Long Chilton, LLP Certified Public Accountants

We have been asked on many occasions whether a client or someone they know should file an income tax return. You might think the answer to that question is easy, but certain circumstances make the question more difficult to answer. This article is intended to shed a little more light on the question.The instructions to Federal Form 1040 provide you with a fairly comprehensive listing of circumstances in which you are required to file a tax return. These include situations where your gross income exceeds a set minimum, depending on your filing status; and whether you owe any special taxes, including but not limited to alternative minimum tax, any penalty on premature distribution from a retirement account, recapture of the first-time home buyer credit and other situations.

We can’t tell you how many times people have come to us for help after failing to file their income tax returns. Their incentive to finally file past due returns is generally a not-so-gentle letter received from the IRS claiming significant taxes, penalties and interest. The first words that come out of most taxpayers’ mouths are, “My withholdings were higher than what I thought I owed, so I didn’t worry about it.” While this can seem like a good answer, taking this approach can cost far more in the long run than if the filing had been done in a timely manner.

For example, say you are a single mother with three qualifying children and your only income in 2010 was a salary of $25,000. You had no other taxable income, although your ex-husband did pay $3,000 a month in child support. You federal withholdings amounted to $2,094. Since you are so busy you can’t even think straight, you forget to file your return.

On the way to work on Oct. 15, you hear a public service announcement reminding everyone that today is the last day to file income tax returns and not get penalized. That has you worried since you are certain you can’t find the time to get to the tax office and file the return. When your co-workers ask what the problem is and you tell them you are worried about taxes, they tell you not to worry; after all, you paid in enough that the IRS won’t care if you forget to file. You stop worrying and the problem drops off your radar screen.

Unfortunately, you have just lost a lot of money. Here is why: aside from the potential of getting threatening letters from the IRS, had you prepared the return – assuming none of the available credits – you would have received a refund of approximately $1,900. However, by the time you include the available earned income credit and child tax credit, the refund goes up to $8,900. That would pay for a few Christmas presents at the end of the year.

The problem we see all too often is that people believe they will automatically be penalized if they file late. This is true if you have a balance due – but many non-filers have overpaid their taxes. When you let this fear overtake you and you don’t file, you are running the risk of letting the IRS keep money that is rightfully yours. Remember, you have three years from the due date of the return to file a claim for a refund. For 2011, the tax return is due April 17, 2012. That means that you must claim a refund by April 17, 2015. File even one day late and that $8,900 goes away.

The foregoing example was fairly clear-cut because your gross income would have exceeded the amount required for filing. What happens if your gross income is less than what is required for filing?

Let’s assume that you retired with your Social Security and $1 million in mutual funds four years ago. Since you also had some cash built up, you didn’t touch the mutual funds. Two years ago, however, you had to remodel your house to make it wheelchair accessible, so you sold $50,000 in mutual funds to pay the bills. At that time, your investments were underwater and you actually lost money on the sale. Since you didn’t make any money and Social Security wasn’t taxable, you saw no reason to file a tax return.

In truth, you would not have had to pay any taxes if you filed your return, but all the IRS knows is that it received a notice from your stockbroker that you sold $50,000 in mutual funds, so they send you a bill for taxes on the entire amount, plus interest and penalty. Not only does it bill you for the income from the mutual fund sales, but it also calculates that a portion of your Social Security benefits are taxable. To correct the errors with the IRS, you will probably spend more time than if you had just filed your return to begin with.

Tax professionals have seen these and many other instances where one would think the decision to not file a return makes sense. Unfortunately, the tax code and its practical application do not always make sense. Unless you are certain there is no way the IRS can construe that you exceed the minimum filing requirements, it’s always a better idea to file than not to file. Even if you are filing late, it is generally wiser to fulfill your filing duties than to bury you head in the sand.

If you have any doubt about your tax filing situation, give us a call. We’ll be glad to help.

