearing the score of a football game without seeing any of the action — the score reveals the outcome but not the drama. The real action can be seen in the meeting minutes, which are usually released a few weeks later. Analysts and journalists pore over the minutes for clues about whether the committee was divided, what specific concerns were discussed, and what data motivated the committee’s decision.

The Wall Street Journal’s Economic Forecasting Survey also showcases competing views. This monthly poll of more than 50 economists reveals predictions of major economic indicators, such as inflation, interest rates, taxes, and employment. Their consensus forecasts are published in the newspaper each month, but their individual views are sometimes more interesting. To adapt an old saying, 50 heads are better than one, and considering the differences among the surveyed economists can sometimes provide clues about how they reached their consensus views.

The National Bureau of Economic Research’s Business Cycle Dating Committee has the last word on when recessions start and end, even though their judgments sometimes come years after the fact. This cautious group of academics uses a broad measure to define a recession: not simply two quarters of declining gross domestic product but also weakness in income, employment, production, and sales. Although the business cycle committee gets most of the headlines, the NBER itself might be the most prestigious collection of economists in the world or in history. Many of its members are Nobel Prize winners; several have served as economic advisers to the president of the United States or as governors and chairmen of the Federal Reserve.

Everyone has an opinion, but clearly not all opinions are equal. Considering the views offered by the best of the best may help with decisions about your Naperville Investments portfolio.

1) The Wall Street Journal, August 16, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Why Realistic Expectations May Be Great Expectations

2011-03-21T00:33:00.009-05:00

A survey of investors found that many have reduced their expectations for the stock market. A large majority expect annual stock market returns over the next one to five years to be no higher than 8%.1 This is down from the 12% return investors expected from stocks in 2010 and the 20% return they expected in 2009.2

Despite scaling back their investment expectations, 87% of investors still expect to reach their long-term financial goals, even though four in 10 made no adjustments to their investment strategies during the previous two years.3

Positive thinking can be a powerful force, but there’s a fine line between optimism and unrealistic expectations.

Possible Pitfalls

The most obvious risk of overestimating how your portfolio will perform is that you may not reach your goal on time. Major financial goals such as retirement and saving for college can take years to achieve. If you arrive at the expected date of your goal but haven’t accumulated the expected funds, there’s no starting over. You may be forced to postpone your goal or make do with less money.

A less obvious risk is that, as you get closer to your target date and it appears as though you may not achieve your goal, you may be tempted to take on more risk than would be suitable for your situation in order to help close the shortfall.

Unrealistic expectations can also create a false sense of retirement security by leading you either to contribute too little of your income during your working years or to withdraw too much during retirement.

A small difference in investment performance can have a tremendous effect over a long period. If you were expecting a 5% average annual return but actually earned 8%, you’d probably be pleasantly surprised. Imagine your disappointment if you were expecting the higher return but actually earned less. Investments seeking to achieve higher rates of return also involve a higher degree of risk.

It’s natural to hope for the best. But being realistic — and not overly optimistic — may put you in a better posi

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tion to pursue your financial goals.

1, 3) Investment Advisor, July 15, 2010
2) CNBC.com, December 21, 2009; December 31, 2008

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent Naperville Investment Services professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

New Rules Are in the Cards

2011-03-17T00:29:00.001-05:00

In 2010, the federal government issued a dizzying array of rules and reforms affecting the plastic you carry in your wallet. In case you had trouble keeping track, here are some of the important developments.

