By Jerry Pittz
Now that we’re in the midst of tax season, you may be anticipating a tax refund, if you haven’t already received one. Of course, not everyone receives a refund, but among those who do, the amount can be sizable. In fact, in 2005, the average tax refund was about $2,125. If you’re going to get a refund, start planning now on how to use it. By making the right moves, you can help speed up your progress toward your financial goals.
So, what should you do with your refund? Here are a few ideas:
Put the money in your IRA. To achieve a comfortable retirement lifestyle, you will need to draw on a variety of financial resources, one of which may be an IRA. In 2006, you can contribute up to $4,000—or $5,000 if you are 50 or older—to a traditional or Roth IRA. So, if you received a $2,125 refund—last year’s average—you’d be well on your way toward “maxing out” on your IRA contribution. If you think that this amount can’t really make that much of a difference to your long-term savings, consider this hypothetical situation: If you put that $2,125 in an IRA that earned 7 percent a year, and you never invested another dime in your account, your money will still grow to more than $16,000 in 30 years. Not a fortune, to be sure, but nothing to scoff at. And in all likelihood, you would not just make a one-time contribution to an IRA. (At the end of 30 years, you’d have to pay taxes on your earnings, but by then, you may be in a lower tax bracket; even if you’re not, you might be able to spread the tax burden over several years. And if you had invested in a Roth IRA, your earnings will grow tax-free, provided you’ve had your account for at least five years and you don’t begin withdrawals until you are age 59-1/2.) Keep in mind that these rates are hypothetical only and do not reflect the rates of any investment currently available.
Contribute to a Section 529 plan. Many people contribute to Section 529 plans to save money for their children’s (and grandchildren’s) college education. You can put in large amounts each year to a Section 529 plan, and your earnings will grow tax-free, provided withdrawals are used for qualified higher education expenses.
Pay down high-rate debt. Short-term interest rates have been rising over the past few months. This could mean that you’ll be paying a higher rate on your credit cards—which probably carried a fairly high rate to begin with. If you use some of your tax refund to whittle down this debt, you’ll be making a wise move, as this debt is typically not tax deductible, and, therefore, of no benefit to you.
Build up your “rainy day” fund. You might want to use your tax refund to build your emergency fund. Generally speaking, you should set aside six to 12 months worth of living expenses to pay for expenses such as car repairs, new appliances and unexpected medical bills.
You can’t always count on a tax refund—but when you get one, make the most out of it. You’ll be glad you did.
Jerry Pittz is an investment representative for Edward Jones Investments in Main Square Shoppes in Delmar. He can be reached at 475.7642 or visit www.edwardjones.com.
Estate planning and your pet
By Carolina Minetto Lazzari, CFP®, EA
Considering that Americans spent $35 billion on their pets last year, it seems that many of us consider our pets to be part of the family. This goes as far as an owner actually including a pet in his estate planning to secure a safe home for it in the event of death or disability. It may sound unusual, but numerous studies have been done on this topic, and it is estimated that between 12 and 27 percent of pet owners include their non-human companions in their wills. If you have been concerned about the care of your animals in the event you are no longer able to care for them yourself, here are some things to consider.
Choose a replacement caretaker
Choose a trustworthy adult who is familiar with your animal and is an experienced pet owner. The two of you should discuss the responsibilities and expectations of caring for your pet ahead of time. These should be updated if the designated caretaker’s personal situations change. It is also important that you clearly identify the chosen caretaker in your will. If something should happen to this caretaker, the administrator of your estate can place your animal with another responsible person. Wills can even specify that a new pet caretaker, also referred to as the animal’s trustee, can be elected and approved by a majority of the estate beneficiaries.
Provide sufficient monetary support for your pet
You already know there are various costs associated with keeping a pet, including veterinary expenses, food, grooming, housing and other unforeseen expenditures that you may want to provide monetary support for in case of your absence. Costs may run anywhere from $500 annually to into the thousands, so it is important to set aside enough funds to cover such expenses for the duration of your pet’s life. Use the annual total of your pet-related expenses
Then, you need to decide if you will provide funds beyond these support costs for the benefit of your caretaker. In other words, will you need to reimburse the caretaker for the inconvenience of taking on the care of your pet? Some owners may feel that bequeathing funds to your pet’s new caretaker contingent on continuous appropriate care may persuade them to continue to take exemplary care of your pet.
