Something very similar to the example in this article below by Robert Sommers happened to a woman I talked to last week. She bought her first investment property to fix up and sell at a profit. When she put it up for sale the market softened. She was carrying a $5500./mo loan and could only rent it for $2500./mo. By the time she lowered the price and paid realtor fees and was hit by the 3.3% Franchise tax, she owed over 16K at time of sale. She didn't have the money. I was unable to help. All this could have been avoided had she had the proper education before entering into the transaction.
Get the Capital Gains Tax Resource Now if you are in a situation that could come back to haunt you.
Be sure and read the highlighted parts.
THE TAX PROPHET: Hot Topics: April, 2004
New California Franchise Tax Board (FTB) Withholding Rules
Part 1 of a 2-part series
Introduction
Faced with unprecedented fiscal woes, the State of California is taking strong measures to ensure that those who receive income from property located within the state pay their taxes. California has instituted a wide-ranging withholding regime on income emanating from California sources and paid to non-California residents - regardless of whether the owner is an entity or individual. These new rules ensnare out-of-state landlords and property owners receiving non-residential rents and royalties on the use of their California property, and the compliance burden falls squarely on the backs of property managers.
New rules also apply to the sale of California real estate by resident individuals. A person living in California and owning a vacation or second home, commercial or investment property, should be prepared to pay 3 1/3% of the transaction value as a withholding tax when they close escrow on a sale. It is estimated that as many as 300,000 transactions will be affected by this new law.
Rents Paid to a Non-California Recipient
The New Income Withholding Rules
The California Franchise Tax Board (FTB) now requires that when making payments to non-California resident owners for rents paid in the course of lessee's business on California property, agents must withhold when distributions exceed $1,500 for a calendar year. This new procedure is required when distributions of California source income are made to nonresident beneficiaries. To avoid this rule, the withholding agent must receive authorization for a waiver or a reduced withholding rate from the Franchise Tax Board.
The withholding rate is 7% of gross rent or royalty payments made to California nonresidents. Although withholding agents are not required to notify nonresident payees about the withholding, agents should warn them anyway to avoid anger and surprise when funds are withheld from expected payments.
Types of income subject to withholding include payments of leases, rents and royalties for property (real or personal) located in California, and include not only payments to non-resident individuals, but also to corporations, limited liability companies, and partnerships that do not maintain a permanent location in the State. Withholding is required when all of the following conditions are met:
Payments on rents or leases must be made in the course of the lessee's business; (Tenants of residential property are not required to withhold on payments made to nonresident owners);
The rented or leased property must be located in California; and
The total payments in a calendar year must exceed $1,500.
Remember: Withholding only applies when the rent-payers are renting or leasing property from a non-California owner in the course of their business. Thus, payments by residential tenants are excluded. An agent who manages a purely residential building will have no withholding requirements with respect to rents received from that building, but an agent who manages properties containing one or more non-residential tenants must withhold on rents paid by those tenants. Therefore, the withholding obligation is determined on a building-by-building, unit-by-unit basis.
New Rules Regarding Withholding on Sales of Real Property
Effective January 1, 2003, individual taxpayers, regardless of residence, who sell California real property, including vacation homes (or any residence not considered their principal residence), business and investment real estate, may be subject to withholding. Buyers are now required to withhold 3 1/3% of the total sales price on any purchase of California real property over $100,000, regardless of the amount of actual profit, unless the property is -
A principal residence as defined in the Internal Revenue Code (IRC);
Involved in a tax-free exchange (although cash received in the exchange will be subject to withholding),
Subject to an IRC Section 1033 involuntary conversion, or
Involved in a foreclosure (but not a sale by the debtor in lieu of foreclosure).
To illustrate the reach of these withholding requirements, consider the sale of a vacation or rental property located in California for a total sales price of $650,000. The buyer must withhold $21,645.00 and pay that amount to the FTB immediately - even if the taxable gain is merely $1.00. To actually owe the $21,645.00 in state taxes, the seller would need a $232,742 profit (assuming a 9.3% tax bracket).
This disparity is akin to over-withholding on salary - a person is entitled to claim it as a refund, but they must wait until the following year to file their tax return. Unfortunately, if someone owes child support or taxes to IRS, California or another state, their refund may be used to offset those liabilities and they could receive nothing. Note: Oversized refunds could trigger federal Alternative Minimum Tax because state income and property taxes are not deductible under the AMT.
Because FTB retains the amount withheld until the taxpayer files for a refund in the subsequent year, those selling property at the beginning of the year will lose the time-value of the monies withheld for the entire year. In effect, the taxpayer is forced to make an interest-free loan to FTB for this period.