Credit cards: Under the Credit Card Accountability, Responsibility and Disclosure Act of 2009, consumers must be given a 45-day notice before any significant changes affecting their account terms can take effect. Such changes include higher interest rates, fees, and finance charges. Consumers who exceed their credit limits cannot be charged an overlimit fee without their consent. Card issuers must send statements a minimum of 21 days before the due date, which must be the same date every month.1

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Debit cards: Banks are required to have a debit-card user’s permission before they can charge overdraft fees on
point-of-sale purchases and ATM withdrawals (overdrafts via paper checks and automatic payments are exempt; banks can continue to cover them for a fee without the account holder’s permission). Card holders who agree to the fees will have their purchases authorized when their accounts don’t have sufficient funds. Card holders who don’t accept the fees will likely see their over-limit purchases declined.2

Gift cards (and certificates): Issuers cannot charge inactivity fees on cards sold on or after August 22, 2010, unless the card or certificate has been inactive for at least one year. After one year, the issuer may levy inactivity fees, but no more than once per month. The money stored in a gift card must be usable for at least five years from the date the card was issued. If a consumer adds money to the card, the amount added must also retain its value for at least five years.3

1) Bankrate.com, 2010
2) National Foundation for Credit Counseling, 2010
3) Federal Reserve, 2010

The information in this article is not intended tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional Naperville Accounting advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Getting to Know Your Beneficiaries

2011-03-14T00:19:00.004-05:00

Thanks to a popular 2007 motion picture, many Americans now have a “bucket list” — an inventory of accomplishments they hope to achieve in their lifetimes.

Although many bucket list endeavors require courage or tenacity, such as traveling to faraway places or writing a book, there’s at least one task you can resolve to accomplish that is fairly simple but could have lasting benefits for your family, friends, and possibly a favorite charity.

Designate Your Beneficiaries

When you set up an IRA or participate in an employer-sponsored retirement plan, you are typically asked to fill out a beneficiary designation form. Although many people postpone the naming of a beneficiary, this can be a big mistake. IRAs and most retirement accounts are not subject to probate, and the assets will convey directly to your designated beneficiaries, regardless of different instructions in your will. Whoever is designated as your account beneficiary will inherit the proceeds directly, and it would be unlikely for a probate court to order a different result.

Failing to designate a beneficiary means your estate could inherit the money. Because your estate is not eligible for the same tax benefits that individual investors enjoy, your estate would be required to withdraw the assets over a shorter time period. By contrast, a correctly named beneficiary can preserve the tax-deferred status of the inherited funds and spread the tax liability over several years or even over his or her lifetime.

Life Insurance Policies, Too

Life insurance benefits also convey directly to beneficiaries, independent of the probate process. Although it would be unusual to purchase life insurance without designating a beneficiary, it’s not unusual for policy owners to fail to review their beneficiary designations on a regular basis.

The reasons you bought your life insurance policy and the people you want it to protect may change over time. But only you can change the designated beneficiaries on your life insurance policy. Major life events such as marriage, birth, divorce, or death may affect your choice of beneficiaries, and it’s important to update your designations to keep pace with any changes in your life.

Estate conservation issues may be uncomfortable to face, but there’s probably no other aspect that is as simple or inexpensive as designating beneficiaries. Keeping your beneficiary designations up to date can help ensure that your valuable assets go to the people you want to inherit them.

For more information on how we can assist you with your Naperville Estate Planning, please call us today!

The information in this article is not intended as Naperville tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

How to Make the Most of the Payroll Tax Cut

2011-03-09T01:07:00.014-06:00

Have you considered what you will do with the extra 2% in take-home pay that you will receive in 2011? The 2010 Tax Relief Act (H.R. 4853) not only extended the expiration dates of many current tax rates but also reduced the Social Security payroll tax by two percentage points for the 2011 tax year.

An extra 2% might not seem like much, but it could be an opportunity to make a difference in your financial future.

Eliminate Credit-Card Debt

Image by Getty Images via @daylife

Two-thirds of Americans who file for bankruptcy attribute the main cause of their financial problems to credit cards.1 If you have credit-card debt, consider how it might be interfering with progress toward your long-term goals.

The average variable interest rate on credit cards is more than 14%.2 Thus, a borrower with a $5,000 credit-card balance and a 14.5% interest rate would pay $1,872 in interest to retire the debt, assuming $125-per-month payments for 55 months — that’s about four and a half years!