If predicting market behavior by looking at past history worked, then most of us would be rich. There are always unknowns in the months ahead, but that doesn’t mean you shouldn’t give some thought to some of the big issues that affect investors here and overseas. Many investment experts see cause for cautious optimism. They see signs of economic recovery in the United States and believe that China’s economic growth will continue at a fast pace. Interest rates are low, and that is typically a good thing for the markets.It’s easy to read the financial news and get discouraged, but remember bad news sells newspapers (or generates online hits). There is no doubt that the world’s economic woes have been subject to some excessive pessimism. Here, in no special order, are some of the big issues that carried over from last year and some current thinking on them:

Europe

The Eurozone debt crisis is not going away soon. Not only does it affect those countries that use the Euro, but it also affects the British pound because the British economy depends a great deal on its European neighbors. However, all is not gloom and doom. Many analysts on the other side of the Atlantic note that progress has been made. They observe that governments – especially those in southern Europe – have recognized the need for austerity in public spending and are taking the necessary steps to cut budgets. They point out that Germany – currently considered the best bet of the Eurozone stock exchanges – was in dire straits a decade ago but was able to cut public spending and increase productivity to become one of the strongest investment markets in Europe.

Could things get worse in Europe? If the Euro tanks, they might. For this reason, risk-averse investors might want to stick with investments denominated in U.S. dollars. On the up-side, investment gurus think that European stocks could look cheap in a year or so.

Market Volatility

Many experienced analysts will tell you that volatility is a natural feature of stock markets – here and abroad. It is very hard for an individual investor to ignore short-term gyrations – it goes against many basic instincts – but accepting that valuations ebb and flow unpredictably is vital. It is a fact that most well-managed companies weather tough times and changing economic conditions. Most analysts will tell you that market volatility usually has no meaningful message for us, but that investors often act on the panic such gyrations create.
Unless one party gains a decisive victory across Congress and the Senate in November’s election, we could see a repeat performance of last year’s budget impasse. If a similar impasse occurs at year-end, expect volatility in the market. The stock market hates uncertainty – and the greater the disagreement between lawmakers, the more the market gyrates.

The U.S. Housing Market

In various guises, the housing crisis in the U.S. has been under way for about six years. Many economists now see signs of recovery. Why is this so important? Experts say the recovery of this sector is contingent on the recovery of many important economic factors, including job growth. Analysts are seeing light at the end of the tunnel and are hoping this translates into greater sales volume of homes along with increased prices. In turn, this lifts home building stocks and durable goods, whose sales are boosted by an increase in household formation.

As always, the remarks above are general in nature and are not intended to be a substitute for advice from a professional investment counselor.

For those who are fortunate enough to be in possession of a highly appreciated asset – whether as a result of hard work, luck or an inheritance –talking to a tax and financial expert to discuss tax and financial planning options is of utmost importance. Highly appreciated assets are exactly what they sound like: assets that have significantly appreciated. These might include, but are not limited to, a successful business, real estate or a stock portfolio.Baby boomers who are nearing retirement and need additional income but want to limit their tax liability should consider placing their highly appreciated assets into a charitable remainder trust or setting up a charitable gift annuity. This type of trust or gift annuity will pay you or your beneficiary an income for life or for a specified number of years. You and your estate will also receive substantial tax benefits. Upon your death or that of your beneficiary, the remainder of the donated asset goes to the chosen charity.

Charitable Remainder Trusts

There are two types of charitable remainder trusts: the charitable remainder unitrust and the charitable remainder annuity trust. The main difference between these two trusts is found in the way the payout is calculated. With a unitrust, the income is variable; with an annuity trust, the income is fixed.

• Charitable Remainder Unitrust

If you expect your donated asset’s value to keep pace with or exceed the inflation rate, the charitable remainder unitrust is an option to discuss with your financial advisor. The payout is based on an agreed upon percentage (not less than 5 percent) of the asset, meaning that your income will vary as the value of the asset rises or falls. One risk, of course, is that the asset will depreciate, leaving you with a reduced income. An advantage to the unitrust is the ability to add additional funds.

• Charitable Remainder Annuity Trust

The charitable remainder annuity trust pays a fixed annual income for life or for a specified term. The annual payout is based on a percentage of the asset value at the time the trust is created; or it may simply be a set, predetermined amount. The advantage to the annuity trust is that even if the asset’s value declines, the income stays the same. You should note, however, that although the payout amount is fixed, if the asset’s value drops to zero, the income will stop. You cannot add additional funds to an annuity trust, but you can establish new trusts.

