Vista Tax Relief | Accounting and Tax Blog

The Benefits of Laddering for an Income Investor

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If you are investing in bonds for income, you most likely want to minimize any risk of loss to your portfolio. Since no investment is entirely risk free, you need to understand where the risks with bonds lie. One risk is the possibility that the issuer won’t pay the interest or repay the principal at maturity. There’s also reinvestment risk, or the risk that your bonds will mature while interest rates are falling. When that happens and you buy new bonds with a lower interest rate, you reduce the income stream that you are depending on.

Laddering is a strategy that minimizes the risk of being locked in at a single interest rate and provides added liquidity to your portfolio. It involves buying a series of bonds (perhaps from different issuers) with a range of maturities. The staggered maturities of the “laddered” bonds can reduce the likelihood of you dealing with reinvestment shock if interest rates happen to be lower when some of your bonds mature. Creating a laddered portfolio can help even out volatility in your income stream while allowing you to estimate how much your portfolio will yield from year to year.

Another benefit of a diverse,* laddered portfolio of bonds is that it can reduce your exposure to default risk. The default of one issuer in a portfolio that holds bonds from multiple issuers is less damaging than it would be in a portfolio concentrated in bonds from just one or two issuers.

The Mechanics of Laddering

As an example, assume that you divide up your portfolio by buying equal dollar amounts of bonds with two-, four-, six-, eight-, and 10-year maturities. So, the average maturity in your portfolio is six years. As each bond matures, you replace that bond with one equal to the longest maturity in your portfolio. For example, when your two-year bond matures, replace it with a 10-year bond. The 10-year bond you initially purchased now has eight years until it matures. And the eight-year bond has six years to maturity and so on. Despite these changes, the average weighted maturity of your portfolio does not change — it remains at six years.

When interest rates fall, your laddered portfolio protects you since the longer maturity bonds at the top of the ladder are still paying above-market rates. And when interest rates start climbing, you reinvest maturing bonds at the bottom of the ladder in higher yielding, longer maturity bonds.

You can also use laddering as a strategy if you are investing in certificates of deposit (CDs) for income. The principle is the same except you are buying bank-issued CDs instead of bonds.

As an income investor, ensuring a steady, predictable stream of income is critically important. Your investment professional can help you determine if laddering bonds or CDs is a smart strategy for achieving your goals.

For more information on Laddering, call Vista Tax Relief at 480-916-2862 today!

Financial Wellness Programs — A Win-Win for Your Business and Your Employees

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Money worries distract workers. Employees who are stressed out about their finances generally have trouble focusing on work and don’t give it their best effort, resulting in a loss of productivity. Moreover, employees who are living from paycheck to paycheck are unlikely to direct money to a workplace retirement plan and, if they do contribute, they tend to contribute small sums. Financially stressed employees are also more likely to leave their jobs, taking their skills with them and putting pressure on their former employers to hire replacements.

Inflation, debt, a lack of emergency savings, and minimal or no retirement savings are some of the factors contributing to the high levels of financial stress among American workers that can affect the companies they work for. Very often, personal financial issues are compounded by a lack of knowledge of basic commonsense money management skills. One way employers can help employees gain more control over their financial lives is by providing them with access to educational programs focused on financial wellness.

What Is Financial Wellness?

When it comes to their finances, employees have different priorities and obligations. But in broad terms, employees who are financially well make sound financial decisions, manage their money wisely, and have a clear, workable plan for saving for their short- and long-term goals. Since they are no longer under extreme financial stress, they can also focus more on fully engaging at work and in other parts of their lives.