If you have racked up some bills on your credit cards, consider using the extra 2% in take-home pay to help reduce or eliminate the debt, which could free up more of your future income to save and invest.
Increase Retirement Plan Contributions

Experts often recommend that you try to give your retirement plan a raise every year by increasing your contribution by an extra 1% or 2%. Putting the extra 2% you will get this year toward your workplace retirement plan is a relatively painless way to accomplish this objective.

For a worker earning $75,000 a year, the 2% payroll tax cut would be worth an extra $125 per month in take-home pay. By contributing $125 more each month for 25 years to an account earning a hypothetical 5% average annual return, a worker could accumulate an extra $74,440 toward retirement. Of course, this assumes the extra 2% contributions continue to be made even after the payroll tax cut expires after 2011. However, if the worker receives annual pay increases, he may be able to use them to maintain the higher contributions in future years without experiencing a reduction in take-home pay. This hypothetical example is used for illustrative purposes only and does not represent the performance of any specific investment. Fees and expenses are not considered and would reduce the performance described if included. Actual results will vary.

In 2011, the contribution limit for 401(k), 403(b), and 457 plans is $16,500 (or $22,000 for workers age 50 and older). If you aren’t making the maximum annual contribution to an employer-sponsored retirement plan, consider using the additional income to increase your monthly contributions. It could help you accumulate more for retirement.

Open an IRA

If you are already making the maximum annual contribution to a workplace retirement plan or don’t have access to such a plan, it might be time to open a Roth IRA or a traditional IRA. In 2011, you can contribute up to $5,000 ($6,000 for those age 50 and older) to all IRAs combined, as long as you have earned income. Contributions to a traditional IRA are generally tax deductible (subject to income limits if you are an active participant in an employer-sponsored retirement plan), whereas contributions to a Roth IRA are after-tax (income eligibility limits apply). Distributions from traditional IRAs and most employer-sponsored retirement plans are taxed as ordinary income. Qualified distributions from a Roth IRA (those made after the account has been in place for at least five years and after the original owner reaches age 59½) are free of federal income tax. Early IRA and employer-plan distributions (prior to age 59½) may be subject to a 10% federal income tax penalty.

Take Your Portfolio in a New Direction

If you are already doing everything you can to pursue your retirement objectives, you might consider investing in something that previously has been out of reach. Perhaps you are interested in an investment opportunity that is not available in your workplace retirement plan. Maybe you have always wanted to broaden your investment experience but never had the money. Remember that investments seeking to achieve higher rates of return also involve a higher degree of risk, so it’s a good idea to make sure you are using money that you won’t need in the near term.

Save for a Specific Financial Goal

The extra take-home income could be an incentive to open an investment account to pursue other important goals, such as saving for a child’s college education, a down payment on a home, a wedding, or a vacation. Because getting started is often the most difficult aspect of pursuing a new goal, using the payroll tax cut to open a new account may help you build momentum so that you will find other ways to keep the account growing.

If you simply plan to spend the extra income from the 2011 payroll tax cut, you could be passing up on an opportunity to adopt some new habits and put yourself in a better position to pursue your financial goals. Although the tax cut is temporary, it may be just the impetus to make a meaningful difference in your long-term financial situation.

1) Reuters, October 25, 2010
2) Bankrate.com, January 18, 2011 (average interest rate as of January 12, 2011)

Phone us today so we can discuss Naperville Investment Services.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Setting Up Your Own Pension

2011-02-28T06:09:00.001-06:00

A Gallup poll taken in April 2010 found that 63% of Americans expected their taxes to go up within a year’s time. Perhaps unsurprisingly, the expectation of higher taxes tended to increase with income: 74% of taxpayers with $75,000 or more in household income expected higher taxes within the year.1

Business owners may have more options for sheltering income from current taxes than ordinary wage earners. One option is setting up a solo defined-benefit plan. This plan offers self-employed individuals and some business owners a tax-advantaged opportunity to target an annual retirement benefit that is comparable with their pre-retirement incomes.