Do you want to establish a trust for your pet?
Many pet owners are actually establishing legal trust funds for their animals, which according to the American Society of Prevention and Cruelty to Animals, is “a legally sanctioned arrangement providing for the care and maintenance of one or more companion animals in the event of a grantor’s disability and/or death.” An appointed trustee is given the duty of monitoring the designated caretaker, thereby ensuring that the animal is receiving proper attention as instructed by the previous owner.
Pet owners who set up trusts for their animals do not receive federal tax code benefits because beneficiary designations are limited to a person, trust, estate, partnership, or company. However, more and more states are adopting laws that allow pets to be named as beneficiaries of trusts.
When setting up your trust here are some important things to remember:
• Provide the name and address of a caretaker and trustee (as well as successors for both) for each of your pets. These can be individuals or corporations.
• Determine the funds needed to adequately cover your pet’s expenses for the duration of the animal’s life. This amount should reflect the type of care you want the pet to receive, but should not reasonably exceed the expected standard of living since some courts have cited over-funding as a reason to overturn a pet trust fund.
• Describe in detail the directions for your pet’s care and require that the trustee perform regular inspections on the pet to ensure the desired level of attention is being upheld.
• Determine the amount of property needed to sufficiently cover the costs of administering the pet trust.
• Designate a beneficiary in the event the pet trust funds are not exhausted.
Be sure to seek the guidance of a qualified attorney to ensure that your trust is set up correctly. Because trusts are legally enforceable and can contain specific instructions on the type of care you want for your animals, pet owners can rest assured their loyal companions would still be well cared for even after they are gone.
Carolina Minetto Lazzari, CFP®EA is a financial advisor in Schenectady, offering a full array of investments and planning services as a registered representative of Commonwealth Financial Network-a member firm of the NASD/SIPC. She can be reached at 346.2726 or email@example.com.
Small business tips to keep in mind when tax time arrives
By Judy Dievendorf
When thinking of starting a small business, a little common sense can save you time and money. Below are five things that new business owners should consider, as well as important tips on deductions.
1. Separation: Keep your personal finances and your business finances separate no matter what. Get a business checking account and checkbook binder system with a spreadsheet check register built right in (around $90). It’s extremely important that all the income and expenses of your business flow through your business’s bank account, even if you are paid in cash.
2. Banking: Find a bank that fits your needs. Make sure that the account features fit with what you need and what you want to pay. Since it is not uncommon for business owners to have issues with their bank account at some point, forming a strong long-term banking relationship is essential for any small business.
3. Organization: Perhaps the biggest problem that people have with a small business is getting it organized. Avoid the “shoebox” full of receipts route. There is no rule that says it has to be a complicated system. Something as simple as a three-ring binder and monthly dividers can be a great start. Inside your binder, keep your important documents like bank statements, payroll reports and check registers catalogued by the month. If your business requires that you spend much of your day in your car or truck, keep a coupon file in your vehicle for your cash receipts. Label each pocket with an expense category and once a week make a summary of those receipts. Be consistent!
4. Bookkeeping: Another thing that business owners have trouble with is bookkeeping. Hiring a professional bookkeeper can be costly, but purchasing bookkeeping software is time and money well spent. If you decide to go this route and aren’t computer savvy, have a professional help you install the software and teach you how it works.
5. Business Entity: Before you commit, do your homework. Visit the NY website www.dos.state.ny.us or call 518.474.8275 to see what regulations you need to abide by. You want to find a business form that fits best with both your personal tax situation and what you want to do. Consulting with a tax professional can help you make an informed decision. Whether the choice is a corporation, an LLC, a partnership or a DBA, they can also help you file required paperwork with the taxman that can save time, money and hassles in the future.
Although the most efficient tax planning is done before year end, it may not be too late to take advantage of some tax -deductions for 2005. If you are willing to put in the time to reconstruct your record keeping, then there are some things you can do to decrease your taxes for 2005. Continuing the same record keeping in 2006 will continue to insure you pay the lowest legal tax.
