Stuckey & Associates CPA LLC

Once you've finished with your tax planning for the year, and your return is safely on its way to the IRS, you're at an excellent point for a quick financial check-up. Your tax return is handy, as a quick snapshot of your financial situation and the figures are recent and accurate. Take a few minutes to consider these questions:

1. Have you determined your short- and long-term financial goals?
Have you consistently reviewed and updated them for any changes?

2. Are you saving and investing sufficient sums to fund your short- and long-term goals?
By defining goals that are time and dollar specific, you can regularly assess if you are on track to reach them.

3. Are you making the best use of tax-deferred savings plans, such as IRAs, 401(k)s, and Keoghs?
Are you contributing the maximum you can? Did you make plan investment choices consistent with your investment time frame and risk tolerance? Alternatively, are you satisfied that you have worked out the most appropriate way to take withdrawals for both yourself and your designated beneficiaries, with a careful balancing of income tax and estate tax considerations?

4. If you are an employee, are you getting the optimum from your employee benefits?
Do you understand and use any flexible spending accounts that you may be eligible for? Have you developed a strategy for exercising your employer stock options and using any deferred compensation plans?

5. If you are concerned about paying for a child's education, are you saving and spending in the most appropriate ways?
Are you using tax-deferred savings, tax-favored loans, and tax credits? Are you striking an appropriate balance between saving in the child's name (either outright or in trusts) and saving in your own accounts?

6. Do you have an "emergency fund?"
Many experts recommend that you have the equivalent of three to six month's take-home pay in an account where you can get at it quickly. An emergency fund gives you cash to weather a squall or two without having to disturb your investment portfolio or sell off any other assets.

7. Have you checked the asset allocation of your portfolio lately?
Run-ups and downturns in the market can each disrupt the allocation of your investments, leaving you with more or less in any one asset class than you consider optimal. Should you be thinking about tax-free or taxable fixed income securities, based on your marginal tax rate and risk tolerance?

8. Do you have adequate insurance?
If you die unexpectedly do you have enough life insurance to protect your family? What about disability insurance if you or your spouse couldn't work for an extended period of time? Most people have auto insurance is required by law and most homeowners also are required to have adequate homeowner's insurance, but did you know that it's just as important to have insurance to protect the contents of your home even if you rent it?

9. Do you have all of the necessary legal documents in place?
Is your will up-to-date? How about your estate plan? Trusts for you and/or your spouse and other heirs? A living will or other health care directives? A durable power of attorney for managing your assets if you can't? Have you told family members or trusted friends where they can find these documents?

10. Is your credit under good control?
Is the interest rate on your mortgage the best you can do, or should you be applying for a lower rate? Should you be shopping for a credit card with a lower interest rate, or perhaps for a home equity loan?

11. Are you maximizing your cash flow through income tax strategies?
How are you funding charitable contributions -- with cash or securities? Do you prepay itemized deductions to accelerate the tax benefit?

12. If you own your own business, do you have a plan for smoothly passing on that business to family members or trusted employees?
Are you aware of and planning for any income and related estate taxes? Are you making optimum use of insurance to safeguard your transition plans?

13. Have there been significant changes in your family this year?
Births, deaths, graduations, engagements, and the beginning and ending of marriages can all have multifaceted effects on your financial plans. Consider their effect on your own situation. You may want to start a college fund for a new baby, or make a plan for investing assets you've inherited, or make provision for your daughter's wedding next summer. On the other hand, if you have recently divorced, you will want to review the beneficiary designations on your insurance policies and retirement plans.

Back To Top

If you're a savvy investor, you probably know that you must generally report as income any mutual fund distributions whether you reinvest them or exchange shares in one fund for shares of another. In other words, you must report and pay any capital gains tax owed.

But if real estate's your game, did you know that it's possible to defer capital gains by taking advantage of a tax break that allows you to swap investment property on a tax-deferred basis?

Named after Section 1031 of the tax code, a like-kind exchange generally applies to real estate and was designed for people who wanted to exchange properties of equal value. If you own land in Oregon and trade it for a shopping center in Rhode Island, as long as the values of the two properties are equal, nobody pays capital gains tax even if both properties may have appreciated since they were originally purchased.

Section 1031 transactions don't have to involve identical types of investment properties. You can swap an apartment building for a shopping center, or a piece of undeveloped, raw land for an office or building. You can even swap a second home that you rent out for a parking lot.

There's also no limit as to how many times you can use a Section 1031 exchange. It's entirely possible to roll over the gain from your investment swaps for many years and avoid paying capital gains tax until a property is finally sold. Keep in mind, however, that gain is deferred, but not forgiven, in a like-kind exchange and you must calculate and keep track of your basis in the new property you acquired in the exchange.