Like the Big Guys

A solo defined-benefit (DB) plan is not unlike the pension plans offered by large corporations. The participant chooses a retirement income target and then an actuary calculates the annual contributions that would be required to meet the target. In 2010, the target benefit amount may not exceed the lesser of $195,000 or 100% of the participant’s average annual income for the past three years.

Once the plan is in place, the participant is required to make the annual contributions until the plan is fully funded. Contributions are generally tax deductible, and any earnings accumulate on a tax-deferred basis. It wouldn’t be unusual for a business owner to put $100,000 a year in a solo DB plan.

There are some rules and drawbacks, as well. Although there is some leeway for a participant to secure a temporary waiver of his or her contribution for a plan year if paying the full amount would cause a “substantial business hardship,” failing to meet the funding requirements typically results in an excise tax.2 Also, the tax code generally requires a company offering a DB plan to make contributions for all employees. There are exceptions for employees younger than 21 and those who have not worked at least 1,000 hours during any 12-month period. Before you take any specific action, be sure to consult with your Naperville Accountant.

As with most other retirement plans, there are fees associated with setting up and maintaining a solo defined-benefit plan. There is an initial plan setup fee and an annual fee for actuarial services, which are required to ensure that the investments are on track to reach the funding requirements.

1) Gallup, 2010
2) CCH, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Charitable Giving Strategies That May Pay You Back

2011-02-25T06:03:00.004-06:00

It appears that American generosity is built to withstand adversity. Although total U.S. charitable giving fell by nearly 4% in 2009 — perhaps the most economically difficult year since the Great Depression — individuals cut back on their giving by less than one-half of 1%.1

This says a lot about what is important to charitable givers. During a time when many consumers and organizations were looking for ways to cut expenses, individual donors apparently decided that giving was not an expense worth cutting. In a survey of wealthy individuals from around the world, Americans were more likely than Europeans or Asians to say that the ability to give to charity was one of the benefits of wealth.2

Where do Americans get their penchant for philanthropy? Although Americans may indeed be generous, it would be an oversimplification to say that they lead the world in philanthropy because they are more generous. U.S. tax law treats charitable giving more favorably than do tax laws in many nations. One example is the way in which certain types of charitable trusts can be used to help reap even greater tax benefits.

Charitable Remainder Trust

A properly structured charitable remainder trust provides the opportunity to receive tax benefits and a potential income from an asset donated to charity. A grantor who places money, securities, property, and/or other assets in a charitable remainder trust can designate an income beneficiary, even if it is the grantor himself (or herself), to receive payment of a specified amount (at least annually) from the trust. Upon the grantor’s death, the trust assets are transferred to the designated charity and won’t be counted as part of the grantor’s estate for estate tax purposes. The grantor may also qualify for an income tax deduction on the estimated present value of the remainder interest that will eventually go to charity.

Charitable Lead Trust

A charitable lead trust takes a nearly opposite tack. The grantor places an asset in an irrevocable trust on behalf of a designated charity, and any income generated by the asset during the trust period goes to the charity. After the trust period, the remaining trust assets are passed to the grantor or the grantor’s designated beneficiaries. This eliminates current capital gains taxes on the donated assets, a valuable benefit when the donated assets have experienced high appreciation. This strategy also could potentially reduce estate taxes because the trust assets are no longer considered part of the grantor’s estate.

Keep in mind that donations to both types of charitable trusts are irrevocable; therefore, the assets cannot be withdrawn once the trusts are formed. Also, some charitable organizations may not be able to use all possible gifts. It is prudent to check first. The type of organization you select can also affect the tax benefits you receive.

The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate conservation professional and your legal and Naperville tax advisors before implementing such strategies.

Giving to a good cause and benefiting your family’s financial situation are not necessarily mutually exclusive. An examination of your charitable giving desires and financial situation may reveal some overlooked opportunities.

1) Giving USA Foundation, 2010
2) The Wall Street Journal, May 24, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

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