Where There’s a Will, There’s a Way

When U.S. congressman and former entertainer Sonny Bono died in a skiing accident in 1998, he died intestate — without a valid will. More than a decade later, his heirs were still contesting his estate.¹ Other famous people who died intestate include Abraham Lincoln, Pablo Picasso, and Howard Hughes.²

This situation is not unusual; only 35% of Americans have a will (see chart). If you have a will, you’ve taken an important step to help ensure that your assets are distributed as you wish, but it’s also important to update your will regularly as circumstances change.

If you don’t have a will, you’re risking unwanted outcomes and potential problems for your heirs. Although it’s natural to feel uncomfortable about estate planning, a will might make a big difference for those you love.

Making Your Own Choices

A will enables you to specify not only which assets you want to give and to whom, but also who you want to administer your estate. It may be the most appropriate way to designate guardians for minor children or for adult children with special needs. Any parent of children who need care should have a will, regardless of financial assets.

If you die without a valid will, the state may decide how your assets will be distributed. Typically, assets would go to the spouse and children, but state laws vary widely, and there are different distribution formulas. When the deceased dies intestate and leaves no spouse or children, the situation becomes more complicated.

Having a will does not avoid probate, the legal process by which assets are distributed. However, a will might make probate more efficient and less expensive.

A will is a good start in estate planning. Here are some other documents to consider.

• Beneficiary designations for life insurance policies, IRAs, 401(k) plans, and similar accounts generally supersede a will, so it’s important to keep them up-to-date.
• A living will specifies your wishes for medical care in the event that you become incapable of making or communicating those wishes.
• A power of attorney authorizes someone of your choosing to make financial or medical decisions on your behalf.
• A trust enables you to specify how assets are distributed after your death and may help avoid probate and estate taxes. Even if you have a trust, you should have a will.

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.

It may be difficult to think about estate planning issues while trying to manage the many challenges of daily life. However, documenting your preferences now could make a big difference for your heirs and help ensure that your legacy is handled according to your wishes.

1) InvestmentNews, September 12, 2011
2) legalzoom.com, March 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 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. Copyright © 2012 Emerald Connect, Inc.

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What Is the Capital Gains Tax?

Tax (Photo credit: 401K)

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 2012; 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 tax or legal advice from an independent Naperville 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. © 2012 Emerald Connect, Inc.

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Escaping the Higher Capitals Gains Tax Rate

How Can I Keep More of My Mutual Fund Profits?

Tax (Photo credit: 401K)

Provisions in the tax law allow you to pay lower capital gains taxes on the sale of assets held more than one year. The maximum long-term capital gains tax rate is currently 15% (0% for individuals in the 10% and 15% tax brackets). Short-term gains — those resulting from the sale of assets held for one year or less — are still taxed at your highest marginal income tax rate.

This means that if you’ve been buying shares in a stock or mutual fund over the years and are considering selling part of your holdings, your tax liability could be significantly affected by the timing of your sale.

The main pitfall for most investors is the IRS “first-in, first-out” policy. Simply stated, this means the IRS assumes that the first shares you sell are the first shares you purchased. Thus, the first shares in become the first shares out. As a result, if the value of your shares has appreciated, more of the money you receive from the sale will be considered to be taxable as a capital gain.

Fortunately, there is an alternative. When you place a sell order, instruct your broker or mutual fund transfer agent to sell those shares that you purchased for the highest amount of money. This will reduce the percentage of the proceeds of the sale that can be considered capital gain and are therefore taxable.

In order for this strategy to work, you must specify exactly which shares you are selling and when they were originally purchased. Ask your broker to send you a transaction confirmation that identifies by purchase date the shares you want to trade. This will enable you to reduce your taxable gain and maximize your deductible losses when you fill out your tax return.

In some cases, you may be better off selling the first shares you purchased, even if this results in a larger gain. If the first shares are subject to the 15 percent long-term capital gains rate, but the recently purchased shares are subject to the higher short-term rate, the correct choice may not be obvious. Always consult a tax professional.

By carefully reviewing your brokerage statements, you can determine which shares you paid the most for. You can then specify exactly which shares you’d like to sell. A word to the wise: Make this request in writing. If the IRS calls the transaction into question, the burden of proof is on you.

Finally, the IRS also allows you to calculate your tax basis by taking the average cost of all your shares. On an appreciating asset, this should result in a lower tax liability than the first-in, first-out rule would dictate. Be aware, though, that if you elect to average, you must continue to average for any subsequent sales.

Using either system, you may end up with a lower tax liability from the sale of your shares than the IRS would assume using the first-in, first-out rule.

The value of stocks and mutual funds fluctuates so that shares, when sold, may be worth more or less than their original cost.

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 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 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. © 2012 Emerald Connect, Inc.

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Tax Season: Taxes on Your Investments

4 Steps to Tax Efficient Investing

What Tax-Advantaged Alternatives Do I Have?

Money hand (Photo credit: RambergMediaImages)

A strong savings program is essential for any sound financial strategy.

We take Benjamin Franklin’s saying to heart, “A penny saved is a penny earned,” and we save our spare cash in savings accounts and certificates of deposit.