Deductions for the self-employed
Deducting your house: If you use a portion of your home exclusively and regularly for business purposes, you may be able to take a home office deduction. You’ll need to know the total square footage of your office and the total square footage of your home, so that you can apply the resulting business use percentage to expenses like utilities, trash removal, maintenance and repairs. If your business income is greater than your regular business expenses, this can be a very useful deduction; if you have a business loss these deductions can be carried forward to a future year.
Deducting your vehicle: You may deduct business miles at a rate of $40.5 cents per mile for the first eight months of 2005. In September, the IRS made a special one-time adjustment for the last four months of 2005, raising the rate for business miles to $48.5 cents per mile in response to a sharp increase in gas prices. Beginning January 1, 2006, the standard mileage rates for the use of a car (including vans, pickups or panel trucks) will be:
• $44.5 cents per mile for business miles driven;
• $18 cents per mile driven for medical or moving purposes; and
• $14 cents per mile driven in service of charitable organizations
The IRS requires you to keep track by use of a mileage log or an appointment book from which the business miles can be reconstructed. Total miles the vehicle was used for the year is a necessary number as well. So while it’s fresh in your mind—it’s time to reconstruct and start keeping track of your odometer.
Deducting your retirement: Self-employed individuals have the opportunity to set aside funds into qualified retirement plans specially developed for them. Although many of these must be established prior to year-end, one type of retirement plan, the SEP, can be established before the filing of the return, including extensions. In 2005, the deduction works out to 20 percent of your net self-employment income up to $42,000. This is a great tool for reducing taxes and paying yourself at the same time. One thing to note: if you have employees, you must contribute for them as well. Ask your tax advisor about those rules.
Judy Dievendorf is president of Dievendorf & Company, located at 318 Delaware Avenue, Main Square, Suite 2-2, Delmar. For more information call 439.1040.
Don’t be a “Groundhog Day” investor
By Jerry Pittz
This month, the spotlight is on Punxsutawney Phil, the world’s most famous groundhog. As the folklore goes, if Phil sees his shadow, he anticipates six more weeks of bad weather, and he retreats underground. If the day is cloudy, he thinks it’s spring and he stays above ground. Of course, many of us would say that Phil is never right. If you live on the East Coast, or in the Midwest or the Great Plains states, you probably don’t view the weather as “springlike” in early February, or six weeks later, either. But Phil is not alone in reliving his errors. Many investors also keep making the same mistakes, year after year. How can you avoid being a “Groundhog Day” investor? Here are a few suggestions:
Don’t chase after “hot stocks.” You can find “hot stocks” featured in financial magazines and touted by “experts” on television. Even your next-door neighbor may have a “can’t miss” tip for you. But you’re probably better off by turning the pages, flipping off the television and redirecting your neighbor to a different subject. In the first place, by the time you even hear about a hot stock—much less buy one—it may already be cooling off. And, more importantly, it just may not be appropriate for your needs. For example, if you already have several stocks quite similar to the “hot” one, you may find that adding it to your portfolio may not boost your diversification—which is essential to investment success.
Don’t “buy and sell” too frequently. If you don’t hold stocks for at least a year before selling them, your profits (if there are any) will be based on your current income tax rate, rather than the capital gains rate, which is likely to be more favorable. You’re much better off buying high-quality investments and holding them for the long term, until either your needs, or the investments themselves, have changed.
Don’t load up on company stock. If you have confidence in your employer, you might be tempted to put a good percentage of your 401(k) dollars in company stock—but this move could be a big mistake. To look at an extreme example, nearly 58 percent of Enron employees’ 401(k) assets were invested in Enron stock as it fell 98.8 percent in value during 2001, according to the National Association of Securities Dealers (NASD). But even after the fall of Enron, many employees have maintained even larger percentages of their 401(k) assets in their company stock. Don’t make that mistake. Instead, diversify your 401(k) dollars among your various investment choices in a way that reflects your risk tolerance, long-term goals and time horizon.
Don’t stop investing when the market goes down. The financial markets will always go through “ups” and “downs.” Some people bail out when the going gets tough, preferring to wait until things turn around. But the most successful investors continue to invest through good times and bad—and, if they choose good investments, and hold them for the long term, they are frequently rewarded.
By following these tips, you can avoid making those repetitive investment mistakes that can prove so costly. And even it’s cloudy this Groundhog Day, your financial future can look sunny indeed.
