Planning For An Easy Tax Season...before the holiday rush


I don't know about you, but December has taken me by surprise again this year. And even while I get excited about the holiday parties and our traditional Christmas breakfast of strawberries and biscuits, I am also suddenly aware of those end-of-year deadlines. Unless you've been really diligent this fall, here are some simple tasks that will keep you from following up your holiday recovery with panic attacks:

  1. If you are a business owner, you need to think about your annual reports for the state, as well as taxes. Here in Massachusetts the reports are often due in the fall. If you missed the deadline, the penalty is small, but you will want to get those in before they get lost in the taxes. Here is your link to the MA state filing forms & instructions.
  2. Planning ahead can often save you on taxes. I know you've heard this before, but this is the moment to actually do something about it. Contact your financial planner or accountant now to see whether it makes sense for you to: sell some investments at a loss (to offset other income); sell some at a gain (if, for instance, you think your tax bracket will be higher for 2016 than it is for 2015, or you would rather pay this year); make some charitable donations or gifts to the family; make a big purchase for the business before December 1; set up a trust.
  3. Put a little more in your retirement account. Now that you've reached the end of the year, you may find that you can afford to put a little more money into your 401k, IRA or other active retirement plan. The IRS allows many retirement contributions to be made anytime up until you pay your taxes, BUT your plan may well have an earlier deadline. Make your contribution by December 31st to be sure.
  4. Set aside some cash if you've had any unexpected income this year. Most people count on the money deducted from their paychecks to cover the taxes that will be due on April 15th. But if you've received money from a side job, from shares in a business, from the sale of some investments, or if you just received a large gift or prize, you probably owe extra taxes. Plan now to keep some cash aside in your account to cover those. And, if this happens regularly, talk to your accountant about paying quarterly estimated taxes to avoid penalties.
  5. Get those receipts together. You probably won't get all of the paperwork you need to file your taxes until January or even February. This stuff includes everything from W2 statements to health insurance coverage certificates and bank or investment tax statements. But you can get your tax receipts in order before the holiday and be ready to turn the whole mess over to your accountant as soon as the paperwork comes in. You will be especially glad you did if you are the tax preparer for your household.

Last but not least, make sure you know who is going to prepare the taxes for you and how. If you are one of those brave do-it-yourself tax filers, go ahead and purchase the tax software now. It's ready and waiting for you.

If you hope to turn this problem over to a professional, keep in mind that these folks get harder and harder to find as April approaches. Ask for referrals to a good accountant in your  area (your financial planner always keeps a list) and make contact now.

When the early spring finally hits, you could be enjoying warm sun and daffodils instead of a shoebox of fading receipts and late night caffeine fixes.

Do I Need Life Insurance?


Something about the fall makes people start to wonder about life insurance. I can't explain this phenomenon, but I can give you a little primer on how life insurance works...and doesn't work. Let's start with this, though—a lot of people do not need life insurance. Are you one of them?

First, check to see if you fall into one of these categories:

1. You Are Someone's Financial Support.

The real purpose of life insurance is to fill in for the financial support that one person is providing for others if the provider dies. If someone (your children, your partner, your parents, etc...) is counting on you to provide for them, life insurance probably makes sense. How much the policy is worth and how long you want that coverage for will depend on the costs you are trying to cover.

2. You are a business owner.

Insurance companies provide "key person" life insurance policies to help cover the costs to the business of losing a key employee or owner. Those costs can range from hiring someone to fill the "key person's" place to paying off their family as shareholders, to paying the costs to shut down the business. Notice that unlike the category above, the beneficiary of this policy isn't a person—it's the business, itself. Sole proprietors are generally fine to use a standard personal life insurance policy, instead.

3. You are working with an attorney to avoid estate tax problems.

Trust & Estates attorneys often make use of insurance policies to move wealth to an heir while keeping down taxes. In most cases, this becomes an issue if your estate is worth more than your state and federal estate tax exemptions (an impressive $5.43 million for 2015 for the feds but $1,000,000 for my state of Massachusetts). But imagine you own a large family property or family business, both of which could easily top exemption amounts. Your attorney might talk to you about an insurance policy that allows your family to pay the estate taxes without selling up. As you might have guessed by now, if you are buying insurance for tax purposes start by talking with your attorney, rather than your insurance agent.

Don't fall into one of these three categories? Then you probably don't need life insurance. And that's good news, as it means you can start putting the money you might have spent on premiums into something you can enjoy while you are still kicking around. If, on the other hand, you do think you need life insurance, stay tuned for my upcoming post on understanding the kinds of life insurance out there and how they work.