Investors who’ve accumulated an adequate cash reserve are to be commended. But as strange as it sounds, it is possible to save too much. Although this may not sound like much of a problem, it can be if you save too much of what you should be investing.

You see, many investors simply put their savings into the most convenient and stable financial instrument they can find. Often, that turns out to be certificates of deposit (CDs). The benefits of CDs are that they are FDIC insured (up to $250,000 per depositor, per federally institution) and generally provide a fixed rate of return.

Unfortunately, placing all your savings in taxable instruments like certificates of deposit can create quite an income tax bill.

In an effort to help provide stability, some investors inadvertently produce a liability. It’s a bit like turning on all the taps in your house just to make certain the water’s still running. Sure, you’ll know that the water’s still running, but a lot of it will go down the drain. The solution is simply to turn off some of the taps.

A number of financial instruments can help you to defer or eliminate income taxes. By shifting part of your cash reserves to some of these instruments, you can keep more of your money working for you, and turn off the taps that hamper your money’s growth.

You can consider a number of tax-advantaged investments for at least a portion of your savings portfolio.

One possibility is a fixed-annuity contract. A fixed annuity is a retirement vehicle that can help you meet the challenges of tax planning, retirement planning, and investment planning. Fixed-annuity contracts accumulate interest at a competitive rate. And the interest on an annuity contract is usually not taxable until it is withdrawn. Most annuities have surrender charges that are assessed in the early years of the contract if the contract owner surrenders the annuity before the insurance company has had the opportunity to recover the cost of issuing the contract. Also, withdrawals made from an annuity prior to age 59½ may be subject to a 10 percent federal income tax penalty. The guarantees of fixed annuity contracts are contingent on the claims-paying ability of the issuing insurance company.

Another tax-exempt investment vehicle is a municipal bond. Municipal bonds are issued by state and local governments and are generally free of federal income tax. In addition, they may be free of state and local taxes for investors who reside in the areas in which they are issued.

Municipal bonds can be purchased individually, through a mutual fund, or as part of a unit investment trust. You must select bonds carefully to ensure a worthwhile tax savings. Because municipal bonds tend to have lower yields than other bonds, the tax benefits tend to accrue to individuals with the highest tax burdens. If you sell a municipal bond at a profit, you could incur capital gains taxes. Some municipal bond interest could be subject to the federal alternative minimum tax. The principal value of bonds may fluctuate with market conditions. Bonds redeemed prior to maturity may be worth more or less than their original cost. Investments seeking to achieve higher yields also involve a higher degree of risk. Bond mutual 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 mutual fund's performance.

A number of other tax-advantaged investments are available. Consult with your financial professional to determine which types of tax-advantaged investments may be appropriate for you.

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 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 tax or legal advice from an independent Naperville Tax 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. © 2012 Emerald Connect, Inc.

Rethinking the Role of Household Debt

Many people aspire to pay off their home mortgages before entering retirement. But shedding debt has become more difficult in recent years, partly as a result of weak economic conditions and the housing crisis. In 2010, 39% of households headed by someone aged 60 to 64 had first mortgages, compared with just 22% in 1994.¹

After more than a decade of free spending and rapidly rising household debt, Americans began taking steps to reduce their debt burdens. By the second quarter of 2011, consumer debt had fallen about 15% from the 2007 peak of $11.4 trillion, but was still close to double the amount owed in 1999 (when adjusted for inflation and population).²

Of course, there are some compelling reasons why pre-retirees may want to avoid carrying large amounts of debt and become less dependent on home equity. As retirement looms and opportunities to reduce debt and increase savings become more limited, these issues may become much more critical.

Dealing with Debt and Dwindling Equity

In the past when retirees owned their homes free and clear, they could often count on them to provide additional financial resources during retirement. For those who wished to stay in their homes during retirement, housing expenses could be significantly reduced once a mortgage was paid off.
Others might opt to downsize to a smaller home or move to a lower-cost area, using the extra money from a home sale to supplement their retirement incomes. However, this might not be an option for those who are unable to sell during a weak housing market or are unwilling to sell for a low price. Because of falling home values, some homeowners may have less equity and might even have to take a significant loss if they sell their homes.
This is not just a problem affecting middle-income homeowners. Affluent homeowners have also been affected by rising debt levels and reduced home equity. Nationwide, high-end homes lost 38% of their value after the marked peaked in 2006, and lower-end homes fell even more.³

Refocusing on Saving

When times are tough, it’s not uncommon for investors to reduce or discontinue making retirement plan contributions in order to meet their obligations. Pre-retirees who are able to reduce or eliminate debt can direct their efforts toward saving and investing more for the future.

In the years preceding retirement, many workers are in their peak earning years, which makes this a particularly critical time to save as much as possible for retirement. Workers aged 50 and older not only may be able to maximize their retirement plan contributions but also could take advantage of catch-up provisions that enable them to contribute even more.

The most recent housing downturn has drawn attention to the potential risks created by carrying too much debt into retirement. Money dedicated to service debt is no longer available to spend or save. This simple fact could have larger implications not only for the economy as a whole but possibly for your own financial future.

