Solving The Equation – Should Kids Help Pay College Tuition?

College expenses continue to rise, and paying for these expenses presents challenges for most families. For those of us who have been down that road, we know the cost of a college education can be staggering.

Because of these high costs, parents have debated for many years whether children should help pay for their college education. While there may not be a clear right or wrong answer to this question, both options have points to consider.

Kids Helping Pay
The old adage of having “skin in the game” applies here. The general thought is that children who are helping to pay for college will be more aware of the costs involved and more likely to take education seriously. They might be more careful about their chosen major and the classes they take, rather than dabbling in various topics of interest without choosing a clear path.

Helping pay for their tuition can also give students a great feeling of responsibility and maturity. After all, they are on the path to independence. In fact, this point is seen as such a positive that many college graduates include the percentage of college expenses they paid on their resume. It’s a way for them to show potential employers that they are adults and are ready for the challenges of the real world because they have experienced the real world of paying for college.

Another point to consider is whether the parents have the means to fund the college education. Many parents, even those who have diligently saved, have seen their incomes cut and their investments deteriorate. Unfortunately, they may no longer be able to pay for the entire experience. If their child wants a college degree, there may be no other choice but for the student to participate financially.

Many financial advisors advocate that parents be sure to prepare for their retirement first before they use all their excess funds to pay for college – better for the students to have school loans than have to take care of their parents financially after retirement.

Parents Footing the Bill
Many people say parents should pay the entire bill for college so that students can focus on studies and do their best with their academic endeavors. Carrying a full load of college classes is, in some ways, a full-time job in itself. For every hour of classroom time, students may need to spend one to two hours outside of class. So a 15-hour class schedule could easily translate into 40 hours of class and study time.

Others believe that a student’s stress level is greatly increased when they have to worry about their finances in addition to classes. They may also miss out on college activities, which some say is a major part of the college experience.

Another consideration is the parent’s income and asset levels. Many financial aid applications require this information. Students may not be able to receive substantial aid because the parents are deemed to be in a position to contribute a large percentage of the costs.

Finally, students who pay for their own college experience will likely enter adulthood with a large amount of debt. They will have to pay back thousands of dollars over 15 to 20 years, possibly delaying their ability to purchase or rent a home. This may result in their moving back in with their parents after college so that they have the funds necessary to repay their school loans.

Rising Cost of Tuition
At our firm, we have many young couples beginning their families.  My advice to them is to start saving for college early and often, possibly by starting 529 plans such as College Savings Iowa.  According to the US Department of Education, since 1978 the cost of attending a public or private college has tripled, with tuition increases rising at an average of double the general inflation rate.  So, who should pay for what? Well, whether the parents pay the entire bill or have the kids pay a portion of the tuition will, most likely, remain an unsolved equation due to many variables.  However, the important part is to start discussions early with your student, so everyone knows the plan and expectations. Let the savings begin!


Kathi Koenig, CPA
Partner - McGowen, Hurst, Clark & Smith, P.C.

Five Tips for Healthy Business Growth

Believe it or not - how you grow your business can sometimes be just as important as whether your business grows.

Business growth carries with it a certain amount of risk.  To avoid potential pitfalls, consider the following tips for successful growth.

1. Find your key focus.  It is important to select and stick to a key focus, particularly in times of an uncertain or slow economy.  Do what your company is good at.  Produce the products that can be delivered consistently and successfully.  It’s harder to add new services or venture too far outside your scope during a recession.
   
2. Don’t become overconfident.  Like a favored team that lets down its guard and loses to an underdog, an attitude of overconfidence can bring about business loss.  Owners who have had success in the past must guard against gaining a sense of omnipotence.  Overconfidence is unrealistic and can spell disaster.
   
3. Don’t define your business by your products or services.  Virtually any product or service can become obsolete over time.  Don’t define your business  by your product, but rather from your customer’s needs that you are able to satisfy.
   
