December 2005

As the winter season begins, our thoughts turn to tax planning.  Part of that planning should be focused on what is changing in the tax law so that actions can be planned or postponed to take advantage of available opportunities.

In 2005 and prior years, higher income individuals whose adjusted gross income exceeds a threshold level must reduce the amount of their itemized deductions.  This limitation is being phased out over 4 years from 2006 through 2009.  High income individuals who find themselves close to the threshold may consider shifting deductions forward.  This is something we consider in setting up estimated tax payments to increase deductibility or minimize loss of state tax deductions.

The Energy Tax Incentives Act of 2005 provides three tax credits for planning consideration.  A tax credit of up to $500 over the 2006 and 2007 tax year is available to homeowners for non-business energy improvements, such as exterior doors and windows, insulation, heat pumps, furnaces, central air conditioners and water heaters.  Also new is a residential alternative energy credit of 30 percent of the cost of eligible solar water heaters, solar electricity equipment (photovoltaics) and fuel cell plants.  The maximum credit is $2,000 per tax year for each category, and $500 for each half-kilowatt of capacity of fuel cell plants installed each year.  Also effective January 1, 2006, the clean-fuel vehicle deduction is replaced with a more generous credit.  Most individuals who purchase a qualifying hybrid vehicle will be allowed approximately $2,000 in credits based on a sliding scale for efficiency.

The IRS has relaxed the “use-it-or-lose-it” rule for medical flexible spending accounts.  Employers may give employees an additional 2.5 month grace period into the next year to use funds in their FSAs.  Before the change, year-end balances were forfeited back to the employers.  Plan documents must be amended by employers before the end of the plan year.

In our upcoming tax interviews, we’ll also be alerting you to expiring provisions that may affect your individual tax situation such as sales tax itemized deductions, higher education and educator’s deductions, and a higher AMT exemption.  Don’t hesitate to call our attention to changes in your financial situation that could impact your taxes.

In the following pages, we focus on financial, investment, and estate considerations that may help you in your personal financial planning.  In a newly required disclaimer by the IRS, “our written tax advice is not intended, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer”.  Please read or download this client letter from our website, http://www.ramercercpa.com/, where you’ll also find additional information as a “thank you” for visiting our site.

R. A. MERCER & CO., P.C.

USE TAX SEASON AS A CHANCE TO PERFORM FINANCIAL CHECKUP

Income tax season isn’t just about settling up with the IRS.  It’s also a golden opportunity for a financial checkup.  Once you’ve assembled year-end statements for all your accounts, you’ve already done half the work.  We can also be of assistance to you in your financial decision-making.

Here are five important questions those statements can help you answer:

• How much is my net worth?  Add up all your assets (such as bank accounts, investment accounts, savings bonds, home value) and subtract your debts (mortgage, credit cards, car loans, etc.)  Net worth is the single best indicator of your financial health because it takes into account what you own and what you owe.  Do this exercise every year and you can tell whether you are making progress.
• Do I have enough in my emergency fund?  Financial planners recommend keeping enough readily accessible funds to pay three to six months of living expenses in case you lose your source of income or face a dire emergency.  You can include bank accounts, money-market funds, short-term CDs, savings bonds, and other short-term investments.
• Are my long-term investments allocated the way I want them to be?  The best allocation among stocks, bonds and cash depends on your age and your risk tolerance.  For example, a 60-40 split between stocks and bonds would be fairly typical for a conservative middle-age investor, while an aggressive 25-year old might opt for 90 to 100 percent stocks.  If you find your portfolio percentages are off, either move money or direct out new contributions to the category that came in underweight.  Larger portfolios should have allocations within each category, such as large cap, small stocks, and foreign stocks, which also should be adjusted periodically.
• Am I saving enough for retirement?  If you’ve already got a financial plan, check your progress against it.  If you don’t have one, you can get a sense of whether you are headed in the right direction by using one of the many retirement planning calculators on the Internet.  See http://www.choosetosave.org/.
• Is my debt burden manageable?  Debt payments (including mortgage) of 40 percent or more of your pre-tax income are a pretty reliable indicator of financial distress, but even lower percentages can be unmanageable.  If your credit card debt has grown since last year, that’s a sign you may be living beyond your means.  If you are making only minimum payments or have been late with any payments, some drastic lifestyle changes may be in order.