1–2) The Wall Street Journal, September 7, 2011
3) USA Today, June 6, 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 Naperville Retirement 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. Copyright © 2012 Emerald Connect, Inc.

Lessons from a Perilous Year

In retrospect, 2011 was a formidable year for catastrophes. Some of the most newsworthy and costly events included a devastating tornado and widespread river flooding in the Midwest, several wildfires in the Southwest, and Hurricane Irene’s ravaging of the East Coast.

Small businesses can be hit hard when extreme weather comes to town. In fact, at least 30% of small businesses have been closed for 24 hours or longer in the last three years due to a natural disaster.¹
Small businesses with thoughtful disaster plans and adequate insurance protection may be in a better position to reopen their doors after the “storm” passes. Here are a few ways to help reduce uninsured losses if your business is affected by a disaster.

Filling Insurance Gaps

• When crafting your disaster plan, schedule annual insurance reviews to make sure your coverage is keeping up with company changes. Updating your policy is especially important if you have expanded or purchased new equipment.
• You may have a choice between a standard policy or special coverage that is more comprehensive albeit more expensive. For an extra cost, additional property coverage may provide for pricey exterior items such as fences, signage, or awnings, which may be vulnerable to wind damage.
• Keep in mind that floods are usually excluded from business owner policies, but coverage may be available from the government’s National Flood Insurance Program or some private insurers. There is a 30-day waiting period before a flood policy takes effect, so it’s not a good idea to wait until the threat is imminent to purchase one. (Earthquakes and terrorism are also typically excluded.)
• Finally, keep an accurate inventory and take photos of the premises and all of your business property, and store them online for an extra layer of protection. Good documentation may help speed up the claims process and reduce the risk of a dispute with your insurer.

1) Insurance Information 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 advice from an independent professional 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. Copyright © 2012 Emerald Connect, Inc.

Keeping Pace With Social Security

Since 1975, Social Security beneficiaries have received a cost-of-living adjustment (COLA) to compensate for inflation every year except 2010 and 2011. The good news is that a 3.6% COLA has been implemented for 2012. However, this “raise” may be reduced slightly by higher Medicare premiums, which are deducted directly from Social Security payments.1

How the COLA Is Determined
The COLA is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which measures the spending habits of workers who are generally younger than Social Security recipients. A recent study suggests that, while Social Security benefits increased 31% from 2000 to 2011, typical expenses for people aged 65 and older increased by 73%.2

One suggestion to address this disparity is to base the COLA on the CPI for Elderly Consumers (CPI-E), an “experimental” price index that the government has tracked since 1983.3 Although the CPI-E has increased somewhat faster than the CPI-W, the difference is relatively small. A monthly benefit of $1,000 in 2001 would have increased to about $1,268 in 2011 based on the CPI-W and $1,280 based on the CPI-E.4

Considering Social Security’s fiscal problems, a more likely change (proposed by two congressional commissions) is to lower benefit adjustments by tying the COLA to the slower-moving Chained CPI for All Urban Consumers (C-CPI-U), which attempts to track changes in spending patterns as consumers respond to price changes.5 If the $1,000 monthly benefit in 2001 had been based on the C-CPI-U, it would have increased to only $1,238 in 2011.6

Regardless of the index used, current and near-retirees are unlikely to see major changes to their basic benefits. It’s clear that Social Security should not be given too much weight in funding a comfortable retirement.

1) Social Security Administration, 2011
2–3) The Senior Citizens League, 2011
4, 6) Haver Analytics, 2011
5) Center for Retirement Research, 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 Financial 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. © 2012 Emerald.

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Tax Strategies E-Seminar

   As this tax season is coming to a close, you may be looking for some additional tax strategies to execute during this next year and beyond. If you are, please consider watching our Tax Strategies E-Seminar . Its never too late to start planning ahead, and if perhaps you need or desire additional information, please feel free to contact me at anytime to schedule an appointment.

Susan S. Lewis
Your Naperville CPA

What is Tax Deferral?

“Tax deferral” is a method of postponing the payment of income tax on currently earned investment income until the investor withdraws funds from the account. Tax deferral is encouraged by the government to stimulate long-term saving and investment, especially for retirement.

Only investment vehicles designated as “tax deferred,” such as IRAs, plans covering self-employed persons, and 401(k)s, allow taxes to be deferred. In addition, many insurance-related vehicles, such as deferred annuities and certain life insurance contracts, provide tax-deferred benefits.

There is a substantial benefit to deferring taxes as long as possible, because this allows the entire principal and any accumulated earnings to compound tax deferred. The compounding effect can be dramatic over an extended period of time and can make a big difference in the accumulation of a retirement nest egg.

Additionally, tax-deferred investments are often made when you are earning a higher income and are therefore taxed at a higher rate. When you reach retirement and begin taking distributions from your tax-deferred accounts, there is the possibility that you will be in a lower tax bracket.

One note of caution: When formulating your tax plan, recognize that most tax-deferred investments do incur penalties for early withdrawals prior to age 59½. All withdrawals are subject to ordinary income tax, but early withdrawals are subject to an additional 10% federal income tax penalty. Once again, the government is encouraging a long-term outlook.

