How to raise financially literate children

If everything your children ever learned about personal finances came from the mass media, they might think credit is a limitless resource and savings something you only find on a clearance rack. To fill in the gaps in their financial education, parents should teach their children the fundamentals of handling money. But where do you start? Perhaps begin with the following benchmarks of financial literacy.

Time Value of Money
One of the most essential of all financial concepts is the time value of money. Children should be shown the benefits of saving money, watching it grow, and patiently deferring purchases until a future time. When children grow a little older, they can learn the reverse lesson: how debt today results in accumulated interest costs down the road. To illustrate the point, show them a loan amortization schedule for a typical car or home loan. That will get their attention.

Transactional Skills
In today's cashless society, your children will someday need to know how to write a check, use a debit or credit card, and how to bank online. When they are ready, consider setting aside a morning to take them to the bank, introduce them to a representative, and set up their first checking account and bank card under the tutelage of the banker. Children will appreciate this rite of passage to adulthood, and they will learn how to navigate an ATM or bank website the right way, not just the way you do it.

Keeping Good Records
You might feel a little hypocritical when pointing out your children's recordkeeping shortcomings, but they probably need your help more than you think. Knowing how to reconcile a checkbook and track where they spend their money is a valuable life skill. Developing a system for safely storing receipts, warranties, and other valuable papers is also important. When they begin driving, point out the location and importance of the vehicle proof of insurance and registration.

Reflecting Your Values
Like any other area of life, you will naturally want to pass down truisms that have guided you financially. Succinct phrases often suit this purpose quite effectively, such as, "keep a little gas in the tank, a little money in the bank." Or, "don't place all your eggs in one basket." Sound corny? Perhaps. But such sayings today might just remind your children of something important tomorrow.

Those who value philanthropy should consider including their children in the charity selection process. Teach them why certain causes are important to you and how you determine the amount to give. Perhaps you could give your children gifting discretion over a small sum of charitable dollars.

Investments 101
The day will eventually come when your children will be ready to talk investments, retirement, and taxes. Feeling intimidated yet? There is no need to fear. Our firm can assist you and your children with these advanced topics. Being financially literate is not child's play. But then again, neither is being a parent.

When are social security benefits taxed?

Are you considering post-retirement employment? If you're collecting social security and thinking of returning to the work force, you may have questions about the effect of that income on the taxability of your benefits.

The answer: Under current law, part of your social security benefits may be taxable. How much? The basic rule is that up to 85% of your annual benefits can be subject to federal income tax when your "provisional" income exceeds specified thresholds. Generally speaking, provisional income is the sum of your adjusted gross income plus tax-exempt interest and one-half of your social security benefits.

Benefits are not taxed when your provisional income is below the threshold applicable to your filing status.

The federal thresholds, called base amounts, range from zero, if you're married filing separately and live with your spouse all year, to $32,000, if you're married filing jointly.

A $25,000 base applies when you file as single, head of household, or as a qualifying widow or widower with a dependent child. If you're married, but file separately and do not live with your spouse during the year, you'll also use the $25,000 figure.

Illustration: When you're married, file a joint return, and your provisional income exceeds $32,000, a portion of your benefits will be taxed.

Please call us to discuss how income from a new business venture or job will impact your taxes. We'll be happy to help with planning moves, such as the timing of retirement account distributions, that can ease the tax bite.

Animal-rescue volunteers win tax deduction case

If you provide care for stray or feral animals in your home for an IRS-approved charity, you may be able to take a tax deduction for your out-of-pocket expenses. A recent U.S. Tax Court judge ruled that a taxpayer who fostered feral and stray cats in her home could deduct amounts she spent for food, veterinarian bills, litter, and other unreimbursed expenses incurred to help the animal charity in its mission. To be deductible, the taxpayer must keep records of the expenses, and the charity must provide a written acknowledgment of the volunteer work as a charitable gift.

The Humane Society hopes to get the word out on this case, stating that thousands of members do volunteer work such as this and spend their own money to support the mission of local shelters and rescue groups.

IRS warns about e-mail and phone scams

The IRS is warning taxpayers not to respond to e-mails and phone calls they may receive which claim to come from the IRS or another federal agency. Such contacts are likely to be scams whose purpose is to obtain personal and financial information from taxpayers – information that is then used by the scammers to commit identity theft.

Typically, the scam e-mail or phone call states that the IRS needs certain information to process a tax return or refund. The e-mail contains links or attachments to what appears to be the IRS website or an IRS form. Though they appear genuine, these phonies are designed to get from taxpayers the information scammers need to steal identities. The links can even download malicious software onto the taxpayer's computer if clicked. The software is often designed to search out and send to the scammer personal and financial information contained on the taxpayer's computer that the scammer uses to commit identity theft.

The IRS reminds taxpayers that it does not send unsolicited e-mails asking for sensitive personal and financial information.

Do you owe the "nanny tax"?

If you had a housekeeper, nanny, gardener, or other household worker help out in 2010, you may have payroll tax obligations (commonly called the "nanny tax"). These payroll taxes apply if you paid a household worker $1,700 or more in 2010, and filing requirements must be met by January 31, 2011. For assistance, call our office.

New tax law will delay processing of 2010 returns

The IRS has announced that it will take until mid to late February before its computers will be able to process certain income tax returns for 2010.

Individual income tax returns that (1) include Schedule A for itemized deductions, (2) claim a deduction for higher education expenses, (3) claim a deduction for educator expenses, or (4) claim a deduction for state and local sales taxes, will not be processed until the computers have been reprogrammed, which is estimated to be completed sometime in February.

This delay affects both paper and electronic filers. The IRS will announce a specific date when it will start processing tax returns impacted by the recent tax law changes. All other tax returns will be processed on the normal schedule as in past years.

IRS eliminates paper coupons for tax deposits

In December 2010, the IRS announced new regulations that effective January 1, 2011, all Federal Tax Deposits must be made using the Electronic Federal Tax Payment System (EFTPS).

The paper coupon system will no longer be available. However, taxpayers who owe minimal amounts may still send their payment along with their tax return. For example, a Form 941 filer that owes less than $2,500 can submit payment with the return or choose to use EFTPS. The minimal amount that permits payment with a return varies with the type of tax. Please contact our office if you need assistance.