Also, transactions in which the seller receives little or no proceeds may fall through when the withholding tax is factored into the deal.
Example, assume that a taxpayer sells property for a total sale price of $300,000, with an adjusted basis of $100,000. The taxpayer will have a taxable gain of $200,000 upon sale (assuming no costs of sale). If the debt on the property is $300,000, then the taxpayer will walk away from the deal without payment. Under the new withholding rules, there needs to be an additional $10,000 paid to FTB ($300,000 gross proceeds x 3.33% = $10,000). This is true even if the taxpayer has sufficient losses from other transactions to offset the taxable gain on the transaction.
Note: Taxable gain is measured by the adjusted basis in property, not by the amount of debt owed - thus, sellers may receive no money from a transaction and still owe taxes.
As illustrated above, equity-thin sellers, when they discover that 3 1/3% of the sales price may be withheld, may attempt to back out of sales - possibly triggering lawsuits in the process. Other sellers may manipulate the sales process by re-titling property in the name of a single-member LLC, S Corporation or other entity that would be exempt from withholding.
Caution: Transferring the property to an entity to avoid withholding tax could trigger severe adverse federal and state income taxes, depending on the entity chosen and the property involved. For instance, transferring property to a C corporation could subject the gains to regular federal corporate tax rates, rather than favorable long-term capital gains rates. Also, efforts to deliberately defeat the withholding requirements through a sham transaction could subject the taxpayer to additional penalties, or worse.
All contents copyright © 1995-2004
Robert L. Sommers, attorney-at-law. All rights reserved. This internet site provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet® is a registered trademark of Robert L. Sommers.
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Paula Straub
Paula's Main Informational Site
Tuesday, August 22, 2006
Wednesday, August 16, 2006
If it sounds too good to be true, Change tax professionals
Let me pose a scenario and see if it sounds a bit too good to be true.
Sal makes 15K per year at his job. He owns a rental property he purchased for 100K five years ago and is selling today for 600K. Let's just say his capital gain including all improvements, depreciation, and after all costs of sale is 450K. (I'm keeping it simple for this example)
Sal goes to his local tax person, and this guy tells Sal that since he is in a low tax bracket (his income spans the 10-15% federal brackets) he will only owe 5% to the federal government in capital gains tax on his 450K gain. After all, capital gains are not considered ordinary earned income, and the 15% rate kicks in at the 25% and above Federal bracket.
[For illustration purposes, I am not even bringing state, city and certain withholding taxes or depreciation recapture into this example.]
The tax guy proceeds to tell Sal that he'd be crazy not to just sell and pay his taxes because the rates are currently so low that to defer them into the future- he will most likely be stuck in a higher tax bracket and pay much more in later years.
"Wow" says Sal, "That does sound like the best option. 5% is nothing really when all is said and done. Thanks, Mr. Tax Man, I think I will just sell and pay my taxes now."
That scenario does sound pretty good, right? You never thought Uncle Sam would be so generous. It is also a scenario I hear all the time as having been told to clients.
So, with that logic let's take it a step further. Let's just say I owned a million dollar building free and clear. I wanted to sell, but didn't want to pay 15% Federal Capital Gains Tax (150K). As a self-employed person I make 100K per year. If I stopped making income for a year, I'd be in the 0% tax bracket, so I'd only pay 5% Federal Taxes on that million dollar sale (50K). Effectively, I could take a year off, and still enjoy the 100K tax savings by doing so, and I wouldn't even have to pay income tax on that 100K! Yipee, I'm off to Tahiti!
OK, I'm trying to make a point here. Uncle Sam is not that generous or that gullible. This is not the way the capital gains tax calculation works, unfortunately. Sigh…
Let me show you how the federal calculation would go, reverting back to Sal's situation.
The first $7550.00 of Sal's income is taxed at 10%, the next $7450.00 is taxed at 15%. This makes up the 15K/year Sal earns as ordinary income.
Now his gain was 450K. The first $23,200.00 of that 450K gain is taxed at 5% capital gains rate. You see, although the gain is not ordinary income, it is considered towards Sal's gross income and sets his tax brackets. At $30,651.00 and above, Sal now enters into the 25% and above Federal Tax Bracket. So, the rest of the 450K gain ($426,800) is now taxed at the maximum long term capital gains rate of 15%.
So, instead of owing $22,500.00 (450K x 5%) to the feds, Sal will owe $65,180.00 to the feds ($23,200 x 5% plus $426,800 x 15%).