4. Make your marketing message consistent.  If you want to grow your company, marketing is essential.  How you market is important.  A key way to grow your business is to have a consistent marketing message.  In today’s complex world, marketing messages have to be very simple, direct and constant.
   
5. Practice what you promise.  Customers will be the most intolerant of mistakes when money and time are tight.  For example, if your marketing campaign promises a certain turnaround time, you need to live up to that promise.  Otherwise, you risk reducing your customers’ satisfaction or possibly losing customers altogether.   

Practicing these few steps and being proactive can help you achieve a healthy business growth.


Kathi Koenig, CPA
Partner - McGowen, Hurst, Clark & Smith, P.C.

Some Relatives Are Easier To Deal With Than Others

If you are like most people, one of the last things that is probably on your mind during the month of June is taxes. After all, tax season ended two months ago, and well, we don’t have to deal with that “less than favorite” relative, Uncle Sam until next year – right?  Well not so fast.  With the Bush-Era Tax Rates scheduled to expire December 31, 2012, a little tax planning for you and your business now, could save you money and be well worth the effort later.  Following are changes that will occur should the current tax rates expire, along with a few tips to help you minimize your tax liability.

Changes as the Bush-Era Tax Cuts Expire:

• Tax Rates: Tax rates for individuals will remain at 10%, 15%, 25%, 28%, 33% and 35% for the duration of 2012, but will revert back to 15%, 28%, 31%, 36% and 39.6% in 2013.
• Capital Gains Maximum Tax Rate: This tax rate is currently at 15%.  However, similar to marginal tax rates, the capital gains rate will increase to 20% in 2013.
• Qualified Dividend Income: Dividend Income is taxed at the same rates as capital gains (maximum rate of 15%). However after December 31, 2012, dividends could be taxed at a rate as high as 39.6%.
• Itemized Deductions: Throughout 2012, itemized deductions will remain the same.  However in 2013, a phase-out of total itemized deductions is scheduled to be implemented.  If this had been in effect for 2012, it would have been applicable to taxpayers with an adjusted gross income greater than $173,650.  (This amount adjusts for inflation.)

Tax Planning Tips

• Get Organized: You need to keep close track of your deductible expenses through the year.  If a pile is starting to accumulate, take the time to sort through your receipts and file accordingly.  A little organization now, will save you hours at tax time, and allow you to accurately estimate your expenses for a tax projection and planning.
• Manage Your Adjusted Gross Income: Many tax breaks are based on your adjusted gross income (AGI). Several breaks are available to you dependent on your AGI, such as the child tax credit, rental real estate loss allowance, education credits and deductions, and other tax breaks.
• Set Up and Contribute to a Retirement Plan: If you own a business, you can save for retirement through a tax-advantaged plan.  For instance, you may establish a Savings Incentive Match Plan for Employees (SIMPLE) or a Simplified Employee Pension (SEP) with relative ease.  This will allow you to plan for your future and reduce your tax liability.
• Hire Your Child: If you are self-employed, you can hire your child which shifts income from your tax bracket to their tax bracket.  You will also have payroll tax savings if your child is under the age of 18 and the child will be eligible to contribute to an IRA.
• S-corporation Losses: An S-corporation’s losses are deductible by the corporation’s shareholders up to the amount of the shareholder’s basis in his or her corporate stock.  If it looks like your S-corporation will show a loss for the year, make sure that you have sufficient basis in your S-corporation stock to take advantage of the loss deduction.
• Capital Gains: As stated above, the anticipated capital gains tax rate is set to be at least 20% in 2013, so if you are considering selling highly appreciated stock it might be wise to do it before year-end at a lower tax rate of 15%.

These are just a few items to assess during a mid-year business review.  There are more.  But taking the time to meet with your CPA and discuss the items listed above will ensure you have a good understanding of your company’s financial situation and the information needed to minimize your tax liability….and make your interactions with Uncle Sam go “relatively” well.

