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10 Things Every Taxpayer Needs to Know About the Pension Law

July 29, 2010 | Filed Under Retirement Savings | 1 Comment
By: Maggie Beetz

The Pension Protection Act, signed into law on August 17, 2006, is designed to address the nation-wide problem of under-funded pension plans. The law penalizes noncompliant companies and encourages employee contributions, but many of the changes directly impact taxpayers of all ages, regardless of retirement status.

“Taxpayers will benefit from many of the act’s provisions, some of which come in the form of tax breaks, but individuals cannot take full advantage of the tax breaks until the new laws are fully understood,” said Michael Smith, Managing Authorized Taxpayer Representative at tax services firm FSI Tax Corp.

The following is a rundown of the most important tax code changes and how they will likely affect taxpayers, as well as retirees.

1. Direct IRA Tax Return Deposits

Taxpayers can now have their tax returns deposited directly into their IRA accounts. The IRS already offers taxpayers the option to automatically deposit returns into checking and saving accounts. By adding IRA accounts, legislators hope taxpayers will contribute more funds toward their retirement accounts.

2. 529 College Savings Plans

Many temporary tax laws enacted by the 2001 tax cuts were made permanent by the Pension Protection Act. This includes the ability to make withdrawals from 529 college savings plans without suffering tax penalties.

“Tax-free college savings withdrawals may seem inappropriate in a pension law, but this provision is welcomed by parents who would otherwise resort to tapping their IRAs to fund their children’s education,” said Smith.

3. Saver’s Credit

Another 2001 tax break that was set to expire this year is the Saver’s Credit, a tax credit matching up to $2,000 for lower-income workers who put money into their retirement accounts. This tax break benefits workers who earn less than $25,000 because pre-tax contributions lower the taxpayer’s reportable income and the Saver’s Credit provides additional tax relief with its matching funds.

4. Increased Contribution Levels

In 2001, the IRS temporarily raised employee-sponsored retirement plan contribution levels from $2,000 to $4,000 this year, $5,000 in 2008 and then adjusted by inflation. The higher limits were set to expire in 2010, but the act made them a permanent increase.

This change, also intended to encourage increased contribution amounts, applies to 401(k)s, IRAs, 403(b)s, 457s and catch-up contributions for workers aged 50 and older.

5. Direct Rollovers from a 401(k) to a Roth IRA

Employees who move from one workplace to another were previously permitted to transfer their 401(k)s to traditional IRAs, both of which require taxes to be paid once money is withdrawn. Only then was the individual allowed to transfer the account into a Roth IRA.

The law now permits former employees to transfer their employer-funded retirement accounts directly into a Roth IRA, a popular option due to the fact that contributions are made after taxes are taken from earnings, which means that there are no taxes due upon withdrawing funds.

“The tax code changes enacted by the Pension law benefit taxpayers and steer them toward contributing to their own retirements,” explained Smith. “While companies should be held accountable for funding employee pensions, each taxpayer should take advantage of changes that make it easier to ensure a secure retirement.”

Tax Deductions for Charitable Giving

Non-pension-related tax code changes include several provisions that significantly increase charitable giving regulations, some of which are unlikely to please donors.

5. Documenting Items

To discourage taxpayers from inflating the value of non-monetary charitable donations for inflated tax deductions, the IRS now requires taxpayers to fill out a form detailing the gifts. Additionally, any significant household item, valued at more than $500, must be appraised before the taxpayer can take a deduction.

Many charitable organizations, including Goodwill Industries International, say the new provisions will guard against worthless donations more suitable for the trash bins, but critics argue that increased regulation will discourage would-be donors and cause a decrease in charitable giving.

6. Documenting Monetary Gifts

Monetary donations will also require documentation. Regardless of the amount, a taxpayer should retain proof of any donation. Appropriate documentation can be a bank record, canceled check, credit card statement or receipt from the charity.

“These records are not required to be included in the tax return but they should be kept on hand should the IRS request proof,” advised Smith.

