Paying your taxes

I remember my very first bank account.  At a young age before I was driving, I somehow managed to obtain a job as a child disc jockey on a local kids radio program.  I worked 2 hours a week for $5 per hour and my job was to record a series of trivia snippets that were later aired on the radio.  After my dad got tired of toting me down to the bank every month to cash a $40 check, he helped me open a bank account.  I handed the teller my money, she put it in a drawer and handed me back a checkbook.  In order to get money out, I had to go into the bank and make a withdrawal.  

My how times have changed.  Now, 15 years later, 99% of my expenses are done automatically over the internet and I probably couldn't tell you where my checkbook was without looking for a minute.  What's more is that this is common for a fair amount of the population now.  So if you're a taxpayer and you owe taxes and you're having a hard time finding your checkbook, what are your options?

With the increasing popularity of electronic filing of tax returns, it seems that the IRS has also become open to the idea of receiving payments electronically as well.  Short of mailing in a paper check to pay taxes, the IRS also has other options available to taxpayers.  

Debit or credit card

Taxpayers can use one of a number of approved payment processors to pay their taxes with a debit or credit card.  The catch is that there are fees associated with the transaction that vary depending on which processor you choose.  For example, Pay1040.com will process your transaction for a flat fee of $2.79 if you use a debit card and 2.35% of the amount if you use a credit card.  This is a good option for taxpayers that are willing to pay the fee for the convenience factor and want to earn a couple of extra points on their credit card.  

Electronic Federal Tax Payment System (EFTPS)

EFTPS provides a taxpayer with online access to a tax payment account.  The taxpayer can attach their EFTPS to a bank account, view previous payments, and schedule future payments.  The EFTPS system is free and available to all types of taxpayers.  In fact, some businesses are required to use EFTPS.  Once a taxpayer signs up for EFTPS, they will receive a confirmation with a PIN in the mail, which they will use when they login.  EFTPS is a good option for all businesses, and individuals that make large payments or estimated tax payments.  The EFTPS system allows you to schedule future payments, reducing the risk that a taxpayer will forget to make their quarterly tax payments.  

Direct Pay

Direct Pay is a new option offered by the IRS.  Instead of using a card, Direct Pay allows a taxpayer to draft their taxes directly out of their bank account.  The process requires the taxpayer to verify their identity and enter bank information, and it has no cost to the taxpayer.  This is a good option for individual taxpayers that owe any amount and do not want to go through the EFTPS process.  Currently Direct Pay is only available to individual taxpayers, not businesses.  

Of course, taxpayers can always use the conventional method to pay their taxes by writing a check.  

Idea$ 2014 - May: Wills, Trusts, and the Zombie Apocalypse

You don't have to be a zombie fan to enjoy watching AMC's The Walking Dead.  The show follows a group of survivors of the zombie apocalypse as they travel across the country finding ways to survive in a new world.  Although the likelihood of an actual zombie apocalypse occurring in the near future (if at all) is pretty low, it does make you consider if you are financially prepared for the end of life.  

There are several misconceptions that hover around end of life financial planning.  One is that only older people need to worry about end of life planning.  Another is that estate planning is only for wealthy individuals.  The truth is there are various levels of planning that can be done by everyone, regardless of their age or financial situation.,  

According to LegalZoom, approximately 55% of American adults currently do not have a will or other estate plan in place, and if you asked any of them why not I am betting they would respond that they are not wealthy, they are too young, they don't have time or they don't know how.  Dying without a will can leave your family in distress, cause your assets not to be divided the way you want, or even be tied up in probate for an extended period of time.  

Will basics

A will is a legal document drafted by an individual that sets forth their wishes to be acted upon at their death.  A will can cover a variety of topics, including distribution of assets, guardianship of minor children, or whether to be buried or cremated.  A will is especially important for individuals that want to make specific bequests at death such as leaving money to charity or leaving assets to children.  

When is the right time to draft a will?  My answer has always been when a married couple has their first child, and the reason being that once a child is brought into the mix, there are considerations to be made regarding guardianship and the transfer of assets in the event that both parents passed away unexpectedly.  But there really is no "right" time to draft a will, because once you have at least one asset, such as a bank account or a car, you need to dictate how that asset is handled upon your death.  