Kathi Koenig, CPA
Partner - McGowen, Hurst, Clark & Smith, P.C.

Identity Theft Is On The Rise For Women

According to a study of more than 800 households by Affinity Security Center, 28% of women interviewed said they had been the victim of some level of identity theft fraud compared to 21% of men.

Why is it that women fall victim to identity theft more often than men?  Is it because we are more trusting by nature or perhaps more careless with our personal information?  Not necessarily either. 

While many factors contribute to the disparity between men and women, according to the study, one of the biggest factors is on-line shopping.  Surprisingly, this digital commerce (purchasing on-line) with built-in technology safeguards, actually makes identity theft more difficult to pursue.  Because men engage in more on-line shopping over real world retail, they are actually less prone to identity theft and fraud.

Women, on the other hand, tend to have more in-person transactions with restaurants, salon, grocery and store purchases.  The report found that most fraud attacks against women occur through in-person purchases, where there is less consumer-control.   The report also showed that women are less likely to discover and report the fraud in a timely manner, which unfortunately results in taking longer to restore their identity.

In a separate study by the Identify Theft Assistance Center, about one fourth of all cases of identity theft are committed by a friend, family member, acquaintance or in-house employee.  Lost or stolen wallets, checkbooks or credit cards account for about 15 percent of fraud, with mail/trash fraud trailing close behind at 11 percent.

For more information on what to do should you become a victim or to help prevent you from becoming a victim, you can visit the Federal Trade Commission site at www.ftd.gov.   No one is immune - which isn't to say, that we're powerless.  There's a lot we can do to deter, detect, and defend ourselves against identify theft. 




Kathi Koenig, CPA
Partner - McGowen, Hurst, Clark & Smith, P.C.

What's Your Dream?

Have you ever dreamed about owning a business? Many people have. Maybe you have dreamed about starting a catering business or owning a quilt shop or a coaching/ consultant business. According to the Small Business Administration, there are more than 27 million small businesses in the US. It is no wonder small businesses are often thought of as the backbone of America and why many financial analysts say they are the vehicle which is driving us out of an economic downturn.

Well before you hang your shingle above the door of your new shop….here are six tips that will help you get started on the right foot.

1. Create a business plan. While it may seem daunting at first, a business plan will help you gain a better understanding of your industry structure, competitive landscape, capital requirements and more.
2. Decide what business entity is right for you. The most common types of business are the sole proprietorship, partnership, LLC, corporation and S corporation. Each of these entities has different tax requirements, so determining the right entity for you is of key importance.
3. Obtain an Employer Identification Number (EIN) which is used to identify a business entity. Most businesses need an EIN, although some do not.  Visit www.IRS.gov for more information. If needed, you can apply for an EIN online. Also be sure to register with the state you are doing business in.
4. Determine what taxes you must pay and how you will pay them. The four general types of business taxes are income tax, self-employment tax, employment tax and sales tax.
5. Keep good records. This will help ensure a successful operation of your new business.  You may choose any record-keeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need for federal tax purposes.
6. Adopt a consistent accounting method. Each taxpayer should use a consistent accounting method which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and accrual method.

Owning your business can bring you countless rewards and help you live your dream. For more information on how to get your business started, it is best to consult with your CPA. She will be able to help you avoid many of the mistakes first time business owners make, and help you achieve success with your new business.


Kathi Koenig, CPA
Partner - McGowen, Hurst, Clark & Smith, P.C.

What Goes Down, Will likely Go Back Up Including Payroll Tax Cuts

If you’re like me, you might have been holding your breath just a bit as Congress debated as to whether or not to extend the payroll tax cut extension for the remainder of 2012.  And of course, the good news is...they did.  Actually, I found it quite refreshing as both sides of Congress put differences aside in a rare display of bipartisanship and chose to do what was right for the American people.  Good for them.  Good for us!