7. Direct Donations from IRAs for Seniors

Another tax law that many charities support affects only seniors. For the next two years, donors 70 ½ or older will be able to donate to charities directly from their IRAs, an accommodation that keeps the donated amount tax-free and avoids tax penalties for early withdrawals.

This provision benefits eligible taxpayers who take the standard deduction, which many older filers do because they receive larger standard deductions. This can also benefit individuals facing donation limits. Generally, people cannot donate more that 50 percent of their incomes, but the money does not count as income when it comes directly from the IRA.

Officials at charities such as United Way claim that despite being temporary, this provision will likely bring in tens of millions of dollars.

Other Pension Provisions

8. Automatic 401(k) Sign Up

Employers are allowed to automatically sign up employees for a 401(k). This change encourages participation from people who may not otherwise bother to sign up for the plan in the first place, though they will have the option to opt out.

9. Investment Advice

Because employees often choose safer investments for their 401(k)s, which generally result in modest returns, the act allows them to receive investment planning advice to encourage riskier investments with the potential for higher returns. The act also provides protection against dishonest advisers who steer employees toward decisions that could increase their own profit.

10. Non-Spousal Benefits

Two provisions that expand allowable withdrawals are pleasing gay rights activists. The non-spousal rollover lets retirement account assets be transferred to a designated beneficiary upon the retiree’s death and the hardship distribution allows retirement account assets be used for a medical or financial emergency of a beneficiary other than a spouse or a dependent.

The majority of the Pension Protection Act aims to ensure that companies fully fund traditional pension plans over a seven-year period, starting in 2008. But many provisions promote increased individual employee participation in retirement planning.

Smith said that while the new law expands allowances and makes it easier for individuals to increase retirement savings, it may be a step toward employee-funded retirement plans – a move that has many critics concerned.

Author Bio
Maggie Beetz is a writer for FSI Financial Literacy, Corp. based in Columbia, MD. FSI Financial Literacy aims to spread financial awareness to clients of FSI Tax Corp., Debt Shield, Inc. (http://www.debtshield.com/) and the general public. For more information, visit www.fsitax.com or please call 800-806-9106 or email mbeetz@fsiholding.com.

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10 Ways to Cut Your Property Taxes

July 29, 2010 | Filed Under Tax Articles | Comments Off
By: Paul Wilson

Property taxes are decided collectively by school boards, town boards, legislators, and councils. The tax rate is set by collating the amount of funds an area needs. This is then divided that by the “total taxable” assessed value of the area. The tax an individual pays is computed by multiplying the tax rate by the assessed value of your property and then deducting any applicable exceptions. Property taxes are at an all time high. Studies indicate that they have increased more than 35% in five years.

Property is assessed by determining property costs in any given area. Property is valued by studying: the current sale price of properties in the area, costs to be incurred to replace the property, potential realization of property if it is rented, sold, or gifted, and the historical value of a property.

There are a few ways in which you could save on taxes:

1. Check if the state you reside in is offering any rebates. For example, a money back rebate, energy rebate, capping of taxes, or home owners rebate where under certain conditions you may be eligible to claim a rebate.

2. Ensure that the property is assessed right. This will ensure that you do not have to pay excess taxes. Assert your right to check you assessment report ensure that there are no miscalculations, mistakes, or assumptions. If in any doubt, do put in an appeal. According to statistics almost 50% of the cases win some relief.

3. Check all exemptions allowed according to the law.

4. Buy property jointly with a partner or family member. This way both owners become eligible for tax rebates.

5. Check if your assessment is in according to other properties in your neighborhood. Check with the assessment office or with your neighbors themselves. It helps to know applicable laws. Use the help of a real estate professional to put together a file of properties similar to yours that have a lower assessment. Or, use the bank’s appraisal to support your case. Be sure that the case you gather together is water tight.

6. Use a property consultant to help you save taxes. Some charge a flat fee while others just a percentage of what you save. A professional will check how assessment is done and also if there are any loop holes you can use.

