Where Do You Get Tax Assistance?

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.

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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.

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Everyday Business Accounting Advice

 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.

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What Is a Required Minimum Distribution?

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

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Evaluating Life Insurance Needs

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.

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Earning Income from Mutual Funds

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.

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What is the Capital Gains Tax?

   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.

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Rising Popularity of Roth IRA as Retirement Vehicle

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

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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.

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What Kind of Investor Are You?

  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.

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Managing Cash When Interest Rates Are Low

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.

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Favorable Dividend and Capital Gains Tax Rates Extended — for Now

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.

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Finding a Good Time to Invest

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.

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Tips for Surviving the Estate Tax

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.

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Are Housing Troubles Standing in the Way of Growth?

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?

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.

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What Is the Gift Tax?

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.

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What Is the Estate Tax?

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.

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Using a Variable Annuity for Guaranteed Income

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.

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The Difference Between the Debt and the Deficit

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.

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Deciding When to Begin

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.

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Understanding the Appeal of Mutual Funds for High-Income Households

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.

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