Are You An Accredited Investor?


I considered calling this post "What The Heck Is An Accredited Investor?" But unless you are hanging out with stock brokers,  you probably don't even recognize the term. That's a problem, because the SEC's accredited investor rule often dictates what you are allowed to invest in and what sort of businesses can afford to ask you for an investment in the first place. The rule has kept our money flowing in certain directions since the aftermath of the Great Depression. And for the first time since then, we are seeing serious efforts made to change it. So what is it and why should it matter to you?

So, are you an accredited investor?

Accredited Investors are the holy grail of ambitious start-ups and private fund managers. If you fall in the Accredited Investor category, the SEC assumes that you can look after yourself (financially, anyway), so many of the careful protections they put in place to keep us all from being squirreled out of our money don't apply to the deals you can make. You would think, then, that you'd have to be very rich or very sophisticated to be an Accredited Investor. The fact is, though, that a lot of well-off but not necessarily "wealthy" people are starting to fall into this category. And it's hard to see where we get the idea that they are all that financially sophisticated.

There are two ways that someone usually qualifies as "accredited":  1. you have at least $1,000,000 in assets (not including your home), OR 2. you made at least $200,000 a year for the past two years and believe you will earn that much next year (the number is $300,000 if it's you and your spouse jointly).  (SEC Reg D, Rule 501).

That first category pulls in quite a few retirees whose pension funds grew over the decades or who inherited retirement funds or property from their own parents. Some of these folks are very sophisticated about money. Most of them probably are not. And while earning $200,000 a year is a great thing, that's not exactly rare or a sign of financial sophistication, either. Sophisticated or not, though, if you are an accredited investor, private businesses, start-ups, hedge funds and other sometimes murky investments are out there looking for you.

Does That Mean I Can Invest In the Next Tech Start-up?

Why, yes it does—maybe. Your Accredited Investor status matters because it means companies can ask you to invest even if they haven't gone through the paperwork and review process that the SEC usually requires in order to sell an investment to the general public.  This can be a very good thing. With SEC public investment filings costing hundreds of thousands of dollars, smaller but equally worthy companies often just can't afford to the process. Limiting themselves to accredited investors means that they still have to follow some basic laws related to what they tell you (and don't tell you), but they don't have to come up with the independent audits and elaborately detailed paperwork. Note, though, that this also means they don't have to make all of that information public for inspection. In other words, it's up to you to make sure you ask the right questions.

What Should I Ask?

You should always ask questions about any investment before handing over your money. But if you are thinking of investing in an unregistered investment as an accredited investor, it's up to you to avoid the Ponzi schemes and the half-baked business plans. You need to ask some extra questions:

1. Who is selling you this thing? Make sure you research the person or company selling you the investment. That might be the company you are investing in, but it might also be an advisor, a hedge fund manager or a broker. Every day the SEC brings charges against people selling fake investments or giving misleading information to investors. Not everyone is caught, but a lot of these names end up on publicly available databases. Start with FINRA's Broker Check site and the Investment Advisor Public Disclosure website to find out more about a broker or advisor;

2. How much will I be charged? A start-up probably won't charge you for giving them money, but a hedge fund definitely will. Be sure you understand any fees you are paying to buy the investment (keep in mind that there might be two layers of fees if there is a broker and a fund involved);

3. How long do I have to leave my money with you? Ask whether your money will be locked in for a period and under what conditions you could sell the investment to get out. Hedge funds almost always require you to leave your money in for a period of time to ensure the manager can follow her long-term strategy. If you invest in a start-up or private business, the only way out will be if someone wants to buy your stake—never a certain event!;

4. How will it make money? Be sure you understand the plan for making money. An investment fund should have a clear, understandable strategy for bringing in returns. A business should be able to show you reasonable (and readable!) estimates for when and how it will make a profit. Make sure you figure in the fees and liabilities to this calculation in case your broker/founder/fund manager doesn't;

5. What can go wrong? If someone tells you there is no risk to an investment, walk away immediately—no such investments exist. Make sure you understand all of the ways your investment could lose value so you can decide how comfortable you are with that risk;

If, after you've asked those questions, you still don't understand something, get an expert. Don't let company representatives, brokers or even your own advisor gloss over the important facts about what you are buying. If the expert in front of you can not make these things clear, or if you are worried that he or she has a conflict of interest, bring in another expert review the materials. Ask an accountant, attorney or financial advisor who is not involved in the deal review the particulars.

For more questions that every investor should ask, check out the SEC's online investor guide.