The original payroll tax break in 2011 cut 2% from payroll taxes used to pay for Social Security, lowering the tax rate for 160 million Americans. The tax break was extended for two months at the end of last year.  And last month, under the Middle Class Tax Relief and Job Creation Act of 2012 workers will continue to receive larger paychecks for the rest of this year based on a lower social security tax withholding rate of 4.2%. No action is required by workers to continue receiving the payroll tax cut, and as before, the lower rate will have no effect on worker’s future Social Security benefits. The reduction in revenues to the Social Security Trust Fund will be made up by transfers from the General Fund. 

For an employee earning $50,000 a year that means keeping an extra $80 a month in take-home pay. For higher-income employees, that extra income could be as high as $2,200 a year, and with the rising cost of groceries and gas, well it certainly can’t hurt.  In addition, more people spending more money will add a needed boost to a sluggish economy – which was the initial intent of the tax cut.  But beware.  The tax cut is still temporary and once it has expired, and our paychecks have been reduced, we may find it harder to adjust our spending back down.

It’s not that we consumers are necessarily consciously choosing to spend the extra cash. In all likelihood, we may not even have noticed the difference in our paychecks. It’s just that money tends to be spent unless we make an effort to set it aside.   While saving is never as much fun as spending, we might consider using that extra money to pay down high-interest debt, increase contributions to flex or health savings accounts, or since it is Social Security tax money, we might think about adding to our retirement accounts.  The important thing to remember is that this payroll tax cut is only temporary and will most likely be adjusted accordingly next year, and that could mean a decrease in our take home pay.


Kathi Koenig, CPA
Partner - McGowen, Hurst, Clark & Smith, P.C.

Five Ways To Show Your Business Isn't A Hobby

You've always been attracted to beautiful jewelry.  Most women are.  But you are so interested in it that you have taken several classes and have begun designing and creating some rather stunning pieces...even if you say so yourself.  And so you think...wow, maybe I should quit my job and make this hobby of jewelry making into my business.  That would be so much fun!  I could run my hobby-turned-business right from my home and best of all...make money too.
Yes it is true, home-based businesses can be lucrative and business owners may deduct operating expenses incurred.  But beware.  The IRS is not one to be "bedazzled" by businesses that show consecutive years of losses as they continue to deduct their expenses.  As a business owner, it is up to you to show you are running a for-profit business in order to deduct losses.  Here is a list of five things you need to know if you wish to turn your hobby into a business.

1. Operate in a Business-like Manner - At a minimum, you should have business cards, invoices and a business banking account.  Keep your business accounts completely separate from your personal ones.  For a home-based business, a separate area of your home should be dedicated to your company.
2. Register your Business - Make sure you register your company and it complies with all local business rules.  Many cities and states require every local business to obtain a tax registration certificate.  Obtaining the permits and paying taxes give the IRS additional reasons to classify the hobby business as a legitimate business activity.
3. Attempt to Show a Profit in at least 3 of the 5 Years - One popular test for determining a profit motive is called the "3 out of 5" test.  Attempt to show that your business made a profit for at least three out of every five years of operation.
4. Continue with Education - Educate yourself in your industry or field.  This will show you have the relevant knowledge to successfully run a business and market the product or service related to your interest.
5. Promote and Market - Most businesses advertise their products or services in some manner.  Make sure you maintain copies of advertising collateral so you can show it to the IRS.

Obviously the guidelines are in place so people do not abuse the tax system.  If your business is audited and the IRS determines you are just spending money on a hobby or using your deductions to minimize your tax liability, you can be subject to penalties and fines.  The deciding factor in determining if your hobby is a bona-fide business is to show the IRS that you are trying (even if you are not necessarily succeeding) to make a profit with your venture.  Your tax professional can help you make sure all measures are in place to help your business succeed and avoid those IRS red flags.


Kathi Koenig, CPA
Partner - McGowen, Hurst, Clark & Smith, P.C.