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News & Market Summary
Investment Portfolio - Diversification
Concept:
Illustrating the importance of diversification
one can compare it to a large windowpane. Suppose you had a giant picture window in your living room. Sure, it’s big and it’s beautiful, but what happens if it breaks? This huge window, your only window, would be very expensive to repair. You’d probably be wishing you’d had one large window, with several
smaller panes, that way, if one pane broke, it would be significantly easier
and far less costly to fix. The same is true for your Investment Portfolio.
Diversification
helps to reduce overall risk in the
good & bad times, and makes it much easier
- financially & emotionally - to recover from setbacks, particularly in bad
times! When diversification is coupled with multiple different asset
classes (stocks, bonds, international instruments, commodities, etc.), the
potential beneficial effects of "asset diversification" can be more fully
realized.
ASSET ALLOCATION DISCLAIMER:
INVESTORS NEED TO BE AWARE THAT NO INVESTMENT PLAN/ASSET ALLOCATION CAN
ELIMINATE THE RISK OF FLUCTUATING PRICES AND UNCERTAIN RETURNS.
Timely Financial Tips Section:
Tips for Reducing Next Year’s Tax Bill (2007-2008)
Current
Tip:
What can you do now to reduce what you will owe in taxes next year? Here are two tips:
1. Keep all receipts and records that will help identify the credits and deductions to which you might be entitled:
* Business expenses,
* Charitable contributions,
* Child care,
* College expenses,
* Alimony,
* Deductible taxes, and
* Medical expenses.
2. Make the maximum contribution to any qualified retirement plan that
you participate in—whether 401(k) plan, IRA or other qualified retirement vehicle. Contributions that are deductible (to self-employed retirement plans and some IRAs) and pre-tax contributions to 401(k)s and other qualified plans, will cut your taxes this year.
Allowable after-tax contributions, though not deductible or excludable this year, earn income that will be tax-deferred until withdrawn.
Prior
Tip:
When S Corporation Owners Go Too Far In Saving Payroll Tax
Some owner-employees of S Corporations believe they have a way to beat the payroll tax. Their idea is to
pay themselves little or nothing as salary. The S Corporation’s profit—higher since not reduced by their
salary—is taxable to them (as of course salary would be). But there’s only an income tax, with no employment
tax due from them or their S Corporation on pay not taken...or so they believe.
The IRS will attack this scheme, which it can often detect just by looking at the S Corporation’s return. One tip-off
is a low or zero number for "Compensation of Officers." Another is the entry for "Loans to
Shareholders""—since funds owner-employees withdraw to live on are sometimes called "loans."
IRS typically then says that the amount owner-employees withdraw (as profits or loans), or the amounts on the
books as S Corporation profits, are salary subject to employment tax (as well as income
tax), and penalties
may be added, for negligence or failure to collect and pay over employment tax.
Such a fate befell a lawyer in a recent case, who had borrowed from his S Corporation law firm instead of
drawing a salary. The IRS and the courts said the loans were wages subject to employment tax, and slapped on a
tax penalty for failure to collect and pay over employment tax.
The
IRS went a bit easier on an S Corporation owner-employee in another recent case. This time it looked at
statistics on pay in comparable businesses in the area and used an amount so determined as the pay subject
to employment tax. This was less than the S Corporation’s earnings; the difference escaped employment tax.
The court went along with this approach.
Tax advisors who are consulted in advance will advise owner-employees to take some salary, at the low end
of what’s reasonable, to pre-empt an IRS claim that the S Corporation profit is really salary too. In this case,
the IRS used its own definition of reasonableness, after the fact, a definition gentler on the S Corporation
than IRS often is.
Could be that a salary figure in this case, arrived at beforehand with a tax advisor’s guidance on what IRS
examining agents will let stand as reasonable, would have gone unquestioned.
(0507182A)