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 tax or legal advice from an independent 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. © 2012 Emerald Connect, Inc.

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What Tax Deductions Are Still Available to Me?

Tax reform measures are enacted frequently by Congress, which makes it hard for U.S. taxpayers to know which deductions are currently available to help lower their tax liability. In fact, a former head of the IRS once said that millions of taxpayers overpay their taxes every year because they overlook one of the many key tax deductions that are available to them.1

One of the most overlooked deductions is state and local sales taxes.2

Taxpayers may be able to take deductions for student-loan interest, out-of-pocket charitable contributions, moving expenses to take a first job, the child care tax credit, new points on home refinancing, health insurance premiums, home mortgage interest, tax-preparation services, and contributions to a traditional IRA.

Of course, some tax deductions disappear as adjusted gross income increases. And some deductions are subject to sunset provisions, which your Naperville tax professional can help you navigate.

Another key deduction is unreimbursed medical and dental expenses.

Remember that you may only deduct medical and dental expenses to the extent that they exceed 7.5% of your adjusted gross income (AGI) and were not reimbursed by your insurance company or employer.*

In addition to medical and dental expenses, certain miscellaneous expenses — primarily unreimbursed employee business expenses — can be written off if they exceed 2% of AGI. Some of the expenses that qualify for this deduction are union dues, small tools, uniforms, employment agency fees, home-office expenses, tax preparation fees, safe-deposit box fees, and investment expenses. Your Naperville tax services advisor will be able to tell you exactly what’s deductible for you.

The end of the year is the time to take one last good look to determine whether you qualify for a tax credit or deduction or whether you’re close to the cutoff point.

If you’re not close, you may opt to postpone incurring some medical or other expenses until the following year, when you may be able to deduct them.

On the other hand, if you’re only a little short of the threshold amount, you may want to incur additional expenses in the current tax year.

With a little preparation and some help from a qualified tax professional, you may be able to lower your income taxes this year. You just have to plan ahead.

* The Patient Protection and Affordable Care Act of 2010 raises the floor on itemized medical expenses to 10% of AGI beginning in 2013.

1–2) Kiplinger.com, December 2010

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 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. © 2012 Emerald Connect, Inc.

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What Is the Most Tax-Efficient Way to Take a Distribution from a Retirement Plan?

If you receive a distribution from a qualified retirement plan, such as a 401(k), you need to consider whether to pay taxes now or to roll over the account to another tax-deferred plan. A correctly implemented rollover can avoid current taxes and allow the funds to continue accumulating tax deferred.

Paying Current Taxes with a Lump-Sum Distribution
If you decide to take a lump-sum distribution, income taxes are due on the total amount of the distribution and are due in the year in which you cash out. Employers are required to withhold 20 percent automatically from the check and apply it toward federal income taxes, so you will receive only 80 percent of your total vested value in the plan.

The advantage of a lump-sum distribution is that you can spend or invest the balance as you wish. The problem with this approach is parting with all those tax dollars. Income taxes on the total distribution are taxed at your marginal income tax rate. If the distribution is large, it could easily move you into a higher tax bracket. Distributions taken prior to age 59½ are subject to an additional 10% federal income tax penalty.

If you were born prior to 1936, there are two special options that can help reduce your tax burden on a lump sum.

The first special option, 10-year averaging, enables you to treat the distribution as if it were received in equal installments over a 10-year period. You then calculate your tax liability using the 1986 tax tables for a single filer.

The second option, capital gains tax treatment, allows you to have the pre-1974 portion of your distribution taxed at a flat rate of 20 percent. The balance can be taxed under 10-year averaging, if you qualify.

To qualify for either of these special options, you must have participated in the retirement plan for at least five years and you must be receiving a total distribution of your retirement account.

Note that these special tax treatments are one-time propositions for those born prior to 1936. Once you elect to use a special option, future distributions will be subject to ordinary income taxes.

Deferring Taxes with a Rollover
If you don’t qualify for the above options or don’t want to pay current taxes on your lump-sum distribution, you can roll the money into a traditional IRA.

If you choose a rollover from a tax-deferred plan to a Roth IRA, you must pay income taxes on the total amount converted in that tax year. However, future withdrawals of earnings from a Roth IRA are free of federal income tax as long as the account has been held for at least five tax years.

If you elect to use an IRA rollover, you can avoid potential tax and penalty problems by electing a direct trustee-to-trustee transfer; in other words, the money never passes through your hands. IRA rollovers must be completed within 60 days of the distribution to avoid current taxes and penalties.

An IRA rollover allows your retirement nest egg to continue compounding tax deferred. Remember that you must begin taking annual required minimum distributions (RMDs) from tax-deferred retirement plans after you turn 70½ (the first distribution must be taken no later than April 1 of the year after the year in which you reach age 70½). Failure to take RMDs subjects the funds that should have been withdrawn to a 50 percent federal income tax penalty.

Of course, there is also the possibility that you may be able to keep the funds with your former employer, if allowed by your plan.