Trusts

This is another term that people generally associate with wealth.  However, trusts can be used by anyone to distribute property or protect assets at the end of life.  There are two terms related to trusts in this situation that you need to be familiar with: revocable and irrevocable.  A revocable trust is a trust that can be set up while an individual is still living and is a "disregarded entity" meaning that the assets and income still belong to the individual.  An irrevocable trust is the opposite.  Although it can be set up during life, once assets are transferred to an irrevocable trust, there is no taking them back, and the assets and income belong to the beneficiary.  

A revocable trust is a good vehicle to use if you want to continue using assets but have transferred in a specific way at the end of life.  For example, John and Jane Doe create the John and Jane Doe Revocable Trust and transfer an investment property into the trust.  In the trust document, John and Jane specify that at their death, their 2 children become the 50/50 beneficiaries of the trust.  John and Jane still technically own the asset and they have to recognize any income or loss from the asset on their individual income tax return each year.  But, upon their death, their two children become the beneficiaries of the trust and technically own the asset.  

An irrevocable trust is used especially well in a gifting situation where an individual is looking to decrease their estate.  For example, let's say an individual with significant assets wants to transfer (i.e. give) assets to their child or grandchild in trust.  The individual can create an irrevocable trust and name the child or grandchild as beneficiary, then transfer assets into the trust.  The best part is, if the assets transferred are less than or equal to the gifting dollar limit for that year ($14,000 for 2014), then the assets are removed from the individual's estate, the assets become available for the beneficiaries use, and there is no gift tax due.  

Trusts can also be used in a will to handle assets left to minor children.  For example, if you own a rental property, you probably don't want to leave it outright to a 3-year-old child.  Within a will though, bequests can be made into trusts for the benefit of minor children but managed by someone else (a trustee) until the child reaches a certain age.  

DIY vs. professional help

Drafting a simple will is very easy to do yourself.  There are online resources such as LegalZoom where you can draft a will online, print, sign, and store for future use.  For a slightly more advanced experience, you can buy a software such as Quicken WillMaker that you can install on your computer.  If you have a good handle on your assets and how you want your affairs handled, either of these options will work.  

If your situation is more complicated, then it is best to meet with an attorney and/or CPA.  An attorney can advise you on the best way to organize your affairs within the legal structure of the state where you live, as well as draft documents and set up trusts.  CPAs are a good resource for getting a handle on your financial situation as well as administering trusts, etc. once they are set up.  One word of caution: attorneys are not accountants, and accountants are not attorneys.  If you do choose to seek professional advice, make sure you are using someone that is proficient in that area.  

Now, if the zombie apocalypse does come, there's no way to know if all of these legal documents will hold up in court during the zombie reign.  But, by having some form of end of life planning, regardless of your financial situation, you will sleep better at night knowing that your wishes will be carried out and that your loved ones will be taken care of.  

How much is too much?

I'm a big fan of the Dave Matthews Band.  I've been to several of their concerts and own pretty much all of their albums.  I must admit that I don't pay attention to the lyrics as closely since I find the music itself will usually line up pretty well with whatever kind of mood I'm in that day.  But, there is one song, Too Much, that inspired me to share some information on saving and investing.  

"I eat too much, I drink too much, I want too much...too much!".  

It has been exactly one month since the filing deadline for individual tax returns.  This has given me some time to regroup and recharge, mainly by playing golf several times.  I have also spent this time catching up with several friends and clients on after-tax-season projects that need to be addressed.  In these discussions, a common question arises: what should I do with my refund?  This inevitably leads me to encourage them to save it for a rainy day, but how do you know when you have enough saved?  

Rule of Thumb

The "rule of thumb" for saving is simple: 6 months of living expenses.  If your household spends $5,000 per month to live, then you should have a minimum of $30,000 in a savings account.  At first glance, that seems like too much mulah.  But consider this: if you (and your spouse if married) lost your job(s) today, how long would it take to find a new one?  The 6 months of expenses gives you a cushion to know that you can survive unemployed for 6 months at the minimum.  It is also important to note that this savings amount should be "liquid", or easily accessible.  The most important factor is that you are able to access the money immediately in the event of an emergency, which is why a simple savings account is the best option for your savings.  

