Investing Basics: Mutual Funds

When you buy shares of a mutual fund, your money is pooled with other shareholders’ money and invested in a portfolio of securities (stocks, bonds, etc.) An investment in a mutual fund offers you diversification and management by professionals.

Mutual funds have no guarantee of good returns or safety of your investment; they go up and down just like the rest of the market.

There are several different kinds of mutual funds, each with different investment objectives. If you decide to put your money into a mutual fund, you should look for one whose objectives match your own investment objectives and financial needs.

The different categories of mutual funds include these major classifications:

• Aggressive growth or capital appreciation funds invest in smaller companies, looking for growth that will result in capital gains income rather than ordinary dividend and interest income. Because of their speculative nature, these funds are in the high risk category, giving you the chance of highest return as well.

• Growth funds buy stocks that are expected to increase in value in the future. They are somewhat less risky than aggressive growth funds, produce very limited income, and are seeking long-term capital gain returns.

• Income funds are those investing in securities to produce current income through dividends and interest, rather than long-term increase in value and capital gains.

• Growth and income funds are aiming for both income and long-term growth. They invest in blue chip companies that pay reasonably good dividends and whose stock tends to increase in value over a period of time read more...

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How to Protect Your Social Security Number from Theft

With the dramatic increase in identity theft, what can be done to protect your Social Security Number (SSN) from these would-be thieves? Here are some ideas.

Do not carry your Social Security Card with you. Your parents were encouraged to do this, but times have changed. You will need to provide it to a new employer, but that is about it.

Know who NEEDS your Social Security Number. The list of those who need to have your number is limited. It includes:

• Your employer. To issue wages and pay your taxes.
• The IRS. To process your taxes.
• The State Revenue department. To process your state taxes.
• The Social Security Administration. To note your work history and record your benefits.
• Your retirement account provider. To enable annual reporting to the IRS.
• Banks. To enable reporting to the IRS.
• A few others. Those who need to report your activity to the government (example: investment companies.)

Do not use any part of your Social Security number for passwords or account access. Many retirement plans use your Social Security Number to enable you to access their on-line tool. When this happens, reset the login and password as soon as possible.

Do not put your Social Security Number on any form. Unless a business has a legal need for your number, do not provide it. Common requestors of this number are insurance companies and health care providers. Simply write, “not available due to theft risk” in the field that requests your number. If the supplier says they need it, ask them why read more...

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How to Defend Your Deductions

When faced with questions on your tax return deductions, it is getting all too common for tax authorities to deny everything and then make you prove that your deductions are valid. Do not let this happen to you. Here are some suggestions.

The one-two punch

To prove your deduction most auditors are looking for two key documents. Miss one of the two and your deduction will evaporate like smoke at a campfire.

1.Receipts. This is the first of the sure-fire two things you must have to validate a deduction. The receipt should clearly show the company or entity, the date, the value of the activity and a clear description of the activity. In the case of donations, the receipt should also have a statement that confirms you received no benefit in return for your donation. It should also state that you are not retaining part ownership of the donation.

2.Proof of payment. This is the second of two sure-fire things you must have to validate a deduction. You will need a canceled check, a bank statement or a credit card receipt and related statement.

Other proof hints

Contemporaneous. Any proof of payment and receipts should generally match the date of the activity. The IRS and state agencies are quick to dismiss receipts that are obtained after the fact. A good rule of thumb is to ensure receipts and proof of payment are received at the time of the activity. If not, at least make sure you have receipts and payment proof within the tax year the deduction is taken.

Other proof. In addition to the above, there are certain deductions that require additional documentation. Here are the most common;

Mileage logs. You will need to show properly maintained mileage logs for business miles, charitable miles and any medical mile deductions.

Business records. You will need financial statements for any business related activity with supporting documentation.

Residency. If you live in multiple states or multiple countries, you may have to prove where you lived during the year. Keep records that show your physical presence to support your tax filings.

Proof of non-reimbursement. If you claim any unreimbursed business expenses, many states are asking you to prove that you were not able to get these expenses reimbursed from your employer. The easiest ways to do this are to show a denied expense report or to get your employer to write a letter that confirms your expenses are not reimbursed. Those most impacted by this are musicians, barbers/hairstylists, construction workers and anyone who uses their own tools to do their job for their employer.

Tax deductions can be tricky. Count on our team to help make sure your deductions have been filed properly. Reach out and schedule time today: https://www.bas-pc.com/appointment-center/

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The Nine Basic Rules of Investing

There is no magic to making money by investing. It requires discipline, determination, perseverance, and hard work. In deciding what investments are suitable for you, you must first understand the nine basic rules of investing.

