CPA Blog Talk

If everything your children ever learned about personal finances came from the mass media, they might think credit is a limitless resource and savings something you only find on a clearance rack. To fill in the gaps in their financial education, parents should teach their children the fundamentals of handling money. But where do you start? Perhaps begin with the following benchmarks of financial literacy.

* Time Value of Money

One of the most essential of all financial concepts is the time value of money. Children should be shown the benefits of saving money, watching it grow, and patiently deferring purchases until a future time. When children grow a little older, they can learn the reverse lesson: how debt today results in accumulated interest costs down the road. To illustrate the point, show them a loan amortization schedule for a typical car or home loan. That will get their attention.

* Transactional Skills

In today’s cashless society, your children will someday need to know how to write a check, use a debit or credit card, and how to bank online. When they are ready, consider setting aside a morning to take them to the bank, introduce them to a representative, and set up their first checking account and bank card under the tutelage of the banker. Children will appreciate this rite of passage to adulthood, and they will learn how to navigate an ATM or bank website the right way, not just the way you do it.

* Keeping Good Records

You might feel a little hypocritical when pointing out your children’s recordkeeping shortcomings, but they probably need your help more than you think. Knowing how to reconcile a checkbook and track where they spend their money is a valuable life skill. Developing a system for safely storing receipts, warranties, and other valuable papers is also important. When they begin driving, point out the location and importance of the vehicle proof of insurance and registration.

* Reflecting Your Values

Like any other area of life, you will naturally want to pass down truisms that have guided you financially. Succinct phrases often suit this purpose quite effectively, such as, “keep a little gas in the tank, a little money in the bank.” Or, “don’t place all your eggs in one basket.” Sound corny? Perhaps. But such sayings today might just remind your children of something important tomorrow.

Those who value philanthropy should consider including their children in the charity selection process. Teach them why certain causes are important to you and how you determine the amount to give. Perhaps you could give your children gifting discretion over a small sum of charitable dollars.

* Investments 101

The day will eventually come when your children will be ready to talk investments, retirement, and taxes. Feeling intimidated yet? There is no need to fear. Our firm can assist you and your children with these advanced topics. Being financially literate is not child’s play. But then again, neither is being a parent.

Are you considering post-retirement employment? If you’re collecting social security and thinking of returning to the work force, you may have questions about the effect of that income on the taxability of your benefits.

The answer: Under current law, part of your social security benefits may be taxable. How much? The basic rule is that up to 85% of your annual benefits can be subject to federal income tax when your “provisional” income exceeds specified thresholds. Generally speaking, provisional income is the sum of your adjusted gross income plus tax-exempt interest and one-half of your social security benefits.

Benefits are not taxed when your provisional income is below the threshold applicable to your filing status.

The federal thresholds, called base amounts, range from zero, if you’re married filing separately and live with your spouse all year, to $32,000, if you’re married filing jointly.

A $25,000 base applies when you file as single, head of household, or as a qualifying widow or widower with a dependent child. If you’re married, but file separately and do not live with your spouse during the year, you’ll also use the $25,000 figure.

Illustration: When you’re married, file a joint return, and your provisional income exceeds $32,000, a portion of your benefits will be taxed.

Please call us to discuss how income from a new business venture or job will impact your taxes. We’ll be happy to help with planning moves, such as the timing of retirement account distributions, that can ease the tax bite.

If you provide care for stray or feral animals in your home for an IRS-approved charity, you may be able to take a tax deduction for your out-of-pocket expenses. A recent U.S. Tax Court judge ruled that a taxpayer who fostered feral and stray cats in her home could deduct amounts she spent for food, veterinarian bills, litter, and other unreimbursed expenses incurred to help the animal charity in its mission. To be deductible, the taxpayer must keep records of the expenses, and the charity must provide a written acknowledgment of the volunteer work as a charitable gift.

The Humane Society hopes to get the word out on this case, stating that thousands of members do volunteer work such as this and spend their own money to support the mission of local shelters and rescue groups.

The IRS is warning taxpayers not to respond to e-mails and phone calls they may receive which claim to come from the IRS or another federal agency. Such contacts are likely to be scams whose purpose is to obtain personal and financial information from taxpayers – information that is then used by the scammers to commit identity theft.

Typically, the scam e-mail or phone call states that the IRS needs certain information to process a tax return or refund. The e-mail contains links or attachments to what appears to be the IRS website or an IRS form. Though they appear genuine, these phonies are designed to get from taxpayers the information scammers need to steal identities. The links can even download malicious software onto the taxpayer’s computer if clicked. The software is often designed to search out and send to the scammer personal and financial information contained on the taxpayer’s computer that the scammer uses to commit identity theft.

The IRS reminds taxpayers that it does not send unsolicited e-mails asking for sensitive personal and financial information.

A recent Congressional study revealed that 51% of U.S. households paid no federal income tax for 2009. About 30% of households received a “refund” check, due to refundable tax credits, such as the earned income credit, home buyer’s credit, and the “making work pay” credit.

An important point: Most of those who paid no federal income tax did pay social security and Medicare payroll taxes.

The majority of taxpayers take the standard deduction rather than itemizing deductions on their tax returns. But there are deductions “above the line” that both itemizers and nonitemizers can take. These include the $250 educator’s deduction for buying classroom supplies and deductions for student loan interest, tuition expenses, job-related moving costs, self-employment taxes, and alimony. Need details? Call us.

If you are in a position to give, making annual gifts can be an excellent strategy for reducing both your estate and income tax liability. Doing your gift-giving well before year-end is especially smart if you are giving income-producing property. You will then remove more income from your 2011 tax return

Don’t overlook a deduction on your 2011 tax return for qualified higher education expenses this year. Single filers may deduct up to $4,000 if adjusted gross income (AGI) is $65,000 or less (AGI of $130,000 or less for joint filers). The deduction limit drops to $2,000 for AGI up to $80,000 for single filers and $160,000 for joint filers. No deduction is allowed over these income thresholds.