That's a difference of $42,680.00 and a heck of a shock if you weren't expecting it after you sell your property!
Don't get me wrong. There are a lot of good, qualified, capable professionals out there who do understand how capital gains tax is calculated. But I'm willing to bet for each one, there are another 3 who do not understand or simply misunderstand. They don't come across enough of the above type situations and give bad advice and counsel.
It comes back to the analogy that when you need brain surgery you don't go to a general practitioner to perform it. Find an experienced professional who handles this type of calculation on a regular basis. Get all of the facts before you make any decisions.
And, don't despair. The Capital Gains Tax strategies you do have available are still very powerful and are sanctioned by the IRS. They won't give away the farm, but they will help you plant crops for your future!
Remember, if it sounds too good to be true…that's right - it probably is.
Paula Straub
Sal makes 15K per year at his job. He owns a rental property he purchased for 100K five years ago and is selling today for 600K. Let's just say his capital gain including all improvements, depreciation, and after all costs of sale is 450K. (I'm keeping it simple for this example)
Sal goes to his local tax person, and this guy tells Sal that since he is in a low tax bracket (his income spans the 10-15% federal brackets) he will only owe 5% to the federal government in capital gains tax on his 450K gain. After all, capital gains are not considered ordinary earned income, and the 15% rate kicks in at the 25% and above Federal bracket.
[For illustration purposes, I am not even bringing state, city and certain withholding taxes or depreciation recapture into this example.]
The tax guy proceeds to tell Sal that he'd be crazy not to just sell and pay his taxes because the rates are currently so low that to defer them into the future- he will most likely be stuck in a higher tax bracket and pay much more in later years.
"Wow" says Sal, "That does sound like the best option. 5% is nothing really when all is said and done. Thanks, Mr. Tax Man, I think I will just sell and pay my taxes now."
That scenario does sound pretty good, right? You never thought Uncle Sam would be so generous. It is also a scenario I hear all the time as having been told to clients.
So, with that logic let's take it a step further. Let's just say I owned a million dollar building free and clear. I wanted to sell, but didn't want to pay 15% Federal Capital Gains Tax (150K). As a self-employed person I make 100K per year. If I stopped making income for a year, I'd be in the 0% tax bracket, so I'd only pay 5% Federal Taxes on that million dollar sale (50K). Effectively, I could take a year off, and still enjoy the 100K tax savings by doing so, and I wouldn't even have to pay income tax on that 100K! Yipee, I'm off to Tahiti!
OK, I'm trying to make a point here. Uncle Sam is not that generous or that gullible. This is not the way the capital gains tax calculation works, unfortunately. Sigh…
Let me show you how the federal calculation would go, reverting back to Sal's situation.
The first $7550.00 of Sal's income is taxed at 10%, the next $7450.00 is taxed at 15%. This makes up the 15K/year Sal earns as ordinary income.
Now his gain was 450K. The first $23,200.00 of that 450K gain is taxed at 5% capital gains rate. You see, although the gain is not ordinary income, it is considered towards Sal's gross income and sets his tax brackets. At $30,651.00 and above, Sal now enters into the 25% and above Federal Tax Bracket. So, the rest of the 450K gain ($426,800) is now taxed at the maximum long term capital gains rate of 15%.
So, instead of owing $22,500.00 (450K x 5%) to the feds, Sal will owe $65,180.00 to the feds ($23,200 x 5% plus $426,800 x 15%).
That's a difference of $42,680.00 and a heck of a shock if you weren't expecting it after you sell your property!
Don't get me wrong. There are a lot of good, qualified, capable professionals out there who do understand how capital gains tax is calculated. But I'm willing to bet for each one, there are another 3 who do not understand or simply misunderstand. They don't come across enough of the above type situations and give bad advice and counsel.
It comes back to the analogy that when you need brain surgery you don't go to a general practitioner to perform it. Find an experienced professional who handles this type of calculation on a regular basis. Get all of the facts before you make any decisions.
And, don't despair. The Capital Gains Tax strategies you do have available are still very powerful and are sanctioned by the IRS. They won't give away the farm, but they will help you plant crops for your future!
Remember, if it sounds too good to be true…that's right - it probably is.
Paula Straub
Monday, August 07, 2006
Successful Woman, Successful Business Sale
One of my girlfriends is selling her auto mechanic shops. Yeah, a woman who owns more than one car repair shop. She has about three, locally, and is getting rid of them all. On the one hand, it's kind of sad to see a woman-owned business drop out of a male-dominated field - especially one that's so successful. On the other hand, I'm happy for her because she'll make a bundle. I've given her a few planning tips to avoid having to pay all of the capital gains tax on the sale, and I'm sure other business owners could benefit.