Saving vs. Investing

Let's say that you are an above-average fiscally responsible person and you have met your 6 months of expenses savings goal.  Congratulations!  Now what do you do?  This is where investing comes into play.  If you have excess funds each month after your living expenses, you can consider investing that money a.k.a put it in the stock market.  But what's the difference between saving and investing?  Saving is safe; you put $10 in and tomorrow you will still have $10.  Investing is riskier; you put $10 in and tomorrow you might only have $8, or you might have $12 depending on the fluctuation of the stock market.  It is because of those fluctuations that investing requires a long-term approach.  However, you should not try to invest to reach your 6 month savings goal, because of the unpredictable nature of investing and the risk that the funds might not be readily accessible in the event of an emergency.  

Other forms of saving

Saving can also be accomplished for specific purposes and life goals.  401(k)'s and 403(b)'s can be used to defer wages into tax-advantaged retirement accounts offered by your employer.  Individuals can also contribute to Traditional or Roth IRAs to accomplish additional retirement savings.  Coverdell and 529 plans save for education (and make great gifts for your recent high school grad!).

In conclusion, there is no amount I consider to be too much in savings.  Plus, "I eat too much, I drink too much, I save too much...too much!" just doesn't flow the same as the original lyrics.

Arkansas Tax Relief for Disaster Victims

The State of Arkansas Department of Finance and Administration has released the following:

“FOR IMMEDIATE RELEASE
Contact: Tom Atchley
Telephone: (501) 682-7200 Fax: (501) 682-7900

April 30, 2014

Tax Relief for Disaster Victims

LITTLE ROCK, AR—The Department of Finance and Administration announced today that taxpayers in the counties declared state disaster areas due to damages caused by severe storms, tornadoes, and flooding occurring on April 27, 2014 will be provided special tax relief. Taxpayers having issues affecting their ability to file or pay sales and use tax, withholding tax, corporate income tax or other state taxes as a result of these storms should call telephone number (501) 682-7924 to discuss their issues. The Department will assist taxpayers by extending the deadline for affected individuals or businesses to file their tax returns and provide other assistance, as needed. Also, interest and penalties that otherwise accrue under state law will be abated if the failure to file or pay results from issues related to this storm.

AFFECTED COUNTIES:
The affected counties are: Faulkner

In addition, taxpayers are reminded that if you have a casualty loss resulting from a federally declared disaster, you may be able to deduct that loss on your income tax return or amended income tax return for the tax year immediately preceding the tax year in which the disaster occurred. For taxpayers making this election, the loss is treated as having occurred in the preceding year. Taxpayers may wish to consult a tax professional for advice regarding this election.
”

— State of Arkansas DFA

For more updates on this development, check the AR DFA website here.

Idea$ 2014 - April: Spring cleaning

When asked about maintaining their investments, most people immediately think about their savings and brokerage accounts.  But, some of the biggest investments American have are their homes and vehicles.  With that being the case, it is important to provide them the same amount of attention as you would a brokerage account.  

I am a CPA by trade, and do not hold out to be a certified home or car repair expert, nor do I claim to be in touch with the ever-changing fashion trends of our current society.  However, I can offer the following simple tips that can help you maintain your home and vehicle investments.  

Your home

Spring is the perfect time to resuscitate your home after the long winter.  Cleaning out gutters, trimming hedges and trees, treating the lawn for weeds and using a power washer to clean off porches and patios will go a long way in maintaining the quality of your home.  If you live in a pollen-heavy area, it is best to wait until the pollen has stopped building up to clean off the exterior of the house.  Inside, this is a good time of year to change air filters which will also help prevent irritation associated with seasonal allergies.  

Your car

Although considering a car as an investment is contradictory due to its rapid decrease in value over time, a car is still important and requires maintenance.  Changing the oil on a regular interval, rotating the tires, cleaning corrosion from the battery and keeping all other fluids topped off are easy regular tasks to complete.  Performing routine service on a vehicle also helps your wallet in the long run because repair shops are not cheap due to the high cost of labor, and you usually do not have much bartering power if your car won't run at all.  

Your closet

Spring is also an excellent time to clean out your closet.  Clothing and other household items that you no longer need or use can be donated to a number of charities including Goodwill and The Salvation Army.  You might also consider contributing these items to victims of recent spring tornado and flood storms.  Keep in mind that if you do make a contribution to a qualified charity, obtain a tax receipt and the fair market value of your contribution can be claimed as a charitable contribution on your income tax return.