IRS ISSUES ALERT FOR CONSUMERS TO BE WARY OF TAX REFUND E-MAILS

Just when shoppers are being bombarded in their e-mail boxes with holiday bargains from retailers, the IRS is issuing a consumer alert about Internet scams for tax refunds.  People should be suspicious if they get an e-mail claiming to be from the IRS about refunds.  Actually, the IRS won’t contact them about refunds via e-mail.  The scheme is an attempt to trick e-mail recipients into disclosing their personal and financial data.  The practice is called “phishing” for information.  When people fall for such scams, the information fraudulently obtained is then used to access the taxpayer’s identity and financial assets.

For individuals who want to learn more about online scams, the IRS web site (http://www.irs.gov/) has a listing of current tax scams out there.  In the web site’s search box, just type in scams or tax scams and you’ll find several informative articles.

Individuals receiving an unsolicited e-mail claiming to be from the IRS should take the following steps:

• Do not open any attachments to the e-mail in case they contain a malicious code that will infect a computer; and,
• Contact the IRS at 1-800-829-1040 to determine whether the IRS is trying to contact you about a tax refund.

TOP 10 THREATS TO INVESTORS

These are some common ploys often used to cheat investors.

1. Ponzi schemes.  Using money from later investors to pay early ones until the scheme collapses is an old con that still finds new victims.

2. Unlicensed individuals selling securities.  Unlicensed sellers should be a red flag for investors.

3. Unregistered investment products.  Most legitimate investments must be registered with the state before they can be offered for sale to the public.

4. Promissory notes.  Notes marketed to the general public typically turn out to be scams.  If the interest rate sounds too good to be true, it probably is.

5. Senior citizen investment fraud.  Con artists continue to target the savings of retirees with fraudulent schemes.  Before investing check with state securities regulators for proper licenses and any complaints against the broker.

6. High-yield investments.  Risk-free, guaranteed high-yield instruments are usually none of these things.

7. Internet fraud.  A bad deal isn’t any better because it’s offered on the Internet.  Many online scams are new versions of old schemes.

8. Affinity fraud.  Con artists are using victims’ religious, ethnic or other affiliations to gain their trust and then steal their life savings.

9. Variable annuity sales practices.  This product isn’t suitable for everyone, particularly seniors.  Sales reps frequently fail to disclose high surrender charges and steep sales commissions.

10. Oil and gas scams.  With high oil prices and instability in the Middle East, regulators fear con artists may renew schemes promising investors easy profits on these commodities.

ADVICE ON AVOIDING IDENTITY THEFT

In order to inform customers of ways to avoid the hassles that come with getting one’s identity stolen, a local community bank issued the following advice:

• When ordering checks, have only initials (instead of first name) and last name put on them.  If someone swipes your checkbook, they won’t know if you sign your checks with you initials or your first name, but the bank will.
• Don’t sign the back of credit cards.  Instead, write, “photo ID required”.
• When writing checks to pay credit card accounts, don’t put the complete account number on the “For” line.  Just put the last four numbers.  The credit card company knows the rest of the number and anyone handling your check as it passes through all the check processing channels won’t have access to it.
• Put a work telephone number on checks instead of a home phone number.  Those who have a post office box should use that instead of their home address.
• Copy the contents of your wallet.  Photocopy both sides of each license and credit card and keep it in a safe place.  You’ll know what you had in your wallet if it’s ever stolen and have all the account and phone numbers.  Copy your passport too.
• Most people know to cancel their credit cards immediately after their wallet has been stolen, and maybe even know to file a police report in the jurisdiction in which the theft occurred.  But individuals should also call three national credit-reporting organizations – Equifax, Experian and Trans Union – immediately, to place a fraud alert on their name and Social Security number.

