Online
Advisor - August 2002
WHAT ‘S NEW IN TAXES
WEIGHT-LOSS COSTS MAY BE TAX-DEDUCTIBLE
A recent IRS announcement is good news for individuals fighting obesity. The cost of weight-loss programs may qualify as a medical expense according to the IRS. This deduction only applies to individuals under a doctor's orders to lose weight for health reasons. It does not include the cost of diet food or the costs of losing weight for your general health or appearance.
You can deduct medical expenses if you itemize your deductions and to the extent your medical expenses exceed 7.5% of your adjusted gross income. If you didn't deduct your weight-loss expenses on prior returns, you can amend returns back to 1999 to cash in on this tax break.
REVIEW YOUR TAX SITUATION BEFORE YOU MARRY
As summer is upon us, you may be among the many couples that are planning marriage. If so, taxes are probably the last thing on your minds. But the fact is that marriage has tax consequences. Many couples find that the taxes they owe as a married couple are higher than the combined taxes they paid as singles. This is the so-called marriage penalty, and it now affects almost half of all married couples.
There are two main reasons why the marriage penalty arises. First, the standard deduction for a married couple is less than twice the standard deduction for singles, so a couple's combined taxable income is higher. Second, because of the way the tax brackets are structured, a married couple's combined income often pushes them into a higher tax bracket. You're most likely to be hit with the penalty if your income and your spouse's are about the same.
Married couples are penalized in numerous other ways too. For example, many tax credits and other tax breaks phase out when incomes hit certain levels. But the income phase-out levels for married filers are usually less than twice the level for single filers, penalizing two-income families. This is the case with eligibility for a Roth IRA and the child tax credit, among others. It also applies to the threshold for taxing social security benefits, affecting married senior citizens.
In some cases, the same income limit applies whether you're married or single. Examples include eligibility to convert to a Roth IRA and limits on capital losses, mortgage interest deductions, and rental property losses. In these cases, two singles receive twice the tax break that a married couple receives.
Last year's tax law gradually expands the 15% tax bracket, the standard deduction, and certain income phase-out limits for couples to provide partial relief from the marriage penalty. However, some of these breaks don't begin to phase in until 2005.
DIVORCE CALLS FOR TAX PLANNING
Divorce is an emotionally wrenching time when the last thing you want to think about is taxes. Yet taxes play an important role in structuring a divorce settlement, and you ignore them at your peril. A wrong decision can lead to big costs and a new source of dispute and anger.
One area where tax planning is essential is in dividing up the property. Although transfers of marital property between divorcing spouses are generally tax-free, that doesn't mean you can ignore tax considerations. For example, if you're dividing up investments, look at the cost basis as well as the market value. The spouse who gets an asset will also get the asset's cost basis and will be taxed on any gain when the asset is sold. So a spouse may be better off accepting a $70,000 investment portfolio with a cost basis of $60,000 than a portfolio valued at $80,000 with a basis of $10,000. The higher taxes payable in the second case may more than offset the difference in value.
Dividing up retirement benefits also presents tax challenges. You can split up the benefits of a qualified retirement plan without tax consequences if you obtain a qualified domestic relations order (QDRO). But even then, the rules are complex and the consequences of an error are severe. In the worst case, both spouses could be taxed on the transfer and there could also be a 10% penalty for withdrawals before age 59½. Other retirement assets such as IRAs can be transferred without a QDRO, but the transfer must still be carefully structured to avoid taxes.
Divorce, like most major life events, calls for tax and financial planning. Failure to consider tax consequences can be very costly.
WHAT’S NEW IN FINANCIAL
STRATEGIES
CONGRESS AND THE SEC ACT TO RESTORE INVESTOR CONFIDENCE
Shortly before adjourning for its August recess, Congress passed landmark
legislation aimed at combating corporate fraud and restoring the public's trust
in corporate
The new law includes provisions that:
* Require chief executive officers and chief financial
officers to sign financial reports.
* Lengthen potential prison terms for individuals who commit corporate fraud
and play a part in document destruction.
* Create an accounting oversight board that is independent of the accounting
industry.
* Bar auditors of public companies from performing certain consulting services
for their audit clients.
* Prohibit executives from trading company stock during blackout periods set by
employee retirement plans.
* Ban certain loans to executives.
* Give the SEC more authority and a bigger budget.
To help restore investor confidence, the Securities and Exchange Commission (SEC) recently ordered the executives at 947 of the largest publicly traded companies to swear by their numbers. The names of these companies appear on an SEC list at (www.sec.gov/rules/other/4-460list.htm). Under the SEC order, both the company's chief executive officer and chief financial officer must personally certify that company reports filed with SEC are both complete and accurate. Officers who make false certifications will face civil and criminal penalties.
ARE YOUR BANK ACCOUNTS INSURED?
How safe are your bank accounts? You probably rely on FDIC (Federal Deposit Insurance Corporation) insurance to protect your money if your bank fails. But this might be a good time to check your FDIC coverage for several reasons.
First, you might have less insurance coverage than you think. If your savings and loan or bank is an FDIC member, you've probably noticed the FDIC logo that says "each depositor insured to $100,000." A common misconception is that every account is insured up to $100,000. Unfortunately, it's not that simple. For example, a $100,000 insurance limit applies to the combined total of all accounts that are in your name alone. If you have $10,000 in checking, $20,000 in passbook savings, and $90,000 in bank CDs, FDIC insurance covers only $100,000 of your total $120,000. Similar limits apply to your share of all joint accounts and your combined IRA accounts.
A second reason to be cautious is that not all products you buy at the bank branch are FDIC insured. Many banks sell investment products, such as annuities and mutual funds. FDIC protection only applies to traditional deposit accounts, such as checking, savings, certificates of deposit, and money market deposit accounts. In addition, your bank must be an FDIC member in order for you to have FDIC protection.
Finally, although the banking industry is generally safe and bank failures are rare, they do happen. The FDIC was created in 1933 to insure deposits and to promote sound banking practices. According to the FDIC, the number of thrifts and banks on their "problem" list has grown in 2002.
By knowing and following the FDIC insurance rules, you can avoid unnecessary exposure to risk. It could be well worth your time to sit down with a bank representative and review the FDIC insurance coverage on each of your bank accounts.
CHUCKLE OF THE MONTH
Only in America......can a pizza get to your house faster than an ambulance.
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Only in
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Only in
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Only in
The information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information on anything in the ONLINE ADVISOR, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.