Tag Archives: Taxes

What are stocks and why should you invest in them?

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What is a stock?
The ownership of a publicly traded corporation is separated into shares of common stock, which is a type of investment. When you invest in common stock (buy shares) you become a partial owner (shareholder) of a corporation and you take on some of the risks and rewards of being an owner of a company. Equity is another word for stock.

Why buy stock?
To make money.  Although, you can lose the money you invest, that is the potential reward vs. risk of stock investing. There are two opportunities to make money on stocks 1) capital gains and 2) dividends.

Capital Gains and Capital Losses
The dollar value per share of stock will fluctuate up and down depending on the perceived value of the share of stock. Stock is sold in an environment where there are buyers and sellers and it is their perception of the value of the stock that drives the price up and down. The buyers and sellers are observing many variables, some of which are directly tied to the stock itself, some of which are related to the stock’s competitors, some variables pertain to the U.S. economy as a whole, and some variables pertain to markets overseas. There are so many factors that go into the daily fluctuation of the price of the stock; it isn’t just the underlying value of the corporation itself that determines the share price of a stock.

If you buy a stock for $10 per share and sell it for $15 per share you have a capital gain of $5 per share.  Congratulations, you have made money on your investment! Don’t get too excited though, Uncle Sam wants his cut.  You will have to claim the income on your tax return. If you have held the investment for less than a year (short term capital gains); it will be taxed at your income tax rate. But it isn’t all bad news; for investments that were held longer than a year (long term capital gains); the 2012 capital gains tax rates are lower than income tax rates; 15% for those in the 25% income tax bracket or higher and 0% for those in the 15% income tax bracket or lower.

If however, you buy a stock for $10 and you sell it for $8, then you have a capital loss of $2, you have lost money on your investment. Uncle Sam lets you write losses against gains, and then write off $3,000 of capital losses against income as a capital loss deduction and then carryover any remaining loss to be used in future years.

See the www.irs.gov website for details.

Dividends
One of the rewards of being a shareholder includes participating in the earnings of the company, if they are paid out, in the form of dividends. Keep in mind that sometimes companies keep their earnings to invest back into the company with the goal of improving the company.

Shareholders also have the opportunity to vote on the election of board of director members and mergers and acquisitions.

FAFSA: Missouri deadline approaching

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What is the FAFSA?
FAFSA is the abbreviation for Free Application for Federal Student Aid. It is the form that you complete when applying for financial aid.  Financial aid is awarded as grants (you do not pay it back) and/or student and parent loans (you do pay it back, with the exception of loan forgiveness programs.)

Should you fill out the FAFSA?
Yes. When working with higher income households, people often indicate that they do not intend to complete the FAFSA. I encourage them to fill out the form, so that they may keep their options open. If their student applies to a private school, they may qualify for aid directly from the school. Private schools often have their own pool of funds to draw from when awarding aid to students, and create their own processes for awarding aid. However, completing the FAFSA is usually part of the process as well as the school’s own financial aid form. Public schools sometimes have awards to give as well, and part of the procedure at some of these schools is having a completed FAFSA form, so keep yourself in the game and fill out the form by the deadline in order to keep your options open.

What is the Missouri FAFSA deadline?
The FAFSA deadline for the 2012-2013 school year for Missouri is April 2, 2012. However, each school can have their own deadlines for priority award consideration. As an example, Mizzou’s FAFSA priority deadline was March 1, 2012 in order to apply for money that the University of Missouri had to give. If you missed that deadline you still have time (until April 2, 2012) to apply for money from state and federal programs. Being aware of each school’s individual FAFSA deadlines is a good opportunity for your student to practice their research and organizational skills. The best strategy is to complete the FAFSA as soon as possible after the first of the year. Watch the mail for W-2s and other tax forms that you will need.

Where can you go to get FAFSA questions answered?
The US Department of Education’s website www.fafsa.ed.gov is a great place to go to find out deadline information and get questions answered about the FAFSA form.

Prepare For Your Tax Return: A Tax Document System

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Tax time doesn’t have to be drudgery.  With a very simple system you can have the information that you need gathered together in one spot to make the process much easier this year and going forward.

The key is to have one year-round dedicated spot for incoming tax information and receipts.  Yes, that’s right, I said year-round.  I know that this is January and you are starting to get the annual onslaught of W-9s, 1099s, mortgage interest information, and other tax documents, and it is very important to establish one spot to collect all the those documents that come in.  That will be very helpful.   But that part of the tax return really isn’t the challenge is it?  It is tracking down the deduction information and the receipts that go with it.  If you are anything like me, you have a lot of donation receipts, I am soft hearted and I usually say yes at the grocery checkout lane when they ask me for a donation.  And I want to take all those little donations off of my taxes, I might be soft hearted, but I’m not soft headed!

If you don’t have a system, start with something simple like this:

1) Create your dedicated spot.  It can be a drawer, a decorative box, an accordion file, or a special section of your file cabinet.  You could even do this electronically by scanning and creating folders.  Just find a system that works for you.

2) Create one file for all the tax documents that come in between January 1st and March 15th, this is a temporary holding spot for those documents like W-9s and 1099s.

3) Create a file for each type of deduction which results in many receipts or statements for you, then one “catchall” file for deductions that do not have many reciepts.  For example, you might have a file for Healthcare, a file for Childcare, and a file for Donations, because there are many receipts for each of those.  But then in your “catchall” file you might put any receipts/statements for deductible expenses such as investment related expenses, tax preparation fees, unreimbursed business expenses, etc.

4) Create files for your bank statements, investment account statements, credit card statements, you can then refer back to these for deductible expenses at tax time.  These files can be with your tax documents or with your other household files; as long as you can easily get your hands on them at tax time.

Having a system like this has another benefit as well.  Do you have a Flexible Spending Account (FSA) or Health Spending Account (HSA) available to you at work?  Keeping a separate file of your healthcare expenses and throwing every single healthcare receipt into it throughout the year will let you know exactly how much you spend on healthcare in a year.  Having that information will allow you to maximize
the tax savings you have available to you through the Flexible Spending Account benefit through your employer.  The same goes for childcare expenses.

Having a system like this will allow you to keep more of your money in your pocket and out of Uncle Sam’s.

It can be very tempting to file your taxes on February 1st, keep in mind the types of investments that you own, because some investments can have K-1s or amended 1099s that come as late as mid-March.

It’s on your To-Do.  Let’s get it To-Done!

Just getting started?  Create your dedicated spot and set your files up. Put it in an easy to see and use spot so that tax time is easier this year and future years.

Ready to take it to the next level?  Make tax time even easier by making notes to yourself.  If you are paper based, throughout the year notate taxable events on receipts and statements.  Know that you charged a charitable donation to your credit card?  Jot a note and throw it into the donations folder so you know to look for it next year.  If you are software based, software such as Quicken and mint.com allow you to note transactions as tax related.