Identity theft has hit the mainstream.  Bad guys will always be around and scammers have gotten very, very good at their craft.  We hope these tips help you prevent becoming a victim of one of them.

10 SMART MOVES FOR RETIREMENT

Ask any reputable financial planner how to secure a decent retirement, and you might just get a laundry list of what you should or should not do.  Most represent pretty good thoughts.  Taxpayers who are more confident and better prepared have followed a few simple, yet smart moves to help them to a more comfortable retirement.  These are indeed worth reviewing.

1. Max out/catch up your 401(k) and IRA.  Roughly one in 10 employees invests the full pre-tax contribution allowable each year in their 401(k).  Those in or near retirement who started saving early and consistently took advantage of savings opportunities, including tax-advantaged workplace savings plans, IRAs, employer matches and “catch-up” provisions, generally were better prepared for what they needed for retirement.

2. Save now to have more later.  One of the most common obstacles for saving for retirement is finding extra cash, and the most common solution is reducing expenses and paying off debt.  For example, put off purchasing a new car for a couple of years, eliminate credit card debt, or take your major vacation every other year.

3. Make your asset mix match you.  Avoid two of the most common retirement savings mistakes; being overly cautious or taking excessive risks when deciding how much of your assets to invest in cash, stocks or bonds.

4. Stretch your salary.  While Americans generally don’t think about working in retirement, a number of investors are planning to work to some degree, and for several very good reasons.  Some nearing retirement want to close the gap between their initial Social Security distributions and when employer pensions are scheduled to kick in.  Others simply want the advantage of a regular income and subsidized health care benefits.

5. Create a regular income stream.  Although company pensions are on the decline, many investors still want the peace of mind that comes with receiving a regular income.

6. Don’t withdraw too much too soon.  Odds are that at least one member of a 65-year old couple will reach the age of 92.  A large number of Americans developing retirement income plans underestimate their longevity and must adjust their expected savings withdrawal rates to better reflect their retirement budget.

7. Create a realistic budget.  Two out of three pre-retirees have not developed a budget for living in retirement.  Many of those who do haven’t considered the lifestyle changes that they’ll face and how those changes will affect monthly expenses.

8. Expect the unexpected.  Unforeseen events or illness can throw off the best of plans.  A couple retiring today at 65 should plan on spending $200,000 for out-of-pocket medical costs over the next 15 to 20 years.

9. Stay on track.  Pre-retirees and retirees anticipate having several sources of household income in retirement.  Not surprisingly, they expect that planning and managing these multiple incomes will be a more difficult task than saving for retirement.  To help stay on track, individuals and spouses should review their plan annually, including expenses, investments and asset allocation.

10. Mix ‘n’ match.  A successful retirement takes more than a one-step solution.  Whether it’s finding a “fun” part-time job, eliminating one of the family cars, or taking a vacation locally, the most confident, better-prepared retirees have taken action and implemented multiple strategies to extend their income, control their spending and maximize their savings.

SIX QUESTIONS YOU SHOULD BE ASKING ABOUT YOUR ESTATE PLANNING

1. Does my Will and/or Trust provide adequate flexibility in the event of a change in the Estate Tax law?  Under current law, the exemption from Federal Estate Tax is increasing to $2,000,000 in January of 2006.  By 2009, the exemption increases to $3,500,000, followed by a repeal of the Tax in 2010.  The Estate Tax comes back in 2011 with a $1,000,000 exemption, unless congress acts between now and then.

2. Is the titling of your property coordinated with your Will and/or Trust?  Most real estate is jointly held between husband and wife.  This means that these assets may not be available to fund the tax-saving Credit Shelter Trusts so vital to saving estate taxes.  Like-wise, insurance policies, IRAs, and other pension assets pass through a beneficiary designation, rather than through a will or trust.

3. Have there been changes to your family situation since your last Will and/or Trust was drawn?  Are you concerned that one or more of your heirs may be incapable of handling a large amount of money wisely.  A review of your estate plan may uncover ways for you to address these issues, while treating other family members fairly.