1. Risk versus return. The greater the risk that you will lose not only the return on your investment but your original investment as well, the greater the potential rate of return. An individual investor should always try to get the highest rate of return without going beyond the risk level that he or she finds comfortable.

2. Inflation. If inflation is higher than the return on your investments, you are losing future purchasing power. If, for example, you have $1,000 earning 3% after tax, and inflation is 4%, your $1,030 will purchase only $990 of goods one year later.

3. Liquidity and marketability. A liquid investment can be readily converted to cash; a marketable investment can be readily sold for cash. A savings account, for example, is highly liquid, and blue chip stocks are readily marketable. A piece of real estate, on the other hand, may take time to sell and convert to cash. Often, yields run conversely with liquidity and marketability.

4. Tax aspects. An investor’s return should always be computed after taxes. Some investments have tax advantages that increase their relative after-tax yield. Tax-exempt bonds, for example, carry a lower return rate than taxable securities. However, your after-tax return may be higher with the tax-free investment than with a taxable one.

5. Income versus appreciation. Some investments provide current income (such as high-dividend stocks); others have little current income but appreciate over time. The best investments provide both income and appreciation.

6. Management. Some investors enjoy managing their own portfolios. Others lack either the time or knowledge to be effective managers. Your desired degree of involvement will help determine the kinds of investments best for you.

7. OPM. Using “other people’s money” and leveraging into investments allows you to get a higher return on your own invested dollars; however, the risk is also higher. Again, you’ll have to decide your own comfort level.

8. Diversification. Those investors seeking safety count on diversification. Diversification is simply investing in two or more kinds of investments. Then if one investment goes sour, you do not lose everything.

9. Your goals. In your own investment program, it is your goals that are important, not the goals of your broker or financial advisor. Never invest in anything that you do not understand or with which you are not comfortable. Decide what your objectives are and what your risk-tolerance level is, and go for the highest return within those boundaries.

For further assistance with financial planning and investments, our team is available to answer any questions you may have. Set up a meeting here: https://www.bas-pc.com/appointment-center/

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Investing Basics: Know When to Sell a Stock

Selling a stock is an important decision – almost as important as the decision to buy. Unfortunately, while the world is full of buy recommendations, there is very little advice on when to sell.

Many investors make the mistake of holding onto losing stocks too long. Sometimes they compound this error by selling their winners too soon. The results? A remaining portfolio of mostly poor performers.

Successful investors limit their losses and let their winners run. There are a variety of ways to do this; the more popular strategies include:

• Setting a predetermined sales price.At the time you invest, choose two prices, one below your purchase and another above it.
  For example, at the time you buy a stock for $50 per share, prepare to sell it at $60. Set a low-side “sell” price, too, to limit your loss if the price falls. Where to set these prices depends upon your expected profit and the loss you can withstand if the stock price drops.

Sell the stock if it hits either of these “target” prices. You may reevaluate and change these prices, but only if there’s a compelling, legitimate reason to do so.

• Another technique uses “moving averages.” You can calculate various moving averages using different stocks and different time periods. These averages are plotted on a graph to reveal trends that help you determine when to sell.

• Monitoring business fundamentals. Yet another technique is to sell when the company’s fundamental business indicators begin to wane. A few of the important factors are earnings, market share, profit margin, and sales volume. You can obtain this information from the company’s financial statements and from newspaper and magazine reports. The idea is to sell when the stock becomes overpriced in light of these factors.

• Selling overvalued stock. The price/earnings ratio (share price divided by earnings per share) is one measure of a stock’s relative value. If the ratio is too high, the stock may be overvalued, and it’s time to sell. For example, if a stock has traditionally sold for 20 times earnings and it’s now selling for 40, it’s probably overvalued. Some investors compare their stock’s ratio to the ratio of the Standard & Poor’s 500, again as a measure of relative value.

• Earnings trends. You might use the company’s earnings to gauge whether the stock will perform well in the future. Some investors compare earnings to other companies in the industry or to the Standard & Poor’s 500. If earnings trail the others by a certain percent, then sell. Other investors compare current trends to historical earnings. Sell the stock if a company’s earnings for the most recent 12-month period are less than the previous 12-month period.

There are, of course, other techniques (and combinations of techniques). If you invest in stocks, be sure to give careful thought to what your selling strategy should be.

There is no consensus on which strategy works the best, but professional investors do agree on one thing: selling stock requires discipline. Any rational strategy is probably better than none at all. Pick one that makes sense to you and stick with it. If you have questions or need help, our team of professionals can help! Schedule time here: https://www.bas-pc.com/appointment-center/

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The Lost Art of Tracking Home Improvements

One of the more popular provisions in the tax code is the $250,000 capital gain exclusion ($500,000 for a married couple) of any profit made when selling your home. As long as you follow the rules, most home sales transactions are not a taxable event.