First, consider her situation. My friend is young, in her mid-forties. Also, she is divorced with two kids - one in her second year of college, one who will graduate from high school next year. She probably won't retire and do nothing, but I think the chances of her ever punching a clock again are slim to none. So, long story short, she'll need a good, steady stream of income for a long time.
The answer to this question lies in how the sale is structured. One option a person could have in this type of situation is to carry back the financing of the sale. This means that the buyer of my friend's business would make payments directly to her. I don't think this is a good idea, and fortunately, neither does she. Basically, it means she gets out of the auto repair business and into the debt servicing business. Like I said, I don't think she's going to retire, but I don't think she wants to spend her days chasing checks. Besides, the point of having and then selling the business is to secure her future, not to sit around wondering if she's ever going to recover the value of her business.
To minimize headaches and maximize her income stream, she needs a large sum of money that she can put to work for her. My friend will get this large sum of money, as most people do, through third party financing. Some bank will pay her the purchase price, and the buyer will pay the bank principal and interest over time. If she gets a corporate buyer, they may be able to skip the financing altogether.
Of course, just getting a bank to hand you a lump of cash isn't structuring. Besides, she would immediately owe a ton of money in taxes - money that would be gone forever. There's more to be done, mostly, I think, setting up a private annuity trust and selling the business through it. It's a really good option for her, and most successful business owners, for three reasons: 1) it allows her to defer all of the capital gains tax until she begins taking payments from the trust, and, even then, the tax burden is spread out over the course of those payments; 2) she can get the proceeds out of her estate, so that it passes to her kids estate, gift, and generation skipping tax free (they will pay income tax), and it passes to them in trust, if she wants it that way; and 3) she gets a stream of income to support her and her kids for the rest of her life or over however many years she chooses to receive it.
It works like this. She sets up the trust and then places the business in it. The trust sells the business, and then invests the proceeds in whatever other investments are appropriate. The trust then makes periodic payments to my friend out of the principle and income of the investments. There is no tax on the sale to the trust because the trust has technically purchased the business at fair market value (that's why it's making payments). The transfer of the business to the trust isn't taxable, but part of the payments she receives from the trust will be taxable as capital gains, income, and recapture of depreciation. Of course, part of the payment will be non-taxable return of capital.
She can only get these benefits if the trust has certain provisions in it. The trustee of the trust must be independent of her, meaning she can choose whoever serves, but that person is not beholden to her. She cannot have any control over the assets in the trust or how they are invested (though she can give a little informal advice from time to time), and the annuity itself cannot be secured in any way.
I'm sure the sale of my friend's business has more capital gains lessons to reveal. I'll follow the sale and let you know if there's anything interesting you should know.
Paula Straub See my Brand New Site
760-917-0858
First, consider her situation. My friend is young, in her mid-forties. Also, she is divorced with two kids - one in her second year of college, one who will graduate from high school next year. She probably won't retire and do nothing, but I think the chances of her ever punching a clock again are slim to none. So, long story short, she'll need a good, steady stream of income for a long time.
The answer to this question lies in how the sale is structured. One option a person could have in this type of situation is to carry back the financing of the sale. This means that the buyer of my friend's business would make payments directly to her. I don't think this is a good idea, and fortunately, neither does she. Basically, it means she gets out of the auto repair business and into the debt servicing business. Like I said, I don't think she's going to retire, but I don't think she wants to spend her days chasing checks. Besides, the point of having and then selling the business is to secure her future, not to sit around wondering if she's ever going to recover the value of her business.
To minimize headaches and maximize her income stream, she needs a large sum of money that she can put to work for her. My friend will get this large sum of money, as most people do, through third party financing. Some bank will pay her the purchase price, and the buyer will pay the bank principal and interest over time. If she gets a corporate buyer, they may be able to skip the financing altogether.
Of course, just getting a bank to hand you a lump of cash isn't structuring. Besides, she would immediately owe a ton of money in taxes - money that would be gone forever. There's more to be done, mostly, I think, setting up a private annuity trust and selling the business through it. It's a really good option for her, and most successful business owners, for three reasons: 1) it allows her to defer all of the capital gains tax until she begins taking payments from the trust, and, even then, the tax burden is spread out over the course of those payments; 2) she can get the proceeds out of her estate, so that it passes to her kids estate, gift, and generation skipping tax free (they will pay income tax), and it passes to them in trust, if she wants it that way; and 3) she gets a stream of income to support her and her kids for the rest of her life or over however many years she chooses to receive it.