Before you decide which method to take for distributions from a qualified retirement plan, it would be prudent to consult with a professional Naperville Income tax advisor.

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 tax or legal advice from an independent Naperville IRA Rollover 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. © 2012 Emerald Connect, Inc.

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Are Consumers Holding the Keys to a Better Economy?

Overall consumer spending still accounts for about 70% of gross domestic product, but some government statistics suggest that consumers may have reduced spending drastically in recent years, especially on purchases that are not considered absolutely necessary.1

According to a report from the Federal Reserve Bank of New York, discretionary service spending (which excludes basic needs such as housing, food, and health care) dropped almost 7% since the beginning of the most recent downturn and has yet to recover significantly. Going back many decades, this category of spending had not fallen more than 3% per capita during past recessions.2

The employment situation, historically high household debt, and a general lack of confidence may be affecting the average consumer’s ability and willingness to spend — a trend that could continue to weigh down economic growth.

Lost Buying Power

High unemployment and several years of slow wage growth mean that many consumers simply have less money to spend. Midway through 2011 and one year into the economic recovery, national average wage levels were nearly the same as they were at the beginning of 2008.3

High gas prices in the first half of 2011 also ate into disposable incomes and forced many consumers to forego discretionary purchases such as furniture, vacations, and restaurant meals.4

A Thin Debt Cushion
In the past, consumers have often added debt, even during lean times, so they could continue to spend. But debt levels have risen to such a point that many American households may not be in a position to rely on borrowing.

The household debt-to-income ratio (after taxes) peaked at 135% in the third quarter of 2007 and fell to 119% by mid 2011. By comparison, it averaged only 89% in the 1990s. Highly leveraged consumers who must devote a larger portion of their incomes to paying off debt may have little choice but to limit spending on other goods and services.5

Shaken Confidence
Even consumers who have not faced job losses or other types of financial difficulties may have seen their net worth and/or confidence damaged by housing price declines, global financial crises, and general economic and market uncertainty. It’s possible that a lingering lack of consumer confidence is one of the reasons why many people have been slow to return to their old shopping habits.

Consumer spending usually falls during an economic downturn. Generally, this is followed by the emergence of pent-up demand and a rise in consumer spending, which is normally a significant driver of growth during recoveries.6 However, it’s unclear how long it will take for hard-hit consumers to regain the financial strength and confidence to resume spending — or how much more consumption may be needed to help propel the economy forward.

1, 4) The New York Times, June 27, 2011
2) The New York Times, July 16, 2011
3) CNNMoney, July 27, 2011
5) The Wall Street Journal, July 15, 2011
6) The New York Times, July 19, 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 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. © 2012 Emerald Connect, Inc.

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For Better, For Worse: Communicating About Retirement

A recent survey suggests that many couples are not communicating clearly about retirement goals and strategies, even as they approach retirement age. The couples surveyed were at least 46 years old with a minimum annual household income of $75,000 or at least $100,000 in investable assets.1
Only 41% said they handle decisions on retirement savings and investments together, and 73% disagreed on whether they had a detailed strategy for retirement income. Many couples also disagreed on when they would retire and whether they would continue to work in retirement.2

In general, wives expressed less confidence than husbands about handling retirement-related financial decisions. This trend is of special concern considering that women often have longer life expectancies than men and may eventually have to make financial decisions on their own.3

Talk It Over
Recognizing and working through these kinds of issues could help prevent unpleasant outcomes. Even if you and your spouse communicate well about retirement, it may be helpful to discuss these basic topics:

When each of you plans to retire.
Where you would like to live. What kind of lifestyle you envision.
Whether either or both of you plan to continue with some type of work.
How much income you expect when you retire, your expected sources of income, and your confidence in the amounts they could provide.
How well you both understand your investments. Whether you both know where official documents are located and have all necessary account information.
Preparing for retirement can be a major challenge. Making sure you and your other half are in agreement and working toward common goals may help you avoid wasted effort and lost opportunities.

1–3) financial-planning.com, June 29, 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 Naperville Retirement 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. © 2012 Emerald Connect, Inc.

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Insurance for Two Could Benefit Your Heirs

Tax (Photo credit: 401K)

Since the federal estate tax was established in 1916, the amount exempted from the tax has been raised substantially over time. The $5 million exemption for 2011 and 2012 is the highest in history, and the 35% top estate tax rate is the lowest in 70 years.1

However, these generous provisions may not last. After 2012, the federal estate tax is currently scheduled to revert to a $1 million exemption and a 55% top tax rate. Many families with a home and large retirement accounts could easily have estates worth $1 million or more. A survivorship life insurance policy is one way to help heirs pay estate taxes, probate costs, and other final expenses.                      

Preserving a Legacy

Also called second-to-die insurance, a survivorship life insurance policy insures two people and pays a benefit after the death of the second person. The premiums are usually less expensive than premiums for a single life insurance policy, because they are based on the life expectancies of both insured individuals.

The unlimited marital deduction allows assets to pass to a surviving spouse free of federal estate taxes, so estate taxes typically do not become an issue until estate assets pass to nonspouse heirs. Thus, a survivorship life insurance policy could pay a benefit at the time it may be needed most.