Section 1031 is not for personal use. For example, you can't use it for stocks, bonds, and other securities, or personal property (with limited exceptions such as artwork).

Properties of unequal value

Let's say you have a small piece of property, and you want to trade up for a bigger one by exchanging it with another party. You can make the transaction without having to pay capital gains tax on the difference between the smaller property's current market value and your lower original cost.

That's good for you, but the other property owner doesn't make out so well. Presumably, you will have to pay cash or assume a mortgage on the bigger property to make up the difference in value. This is referred to as "boot" in the tax trade, and your partner must pay capital gains tax on that part of the transaction.

To avoid that you could work through an intermediary who is often known as an escrow agent. Instead of a two-way deal involving a one-for-one swap, your transaction becomes a three-way deal.

Your replacement property may come from a third party through the escrow agent. Juggling numerous properties in various combinations, the escrow agent may arrange evenly valued swaps.

Under the right circumstances, you don't even need to do an equal exchange. You can sell a property at a profit, buy a more expensive one, and defer the tax indefinitely.

You sell a property and have the cash put into an escrow account. Then the escrow agent buys another property that you want. He or she gets the title to the deed and transfers the property to you.

Mortgage and other debt

When considering a Section 1031 exchange, it's important to take into account mortgage loans and other debt on the property you are planning to swap. Let's say you hold a $200,000 mortgage on your existing property but your "new" property only holds a mortgage of $150,000. Even if you're not receiving cash from the trade, your mortgage liability has decreased by $50,000. In the eyes of the IRS, this is classified as "boot" and you will still be liable for capital gains tax because it is still treated as "gain."

Advance planning required

A Section 1031 transaction takes advance planning. You must identify your replacement property within 45 days of selling your estate. Then you must close on that within 180 days. There is no grace period. If your closing gets delayed by a storm or by other unforeseen circumstances, and you cannot close in time, you're back to a taxable sale.

Find an escrow agent that specializes in these types of transactions and contact your accountant to set up the IRS form ahead of time. Some people just sell their property, take cash and put it in their bank account. They figure that all they have to do is find a new property within 45 days and close within 180 days. But that's not the case. As soon as "sellers" have cash in their hands or the paperwork isn't done right, they've lost their opportunity to use this provision of the code.

Personal residences and vacation homes

Section 1031 doesn't apply to personal residences, but the IRS lets you sell your principal residence tax-free as long as the gain is under $250,000 for individuals ($500,000 if you're married).

Section 1031 exchanges may be used for swapping vacation homes, but present a trickier situation. Here's an example of how this might work. Let's say you stop going to your condo at the ski resort and instead rent it out to a bona fide tenant for 12 months. In doing so, you've effectively converted the condo to an investment property, which you can then swap for another property under the Section 1031 exchange.

However, if you want to use your new property as a vacation home, there's a catch. You'll need to comply with a 2008 IRS safe harbor rule that states in each of the 12-month periods following the 1031 exchange you must rent the dwelling to someone for 14 days (or more) consecutively. In addition, you cannot use the dwelling more than the greater of 14 days or 10 percent of the number of days during the 12-month period that the dwelling unit is rented out for at fair rental price.

You must report a section 1031 exchange to the IRS on Form 8824, Like-Kind Exchanges and file it with your tax return for the year in which the exchange occurred. If you do not specifically follow the rules for like-kind exchanges, you may be held liable for taxes, penalties, and interest on your transactions.

While they may seem straightforward, like-kind exchanges can be complicated. There are all kinds of restrictions and pitfalls that you need to be careful of. If you're considering a Section 1031 exchange or have any questions, don't hesitate to call.

Back To Top

One of the most important questions you face when changing job is what to do with the money in your 401(k) because making the wrong move could cost you thousands of dollars or more in taxes and lower returns.

Let's say you put in five years at your current job. For most of those years, you've had the company take a set percentage of your pretax salary and put it into your 401(k) plan.

Now that you're leaving, what should you do? The first rule of thumb is to leave it alone. You have 60 days to decide whether to roll it over or leave it in the account. Resist the temptation to cash out. The worst thing an employee can do when leaving a job is to withdraw the money from their 401(k) plans and put it in his or her bank account. Here's why:

If you decide to have your distribution paid to you, the plan administrator will withhold 20 percent of your total for federal income taxes, so if you had $100,000 in your account and you wanted to cash it out, you're already down to $80,000.

Furthermore, if you're younger than 59 ½, you'll face a 10 percent penalty for early withdrawal come tax time. Now you're down another 10 percent from the top line to $70,000.