4. Are you exposing your heirs to Double Taxation on some of your most valuable assets?  IRAs, pensions, and annuities provide for tax-advantaged savings during your lifetime.  However, they can be taxed twice at your death.  With proper planning, it may be possible to eliminate all or most of these taxes at your death.  In the worst case, it is possible to spread the income taxation out over many years, thereby maximizing the ultimate value to your heirs.

5. Is your existing life insurance up to date?  Recent changes in insurance pricing and underwriting have made insurance more affordable than ever.  Discuss your life insurance with a reputable professional.

6. Have you addressed your need for Long-Term Care?  The average couple is expected to need to spend over $200,000 during retirement on medical care and long-term care not covered by insurance.  Where will this money come from?  Long-term care insurance is suitable for some, but not all.  Your estate planning review should also focus on the need to provide for these expenses.

OTHER ESTATE TIPS IN GETTING UP TO SPEED

• Update Your Health-Care Proxy.  Under new rules that went into effect in 2003, if you name someone other than your spouse to take care of medical decisions on your behalf, you may have to change the language in your health-care proxy to ensure the person can access your medical documents.
• Consider Differing State Laws.  Depending on what state you live in, your effective state estate-tax rates may have skyrocketed lately.  Since 2001, a number of states that had an estate tax let it expire, so there are now 26 states without an estate tax.  But 24, states – including New York, Kansas and Illinois – have revised their marginal estate-tax rates to as high as 16 percent.
• Paper, Paper, Paper.  Below, in their order of importance, is a list of documents that should be located and available.

  • Wills or trusts
  • Health insurance policies
  • Most recent income tax return
  • Name (and address if available) of employer/former employers
  • Life Insurance policies (if unavailable, any statements or bills, including employer, union, or association policies)
  • Social Security and/or Veterans Administration information
  • Credit card records and receipts
  • Bank and investment statements (especially IRAs and retirement plans), annuities
  • Loans or mortgage information
  • Titles to home(s), autos, boats, etc.
  • Insurance policies on homes/autos/boats
  • Safe deposit box location

RESEARCH CHARITIES BEFORE GIVING

In the aftermath of a disaster like Hurricane Katrina, new charities pop up all over the map.  Telemarketers make repeat calls and e-mails are sent out in droves.

The end of summer is already a high season of natural disasters, demonstrated by Katrina in the South, wildfires in the West and massive flooding in Europe.

Wanting to donate money to a charity supporting the victims of these tragedies is admirable, but you need to be smart about the charity you choose.

Do your research first on sites such as CharityNavigator.com, an organization that evaluates American charities.  Visit the site: http://www.charitynavigator.org/.

If you do decide to make a donation, the Federal Trade Commission recommends:

• Be wary of appeals that tug at your heartstrings.
• Ask for the name of the charity if the telemarketer does not provide it promptly.
• Ask what percentage of the donation is used to support the cause and what percentage is used for administrative costs.
• Call the charity to find out if it’s aware of the solicitation and has authorized the use of its name.
• If the telemarketer claims that the charity will support local organizations, call those organizations to verify.
• Discuss the donation with a family member or trusted friend before contributing.
• Don’t provide bank or credit card information over the phone.
• Ask for a receipt showing the amount of the contribution and stating that it is tax deductible.  (Understand that contributions to a tax-exempt organization are not necessarily tax deductible)
• Avoid cash gifts, which can be lost or stolen.  Instead, send a check made out to the charity organization – not the solicitor.
• The table on the following page identifies a number of different ways of making a charitable gift depending on your goals, with the financial or tax benefits for each type of gift.

CHOOSE THE GIFT OPTION THAT MATCHES YOUR GOALS

TECHNOLOGY – SOONER THAN YOU THINK

Imagine that you’re a business person from 100 years ago who’s just been zapped into 2005. Would you understand even half of the technology now used to conduct business?

Today’s lightning-quick rate of technology innovation could turn you into a dinosaur in no time. That’s because the interval between once-new technology and their more advanced successors has been shrinking rapidly. As a result, it’s easy to fall out of touch.