News, Tips & Hints

Tax Tip of the Week
July 23, 2007

Will the change in the "kiddie tax" affect you?

The “kiddie tax” rules need a new name.

These rules govern the taxability of your child’s unearned income and currently apply to children under age 18.

But starting in 2008, the kiddie tax will include children under age 19, as well as full-time students under age 24.

The change could mean a bigger tax bill for your college student.

  • How the kiddie tax works. When your child receives more than a specified amount of net unearned income in a year ($1,700 for 2007), the excess is usually taxed at your top tax rate if it’s higher than your child's tax rate. Unearned income is typically defined as income from investments, such as dividends, interest, and capital gains.
  • The exceptions. The kiddie tax doesn’t come into play if your child is married and files a joint return. In addition, the newly expanded age provision won’t apply when your child earns enough income to provide over half of his or her own total annual support.
  • Planning moves to make. To save for college without getting hit by the kiddie tax, consider investing in college savings plans such as a Section 529 plan or a Coverdell educational savings account. Both offer tax-free earnings and distributions when the funds are used to pay for school-related expenses. Hiring your child to work in your family business is another option. Wages are earned income and are taxed at your child’s rate, not yours, even if the child is under the kiddie tax age limit.

Please call our office to discuss the effect the expanded rule will have on your gifting and college savings strategies. We can help you minimize the consequence.

Tax Tip of the Week Archives

Business Tip of the Month
July 2007

Small businesses need an exit strategy

Many business owners spend years getting their firm off the ground, developing their customer base, and striving to increase the firm’s value in the marketplace. Ironically, these same owners often don’t develop a plan for getting their investment out of the business. No matter how great your entrepreneurial and management abilities, the day will come when you want to sell the business, turn it over to someone else, or simply shut it down. It makes sense to plan for that day.

Here are three key considerations when developing an exit strategy:

Know thy business and thyself. How do you want to exit the business? Do you want to sell the firm or turn it over to family members or employees? How long do you plan to stay involved in day-to-day operations? How much money will you take out of the business for retirement or other ventures? How will you deal with relinquishing control to others? Thinking through the answers to these questions is key to a successful exit strategy.

Set up an advisory team. Whether you plan to sell the business or turn it over to others, it makes sense to get at least two professionals involved from the start: your lawyer and your accountant. An experienced business attorney can guide you through the maze of requirements and factors surrounding due diligence, business sales, and estate planning. Your CPA can prepare accurate financial statements, develop tax strategies, and may even provide a business valuation. Depending on the type and complexity of your firm, you also might hire other professionals, including real estate agents and management consultants.

Make the transition smooth. If you plan to sell the business or hand it over to someone else, the new owners will want assurance about the firm’s future viability. To provide this assurance, take steps to ensure that your customer base remains stable, vendors stay committed, and the transition to new management flows as smoothly as possible. Often these goals can be accomplished by retaining key employees who have established relationships with clients and vendors. In addition, smart buyers will want to verify your numbers. You can facilitate this process by ensuring that your financial records are in order and your asset inventory remains current.

If you need help planning an exit strategy for your business, give us a call.

Financial Tip of the Month
July 2007

What you need to know about private mortgage insurance

If you’re in the market for a home, you’ve probably heard of private mortgage insurance or PMI. It’s insurance that protects lenders — not borrowers — if the mortgage goes into default. Lenders generally require PMI if you’re unwilling or unable to make a down payment of at least 20% of the home’s purchase price. Depending on your credit history, your income, the size of your mortgage and other factors, PMI can run from $50 to several hundred dollars a month. After building up equity in your home (in technical terms, when your loan-to-value ratio drops below 78% of the original loan balance), your PMI policy can be cancelled. But building up that much equity, especially with a conventional long-term mortgage, can take a decade or longer.

Is everyone who can’t afford a big down payment required to take out a PMI policy? If you’re financing a home with a conventional mortgage, the short answer is: probably. Homes financed with a Veteran’s Administration (VA) or Federal Housing Administration (FHA) mortgage don’t require PMI. That’s because the federal government protects these lenders by paying off the outstanding mortgage balance if the borrower defaults. Lenders who finance conventional mortgages don’t have that protection. From the lender’s perspective, if you borrow more than 80% of the home’s market value, you’re more likely to default on the loan. (And, yes, lenders can trot out studies to prove their point.) To compensate for this greater perceived risk, conventional mortgage lenders generally require you to purchase PMI. Those lenders who don’t require PMI will compensate for their risk in other ways, such as jacking up your mortgage’s interest rate.

On the plus side, a conventional mortgage with PMI may enable you to acquire a home that’s otherwise outside your budget. On the other hand, the availability of PMI may entice you to purchase a home that’s more expensive than you can realistically afford. Consider also that PMI premiums add an extra cost to your monthly house payment, and they’re tax-deductible in 2007 only.

So if you’re looking to finance that dream home, be sure to consider all the factors — including PMI. If you need assistance, give us a call.

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