Credit life insurance can be expensive

Many people have paid for credit life insurance without understanding what it is or how expensive it can be. If you borrow money for any purpose, your loan payment may include a premium for credit life insurance.

Moneylenders such as banks, retailers, auto dealers, and finance companies sell credit life insurance to pay off your loan balance in the event of your death. Some lenders also sell credit disability insurance to cover your loan payments in the event you become disabled.

State laws vary, but some permit very high premiums on this type of insurance. A borrower's health is often not a factor in being eligible for credit insurance, and therefore, the underwriters need to charge everyone higher premiums to cover the potential risks. The insurance premium is often added into the loan. This may make it harder for you to determine your actual cost.

Moneylenders may require that you have insurance to pay off the loan in the event of your death or disability. In most cases, however, you should have the right to buy a policy from another insurance agent or to assign the benefits from an existing policy. Your age, health, and size of the loan are all factors to consider in determining whether to use an outside insurance agent or to purchase the lender's credit insurance.

Some lenders don't require credit insurance if the loan is properly collateralized. When completing a loan application, ask what loan insurance, if any, is required. This will allow you time to review your best insurance alternatives before you actually sign for the loan.

If you would like assistance in analyzing a loan, or with other financial matters, please contact us. We are here to help you.

Follow the tax rules when you borrow from your corporation

If you're a business owner and your company lends you money, you'll enter it in the books as a shareholder

loan. However, if your return is audited, the IRS will scrutinize the loan to see whether it is really disguised wages or a dividend, taxable to you as income. Knowing what the IRS might look at may be useful when you structure the arrangement.

* First, the IRS will look at your relationship to the company. If you're the sole shareholder with full control over earnings, that may weaken your case that the loan is genuine. On the other hand, if you're one of several shareholders and none of the others received similar payments, that suggests it might be a genuine loan.

* Next, the IRS will look at the details of the loan. Did you sign a formal promissory note? Did you pledge any security against the loan? Does the loan have a specific maturity date, or is there a repayment schedule? What rate of interest are you paying? Have you missed any payments, and if so, has the company tried to collect them? The more businesslike the terms of the loan, the more it will appear to be a genuine debt.

* Finally, the IRS will consider other factors. Is your company paying you a salary that's in line with the work you perform? Has the company paid dividends, or is this the only payment to its shareholder? Is the size of the loan within your ability to repay? How does the size of the loan compare to the company's profits?

Whether the IRS will try to tax you on the "loan" will depend on all these factors. If you've paid attention to the details, the loan should withstand IRS scrutiny. Contact us if you'd like more information about borrowing money from your closely held corporation.

Have a financial talk with elderly parents

One day you may find yourself taking care of an elderly parent who is in declining physical or mental health. This can be stressful, both emotionally and financially. On the financial side, there are steps you can take to prepare for this situation.

* Talk to your parents about their financial affairs. Parents may be reluctant to discuss their finances, but someone needs to know the names of their lawyer and accountant. Someone needs to know where their important financial papers are located. If they are still fit, encourage your parents to make a detailed financial list for you, including information about bank accounts, investments, insurance policies, retirement plans, location of safe deposit boxes, etc. Getting familiar with important information now will be much easier than trying to find this information after a parent becomes physically or mentally impaired.

* Review your parents' financial picture together. Do your parents have enough retirement income and savings to provide for their needs? Should steps be taken to help stretch their assets over their life expectancies? What if they eventually need nursing home care? Assess whether long-term care insurance makes sense for them.

* Consider these important documents. A durable power of attorney allows another person to make financial decisions on a parent's behalf if he or she becomes incapacitated. A medical directive or living will is a document stating a parent's wishes about medical treatment in case he or she becomes too ill to communicate these wishes.

* Help put your parents' estates in order. Does each parent have a will, and if so, where are the wills stored? When were their wills last updated? The 2001 Tax Act made major changes to the estate and gift tax rules. Have their estate plans taken these changes into account? Encourage your parents to review their beneficiary designations on insurance policies, annuities, and retirement plans to make sure their choices are still suitable.

Talking finances with your parents now can make caring for your parents in the future much easier. For assistance, give us a call.

Taxes and your child's summer job

With the school year over, your teenager might be taking a summer job. If so, you both may have questions

about taxes. Here are some of the common concerns.

If your child chooses a typical wage-paying job, he or she will soon be confronted with the task of calculating withholding allowances on Form W-4. Claiming zero allowances and thereby withholding the maximum amount is the safest option, but it might also unnecessarily tie up hard-earned cash until this year's tax return is filed. However, claiming too many allowances, especially if the child holds multiple part-time jobs, might cause underwithholding. For help figuring the right number, try the withholding calculator at www.irs.gov. (Look under "Filing Information for Individuals.")

If your child decides to mow lawns or perform other tasks and be his own boss, there are a few more tax issues to consider. Such activity will likely generate taxable income, on which federal and state income taxes might be due. If net earnings are $400 or more, self-employment taxes will also be owed. These taxes can often be paid at the time that the child files a 2013 tax return, but if the income is substantial enough, estimated tax deposits might be necessary.

Being self-employed also means keeping detailed records of income and business expenses. Encourage your teen to purchase a simple low-cost ledger book to help organize the records. And when tracking income, remind the child that tips received are not just tokens of gratitude - they are considered taxable income by the IRS.