Moreover, by purchasing the survivorship policy in an irrevocable life insurance trust, the proceeds may not be considered part of your taxable estate. 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 Naperville tax accountant before implementing such strategies.

Even if you are not concerned about the estate tax, a survivorship life policy could be a relatively inexpensive way to leave a legacy, especially considering that an individual life insurance policy may be more expensive or difficult to obtain later in life. Survivorship life might also be used to insure business partners.

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. 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.

With the uncertain future of the estate tax, now may be a good time to consider a survivorship life insurance policy. Even if the estate tax doesn’t apply to your estate, the insurance proceeds could benefit your heirs or a favorite charity.

1) Internal Revenue Service

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. © 2012 Emerald Connect, Inc.

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A Look Into 2012

The past year was marked by a devastating disaster in Japan, fiscal unravelling in Europe, a highly volatile market, and bitter political infighting over federal spending and the national debt. What’s in store for 2012? No one knows, of course, but the consensus seems to be that the U.S. economy will continue to grow slowly, with slight improvement in employment, little change in the housing market, and interest rates remaining at or near historic lows.1 In short, there may not be much to get excited about. But as 2011 proved, it’s impossible to predict the future. Here are several key areas that bear watching as 2012 unfolds.

European Enigma
A new fiscal pact in December engendered cautious optimism, but the European sovereign debt crisis is far from over. Although Italy and Spain remain a major concern, you might keep tabs on potential downgrading of the credit ratings of other large European economies including France, Austria, and Great Britain.

The European Union is the world’s second-largest economy after the United States and our largest trading partner.2–3 A devalued euro and a weakened European economy could lead to a shrinking market for U.S. exports at a time when the trade deficit has begun to improve — which may impact an already shaky U.S. jobs outlook.4

Although the European situation may require attention, it’s important not to overreact to international events. Investors’ emotions can contribute to market volatility.

GDP and Jobs
Following a very slow start in 2011, the U.S. economy grew at an annual rate of 1.8% in the third quarter. Forecasters project slightly higher growth through the end of 2012.5–6

After hovering around 9%, the unemployment rate unexpectedly dipped to 8.6% in November, the lowest level since March 2009.7 Although this appears to be good news, part of the statistical improvement reflects people who have given up looking for work.8 Many economists see unemployment falling no lower than 8.5% during 2012; but if the downward trend continues, it may mean better times to come.9–10

A major obstacle to job creation seems to be hesitation by U.S. corporations to make capital investments, despite many having larger cash reserves than ever before.11 One factor could be uncertainty over the global economic picture — yet another reason to keep a watchful eye on the European crisis. Another factor may be that the recession led to further utilization of technology and outsourcing to sustain productivity with a smaller U.S. workforce.

Inflation, Interest, and Housing
Inflation (as measured by the consumer price index) is projected to drop into the low 2% range, within the goals of Federal Reserve monetary policy.12 On December 13, the Fed announced its intention to keep the federal funds rate (a benchmark for short-term interest rates) at 0.25% or lower and affirmed its commitment to increasing the average maturity date of its securities — a strategy intended to lower long-term interest rates to stimulate business investment and keep mortgage rates low.13

Some experts question the effectiveness of this strategy because rates on mortgages and business loans are already low. The major drags on the housing market are the large inventory of homes in foreclosure, more rigid lending standards, and the continuing jobs crisis. At best, there may be a slight increase in average housing prices.14

Taxes and Domestic Spending
In late December, Congress passed a two-month extension of the payroll tax cut. Further debate on a year-long extension has the potential to affect consumer confidence and spending.

The scheduled expiration of key tax provisions at the end of 2012 — affecting federal income tax rates, the estate tax, and taxes on capital gains and dividends — could have some impact as the issue heats up later in the year. However, action may not occur until after the November election and could extend into 2013.

Spending cuts mandated by the Budget Control Act may cast a shadow over the economy in 2012 but are not scheduled to take effect until January 2013. Like the tax provisions, action may be delayed until next year.

As with 2011, wild cards might include a natural disaster or political unrest that could affect an already fragile global economy. It’s important to monitor unfolding events, but the soundest approach is generally to follow an investment strategy suited to your personal goals and situation.

Investments are subject to market volatility and loss of principal. 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, 10, 12, 14) The Wall Street Journal’s Economic Forecasting Survey, December 2011
2) CNNMoney, December 16, 2011
3) U.S. Census Bureau, 2011
4, 6, 9) Kiplinger Economic Outlook, December 2011
5) U.S. Bureau of Economic Analysis, 2011
7–8) The New York Times, December 2, 2011
11) The Wall Street Journal, September 16, 2011
13) Federal Reserve, 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 visit a Naperville Tax Advisor or obtain 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. © 2012 Emerald Connect, Inc.