• But what if the tax law is changed?
• What if you rent out your home?
• What if you cannot prove the cost of your home?

Your best defense to a potentially expensive tax surprise in your future is proper record retention.

The problem

The gain exclusion is so high, that many of us are no longer keeping track of the true cost of our home. This mistake can be costly. Remember, this gain exclusion still requires documentation to support the tax benefit.

The calculation

To calculate your home sale gain take the sales price received for your home and subtract your basis. This “basis” is the original cost of your home including closing costs adjusted by the cost of any improvements you have made in your home. You might also have a reduction in home value due to prior damage or casualty losses. As long as the home sold is owned by you as your principal residence in at least two of the last five years, you can usually take advantage of the capital gain exclusion on your tax return.

To keep the tax surprise away

Always keep documents that support calculating the true cost of your home. This should include:

• Closing documents from the original home purchase
• All legal documents
• Canceled checks and invoices from any home improvements
• Closing documents supporting the value of the sale of the home

There are some cases when you should pay special attention to keeping track of your home value.

You have a home office. When a home office is involved, it can impact the calculation of the capital gain exclusion. This is especially true if you depreciated part of your home for business use.

You have lived in your home for a long time. Most homes will rise in value. The longer you stay in your home the more likely the value of your home will rise over time. For example, a sizable gain can occur when an elderly single parent sells their home after living in it for over 50 years.

You live in a major metropolitan area. Certain areas of the country are known to rapidly increase in value.

You rent out your home. Any time part of your home is depreciated, it can impact the calculation for available gain exclusion. Home rental also can impact the residency requirement calculation to receive the home gain tax exclusion.

You recently sold another home. The home sale gain exclusion can only be used once every two years. If you recently sold a home with a gain, keeping all documents related to your new home will be critical.

The best way to protect this tax code benefit is to keep all home-related documents that support calculating the cost of your property. We’re here to help! Please schedule time if you wish to discuss your situation with our team: https://www.bas-pc.com/appointment-center

Sharing Economy Now in IRS Spotlight

Did you know… 40% of the workers in the Sharing Economy are unaware of their tax responsibilities and over 60% of the service provider companies are not training their new workers on their tax responsibilities.
Source: Written statement of Nina E. Olson, National Taxpayer Advocate given at the Hearing on “The Sharing Economy” to the Committee on Small Business, U.S. House of Representatives, May 26, 2016.

Tax compliance is a problem for Uber drivers, Airbnb and others deemed to be in the new Sharing Economy. The IRS is aware of this and has recently launched a new “Sharing Economy Tax Center” on their website to help this growing group of workers. Here are ideas to keep you out of this IRS spotlight.

The Sharing Economy

The sharing economy consists of workers that are taking part in the service economy by “sharing” their resources for part-time or full time employment. Some common examples are:

Cab services: use your car
Delivery services: use of your car
Short-term rentals: use of rooms, apartments, and homes
Home services: use of your personal tools and supplies
Note: While the IRS seems to be focusing on this new “Sharing Economy” really any freelance worker has the same tax challenges as these workers.

Key Tax Responsibilities

If you use your car as a cab or rent out your home for the big golf tournament, you will need to understand the following tax obligations.

Employee or contractor? You need to know which of these defines your employment arrangement. Your personal tax obligations are markedly different under each scenario. As an employee, the service company is responsible for paying the business portion of Social Security and Medicare. They will pay unemployment taxes. They will also withhold your portion of Social Security, Medicare, federal taxes and state taxes and send them in for you. These payments are reported to you on a W-2. This is not the case if you are a contractor.

Social Security and Medicare. All employers are required to pay Social Security and Medicare taxes. As a contractor, you will need to reserve 12.4% of your net income for Social Security and 2.9% for Medicare payments.

Estimated taxes. You may need to send in quarterly estimated tax payments to avoid tax penalties when you file your tax return.

Other taxes. You may be subject to other taxes including unemployment taxes.

Depreciation. This area can be confusing. You are able to expense a portion of the cost of capital assets (like your car) if they are used for business purposes. However, if also used for personal use you will need to adjust the amount available for depreciation.

Special tax rules. Other areas of the tax code have special provisions. The most common of these is use of your home for business or rental.

The tax rules for those in the new service economy are complex and confusing. Our team has the experience and know-how to help you navigate this tricky part of the tax law. If you need assistance, feel free to reach out to our team to schedule time: https://www.bas-pc.com/appointment-center