7. There is strength in numbers. Get together with other owners who are also checking or fighting assessments. Check on the National Taxpayers Union Web site http://www.ntu.org for your rights.

8. Ask you home loan provider whether you are eligible for refund of property taxes paid. Some agreements have a provision for this. Many mortgages have automatic escrow of taxes.

9. Even before you buy a home find out what the property taxes are in the area and what have been the increases in tax rates.

10. Be sure to read through assessment and tax manuals published by your local authorities. These will give a clear idea of what are the parameters used and what you must do to reduce or pay the correct property taxes.

In order to be money smart you need to get the help of an efficient and dedicated accountant, plan your tax liabilities well, known thoroughly all aspects of Property Tax. If you are prudent, you can benefit by using ways and means to cut your tax burden and liabilities.

Author Bio
Paul Wilson is a freelance writer for http://www.1888PressRelease.com/Home-and-Family-Taxes-1-81.html, the premier website to Submit Free Press Release for any announcements including launching of new product or services, new website, announcing new hires, sponsoring a special event or seminar and more. His article profile can be found at the premier Legal Article Submission Directory www.1888Articles.com/legal-articles-3.html

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How To Dissect Mutual Fund Returns

July 29, 2010 | Filed Under Uncategorized | Comments Off
By: Sam Subramanian
On January 1, 2006, a leading financial daily reported the trailing 1-year and 5-year returns of Fidelity Contrafund (Nasdaq: FCNTX), a no-load mutual fund, as 16.23% and 6.21% respectively. While the financial daily’s return information is useful, there is more to mutual fund returns.
    Is the performance of the fund superior or inferior?
    How tax-efficient is the fund in delivering these returns?
    Are the returns of the fund commensurate with the risk the fund manager has taken to achieve them?

Savvy investors will seek answers to such questions when evaluating mutual fund returns. Before getting into the nitty-gritty of mutual fund returns, it is good to understand what the data reported in the financial daily really mean.

Total Return
Fidelity Contra’s reported 16.23% 1-year return is the fund’s total return for the December 31, 2004 to December 31, 2005 period. In practical terms, $10,000 invested in the fund on December 31, 2004 is worth $11,623 on December 31, 2005. The total return includes more than the increase (or decrease) in the fund’s share price. It also assumes reinvestment of all dividends as well as short- and long-term capital gain distributions into the fund at the price at which each distribution is made.

Compound Annual Return
The reported 6.21% 5-year return is the fund’s compound annual return (also called the average annual return). The compound annual return is a calculated number that describes the rate at which the investment has grown assuming uniform year-over-year growth during the 5-year period.

A $10,000 investment in the Contrafund on December 31, 2000 has grown to $13,515.34 on December 31, 2005. The ending value of $13,515.34 = $10,000[(1 + 0.0621)^5] where 6.21% is the compound annual return. The investment in the fund grew at an implied annual growth rate of 6.21% over the 5-year period.

While total return and compound annual return are useful, they do not tell how a particular mutual fund has performed compared to its peers. They also do not provide information on the return actually earned by investors after accounting for taxes. Finally, they do not offer insight on how well the fund manager has managed risk while achieving the returns.

Relative Return
Relative return
compares the performance of a mutual fund against its peers. It is the difference between the total return of the fund and the total return of an appropriate benchmark over the same period.

Fidelity Contra is a large-cap growth fund that primarily invests in U.S.-based companies. It is therefore appropriate to compare its performance with that of an average large-cap growth fund. It is also relevant to benchmark the fund against the Standard & Poor’s (S&P) 500 index, comprising of large U.S.-based companies.

While Fidelity Contra has a compound annual return of 6.21% for the 5-year period ending December 31, 2005, Morningstar reports the average large-cap growth fund has an average annual loss of 8.48% over the same period. The S&P 500 index has an average annual return of 0.54% over the same period. Fidelity Contra has outperformed with a relative return of 14.69% over the average large-cap growth fund and with a relative return of 5.67% over an S&P 500 index fund.