Summer jobs can provide tax breaks for some parents. Business owners can hire their own children and deduct the wages paid to them, effectively shifting income from the parent's higher income bracket to the child's lower bracket. What's more, if operating as a sole proprietor, you do not have to pay FICA taxes if your teen is under age 18 nor pay federal unemployment taxes if the child is under age 21. Just remember, the wages you pay your child must be appropriate for the services actually rendered.

Looking for a little icing on the summer employment cake? When your child receives earned income, he or she can also qualify for a Roth IRA. The lower of $5,500 or the child's annual earned income can be contributed to a Roth by the teen, parent, or someone else.

Summer employment can be your teen's first exposure to the real world. Help them make it a tax-smart experience. If you have questions about taxes and summer jobs, give us a call.

It's tax planning time

It's midyear 2013, and if you haven't thought about your 2013 tax situation yet, it's time to do so. By now, you should have a good idea of what your 2013 income and deductions will be. There are several very significant tax changes this year, and you need to start planning now if any of them will affect you. Don't procrastinate or you could end up paying more tax for 2013 than necessary. Contact us to schedule your midyear review.

IRS announces 2014 HSA contribution limits

The IRS recently announced the inflation-adjusted contribution limits for health savings accounts (HSAs) for 2014. HSAs allow taxpayers with high-deductible health insurance plans to set aside pretax dollars that can be withdrawn tax-free to pay unreimbursed medical expenses. The 2014 contribution limit for individuals is $3,300; the limit for family coverage is $6,550. A catch-up contribution of an additional $1,000 is permitted for individuals who are 55 or older.

FBAR filing due by June 28, 2013

If you have assets in a foreign account and the total value exceeded $10,000 at any time, you must file the "Foreign Bank Account Report" (commonly called FBAR) by June 28, 2013. The FBAR is an annual information form, filed separately from your federal income tax return. The 2012 FBAR must be received by the Treasury Department by the deadline, not just postmarked by that date. No filing extension is available, and penalties for failing to file are steep. You may choose to file electronically. For details or filing assistance, please contact our office.

Budget issues force IRS closures

The IRS will close all of its operations on June 14, July 5, July 22, and August 30, 2013. The current budget situation, including the sequester, has made these closures necessary; IRS employees will be furloughed without pay on these days. Taxpayers should continue to file returns and pay any taxes due as usual, though on these days the IRS will not answer toll-free hotlines or accept or acknowledge receipt of electronically filed returns. Electronic deposits of employment and excise taxes must be made as usual.

Keep an eye on your company's cash

Do you regularly monitor your company's cash accounts? You should. Even if you leave the job to your bookkeeper or accountant, you should stay aware of where the cash is going and how the spending is approved. Along with inventory "shrinkage," theft or improper expenditures of cash are among the chief sources of loss for small companies.

Periodically, you hear about a huge loss caused by an employee who's been quietly embezzling cash for years. But many smaller cases are never noticed. And it's not always employees at fault. In fact, the vast majority of employees are scrupulously honest and loyal. Outsiders can be stealing your cash too, by submitting false or inflated invoices that are paid without proper review.

What can you do to reduce the risk of losses? The textbook answer is "internal controls." This refers to things such as standard procedures for approving and paying bills. It includes segregation of duties - having more than one person involved in preparing, signing, and reconciling checks. Unfortunately many small companies don't implement proper controls - either because there's not enough staff or because they think it's too much trouble.

Regardless of the size of your business, here are some steps you can take:

* Maintain a strict rule that all invoices must have an approval signature before being paid. Nothing focuses a person's mind like having to sign his or her name on something.

* Have a policy that all employee expense reports must be signed off by a higher-level employee.

* Make it a rule that the person who prepares a company check can't sign that check.

* Ask your bookkeeper or accountant to give you a signed note each month affirming that the bank statement has been reviewed and balanced.

* Check personally to make sure that these procedures are being followed.

* On occasion, ask to see the bank statement and canceled checks for the prior month. Review them in detail. Not only will this increase your chances of spotting fraud, but it will also remind you just what the company's cash is being spent on.

Please contact our office for details or for assistance in improving controls over your company's cash.

Six rules for avoiding credit card disaster

Here are the rules to help keep you from becoming a credit card victim. Credit cards should be a convenience for payment, not a source of credit. This requires that the entire balance due on the card be paid each month. If the entire balance is not paid on any month, the card should not be used again until the balance is zero. The only exception would be an "essential" purchase such as for gas to go to and from work.

The six credit card rules:

1.  Pay the entire balance due each month.

2.  If a balance remains unpaid at month's end, do not use the card again.

3.  Do not use more than one credit card.

4.  Do not accept credit cards from specific retail stores.

5.  Do not pay off one credit card with another.

6.  Do not purchase gifts for people with your credit card. Give them a nice card or letter instead. It is too easy to let your generosity exceed your ability to pay.

To monitor and review your spending habits, try this exercise. Take your credit card charges and your cancelled checks for the past year and do the following: Sort each charge or cancelled check into two piles. One pile is for the "must" payments such as utilities, taxes, medication, rent, mortgage payment, etc. The other pile is for the optional spending, such as meals at restaurants, gifts for people, recreational events or equipment, etc.

This review of how you spend your money may give you some guidance on how to spend more wisely and it may even help you create a surplus of cash for a savings and investment program.