Janell A. Israel & Associates
August 2006 Tax Newsletter
Happy Statehood day!
What's New in taxes:
IRS Concedes Defeat on Telephone Tax
After numerous losses in
court, the IRS is admitting defeat on the issue of telephone excise taxes. The
Service will no longer collect the 3% excise tax on long-distance telephone
services. In addition, the IRS will issue credits or refunds of all excise
taxes paid on long-distance service billed after February 28, 2003, along with
interest. These refunds will be claimed on individual’s 2006 tax
returns.
Consider The
Tax Benefits Of Annual Gifts
Did you know that this year
you can give gifts of up to $12,000 to as many individuals as you want without being
liable for gift tax? Normally, the gifts you make count towards your lifetime
exemption from gift and estate taxes. That’s so you don’t just give
away your estate shortly before death to avoid estate taxes.
But each year you can make an
unlimited number of gifts free of tax, provided they’re below a certain
amount. The limit for 2006 is $12,000 given to any one individual. A husband
and wife each have their own separate limit, so they can jointly give up to
$24,000 to any one person.
Use The Annual Exclusion
You can put the gift
exclusion to good use in several situations. For example, you could use a
multi-year gifting program to decrease the size of your estate and reduce
estate taxes.
A married couple giving to
each of their three children could reduce their estate by a total of $72,000
every year, for example.
You could also use the gift
exclusion in an income-shifting strategy. You could make gifts of
income-generating assets to your child who is in a lower tax bracket. If done
carefully to avoid the “kiddie tax,” the
result can be a lower overall tax bill for the family unit.
Three types of gifts are
exempt from the $12,000 limit. You can make unlimited gifts for tuition
expenses or medical expenses on behalf of any person, provided you make the
payments directly to the educational institution or health care provider. You
can also make unlimited gifts to your spouse.
Before you give away money or
other assets, be sure you will not need them yourself to provide income in
later years. Consider the impact inflation will have on your resources.
Planning is essential in this area, so contact us for any assistance you need
before making 2006 gifts.
What's New in Finances:
Nearly Half Of Americans Aren’t Saving Enough
A new study
done by the Center for Retirement Research at
Even more alarming is the
fact that this study did not take into account the “wild card” of
medical expenses, a retirement expense that is difficult to estimate and one
that could be a major item in people’s retirement budgets.
The conclusion that can be
drawn from the study is that today’s workers need to save more now if
they hope to have a comfortable retirement.
Don't Cash Out The
Equity In Your Home Just Because It's There
With today's low interest
rates, homeowners have been flocking to refinance their mortgages. But instead
of reducing their payment by the maximum amount, many have increased the size
of their mortgage to tap into the home's equity. Part of the new loan pays off
the old mortgage, and the remainder is paid in cash. These
"cash-outs" have accounted for well over half of all refinancings in recent months.
Although instant cash is
always tempting, you should think carefully before cashing out the equity in
your home. Whether it's a good or bad idea depends on your financial situation
and how you intend to use the cash. For example, using the cash to pay off
high-interest credit card balances might seem like a good idea. But first you
should look carefully at your personal economic situation. If you can't make
the loan payments, you stand to lose your home.
The economy is troubled, with
high unemployment and more job cuts being announced every month. Even though
interest rates have fallen, mortgage foreclosures have reached record levels
this year. Many individuals are stretched well beyond their financial means.
This is not the climate to casually take on extra debt.
Before you increase the size
of your mortgage, consider your financial situation. Is your job secure, or is
there a possibility of losing your job? If you lose your job, how are you
positioned to meet your monthly payments? How quickly could you find another
job? What if you need to relocate, but you can't sell your home for enough to
cover the mortgage? Do you have a cash reserve for unexpected financial
emergencies?
While refinancing might make
sense to lower your interest rate or shorten your loan's term, exercise caution
when it comes to cashing out your home's equity. Call us to discuss whether refinancing
makes sense in your situation.
Take a Break
The Poetry of D. H. Rumsfeld
[from a Feb. 12, 2002,
Department of Defense news briefing…]
The Unknown
As we know,
There are known knowns.
There are things we know we know.
We also know
There are known unknowns.
That is to say
We know there are some things
We do not know.
But there are also unknown unknowns,
The ones we don’t know
We don’t know.
The information contained in this newsletter 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
this newsletter, or for assistance with any of your tax, business,
or financial strategy concerns, contact our office.