McKonomics

Identity Theft: Keep Your Name Clear

Identity theft is a growing problem. It can result in a ruined credit record and even the loss of your life savings.

 

Many people think it's a problem that could not happen to them. But even if you are careful about storing personal papers securely, there are many ways an identity thief can get information. For example, making a change of address to divert your mail, rummaging through your trash, or posing as someone who has a legitimate need for information, such as a landlord or a creditor.

 

With the data in hand, the thief may then, among other things, change the mailing address on your credit card account and run up charges; open a new credit card account in your name and not pay the bills, establish phone or wireless service; open a bank account and write bad checks; file for bankruptcy under your name, and buy cars using a loan.

 

Here are some of the precautions you should take to prevent identity theft:

Ten Myths About Starting a Business

1."I'm broke, so it's a good time to start a business." New ventures drain bank accounts fast, so plan on having at least two year's worth of income in addition to start-up costs, which vary depending on the business. Then, you can devote all your time and energy without having to hold down a job at the same time.

 

2. "I need a little more practice before I launch my business." Many people start new businesses based on their experience, but it's easy to keep putting it off because you need "more practice." At some point, you have to take the leap from "practicing" to "owning a business."

Five Questions Business Owners Should Answer Now

The recession has "bottomed out," former Federal Reserve Chairman Alan Greenspan recently stated. But he warned that the recovery will be "slow" and "trudging."

 

Although the comments of Greenspan and other economists are cautious, they are good news for struggling business owners who are waiting for a return to prosperity. With the economy showing some signs of recovery, now is the time to position your company to reap the benefits of improved conditions.

 

Here are five questions business owners and executives can answer to help assess their readiness to take advantage of upcoming opportunities and challenges.

Income Tax : One-Year Repeal Could Mean Tax Savings For You

For years, higher-income taxpayers have worried about their itemized deductions and personal exemption write-offs being phased out. This means that they didn't get the full benefit of the most popular itemized deductions such as mortgage interest, state and local taxes, charitable contributions, and miscellaneous deductions.

 

Thankfully, these "phase-out" rules have been getting phased out since 2006, as part of the "Bush tax cuts."

 

The good news: For 2010, the phase-out rules are gone. The bad news: It's only a one-year reprieve. The rules are scheduled to reappear in 2011 with sharper teeth as the Bush tax cuts expire.

No Estate Tax is a Good Thing...Right?

Generally speaking, the fact that we currently have no federal estate tax is a good thing. However, the unprecedented temporary repeal may cause problems for some estates.

Most advisors assumed the Senate would extend the 2009 estate tax exemption and rate structure through 2010. Little did we know, the healthcare reform battle would be at the forefront of our legislator's minds and the looming estate tax repeal would go unchanged. Here we are, roughly a month into 2010 and no word on if and how Congress will fix this mess. Will new legislation be passed during 2010? Will it be retroactive? How do we deal with basis step-up? We will save those debates for another time. For now, we want to focus on a simple, yet BIG issue that the current repeal may cause for many estates.

Retiring in a Weak Economy

It's one of the worst things that can happen to a retiree. Just as you are about to retire or right after you retire, the market substantially declines, drastically lowering your portfolio's value. How damaging can this be to your retirement?

One study looked at the probability of a retirement portfolio lasting 30 years, based on the portfolio's performance during the first five years of retirement. The study assumed that 4% of the portfolio balance was withdrawn in the first year, with withdrawals increasing annually by 3% for inflation. The portfolio was comprised of 55% stocks and 45% bonds. If the portfolio earned between 4% and 5% annually in the first five years of retirement, there was a 74% probability that the portfolio would last for 30 years. With a return of 0% to 1% during the first five years, the probability was reduced to 50% (Source: The Wall Street Journal, June 14, 2008).

The market declines of the past couple of years, combined with decreasing housing values, have substantially reduced retirement portfolios. If you are still working, you can work longer to help overcome these lower balances. But if you are already retired or about to retire, the choices aren't as easy. Faced with that situation, consider the following tips:

• Withdraw as little as possible from your investments. If your investments have declined substantially, reevaluate your withdrawals. Withdrawing the same amount from a substantially smaller portfolio means you'll deplete the balance much sooner. At a minimum, consider freezing your withdrawal amounts and not increasing them for inflation.
• Go back to work on at least a part-time basis. By going back to work, you'll be able to reduce your withdrawals from your retirement portfolio. Even modest earnings can help.
• Set aside a cash reserve. This reserve should contain assets not tied to the stock market, totaling two to four years of retirement expenses. With the reserve in place, you'll have money for day-to-day expenses and won't be forced to sell stock investments during market declines.
• Withdraw funds in a tax-efficient manner. In general, you should consider withdrawing taxable investments first, so your tax-deferred investments can continue growing. This may also help with income tax expenses. You already paid taxes on your taxable investments, while any withdrawals from tax-deferred investments will likely be fully taxable as ordinary income.

If you would like other useful tips on how to handle declines in your retirement portfolio, please contact us.

Generation Skipping Transfer Tax Is Gone Too (for Now) But the Gift Tax Lives On

As part of the one-year repeal of the federal estate tax, the generation skipping transfer tax (GSTT) was also repealed for 2010.

The GSST is a super-confiscatory extra tax that is added on top of the "regular" gift or estate tax bill when generation-skipping transfers in excess of the exemption amount are made.

Generation-skipping transfers are those made via gifts while alive or as part of bequests after death to individuals who are deemed to be two or more generations below the giver. For 2009, the GSTT exemption was a relatively generous $3.5 million, and the maximum tax rate was 45 percent. Next year, the GSTT is scheduled to come roaring back with an exemption of only $1 million, and the maximum tax rate is scheduled to go up to 55 percent.

Estate Tax Is Dead (For Now): What to Do?

It unexpectedly happened: Congress let the federal estate tax die for 2010. Lots of people are confused about what it all means. It's no wonder ... the current situation is a huge mess that creates uncertainty for those with large estates.

 

Here is a brief discussion of how the United States arrived at this strange destination along with some ideas to discuss with your estate planning professional.

 

Repeal for 2010 but the Story Is Not Over

 

Ever since the Economic Growth and Tax Relief Reconciliation Act of 2001 became law, the estate tax has been a two-party story:

Uncle Sam Continues Health Insurance Life Ring

Although some indicators point the economy recovering, other signs are not as encouraging.

 

For example, the U.S. economy lost 85,000 jobs in December of 2009, and the unemployment rate continues at 10 percent, according to statistics just released by the Labor Department.

 

Fortunately, the federal government has provided a last-minute reprieve for some unemployed taxpayers. In new legislation, Uncle Sam extended the COBRA assistance program for some unemployed people who want to continue health insurance with their former employers. Specifically, the law made these changes:

Important Tax Figures for 2010

The following table provides some important federal tax information for 2010, compared with 2009. Many of the dollar amounts are unchanged or have changed only slightly due to low inflation. Other amounts are changing due to legislation.