It works like this. She sets up the trust and then places the business in it. The trust sells the business, and then invests the proceeds in whatever other investments are appropriate. The trust then makes periodic payments to my friend out of the principle and income of the investments. There is no tax on the sale to the trust because the trust has technically purchased the business at fair market value (that's why it's making payments). The transfer of the business to the trust isn't taxable, but part of the payments she receives from the trust will be taxable as capital gains, income, and recapture of depreciation. Of course, part of the payment will be non-taxable return of capital.
She can only get these benefits if the trust has certain provisions in it. The trustee of the trust must be independent of her, meaning she can choose whoever serves, but that person is not beholden to her. She cannot have any control over the assets in the trust or how they are invested (though she can give a little informal advice from time to time), and the annuity itself cannot be secured in any way.
I'm sure the sale of my friend's business has more capital gains lessons to reveal. I'll follow the sale and let you know if there's anything interesting you should know.
Paula Straub See my Brand New Site
760-917-0858
Monday, July 31, 2006
Beware of some CPA and Attorney Recommendations
I am a great believer in working closely with competent CPA's and Attorneys. As a matter of fact, many times it is an absolute necessity. To complete a good Capital Gains Tax Saving Strategy, the Financial Advisor, CPA and Attorney should all be in harmony so that you hang onto as much of your money as possible.
That said, an incompetent or unknowledgeable professional can really cause you great financial harm. Just because someone passed their CPA exam or Bar exam at one point does not make them capable of knowing everything about capital gains. A good professional will either admit to their lack of knowledge, or take the initiative to do the proper research to bone up on the subject. You may have to pay for their research time, however, as most do nothing for free.
Case in point. I have a client in the mid-west. She has been having great difficulty finding a good tax professional in her area (fairly rural). She needs a good professional, as we are considering doing partial 1031 exchanges with her property. The first person she called told her she had no options but to pay taxes on sale.
I set out to find her someone that knew what they are doing. I contacted a "find a good CPA" type of site and told them what I was looking for. They gave me a name and I called them. The fellow seemed to be on the same page, so I had him contact my client.
I then got an email from my client. Someone from his office had contacted her. She told my client she was knowledgeable and preceded to give my client blatant incorrect tax advice without knowing what she was doing or taking a complete financial workup.
I called the CPA I talked to and relayed what the "assistant" said. He promised to contact my client and straighten out the misunderstanding. Then, much to my dismay, he contacted the client and gave more wrong information!
I am not a CPA or licensed tax professional. I can go to the IRS website to verify information I am forwarding, however. I preceded to find the correct information and email it in writing to both my client and the "tax professional".
Needless to say, my client will not be using this particular CPA. What a complete waste of precious time and energy, however. This is exactly what I was trying to avoid in the first place.
I have had very similar experiences with attorneys. They may be great at some things they do on a regular basis. However, many will not do their research on something they are not familiar with before dismissing it out of hand. This is a disservice and can cost you a huge sum of your proceeds.
The moral of this story is: make sure you are consulting with experienced and knowledgeable professionals for this special capital gains niche market. I have found that if all parties are on a conference call, the correct information can be discussed, and if there are conflicting opinions, everyone involved can produce the correct information from a qualified source and disburse it to all parties.
A professional team is crucial when implementing a capital gains tax strategy. Don't take the advice of someone who dismisses something out of hand without giving specific reasons to both you and the party recommending the strategy.
If you need brain surgery, you wouldn't go to a general practitioner would you?
ps. My brand new website I've been talking about went live today. Please check it out and let me know what you think.
Paula's new site
Paula Straub
http://www.Paula-Straub-Capital-Gains-Tax-Site.com
That said, an incompetent or unknowledgeable professional can really cause you great financial harm. Just because someone passed their CPA exam or Bar exam at one point does not make them capable of knowing everything about capital gains. A good professional will either admit to their lack of knowledge, or take the initiative to do the proper research to bone up on the subject. You may have to pay for their research time, however, as most do nothing for free.
Case in point. I have a client in the mid-west. She has been having great difficulty finding a good tax professional in her area (fairly rural). She needs a good professional, as we are considering doing partial 1031 exchanges with her property. The first person she called told her she had no options but to pay taxes on sale.