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Be Ready for a Change in Interest Rates

When it comes to interest rates, about the only thing you can count on is change. The Federal Reserve, which uses interest rates to influence economic activity, has adjusted the federal funds rate — a key benchmark for other interest rates — more than 240 times over the past 40 years.1

Fluctuating interest rates can be challenging for bond investors. When bonds mature during a period of low rates, bond investors may have to accept lower yields when they reinvest their money. On the other hand, if rates rise at a time when their principal is tied up at lower interest rates, they may not be able to take advantage of higher yields.

Fortunately, there is a strategy to help manage the risks associated with fluctuating interest rates.

Climbing the Ladder
One upside of bond investing is that the interest rate on an individual bond is generally fixed throughout the life of the bond, providing the bondholder with a fairly predictable income (unless the bond issuer defaults). When the bond matures, however, the amount of future income the bondholder can expect from reinvesting the principal is highly dependent on the current interest-rate environment.

One way to help manage reinvestment risk is by staggering the maturity dates within a bond portfolio so that at least one bond matures every year or two. This strategy, known as a bond ladder, may help limit exposure to falling interest rates while also increasing the likelihood that at least some principal may be available to reinvest when rates are rising.


A bond ladder is a form of diversification because it helps spread risk over a period of time. Of course, diversification does not guarantee against loss; it is a method used to help manage investment risk.

The principal value of bonds may fluctuate with market conditions. Bonds redeemed prior to maturity may be worth more or less than their original cost. Investments seeking to achieve higher yields also involve a higher degree of risk.

Building a bond ladder has no effect on the underlying risk of the bonds themselves. However, ensuring that only a limited portion of a bond portfolio matures at any given time may be an effective way to help manage reinvestment risk.

 1) Federal Reserve Bank of New York, 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 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.

Leaving Your Home Out of the Retirement Equation

Plummeting prices and increased borrowing cut U.S. home equity by more than 60% during the Great Recession. Although the recession officially ended in June 2009, home prices have not recovered (see chart).1–2
In this type of market, it’s not surprising that many homeowners who borrowed against their home equity have found themselves owing more than their homes are worth. Homeowners with a second mortgage are more than twice as likely to be “underwater” than are homeowners with only a first mortgage.3

The good news is that housing values typically recover from downturns. But no matter which way the market heads, it’s probably not a good idea to count on the value of your home to help fund your retirement.

Potential Risks of Downsizing
Although moving to a less expensive home could be appropriate for some people, the falling market of the last few years demonstrates that you may not always be able to sell your current home at the price you expect. Transaction fees and moving expenses could also leave you with substantially less cash than you were anticipating.


It might be more realistic to view downsizing or moving to a different area as a personal choice rather than a way to pay for retirement. If you place too much emphasis on your home equity in your retirement strategy, it could lead you to underestimate how much you may need to save for a comfortable retirement.

Shifting into Reverse
A reverse mortgage may allow homeowners age 62 and older to borrow against the value of their homes. They don’t have to pay back the loans during their lifetimes for as long as they continue living in them. This strategy may be appropriate for some retirees, but it also involves substantial fees — and the amount you can borrow is typically much less than the actual value of the home. Because a reverse mortgage loan must be paid back after you stop living in the home for one year or more, it’s likely that either you or your heirs may eventually be forced to sell it, risking exposure to the uncertainties of the housing market.

Your home might have substantial value, but it also provides shelter and may have sentimental value. You may be in a stronger position to make decisions about your home if you leave it out of the retirement equation.

1) Federal Reserve Bank of New York, 2011
2) National Bureau of Economic Research, 2010
3) The Wall Street Journal, June 8, 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 Retirement 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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Another Year, another AMT patch

The alternative minimum tax (AMT) was created in 1969 after Congress heard testimony that a small group of wealthy Americans had used deductions and credits to avoid paying any federal income taxes.1
Because the AMT is not indexed to inflation, it has grown to affect millions of taxpayers, including many who may not fit the definition of wealthy. In 2009, about 23% of AMT payers had AGIs ranging from $100,000 to $200,000, and 5% had AGIs ranging from $50,000 to $100,000.2

Although Congress frequently enacts temporary patches to exempt low-income and middle-income taxpayers from being subject to the AMT, it’s important to stay abreast of current developments because there is never a guarantee that Congress will continue limiting the AMT’s reach.

Expanding Scope
The AMT is a separately calculated tax that eliminates certain credits and deductions to help ensure that taxpayers with higher incomes pay a minimum amount of tax. Taxpayers subject to the AMT must pay any AMT obligation in addition to their regular tax liability.


The 2010 Tax Relief Act adjusted AMT exemption levels for 2010 and 2011 to prevent an estimated 21 million middle-income taxpayers from being subject to the tax.3 The 2011 exemption amounts are $48,450 for single filers and $74,450 for married taxpayers filing jointly.4 Even with this temporary change, it’s projected that 4.3 million taxpayers may be subject to the AMT in 2011.5

When the current patch expires, as many as 31.2 million taxpayers may be affected by the AMT in 2012 and almost 55 million by 2022.6 However, if recent history is any indication, it seems likely that Congress could enact another patch for 2012.

Regardless of your income, it would be prudent to consider the potential effect of the AMT on your tax liability. Before you take any specific action, be sure to consult with your tax professional.

