Janell A. Israel & Associates
What's
New in taxes:
IRS Warns Taxpayers About Phony E-mails
The IRS is warning taxpayers
about Internet scams and fraudulent e-mails that appear to be from the IRS. The
e-mails direct the taxpayer to a Web link that looks like the genuine IRS site
and requests information such as the individual' s
social security number and bank account or credit card numbers. This
information is then used by the scammers to steal from the victim'
s bank account and run up charges on his or her credit card.
The phony Web sites use
images and content taken from the official IRS site and can appear quite
legitimate. But the IRS reminds taxpayers that it never sends out unsolicited
e-mails and never asks people for PINs, passwords, or
other private access information for financial accounts. Also the IRS reminds
taxpayers that the official IRS Web address is www.irs.gov. If the site is
.com, .net, .org, or any other designation than .gov, it's not the IRS site.
The schemes have several
variations, including notification that the taxpayer is eligible for a refund,
a claim that the taxpayer's credit card has been used to pay another person' s taxes, and instructions to send money to claim a
large lottery winning. None of these schemes has anything to do with the IRS;
they are all scams to snare the unwary taxpayer.
If you receive an e-mail
claiming to be from the IRS, you should not open any attachments or click on
any links in the e-mail. Instead, forward the e-mail to the IRS at
phishing@irs.gov so that it can be investigated.
Time For
Midyear Planning
Filing your 2006 tax return
might signal the official end of 2006, but for tax-savvy individuals, it' s also the kick-off for saving taxes in 2007. Getting an
early start on your 2007 tax planning will help you take maximum advantage of
the latest tax breaks, inflation adjustments, and retirement options.
* First, commit to
maximizing your retirement plan contributions. This will lower your 2007
taxable income and enhance your nest egg to boot. If you have an IRA, consider
making contributions earlier in the year to reap extra tax-deferred earnings.
* Second, minimize any
surprises next year by examining your paycheck withholdings now. Are tax
withholdings on track with your current financial situation? A large tax refund
or amount due on your 2006 return might require an adjustment to your Form W-4
for 2007. Additional factors to consider include recent changes to family
income, a new home, or children no longer qualified as dependents.
* A law enacted last year
extends the age threshold for taxing children's unearned income at the parent's
higher tax rate. Now the "kiddie tax"
applies until the child reaches age 18. This might be a good year to consider a
529 college savings plan as an alternative to transferring funds directly to a
child's account.
* And don'
t forget to take advantage of available energy tax credits this year.
Qualified home improvements can trim your utility bills and lower taxes at the
same time.
* Staying abreast of new tax
laws is always a good idea, and this year is no exception. For instance,
taxpayers age 70½ and older can now make charitable donations directly from
their IRA without paying tax on the distribution. In addition, the payments
satisfy the required minimum distribution obligation. So if you are charitably
inclined and don' t need your IRA distributions to
live on, this might be a winning strategy.
* The most common
tax-related resolution - and the hardest to keep - is a vow to maintain better
tax records. The deductions for higher education expenses and teacher's
out-of-pocket expenses have been reinstated for 2007. These and other
deductions and credits could be lost if you don't have a satisfactory
recordkeeping system.
What's New in Finances:
Stamps Will Cost More Beginning
May 14
The U.S. Postal Service
announced that the cost of mailing a first-class letter will go up 2 cents to
41 cents, effective May 14.
The Postal Service will be
offering something new as well - a "forever" stamp that can be used
indefinitely no matter what increases occur. To begin with, the forever stamp
will sell for 41 cents. Stamps purchased at that price can be used "forever"
even when prices increase in the future. Stamps purchased in the future will be
sold at whatever the prevailing first-class stamp rate is.
The forever stamp offers
customers the benefit of never having to buy small-value stamps to get the
right postage amount when prices increase and the customer has some of the
older stamps left over. Customers can also stock up on stamps and use them
"forever," avoiding price increases until their supply runs out.
Use Compounding To Build
Your Wealth
There are several ways to
earn income on investments, but compounding may be your most reliable path to
wealth. If you put $1,000 under your mattress, it will still be $1,000 a year
later, but it probably will buy you a little less due to inflation. If you lend
the money to a friend at 12% simple interest, at the end of the year you' ll receive $1,000 plus $120
of interest, since simple interest is computed only on the principal.
Compound interest is
computed on both the principal and the interest earned. If you invest the $1,000
in a bond that earns 12% interest compounded monthly, in the first month it
will earn 1% (1/12 of 12%), or $10. Now you have $1,010, which will earn 1%
interest in the following month, only now the earnings will be $10.10. At the
end of the third month, you' ll
earn 1% interest on $1,020.10 ($1,000 plus $10 plus $10.10), and so on. By the
end of the year, you' ll
have $1,126.83, or $6.83 more than you would earn if you loaned out the money
at the same rate but at simple interest.
Time matters
An additional $6.83 doesn' t
sound like much, but things change over time. After 10 years at 12% simple
interest, your $1,000 would be worth $2,200, which is the original $1,000 plus
12%, or $120, multiplied by 10 years. At 12% interest compounded monthly for 10
years, your $1,000 would be worth $3,300, or half
again as much as it would without monthly compounding. After 30 years, your
$1,000 would be worth $35,950!
Rate of return is also
important. Since after 10 years your $1,000 would be worth $3,300 at 12% interest
compounded monthly, it would have earned $2,300. At 6%, after 10 years the
$1,000 would be worth $1,819, earning only $819 rather than $2,300.
Now suppose the $1,000 came
from your net wages. If you're in a 25% income tax bracket, you earned $1,333 to
get $1,000 after taxes were withheld. But what if you could have invested the
entire $1,333 for 10 years? Then you will have an additional $1,100.
Compound Benefits
The above examples suggest
the following ways to use compounding to increase your earnings:
* Start saving and investing
now. Time is your most powerful multiplier.
* Shop for the best rates of
return, consistent with your risk tolerance.
* Set up your investments to
automatically reinvest interest and dividends earned.
* Use tax-deferred programs
like IRAs and 401(k) plans to the fullest possible extent.
If you' d
like to learn more about compounding, just give us a call. We'
ll be happy to review the numbers that apply
to your business and investment decisions.
Take a Break
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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 the ONLINE ADVISOR, or for assistance with any
of your tax, business, or financial strategy concerns,
contact our office.