Jerry Pittz is an investment representative for Edward Jones Investments in Main Square Shoppes in Delmar. He can be reached at 475.7642 or visit www.edwardjones.com.
Worth keeping score: the power of your credit rating…and how to protect it
By Anthony J. Lanzillo
Cash is king. At least that’s how the saying goes in the business world, where operating cash flow is a true measure of a company’s health. However, in personal banking, where most individuals don’t have enough cash flow to buy a house, car or finance their children’s education outright, the true king is credit. And just as our high school SAT scores categorized our potential and for many of us narrowed down our choice of colleges, our credit score is a measure of our financial health and often dictates the extent of our financial freedom.
In fact, the difference between poor credit, good credit and excellent credit can be the difference between what type of housing you are able to secure for yourself, the type of job you can work, and/or thousands upon thousands of dollars in increased interest when financing your house, car or child’s education. In some cases, a weak credit rating can prevent an individual from receiving any financing at all.
So what, exactly is your credit rating?
In short, your credit rating is a report on your ability to repay a loan based upon your prior financial history. A credit report is the first place that potential lenders, insurance agents, employers or landlords look in deciding whether to lend to, insure, employ or rent to you.
For most of us (some 18-year-old college freshmen aside), we are well aware of how our use of credit can impact us financially. So we make our best effort to manage our debt responsibly and keep a clean credit report. What many of us do not know, though, is that maintaining a strong credit rating often takes more than responsible money management. It takes due diligence and attention to detail. Why? Because a recent U.S. Public Interest Research Group survey found that 79 percent of the credit reports on 200 adults surveyed had mistakes. Of those, 54 percent had obsolete information or information on the wrong people, and 30 percent had information on accounts that were closed, but were still being reported as open.
In a perfect world, such important information would be perfectly correct, but problems are common in credit reports and if uncorrected they can remain on your record for seven years.
While The Fair Credit Reporting Act requires that obsolete information be deleted from credit reports, gives us access to our credit reports and provides the right to have mistakes corrected, this process often takes time and may affect your ability to get the loan you need when you need it. Therefore, to maintain your financial freedom, it is imperative to protect your own credit ratings. Three national private, for-profit businesses provide credit reports:
Equifax—P.O. Box 105851, Atlanta, GA 30348
TransUnion LLC—Credit Bureau Services
P.O. Box 1370, Buffalo, NY 14231-1370
Experian—475 Anton Blvd.
Costa Mesa, CA 92626, 714.830.7000 or
955 American Lane, Schaumburg, IL 60173
847.517.5600, www.experian.com, 888.397.3742
Contact one of these credit bureaus annually (at least) to check your credit rating or to request corrections. By law, you are entitled to one free credit report every 12 months. For more information, visit www.annualcreditreport.com. Also, anyone who refuses you credit must notify you in writing of the decision and the reason. They must also tell you what credit bureau issued the report used in making that decision.
If you find that the decision was based on a flawed credit report, the credit bureau must help you make corrections. First, you’re entitled to add a written statement (100 words or less) explaining your view of the mistake. Also, the credit bureau must send that explanation to anyone who requested your credit report within the past six months (if the request was for credit purposes) and within the past two years (if the request was for employment purposes).
Be persistent and precise in making challenges. Record dates when you contacted the credit bureau, names and phone numbers of those you contacted, and ask for an amended report after receiving assurances that corrections have been made.
To correct these errors by creditors, contact the creditor within 60 days after the erroneous bill was mailed to you, but pay any part of the bill that is not in error. You deserve a reply within 30 days, will not have to pay any finance charges on the disputed amount until a final resolution and your credit rating cannot be threatened while the matter is being decided. Even if no error is found, the creditor must explain that in writing.
Again, in a perfect world such information would always be correct. Then again, in a perfect world we could pay cash for everything. But the world is not perfect and we have to work hard for our money, which at various times throughout our lives is not enough to finance our needs. Credit can help us through these times and open the door to much greater opportunities. And unlike the elusive perfect score on the SAT, which is reserved for the brightest of the bright, an excellent credit rating—and thereby increased financial freedom—is attainable for everyone.
Anthony Lanzillo is senior vice president of KeyBank and heads the Capital Region’s Retail Banking team. He can be reached at 257.8598 or firstname.lastname@example.org.