Wednesday's tax tip Vol. 11 - College Savings II

In the past, I've advised client's to gift shares of stock to children in college to fund their education. When the child would sell the stock, the child would be taxed at a lower rate than the parent would be.

Unfortunately, that strategy has been taken away. Congress has passed an expansion of the kiddie tax, income taxed at the parent's marginal tax rate.

Even though that strategy has been eliminated, I believe it's still a good idea to use capital assets to fund college education (note assuming you do not have 529 plans in place).

The tax rate on capital assets is still a top rate of 15% v. 25-25% for ordinary income.

It still may be a good idea to gift assets to the children since most states have no "kiddie tax".

Again, your college savings plans still provide for a great savings vehicle but should be placed in the context of overall financial plan.

Wednesday's tax tip Vol. 10 - College Savings

If you're in the position to start savings for a child's college expenses, avoid using UGTM (Uniform Gift to Minor) accounts.

First, these accounts are fully taxable and, if the income is large enough, taxable at the parent's marginal rate, aka the "kiddie tax".

Second, once a child turns 18 the account is theirs and I've seen it happen where a child has pulled all the money out of the account and blew it. While no one thinks it could happen to their child, if seen happen enough to know that it happens all the time.

If you are saving for a child's education consider a 529 plan. Under the plan the contributions are not deductible for federal tax purposes. However, the proceeds from the plan will be tax free if used for college education purposes.

The best part is the account is under your control so if Child A decides not to go to school, you can transfer the funds to Child B.

The downside of the plans; you are limited in the funds you can invest in. Each 529 plan is sanctioned by a state, so you effectively only have 50 state sanctioned fund family's to deal with.

If you want to know more, please email me at gtvcpa@yahoo.com

Personal Financial Tip Vol. 8 - Do the numbers

Two weeks ago we did a post "Know Your Number" about your credit score.

This week let's talk about knowing your debt service numbers.

In general, most consumer lenders look at your debt breakdown as follows;

Mortgage loan should not exceed 25% of your monthly income
Total debt (including mortgage) should not exceed 35% of monthly income

So for instance, assume you make $48,000/year or $4,000/month, your monthly debt service for housing should not exceed $1,000/month. The rest of your debt should not exceed $400/month.

I would offer that your 25% should income your real estate tax, insurance and PMI escrow amounts.

While the 10% of the remaining debt uses your minimum credit card payment as part of the additional debt, I would offer that to be in good financial shape you should take your credit card balance(s) divided by 12 (should result in a higher number) in your calculation.

Managing debt is difficult. Too often we all can be caught in the allure to "have something new and have it now". Remember Lay-a-way at the local department store? They were places you actually made periodic payment before you received your goods. With our US consumerism in full force, we are all subject to "have it now" message 24/7 & Lay A Way went extinct with the dinosaurs.

The good news is with debit cards readily available, we can now pay for many consumer items without carrying a lot of cash; making the need for credit cards less and less and thus keeping us out of the debt trap.

Business Tip Vol. 6 - Accounting Systems

How are your accounting systems?

In my 22 years of working in the accounting/banking business, I have yet to run into an entrepreneur who was a great financial person.

It stands to reason that most business owners are out to sell and make, not to count.

For most business owners, their financial analysis consists of this question... How much money is in the account? A lot means you're making money; not such much means you're losing money.

But there is so much more to good financial analysis, all of which could mean more profits for you in the long run.

How is your current ratio? What about your projected debt service? Are your inventory turns improving? What are your future CAPEX requirements? How are your profit margins holding up to industry standards?

I can attest to my own business, once I started really looking at my numbers and getting a true view of the financial strengths and weaknesses my profits started going up.

Just taking a couple of hours a week looking over the financial side of the business is 90% of the battle. Once you become conscience of the company's weaknesses, you can address most of them in the general operation of the business; thus improving profits.

Wednesday's tax tip Vol. 9 - Business or Hobby

The Wall Street Journal has an interesting piece today regarding the distinction between business and hobby losses.

In general, business losses are fully deductible against other income where as hobby losses are not. The rules and application of those rules leaves a lot of murky water around the issue.

How do you determine whether an activity is a hobby or business?

First, Time. How much time do you spend on the activity? If you attend a bass tournament every weekend that could be enough time to justify business expenses against the income.

Second, Pursuit of income. Are you actively pursuing income for the activity. For the example above, if you can show that sought out sponsorships or you maintained a web site or other means of generating income it would go a long way of showing your activity as a business.

Finally, Organization. Do you have your business in an LLC or Corporation entity? Having a definitive business entity with segregated bank accounts and activity goes a long way in proving your activity is a business.

The fact that you enjoy the activity is by no means a test of it being a hobby. A power boat owner recently won a Supreme Court case for business losses even though the owner outright admitted he loved the activity.

These are just a few of the tests that the IRS may use in determining the profit motivation of your activity. Talk to your adviser about your specific activity.

Business Tip 5 - How efficient are you?

An old axiom in the accounting business; The mark of an efficient practice is 1/3 of sales for payroll, 1/3 for overhead and 1/3 for you.

I taken that and altered it for manufacturing sector; 1/5 for payroll, 1/5 for direct costs, 1/5 for CAPEX , 1/5 for overhead and 1/5 for you.

How does your business match up?

Wednesday's tax tip Vol. 8 - Home office Deduction

Many client's have always had the impression that home office deduction is a red flag to an audit.

My typical response is "if it's a legitimate deduction and we can document it, we should take it".

The general rules on home offices are 1) it must be your principal place of business and 2) the space must be exclusively used for the business purpose.

Once you have met the test requirements then it becomes a matter of calculating the total expenses related to the house. Interest, real estate taxes, insurance, PMI, utilities, water, trash removal, home owner association dues, depreciation on the business portion of the home, repairs, etc.

Establishing a home office could have other implications by not claiming it. For instance, if you do not have a home office are your commutes to clients deductible?

So go through the exercise and see what the tax implications of the home office deduction is worth to you.