1) Tax Foundation, 2011
2) Congressional Budget Office, 2010
3–4) CCH, 2010
5–6) Tax Policy Center, 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 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.

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Help Chart the Future of Your Family Business

A recent survey found that 27% of business owners expect to hand off their businesses in the next five years. And even though more than half of the business leaders who plan to retire believe their companies will stay in the family, it has been estimated that only about 36% of American family firms actually are passed on to a second generation.1 The transition from one generation to the next is considered to be one of the biggest risks to the survival of a family-owned business, so it’s somewhat surprising that 47% of family firms have no formal succession plan.2

A thoughtful succession strategy not only outlines when and how ownership should be transferred but also takes tax implications, family relationships, and other sensitive issues into account.

Management Succession
Think realistically about who is most capable, motivated, and/or prepared to run the business. Because it may take several years to groom a successor, it’s important to identify potential candidates early. If no family members are interested in leading, you may want to consider tapping someone competent from outside the family.

Ownership Succession

Family members who are not willing to take on significant operating roles may still want to retain a stake in the company. How you decide to divide your ownership shares among your heirs and business partners could have a major influence on the future of the company. Involving family members in the process may help promote a smooth transition.

Keep Taxes in Mind
Because tax laws tend to change frequently, it can be critical to stay on top of potential estate tax issues. Trusts, buy-sell agreements, and/or insurance policies may be used to help reduce taxes or provide the funds to help pay them.

It’s a shame that some businesses must be sold either to pay estate taxes or because family members can’t agree on how to move forward. Forming a plan well before you intend to retire could help ease the transition to the next generation.

1–2) PricewaterhouseCoopers, 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 an 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.

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Is Your Business Ready for a Structure Change?

Three-fourths of CEOs running small and mid-size businesses reported in 2011 that they were anticipating higher revenues in the year ahead, and nearly 60% expected rising profits. Among those who expressed confidence in their futures, 54% expected to hire more employees and 50% were planning to invest in their facilities.1

Growth is often accompanied by change. In fact, the U.S. Small Business Administration has found that increased employment and faster growth are factors that often lead businesses to change their legal form of organization.2

For business owners seeking to reduce their exposure to risk, a popular entity in recent years has been the limited liability company (LLC).3 Here are some additional benefits associated with LLCs.

Legal protection — An LLC offers many of the legal advantages of a corporation and may help shield the business owners’ personal assets from lawsuits brought against a firm’s products or employees. In theory, financial losses would be limited to the owners’ stake in the company, but exceptions may include any business debt they personally guarantee or misdeeds (such as fraud) they carry out.

Simplicity — In most states, an LLC is easier to form than a corporation, and there may be fewer rules and reporting requirements associated with operating an LLC. The management structure is less formal, so a board of directors and annual meetings are not usually required.

Tax efficiency — An LLC is a pass-through entity for tax purposes, so a firm may avoid tax liability by passing profits or losses on to the members (owners), who declare them on their personal tax returns. Members are allowed to choose whether the company is taxed as a sole proprietorship, a partnership, an S corporation, or a C corporation, provided it would qualify for the particular tax treatment.

Flexibility — The structure of an LLC may help facilitate growth because it’s possible to add an unlimited number of owners and/or investors to the business, and ownership stakes may be transferred easily from one member to another. LLCs may also be owned by another business.

Owners who aspire to expand their operations may want to explore whether an LLC, or another type of business structure, would better suit the company’s particular needs.

1) USA Today, April 8, 2011
2) U.S. Small Business Administration, 2011
3) The Wall Street Journal, March 28, 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 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.

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Preparing Your Naperville Taxes: What Are Your Options?

We all know the saying, right? “The only things certain in this life are death and taxes...” And some people get so out of sorts when the time comes to file their Naperville taxes, that you might think they'd prefer to never have to deal with filing a tax return again. But since we're all going to have to deal with tax returns, as long as we're around it pays to know what your options are.

Filing Your Own Taxes
Unless you're very familiar with the latest tax laws, and understand all of the deductions that you are eligible for, filing your own taxes may not be the best option. But for people with very limited incomes, and no investments, filing taxes can be a bit simpler and easier to do without professional guidance.

The Yearly Tax Preparation Services
You know it's truly spring time when those tax preparation places start popping up in strip malls all over the place. And while these places may be preferable to filing taxes on your own, it's not often that you get a certified tax professional when you choose to use one of these establishments.

Tax Software
The latest craze in tax filing is the various tax preparation software programs that are available. These tools do make it quicker to file your own taxes, but again, if you don't understand the tax laws, even these programs may miss important deductions that you should be taking.

Hiring an Accountant
If you choose to hire an accountant to file your Naperville taxes, you'll have a professional, experienced, and certified tax expert taking care of your return. Of course, we know that not every “accountant” out there is a CPA or tax expert, so you'll want to check the credential of any accountant that you hire to take care of your taxes.

In Naperville, Lewis CPA has earned a reputation as the best resource for tax preparation services. If you're in need of an accountant, either for tax preparation or for other financial planning, we recommend contacting the staff at Lewis CPA.

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