I set out to find her someone that knew what they are doing. I contacted a "find a good CPA" type of site and told them what I was looking for. They gave me a name and I called them. The fellow seemed to be on the same page, so I had him contact my client.
I then got an email from my client. Someone from his office had contacted her. She told my client she was knowledgeable and preceded to give my client blatant incorrect tax advice without knowing what she was doing or taking a complete financial workup.
I called the CPA I talked to and relayed what the "assistant" said. He promised to contact my client and straighten out the misunderstanding. Then, much to my dismay, he contacted the client and gave more wrong information!
I am not a CPA or licensed tax professional. I can go to the IRS website to verify information I am forwarding, however. I preceded to find the correct information and email it in writing to both my client and the "tax professional".
Needless to say, my client will not be using this particular CPA. What a complete waste of precious time and energy, however. This is exactly what I was trying to avoid in the first place.
I have had very similar experiences with attorneys. They may be great at some things they do on a regular basis. However, many will not do their research on something they are not familiar with before dismissing it out of hand. This is a disservice and can cost you a huge sum of your proceeds.
The moral of this story is: make sure you are consulting with experienced and knowledgeable professionals for this special capital gains niche market. I have found that if all parties are on a conference call, the correct information can be discussed, and if there are conflicting opinions, everyone involved can produce the correct information from a qualified source and disburse it to all parties.
A professional team is crucial when implementing a capital gains tax strategy. Don't take the advice of someone who dismisses something out of hand without giving specific reasons to both you and the party recommending the strategy.
If you need brain surgery, you wouldn't go to a general practitioner would you?
ps. My brand new website I've been talking about went live today. Please check it out and let me know what you think.
Paula's new site
Paula Straub
http://www.Paula-Straub-Capital-Gains-Tax-Site.com
Tuesday, July 25, 2006
Planning for Our Futures
Whether it's Capital Gains Tax planning, or just plain financial planning, the bottom line is just to start. Below is a good article from the news. The moral of the story is Just Do It!
Got a plan for your retirement?: NML speaker says it's more crucial now
Milwaukee Journal Sentinel, The (KRT) via NewsEdge Corporation :
Jul. 24--About 76 million baby boomers are headed toward retirement over the next three decades, and many of them are simply drifting there without a plan, says Lee Eisenberg.
"It's human nature that people don't like to think about getting old," said Eisenberg, a former Lands' End executive who wrote a bestselling book about retirement, "The Number." "When you're in your 30s or 40s, or even your 50s, you do everything in your power very frequently to deny the inevitable, which is that you are going to get old, and that there may not be too many institutions or people out there to take care of you."
But people need to take a look -- the sooner the better -- not only at how big of a nest egg they'd like to have, but also at what kind of retirement they envision, said Eisenberg, who will speak Wednesday to thousands of Northwestern Mutual Life Insurance Co. agents in Milwaukee for their annual meeting.
There has been a transition during baby boomers' lives that Eisenberg calls "the new rest of your life" instead of the old way of viewing retirement.
"Basically, it has to do with going from a former system in which there were very stable, really predictable support systems in place -- namely corporate pensions and an unquestionably secure Social Security system -- to the new rest of your life where each of us basically is responsible for ourselves," he said during an interview from his Chicago home.
Eisenberg said that when 401(k) retirement plans came into existence in the early 1980s, "a lot of people didn't see the handwriting on the wall" that their employers and the government weren't going to take care of them when their careers ended.
"When it was introduced, there was no big press release that said, 'Guess what? All the retirement funding rules are now dramatically going to change and you better somehow get on the boat and make sure that you are doing what you can individually to take care of your future,' " Eisenberg said.
At the same time, boomers have been coasting through an unprecedented period of low inflation, and easy credit has made them splendid consumers but not-so-good savers, he said.
"As a result, a great many people now are finding themselves unprepared," said Eisenberg, an editor at Esquire and Time magazines before joining Lands' End in Dodgeville as an executive for creative efforts from 1999 to 2004.
His book "The Number" examines the process of planning for retirement -- not just financially but emotionally. The title, in its narrowest definition, refers to how much money a person needs to feel financially secure in the later stages of life.
It's impossible to come up with a figure without envisioning what kind of a retirement a person plans to have, he said.
For example, people may choose to keep working past age 65 because they want to. They might do a new kind of work -- something they've always wanted to do.
They might scale back their lifestyle, which, of course, will require less income. On the other hand, some may want to maintain the same standard of living they had in their peak earning years, which will require that more be put away.
" 'The number' is not just how much, but 'the number' also really has to address what for," Eisenberg said.