The charitable gift annuity differs from the charitable remainder annuity trust in that this type of arrangement is simply a contractual agreement between you and the charity, instead of being a legal trust. In exchange for the donation of your highly appreciated asset, the charity agrees to provide you or a designated beneficiary with a fixed annual income for life. Regardless of the asset’s future value, you are guaranteed a fixed amount of income for the full term of the agreement. Charitable gift annuities might not be offered in your state, so check with your financial advisor for availability.
Charitable annuity trusts and charitable gift annuities are usually offered by major charitable institutions due to the financial risk assumed by the organization. Due to the recent market volatility, the fixed-income aspects of charitable remainder annuity trusts and charitable gift annuities have become more popular than the variable income offered by charitable remainder unitrusts.

Talk to an Advisor About Other Strategies

As with all important financial, estate planning and tax-related decisions, you should always consult with a trusted advisor before establishing a charitable trust or gift annuity. An expert can identify other strategies, such as using part of your tax savings to purchase life insurance, which can further limit your tax liability and benefit your heirs.

Staying on top of search engine optimization (SEO) is critical for all marketers, whether they are Fortune 500 companies or small businesses. This can be daunting for small firms without IT departments or big marketing budgets. Over the past couple of years, revisions to Google’s indexing infrastructure – the “caffeine web indexing system” – have brought both benefits and headaches to small business owners. For most entrepreneurs, the effort to keep web content constantly fresh and their SEO practices up-to-date is a challenge. Any changes that Google makes to the algorithm – the indexing infrastructure that makes the search process work – can (and do) affect the flow of web traffic. Obviously, changes that diminish a company’s visibility on the Internet can severely affect its bottom line. Google’s recent changes – made toward the end of 2011– have brought both accolades and protests. Here is a top line summary of what you need to know:

1. What has changedThe launch of Google Search Plus Your World or Google+ is the latest big news in search engine development. A Google+ user’s search results will include posts and links shared by the people the user follows on Google+. Googlehas stated that the change to the algorithm will help users with different search needs and different “freshness needs.”  Perhaps it is helpful to think of “freshness” as the difference between updates on “red hot” or breaking news (financial announcements, major news, sports scores or air or road accident reports) and frequent updates (consumer reports on coffeemakers or hotel ratings). Google’s statements say that the change is designed to allow Google to crawl and index the web much faster for timely news on an enormous scale. Google alone controls the algorithm that determines relevancy in Google searches.
2. Why does it matter?Google+ incorporates elements of social searches. Some business leaders believe this could muddy the Google Search process, making the results less relevant for business users. They fear the new algorithm will push company names or brands down further in the search listings, making them less visible during search processes. To avoid this problem, business owners should consider getting on Google+ and putting their key words on their Google+ pages. The new “+ process” includes posts and searches shared by people you follow on Google+. Some business people fear that Google – by stacking the new Google+ into their main search process – will favor its own users at the expense of relevancy. At a user level, the changes have an impact on privacy – though it should be noted that neither Facebook nor Twitter gives Google sufficient access to index their respective contents. Nevertheless, the privacy issue is important. Information from Google+ users that is currently not displayed publicly might show up in unexpected places. For example, a user might come across an old post from a contact and might decide to repost it where anyone might see it.
3. What’s the point of these changes?Industry experts think that Google’s continued leadership position requires the company to gain prominence within social media. Google+ is their major entry into the social segment. They note that changing its search algorithm to drive traffic through Google+ gives Google’s social media positioning a huge boost. For its part, Google says that the new algorithm will give users more relevant and up-to-date results that take into account subjective definitions of “recent” (i.e. breaking political news vs. this month’s train schedule).
   There are many issues still under discussion among industry experts. Regardless of the debate, small businesses should keep a close eye on their website traffic and Internet-based business inquiries. If sales and marketing activities are down, consider reviewing your SEO practices with an Internet expert.