If you separate from service during or after the year you reach age 55 (age 50 for public safety employees of a state, or political subdivision of a state, in a governmental defined benefit plan) there is an exception to the 10 percent early withdrawal tax penalty. This applies to 401(k) plans only. IRA, SEP, SIMPLE IRA, and SARSEP Plans do not qualify for the exception.

In addition, because distributions are taxed as ordinary income, at the end of the year you'll have to pay the difference between your tax bracket and the 20 percent already taken out. For example, if you're in the 32 percent tax bracket, you'll still owe 12 percent, or $12,000. This lowers the amount of your cash distribution to $58,000.

But that's not all. You also might have to pay state and local taxes. Between taxes and penalties, you could end up with little over half of what you had saved up, short-changing your retirement savings significantly.

What are the Alternatives?

If your new job offers a retirement plan, then the easiest course of action is to roll your account into the new plan before the 60-day period ends. This is known as a "rollover" and is relatively painless to do. Contact The 401(k) plan administrator at your previous job should have all of the forms you need.

The best way to roll funds over from an old 401(k) plan to a new one is to use a direct transfer. With the direct transfer, you never receive a check and you avoid all of the taxes and penalties mentioned above and your savings will continue to grow tax-deferred until you retire.

One word of caution: Many employers require that you work a minimum period of time before you can participate in a 401(k). If that is the case, one solution is to keep your money in your former employer's 401(k) plan until the new one is available. Then you can roll it over into the new plan. Most plans let former employees leave their assets several months in the old plan.

60-Day Rollover Period

If you have your former employer make the distribution check out to you, the Internal Revenue Service considers this a cash distribution. The check you get will have 20 percent taken out automatically from your vested amount for federal income tax.

But don't panic. You have 60 days to roll over the lump sum (including the 20 percent) to your new employer's plan or into a rollover individual retirement account (IRA). Then you won't owe the additional taxes or the 10 percent early withdrawal penalty.

If you're not happy with the fund choices your new employer offers, you might opt for a rollover IRA instead of your company's plan. You can then choose from hundreds of funds and have more control over your money. But again, to avoid the withholding hassle, use direct rollovers.

Leave It Alone

If your vested account balance in your 401(k) is more than $5,000, you can usually leave it with your former employer's retirement plan. Your lump sum will keep growing tax-deferred until you retire.

However, if you can't leave the money in your former employer's 401(k) and your new job doesn't have a 401(k), your best bet is a direct rollover into an IRA. The same applies if you've decided to go into business for yourself.

Once you turn 59 ½, you can begin withdrawals from your IRA without penalty and your withdrawals are taxed as ordinary income. The IRS "Rule of 55" allows you to withdraw funds from your 401(k) or 403(b) without a penalty at age 55 or older.

With both a 401(k) and an IRA, you must begin taking required minimum distributions (RMDs) when you reach age 72, whether you're working or not.

Back To Top

When you place an order to buy or sell stock, you might not think about where or how your broker will execute the trade. But where and how your order is executed can impact the overall costs of the transaction, including the price you pay for the stock. Here's what you should know about trade execution.

Back To Top

Trade Execution Isn't Instantaneous

Many investors who trade through online brokerage accounts assume they have a direct connection to the securities markets. But they don't. When you press "enter," your order is sent over the Internet to your broker - who in turn decides which market to send it to for execution. A similar process occurs when you call your broker to place a trade.

While trade execution is usually seamless and quick, it does take time. And prices can change quickly, especially in fast-moving markets. Because price quotes are only for a specific number of shares, investors may not always receive the price they saw on their screen or the price their broker quoted over the phone. By the time your order reaches the market, the price of the stock could be slightly - or very - different.

No SEC regulations require a trade to be executed within a set period of time. But if firms advertise their speed of execution, they must not exaggerate or fail to tell investors about the possibility of significant delays.

To avoid buying or selling a stock at a price higher or lower than you wanted, place a limit order rather than a market order. A limit order is an order to buy or sell a security at a specific price. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. When you place a market order, you can't control the price at which your order will be filled.

You want to buy the stock of a "hot" IPO that was initially offered at $9, but don't want to end up paying more than $20 for the stock. Place a limit order to buy the stock at any price up to $20. By entering a limit order rather than a market order, you will not be caught buying the stock at $90 and then suffering immediate losses as the stock drops later in the day or the weeks ahead.

Your limit order may never be executed because the market price may quickly surpass your limit before your order can be filled. But by using a limit order you also protect yourself from buying the stock at too high a price.

