Tax Tips and Ideas From The Big Bear Tax Lady

Last year brought volumes of new tax laws within the Banking Reform and Health Care Reform bills. Included here is a review of what is currently impacting all of us. This month’s newsletter also includes some timely advice on borrowing money from your 401(k) and a thought or two about social networking.

As always, should you know of someone who may benefit from this information please feel free to forward this newsletter to them.

 

 Borrowing from your 401(k)…Good Idea?

Most company 401(k) retirement savings programs allow qualified participants to borrow money from their account. Usually the amount is limited to a maximum of 50% of the account balance, requires timely repayment, and immediate repayment of outstanding loans should you leave your employer. So is borrowing money from your 401(k) retirement account a good idea?

Why these loans are usually a bad idea
In most cases, borrowing money from a 401(k) is a bad idea. Why?

Federal Income Tax Quiz
1 Opportunity cost. Your investments used for a loan from your 401(k) are no longer earning investment income. Instead it is usually earning a lower interest rate paid by you as you repay your loan. 2 Tax implications. Your repayment of the loan is usually in “after-tax” dollars. If you are in the 25% federal tax bracket you need to pay $1,250 dollars pre-tax for every $1,000 you borrowed BEFORE applying the interest expense. 3 Cash Flow. Often those taking out a loan are cash strapped. This loan too, must be repaid within 5 years unless used to buy a home. Have you done the math to ensure you will have cash available to make these new loan payments each month? 4 Tax penalty. If you do not pay the loan back, you will often be subject to two more tax events. The first is income tax on the unpaid 401(k) loan amount as it is now deemed to be ordinary income. The second is a possible 10% tax penalty for unqualified early withdrawal. In other words, if you miss a payment or two, the tax implications could be huge. 5 Immediate repayment. If you leave your employer, these loans are often immediately due in full within 60 days of leaving your employer. So if you lose your job or wish to change your job you need to be prepared to repay any 401(k) loan balances immediately. 401(k) Loans have Congressional Attention
The increase in use of 401(k) loans and defaults on these loans has captured the attention of our legislators. There is a new bill introduced in the Senate this year called the “SEAL 401(k) Savings Act”. If passed the act would:
Check Limit the number of 401(k) loans a person may take from their plan Check Extend the period of loan repayment to reduce defaults Check Extend the grace period to repay loans should employment be terminated Check Ban the use of Debit Cards to access 401(k) balances Check Allow continued participation in 401(k) programs if locked out of the program due to hardship withdrawals.

While it is usually not advisable to take out a loan from your 401(k) program, sometimes your situation may merit this action. Please make sure you are taking this step with knowledge of the potential risks.

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Mortgage Reform
Know Before You Owe Project

Employee Tax Free IncomeOne of the objectives of the Dodd-Frank Wall Street Reform and Consumer Protection Act of July, 2010 is to clean up the mortgage lending business. As part of this bill the newly formed Consumer Financial Protection Bureau (CFPB) recently announced the Know Before You Owe project.

The Know Before You Owe project is meant to combine two Federally required mortgage disclosures into one easy to read notification on the cost of a proposed mortgage. If done correctly, consumers will be able to readily compare one mortgage option with another prior to making a lending decision. In short, consumers should be able to use this form to answer two questions:

Can I afford this mortgage?

Can I get a better deal?

What you need to know

Check Proposed forms and regulations are due to be issued by July 2012
Check You can view and provide feedback on the two simplified disclosure forms being tested by going to: http://www.consumerfinance.gov/ and clicking on the Know Before You Owe button
Check If house shopping, consider printing out one of the proposed forms and compare it to loan disclosure documentation you currently receive to help make sure you get the best mortgage.

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 Health Care Reform

What’s Currently in Place

Since the passage of the Health Care Reform bill a number of the provisions have been implemented and a number are scheduled to be put in place within the next 24 months. Here, in a nutshell, is a list of the major components that are now law and those that will be shortly:

Year: 2010

Check 10% excise tax on indoor UV tanning services: July 1, 2010
Check Health care coverage expansion to children under the age of 27: March 30, 2010
Check Medicare Part D Coverage Gap (donut hole) $250 rebate
Check Small business health care tax credit
Employee Tax Free Income
Year: 2011

Check Elimination of over-the-counter medicines as a reimbursable expense from Flexible Spending Accounts or other health reimbursement arrangements like HSAs without a prescription.
Check Optional employer reporting of the cost of employer-provided health insurance coverage on employees’ W-2s
Check Repeal of additional 1099 informational reporting, but increasing the penalties for late filing of 1099s

The next major block of legislation goes into place in 2013 and 2014 so stay tuned!

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Are We Becoming Social Networking Zombies?

Employee Tax Free IncomeMillions of children under the age of 13 have Facebook accounts. Professionals in many fields are being rained upon with emails from Linkedin updating them on who their business associates are adding to their personal contact list. Twitter messages are telling us when someone famous is getting a haircut. Your web browser is automatically updating you with the latest information from some blog via an RSS feed. While a very powerful set of tools, this social network explosion comes with a price.

You are the product

While most of these services are “free” to you, one has to remember that old saying, “there is no such thing as a free lunch”. So what is the price you pay? You pay with your privacy. You become the product being sold by Facebook and Linkedin to advertisers. You provide enough traditionally private information for advertisers to sell you AND your friends their products and services.

Privacy and safety

Does the maker of Oreos know who your friends are? Do they know what you look like? What you like to eat? What music you listen to? Do they know your cell phone number or your address? These once private pieces of your life are now available to anyone willing to pay for it via Social Networking. While this information is the strength of this new technology, it is also the weakness of it if you lose control of your information or it falls into the wrong hands.

Scams and False IDs

One of the major problems with Social Networking is most consumers are using these tools with a presumed level of trust. Accounts are being opened up by minors who simply want to be connected with their friends. Most of us do not even read the terms of use prior to signing up for these services. What could go wrong? Here are some examples:

Check Creating an imposter profile on Linkedin of someone well known and then using the profile to collect a list of prominent contacts.
Check Someone accessing your cell phone numbers via Twitter and then being stalked by them.
Check Having your MySpace or Facebook community breached by an unwanted visitor who uses a false name of someone you know.
Check Losing a job because of inappropriate information about you available on a social network.
Check Having your identity stolen or your reputation damaged by fraudulent use of the network.

What you can do

Check Understand the price of privacy you are willing to pay for the Social Networking Service of your choice. Periodically review the “terms of use” to ensure the network has not changed their privacy policy.
Check Be very selective about who is allowed into your community. It is easy to let someone in, it is difficult and often hurtful to keep someone out.
Check Protect your kids. Social Networking is becoming a place of relentless cyber bullies and stalkers.
Check Periodically conduct a find on yourself and your family via a web search engine. Know what information is on the internet about yourself.
Check Understand “why” you are using the specific Social Network tool. If the purpose is unclear, then keep your information private.
Check Understand how to get rid of information in your account prior to adding it. Often times your private information is stored indefinitely, even after you close your account.

The bottom line? Most social networking tools are successful because most of us are signing up for the new technology without understanding what the price is. We need to stop being social networking’s zombies and treat this product like any other one we decide to purchase.


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As always, should you have any questions or concerns regarding your situation please feel free to call.

 

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