He said people need to ask themselves what will really matter to them in retirement once their basic needs are met.
"That examined life may well be a lot less costly than a life in which you just assume, 'Well, you know, I know I'll still need two SUVs and it would be nice to have a condo in a warm place,' " Eisenberg said.
Beyond human nature, several problems hinder adequate retirement planning for many Americans, he said.
One is that students often aren't taught from an early age the fundamentals about money, including the "magic of time and compounding interest" and the danger of putting too much money in one investment. As a result, the workings of money and investing remain a mystery.
Another problem is that professionals with great know-how about money usually aren't very interested in helping average-income people because they can't make enough money off them. Planning professionals normally cater to those who already have a bundle, he said.
"There is no question that a great many people who need financial planning the most are people who either can't afford it or can't figure out a way to get it, and we're going to have to figure out a way to do that as a society," he said.
Eisenberg said financial services companies tell him a lot of people don't start asking questions about retirement planning until they're in their 50s. While that's far from ideal, it's better to get serious about saving later than never, he said.
Many people in their 20s aren't counting on Social Security when they retire, which may inspire them to get a better jump on retirement planning than their mothers and fathers did, Eisenberg said.
"I think they will begin to take much more seriously the need to sign up for the 401(k) and begin to realize that over the long term, that can make an enormous difference," Eisenberg said.
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Paula Straub
SaveGainsTax
Paula's Site
Got a plan for your retirement?: NML speaker says it's more crucial now
Milwaukee Journal Sentinel, The (KRT) via NewsEdge Corporation :
Jul. 24--About 76 million baby boomers are headed toward retirement over the next three decades, and many of them are simply drifting there without a plan, says Lee Eisenberg.
"It's human nature that people don't like to think about getting old," said Eisenberg, a former Lands' End executive who wrote a bestselling book about retirement, "The Number." "When you're in your 30s or 40s, or even your 50s, you do everything in your power very frequently to deny the inevitable, which is that you are going to get old, and that there may not be too many institutions or people out there to take care of you."
But people need to take a look -- the sooner the better -- not only at how big of a nest egg they'd like to have, but also at what kind of retirement they envision, said Eisenberg, who will speak Wednesday to thousands of Northwestern Mutual Life Insurance Co. agents in Milwaukee for their annual meeting.
There has been a transition during baby boomers' lives that Eisenberg calls "the new rest of your life" instead of the old way of viewing retirement.
"Basically, it has to do with going from a former system in which there were very stable, really predictable support systems in place -- namely corporate pensions and an unquestionably secure Social Security system -- to the new rest of your life where each of us basically is responsible for ourselves," he said during an interview from his Chicago home.
Eisenberg said that when 401(k) retirement plans came into existence in the early 1980s, "a lot of people didn't see the handwriting on the wall" that their employers and the government weren't going to take care of them when their careers ended.
"When it was introduced, there was no big press release that said, 'Guess what? All the retirement funding rules are now dramatically going to change and you better somehow get on the boat and make sure that you are doing what you can individually to take care of your future,' " Eisenberg said.
At the same time, boomers have been coasting through an unprecedented period of low inflation, and easy credit has made them splendid consumers but not-so-good savers, he said.
"As a result, a great many people now are finding themselves unprepared," said Eisenberg, an editor at Esquire and Time magazines before joining Lands' End in Dodgeville as an executive for creative efforts from 1999 to 2004.
His book "The Number" examines the process of planning for retirement -- not just financially but emotionally. The title, in its narrowest definition, refers to how much money a person needs to feel financially secure in the later stages of life.
It's impossible to come up with a figure without envisioning what kind of a retirement a person plans to have, he said.
For example, people may choose to keep working past age 65 because they want to. They might do a new kind of work -- something they've always wanted to do.
They might scale back their lifestyle, which, of course, will require less income. On the other hand, some may want to maintain the same standard of living they had in their peak earning years, which will require that more be put away.
" 'The number' is not just how much, but 'the number' also really has to address what for," Eisenberg said.
He said people need to ask themselves what will really matter to them in retirement once their basic needs are met.
"That examined life may well be a lot less costly than a life in which you just assume, 'Well, you know, I know I'll still need two SUVs and it would be nice to have a condo in a warm place,' " Eisenberg said.
Beyond human nature, several problems hinder adequate retirement planning for many Americans, he said.
One is that students often aren't taught from an early age the fundamentals about money, including the "magic of time and compounding interest" and the danger of putting too much money in one investment. As a result, the workings of money and investing remain a mystery.