An effective financial wellness program should focus on imparting the knowledge and skills that help individuals overcome personal financial challenges. Employers should consider the following topics and strategies:

  • Budgeting. Learning how to budget and set spending priorities is an invaluable skill that can help individuals get a handle on their financial lives. Employers could direct employees to online tools that help with budgeting and offer suggestions on how to not overspend.
  • Debt management. Online seminars, videos, and written materials that explain the terms and conditions of consumer debt and how to comparison shop among credit card issuers can help prevent employees from making expensive errors and falling deeper into debt. There are also tools that allow users to develop a strategy for paying off credit cards and other debts that limit their ability to save for the future.
  • Saving for current and future goals. Offering materials that teach employees how to establish and prioritize financial goals, such as building an emergency fund, buying a first home, financing a child’s college education, and saving for retirement, can be hugely helpful in putting employees on the road to financial wellness.
  • Investing education. Covering a variety of investment-related topics — including asset allocation, diversification, risk and reward, volatility, and rebalancing — can help retirement plan participants make sound decisions about managing their plan assets. Online tools, seminars, and handouts that explain these topics in easy-to-understand language give employees the skills they need to make the most of their opportunity to attain retirement security.

Your financial professional can offer helpful insights on smart ways to help your employees take control of their finances and improve their financial health.

For more information on Financial Wellness Programs, call Vista Tax Relief at 480-916-2862 today!

Projects That Add to the Value of Your Home

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You only have to look at the number of home remodeling shows on television to understand just how many people enjoy watching others upgrade their living spaces. These popular home remodeling shows have inspired many people to try their own hands at various remodeling projects.

If you are interested in having work done on your living space or doing it yourself, you should understand that some remodeling and construction projects will enhance the value of your home as well as its appearance. Other remodeling projects may be on your wish list and make you happy but won’t materially affect the value of your home.

What projects will add to the value of your home? According to the “2023 Cost vs. Value Report” conducted by Remodeling, a leading trade publication/platform, the top five renovations that increase — or come close to increasing — home value are as follows:

HVAC Conversion

Switching out your fossil-fuel burning furnace to a more environmentally friendly alternative — an electric heat pump — is an expensive undertaking but easily recoups its cost. Typically, the cost of converting a 2,000-square-foot home to an electric heat pump is estimated to be $17,747, but the report notes that it adds about $18,366 to the home’s resale value — a 103.5% return on the investment.

Garage Door Replacement

A new garage door definitely enhances a home’s curb appeal and easily recoups its initial cost. The report found that removing and disposing a 16- by 7-foot garage door and replacing it with four-section doors with heavy galvanized steel tracks would cost $4,302 on average but would boost the home’s resale value by $4,418, a 102.7% return on investment.

Manufactured Stone Veneer

Stone veneer has grown in popularity amongst homeowners looking to craft a warm and welcoming feel to their homes’ exterior. It costs an estimated $10,925 to install 36 linear feet of sills, 40 linear feet of corners, an address block, and other materials, including water-resistant and corrosion-resistant barriers. However, homeowners will recoup 102.3% of the project’s cost if they put their home on the market.

Replacing an Entry Door

New front doors can help improve a home’s energy efficiency as well as enhance its appearance. Replacing an old entry door with a new steel one will cost an average of $2,214 but will increase your home’s resale value by $2,235, recouping 102.9% of its original cost.

Replacing Siding

Replacing a home’s siding is an expensive undertaking, but it is one project that delivers immediate eye appeal. New siding refreshes a house’s appearance and adds to the neighborhood’s overall desirability. The report looked at the costs of installing both fiber-cement siding and vinyl siding. It found that the average cost of installing 1,250 square feet with fiber-cement siding would run a homeowner $19,361. The homeowner would expect to recoup 88.5% of the cost of the project, or $17,129. Installing new vinyl siding would be less costly than fiber-cement siding. Siding for a 1,250-square-foot house would cost an estimated $16,348, and the homeowner could expect to get back around 94.7% of that total cost at resale.

Be aware that labor costs vary from state to state and from community to community. The cost of materials fluctuates, sometimes considerably, depending on inflation, supply chain issues, and other economic and political forces.

For more information on Home Projects, call Vista Tax Relief at 480-916-2862 today!