After-Tax Return
Unlike assets held in qualified accounts such as 401k plans or individual retirement accounts (IRA), assets held in regular individual or joint accounts are not tax-deferred. For such non-qualified accounts, after-tax return is the return realized after accounting for taxes.

Short-term capital gains and short-term capital gain distributions from a mutual fund are currently taxed at the same rate as earned income. Dividends, long-term capital gain distributions and long-term capital gains realized from the sale of fund shares are currently taxed at a lower rate.

Fidelity states the compound annual return for Fidelity Contra before taxes is 6.21% for the 5-year period ending on December 31, 2005. When all distributions are taxed at the respective maximum possible federal income-tax rate, the after-tax return dips to 6.10%. The after-tax return drops further to 5.33% after accounting for the long-term capital gain tax due on sale of the fund shares.

Risk-Adjusted Return
Some fund managers take more risk than others. It is important to assess a fund’s return in light of the amount of risk the fund manager takes to deliver that return.

Risk-Adjusted Return is commonly measured using the Sharpe Ratio. The ratio is calculated using the formula (mutual fund return – risk free return)/standard deviation of mutual fund return. The higher the Sharpe ratio, the better is the fund’s return per unit risk.

Based on returns for the 3-year period ending on November 30, 2005, Morningstar reports Fidelity Contra’s Sharpe ratio as 1.74. The fund’s Sharpe Ratio may be compared with those of similar funds to determine how the fund’s risk-adjusted return compares with those of its peers.

Beyond Mutual Funds
Return concepts such as relative return, after-tax return, and risk-adjusted return may also be used for evaluating separately-managed accounts, hedge funds and investment newsletter model portfolios.

The AlphaProfit Sector Investors’ Newsletter, for example, tracks the total return and compounded annual return of its Core and Focus model portfolios. To provide Subscribers with a more complete picture of model portfolio returns, this newsletter also tracks the relative and risk-adjusted returns of the model portfolios. The newsletter’s model portfolios are constructed and repositioned with a view to maximizing after-tax returns.

Summary
While total return and compound annual return are useful, they do not provide a complete picture of a mutual fund’s performance. Metrics such as relative return and after-tax return offer insights on the fund’s relative performance and tax-efficiency. Risk-adjusted returns enable investors to assess how a fund’s returns stack up when risk is factored in.

Notes: This report is for information purposes only. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice. This report does not have regard to the specific investment objectives, financial situation, and particular needs of any specific person who may receive this report. The information contained in this report is obtained from various sources believed to be accurate and is provided without warranties of any kind. AlphaProfit Investments, LLC does not represent that this information, including any third party information, is accurate or complete and it should not be relied upon as such. AlphaProfit Investments, LLC is not responsible for any errors or omissions herein. Opinions expressed herein reflect the opinion of AlphaProfit Investments, LLC and are subject to change without notice. AlphaProfit Investments, LLC disclaims any liability for any direct or incidental loss incurred by applying any of the information in this report. The third-party trademarks or service marks appearing within this report are the property of their respective owners. All other trademarks appearing herein are the property of AlphaProfit Investments, LLC. Owners and employees of AlphaProfit Investments, LLC for their own accounts invest in the Fidelity Mutual Funds included in the AlphaProfit Core and Focus model portfolios. AlphaProfit Investments, LLC neither is associated with nor receives any compensation from Fidelity Investments or other mutual fund companies mentioned in this report. Past performance is neither an indication of nor a guarantee for future results.

Author Bio
Sam Subramanian, Ph.D, MBA is Managing Principal of AlphaProfit Investments, LLC. He edits the AlphaProfit Sector Investors’ NewsletterTM. The investment newsletter is ranked #1 by Hulbert Financial Digest. As of December 31, 2005, the investment newsletter’s model portfolios have gained up to 87.8% since start of publication on September 30, 2003. The Dow Jones Wilshire 5000 index has gained 34.6% during the same period. To learn more about the newsletter, visit www.alphaprofit.com.

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