Another problem is that professionals with great know-how about money usually aren't very interested in helping average-income people because they can't make enough money off them. Planning professionals normally cater to those who already have a bundle, he said.
"There is no question that a great many people who need financial planning the most are people who either can't afford it or can't figure out a way to get it, and we're going to have to figure out a way to do that as a society," he said.
Eisenberg said financial services companies tell him a lot of people don't start asking questions about retirement planning until they're in their 50s. While that's far from ideal, it's better to get serious about saving later than never, he said.
Many people in their 20s aren't counting on Social Security when they retire, which may inspire them to get a better jump on retirement planning than their mothers and fathers did, Eisenberg said.
"I think they will begin to take much more seriously the need to sign up for the 401(k) and begin to realize that over the long term, that can make an enormous difference," Eisenberg said.
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Paula Straub
SaveGainsTax
Paula's Site
Monday, July 24, 2006
The Alternative Minimum Tax - Gotcha!
Few people and many professionals really know much about the dreaded Alternative Minimum Tax, how it's calculated, and when it might really bite you.
I read an article today that had some good examples. It's amazing that something with such good intentions in 1969 is catching so many undeserving individuals today and no one is willing to permanently get rid of it or to bring it up to date for whom it is meant to catch.
Bloomberg.com: Worldwide
For anyone selling highly appreciated assets, you should visit your CPA and have them do a calculation to see if this will affect you if you chose to sell and "just pay taxes".
Proper planning is always the key!
ps. Really hoping to debut my two new websites by Aug 1st. Stay tuned.
Paula Straub
SaveGainsTax
Capital Gains Tax Resource - Interview with the Pros
I read an article today that had some good examples. It's amazing that something with such good intentions in 1969 is catching so many undeserving individuals today and no one is willing to permanently get rid of it or to bring it up to date for whom it is meant to catch.
Bloomberg.com: Worldwide
For anyone selling highly appreciated assets, you should visit your CPA and have them do a calculation to see if this will affect you if you chose to sell and "just pay taxes".
Proper planning is always the key!
ps. Really hoping to debut my two new websites by Aug 1st. Stay tuned.
Paula Straub
SaveGainsTax
Capital Gains Tax Resource - Interview with the Pros
Thursday, July 20, 2006
Contract Exchanges, What are they?
Tax strategies are always evolving. I enjoy keeping up with all the latest methods to help clients save money and taxes. This week I thought I'd pass along a great article by a colleague I respect. Enjoy!
Contract Exchanges: A Money-Saving Shortcut for a Turbulent Market
By Stephen A. Wayner, Esq., CES
Contract exchanges have recently become a hot topic among tax professionals, because many investors desire to cash in on the built in gains from the real estate market. Now, sensing possible dwindling future returns over the paper appreciation already earned, real estate investors want to lock in the gains from their hot investments such as condominium development contracts, and move into less high-flying, high-risk real estate holdings.
A “Contract Exchange” is the tax-deferred exchange of:-The Buyer’s ownership in a Sales Contract on real property, for different real property, or for a contract or option on different real property; or -The Option Holder’s exchange of an Option to purchase real property, for different real property, or for an option or contract on different real property. Essentially, a contract exchange is an exchange of an open option to purchase, or an open Sales Contract, rather than an exchange of the underlying real estate itself.
For the rest of the article, click the link below.
1031 Exchange News
ps. My new and improved sites are almost complete. I hope to be launching them with my next post.
Paula Straub
SaveGainsTax
askpaula@savegainstax.com
Contract Exchanges: A Money-Saving Shortcut for a Turbulent Market
By Stephen A. Wayner, Esq., CES
Contract exchanges have recently become a hot topic among tax professionals, because many investors desire to cash in on the built in gains from the real estate market. Now, sensing possible dwindling future returns over the paper appreciation already earned, real estate investors want to lock in the gains from their hot investments such as condominium development contracts, and move into less high-flying, high-risk real estate holdings.
A “Contract Exchange” is the tax-deferred exchange of:-The Buyer’s ownership in a Sales Contract on real property, for different real property, or for a contract or option on different real property; or -The Option Holder’s exchange of an Option to purchase real property, for different real property, or for an option or contract on different real property. Essentially, a contract exchange is an exchange of an open option to purchase, or an open Sales Contract, rather than an exchange of the underlying real estate itself.
For the rest of the article, click the link below.
1031 Exchange News
ps. My new and improved sites are almost complete. I hope to be launching them with my next post.
Paula Straub
SaveGainsTax
askpaula@savegainstax.com
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