Separating Business and Personal Expenses

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Running a small business is a demanding task that requires careful attention to various aspects, including finances. One of the most critical financial practices is separating business and personal expenses. While it may seem like a minor detail, this separation is essential for the financial health and legal integrity of your business. Here’s why keeping these expenses distinct is important.

Accurate Financial Tracking

When you mix business and personal expenses, it becomes challenging to track the true financial performance of your business. Accurate financial tracking is crucial for understanding how your business is doing, making informed decisions, and planning for the future. Without clear records, you may struggle to see where your money is going, which can lead to poor financial decisions that could harm your business.

Simplified Tax Filing

Tax season can be stressful for any business owner, but it’s even more challenging when business and personal expenses are intertwined. The IRS requires that you report your business income and expenses accurately. If your records are muddled, you might miss out on valuable deductions or, worse, inadvertently claim personal expenses as business ones. This can result in penalties or even an audit. Keeping expenses separate simplifies tax preparation and ensures that you are compliant with tax laws.

Legal Protection

For businesses structured as limited liability companies (LLCs) or corporations, maintaining a clear distinction between personal and business finances is vital for protecting personal assets. This separation helps uphold the “corporate veil,” which is the legal barrier that protects your personal assets from being used to satisfy business liabilities. If you don’t keep your finances separate, a court could rule that your business is not truly separate from you, putting your personal assets at risk.

Professionalism and Credibility

Maintaining separate finances also boosts your business’s credibility. Whether you’re dealing with lenders, investors, or clients, having clear and organized financial records shows that you run your business professionally. This can build trust and open doors to opportunities that might not be available if your finances were disorganized.

Better Financial Management

When you separate business and personal expenses, it’s easier to manage your cash flow, create budgets, and forecast future financial needs. This clarity allows you to make better decisions about when to reinvest in your business, when to cut costs, and how to plan for growth.

How to Keep Business and Personal Finances Separate

  • Open a Business Bank Account: Use a dedicated bank account for all business transactions. This makes it easier to track income and expenses and simplifies record-keeping.
  • Get a Business Credit Card: Charge all business-related expenses to a business credit card. This keeps personal spending separate and helps build business credit.
  • Pay Yourself a Salary: Instead of dipping into business funds for personal use, establish a regular salary or owner’s draw. This ensures that business income and personal income remain distinct.
  • Keep Detailed Records: Maintain thorough records of all business transactions. Save receipts, invoices, and bank statements to ensure you have a clear trail for tax purposes and financial management.
  • Consult a Professional: Consider working with an accountant or financial advisor who can help you establish and maintain good financial practices.

Separating business and personal expenses is more than just a good habit—it’s a necessity for the long-term success of your business. By keeping these expenses distinct, you can ensure accurate financial tracking, simplify tax filing, protect your personal assets, and present a professional image to the world. In the end, this practice will save you time, reduce stress, and help your business thrive.

For more information on Business and Personal Expenses, call Vista Tax Relief at 480-916-2862 today!

Tax Diversification Can Be a Smart Strategy

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We are all familiar with some of the more common threats to our retirement savings. Inflation is a significant threat because it can make today’s dollar worth less in the future. An illness or injury that forces one to spend a large percentage of retirement savings on health care is another. Bad investment decisions and periods of sustained underperformance in the investment markets can also erode retirement savings. However, fewer people are familiar with an important but often overlooked threat to retirement savings — taxes.

Having to pay taxes can reduce the size of your retirement nest egg over time. However, there are strategies that can help minimize the impact of taxes on retirement savings. One of the most effective is tax diversification. It essentially involves spreading your retirement assets among accounts that are treated differently for tax purposes to achieve greater control over your taxes.

Taxable Accounts

When you invest in mutual funds,* stocks, bonds, and money market securities in a taxable account, any net realized capital gains, interest earnings, and dividends are taxable each year. The advantage of a taxable account, however, is that you don’t have to take annual required minimum distributions (RMDs) upon reaching age 73 (or other RMD age), so you can choose to withdraw your money when it suits your needs.