Back To Top

Your Brokers' Choices for Executing Your Trade

Just as you have a choice of brokers, your broker generally has a choice of markets in which to execute your trade:

• For a stock listed on an exchange, such as the New York Stock Exchange (NYSE), your broker may direct the order to that exchange, to another exchange (such as a regional exchange), or to a firm called a "third market maker." A "third market maker" is a firm that stands ready to buy or sell a stock listed on an exchange at publicly quoted prices. As a way to attract orders from brokers, some regional exchanges or third market makers will pay your broker for routing your order to that exchange or market maker - perhaps a penny or more per share for your order. This is called "payment for order flow."

Upon the opening of a new account and on an annual basis, firms must inform customers in writing whether they receive payment for order flow and, if they do, a detailed description of the type of payments. Firms must also disclose on trade confirmations whether they receive payment for order flow and that customers can make a written request to find out the source and type of the payment as to that particular transaction.

• For a stock that trades in an over-the-counter (OTC) market, such as the NASDAQ, your broker may send the order to a "NASDAQ market maker" in the stock. Many NASDAQ market makers also pay brokers for order flow. Note: A "market maker" is a firm that stands ready to buy and sell a particular stock on a regular and continuous basis at a publicly quoted price. You'll most often hear about market makers in the context of the NASDAQ or other "over the counter" (OTC) markets. Market makers that stand ready to buy and sell stocks listed on an exchange, such as the New York Stock Exchange, are called "third market makers." Many OTC stocks have more than one market-maker.

Market-makers generally must be ready to buy and sell at least 100 shares of a stock they make a market in. As a result, a large order from an investor may have to be filled by a number of market-makers, perhaps at different prices.

• Your broker may route your order - especially a "limit order" - to an electronic communications network (ECN) that automatically matches buy and sell orders at specified prices. A "limit order" is an order to buy or sell a stock at a specific price.

• Your broker may decide to send your order to another division of your broker's firm to be filled out of the firm's own inventory. This is called "internalization." With this option, your broker's firm can make money on the "spread" - the difference between the purchase price and the sale price.

Back To Top

Your Broker Has a Duty of "Best Execution"

Many firms use automated systems to handle the orders they receive from their customers. In deciding how to execute orders, your broker has a duty to seek the best execution reasonably available for its customers' orders. That means your broker must evaluate the orders it receives from all customers in the aggregate and periodically assess which competing markets, market makers, or ECNs offer the most favorable terms of execution.

The opportunity for "price improvement" - which is the opportunity, but not the guarantee, for an order to be executed at a better price than what is currently quoted publicly - is an important factor a broker should consider in executing its customers' orders. Other factors include the speed and the likelihood of execution.

You enter a market order to sell 500 shares of a stock. The current quote is $20. Your broker may be able to send your order to a market or a market maker where your order would have the possibility of getting a price better than $20. If your order is executed at $20 1/16, you would receive $10,031.25 for the sale of your stock - $31.25 more than if your broker had only been able to get the current quote for you.

Of course, the additional time it takes some markets to execute orders may result in your getting a worse price than the current quote - especially in a fast-moving market. So your broker is required to take into account any trade-off between providing its customers' orders with the possibility of better prices and the extra time it may take to do so.

Back To Top

You Can Direct Your Trades

If for any reason you want to direct your trade to a particular exchange, market maker, or ECN, you may be able to call your broker and ask him or her to do this. But some brokers may charge for that service.

Some brokers now offer active traders the ability to direct orders in NASDAQ stocks to the market maker or ECN of their choice.

Back To Top

New Rules on Execution Practices

On November 15, 2000, the SEC adopted new rules aimed at improving public disclosure of order execution and routing practices. Beginning April 2001, all market centers that trade national market system securities must make monthly, electronic disclosures of basic information concerning their quality of executions on a stock-by-stock basis, including how market orders of various sizes are executed relative to the public quotes and information about effective spreads - the spreads actually paid by investors whose orders are routed to a particular market center. In addition, market centers will disclose the extent to which they provide executions at prices better than the public quotes to investors using limit orders.

The new rules also require brokers that route orders on behalf of customers to disclose quarterly the identity of the market centers to which they route a significant percentage of their orders. In addition, the rule mandates that brokers respond to the requests of customers interested in learning where their individual orders were routed for execution during the previous six months.

With this information now readily available, you can better learn where and how your firm executes its customers' orders and what steps it takes to assure the best execution.

Ask your broker about the firm's policies on payment for order flow, internalization, or other routing practices - or look for that information in your account agreement. You can also write to your broker to find out the nature and source of any payment for order flow it may have received for a particular order.

If you're comparing brokerage firms, ask each how often it obtains price improvement on customers' orders. And then consider that information in deciding with which firm you will do business.

Back To Top