Roth Accounts

When you invest using after-tax dollars in a Roth IRA or a Roth 401(k) plan, investment earnings accumulate tax deferred, and withdrawals from the account will be tax free after you’ve had the account for at least five tax years and have reached age 59½. Investing in a Roth account could give you access to your retirement savings without the potential for being shifted into a higher tax bracket. And if you don’t need to withdraw money, you can simply leave it invested in your account — the RMD rules don’t apply to a Roth IRA or, starting in 2024, to a Roth 401(k) account during the owner’s lifetime.

Traditional Retirement Accounts

You won’t owe any taxes on the money you contribute to a traditional 401(k) or similar workplace retirement savings plan — or on tax-deductible contributions to a traditional IRA — until you make withdrawals. Investment earnings in these accounts are also tax deferred until withdrawal. Tax deferral lets your account grow faster than it would if taxes were paid on the income as it was earned. When you are retired and start taking withdrawals from your account, you may be in a lower tax bracket.

The Benefits of Tax Diversification

Diversifying across different types of accounts can give you greater control over when and how much you take from your retirement accounts. By spreading taxable distributions over a longer period, you may end up paying less tax and retain more of your savings.

The challenge is to determine the most strategic way to allocate your retirement assets among the different accounts. A tax professional can provide more insights on how tax diversification may work for you.

*You should consider the fund’s investment objectives, charges, expenses, and risks carefully before you invest. The fund’s prospectus, which can be obtained from your financial representative, contains this and other information about the fund. Read the prospectus carefully before you invest or send money. Shares, when redeemed, may be worth more or less than their original cost.

For more information on Tax Diversification, call Vista Tax Relief at 480-916-2862 today!

Unpaid Payroll Taxes: A Common Small Business Mistake

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Managing a small business involves juggling many responsibilities, and payroll taxes often get overlooked. Unfortunately, failing to handle payroll taxes properly is a common mistake that can lead to significant financial and legal issues.

What Are Payroll Taxes?

Payroll taxes include federal income tax withholding, Social Security and Medicare taxes (FICA), unemployment taxes, and state income tax withholding. Employers must withhold these taxes from employees’ wages and remit them to the government.

Why Small Businesses Struggle with Payroll Taxes

  • Lack of Awareness: Many small business owners underestimate the importance of timely payroll tax payments.
  • Cash Flow Issues: Delaying payroll tax payments to manage cash flow is risky due to penalties and interest.
  • Complex Regulations: Federal, state, and local tax laws can be confusing and challenging to navigate.
  • Inadequate Systems: Relying on outdated or manual processes often leads to errors.
  • Poor Record-Keeping: Missing payments or reporting errors are common without proper documentation.

Consequences of Unpaid Payroll Taxes

  • Penalties and Interest: The IRS imposes hefty fines for late or insufficient payments.
  • Legal Action: The IRS can take legal measures, including asset seizure or business closure.
  • Personal Liability: Business owners can be held personally responsible for unpaid taxes.
  • Reputation Damage: Failing to pay taxes can harm your business’s credibility.

How to Avoid Payroll Tax Mistakes

  • Educate Yourself: Understand your payroll tax obligations and deadlines.
  • Use Reliable Systems: Invest in payroll software or a service provider to ensure accuracy.
  • Separate Payroll Funds: Set aside taxes in a separate account to avoid spending them elsewhere.
  • Keep Accurate Records: Maintain detailed records to avoid errors and prepare for audits.
  • Consult a Professional: Seek help from a tax professional or accountant if you’re unsure.

Payroll tax management is crucial for small businesses. By staying informed, using the right tools, and seeking professional guidance, you can avoid the common pitfalls of unpaid payroll taxes and keep your business on track.

For more information on Unpaid Payroll Taxes, call Vista Tax Relief at 480-916-2862 today!