Janell A. Israel & Associates

1585 Kapiolani Blvd., Suite 1604, Honolulu, Hawaii 96814 Phone: 808-942-8817

September 2011 Tax Newsletter

What's new in taxes:

What's New in Taxes: Use adjusted numbers in your long-range planning

As you start to look ahead in your tax planning, here are some adjusted tax numbers you will find useful.

* The amount you can set aside in a health savings account (HSA) in 2012 will increase to $3,100 for an individual and to $6,250 for a family. If you're 55 or older, you're allowed an additional $1,000 contribution. HSAs permit taxpayers who have high-deductible health insurance plans to set aside pretax dollars that can be withdrawn tax-free to pay medical expenses not reimbursed by insurance.

* Another 2012 adjustment: The social security wage base is expected to increase to $110,100. That's $3,300 higher than the 2011 wage base. Unless Congress acts to extend the 2% rate cut in the social security tax, the 2012 rate will return to 7.65% on the wage base for both employers and employees.

Take a refresher course on saving for college the tax-smart way

With tuition costs climbing ever higher, setting aside funds for college can be a formidable task. Here's a refresher course on the various programs and tax breaks you can use to lessen the financial burden of college.

* Coverdell education savings accounts. These accounts offer several advantages over other college savings plans. First, there's flexibility. Like an IRA, you can choose from a wide variety of investments to meet your individual needs. Also, funds in the account can be withdrawn tax-free if used for qualified education expenses such as tuition, room and board, books, even a computer. Unlike other programs, qualified expenses include costs of elementary and secondary school.

However, the maximum annual contribution for a beneficiary is $2,000 — from all sources. Also, funds must be used by age 30. If the funds are not spent on college by the time the beneficiary is 30 years old, the unspent money must be withdrawn (subject to income tax and a 10% penalty) or rolled over into another family member's education savings account.

* Section 529 plans. If you want to put a large lump sum into a college savings account, a Section 529 plan may be your best option. In this type of account, there are no phase-out limits for high earners, and plan sponsors set maximum allowable contributions.

* Custodial accounts. With custodial accounts (Uniform Transfers to Minors Act or UTMA), you can generally invest in a wider variety of investments than with a 529 plan. The proceeds can be taken out penalty-free - even if used for something other than education. The biggest potential disadvantage is that you gift the funds irrevocably to the child. At a certain age, your child controls the account and could spend the funds on a sports car instead of college.

* American opportunity credit. With this credit you reduce your taxes dollar for dollar for education expenses incurred during four years of college. The credit has an annual limit of $2,500 per student.

* Lifetime learning credit. The limit for this credit is $2,000 per tax return, and qualified expenses include tuition, fees, and books for both undergraduate and graduate programs. You're limited to using only one credit (American opportunity or lifetime learning) per student.

* Other options. Roth IRAs and U.S. savings bonds are additional options worth considering. You may also qualify for an interest deduction on education loans. If you need help reviewing the options that best fit your situation, give us a call.

New Business:

Small Business Alert! Hackers target small companies

If you think your business computers are safe from hacking attacks because your company is too small to appeal to hackers, think again. Though the big international companies are indeed attractive to hackers, these web criminals are beginning to find small businesses lucrative targets too.

The U.S. Secret Service and Verizon Communications forensic analysis unit handled 761 data breaches in 2010, a significant increase from the 141 breaches investigated in 2009. Of the 761 attacks in 2010, 482 or 63% involved companies with 100 or fewer employees.

These statistics make it clear that being small does not mean a company is safe from hackers. A 2010 survey reported in the Wall Street Journal showed that 64% of small and medium sized retailers in the U.S. believed their businesses weren't vulnerable to credit card data theft by hackers. Only 49% had done a review of their security safeguards.

What's New in Finances:

No more paper savings bonds after 2011

For the past 76 years, investors had the option of buying U.S. savings bonds at a bank or credit union. After December 31, 2011, that will no longer be the case. Savings bonds can then only be purchased electronically through Treasury Direct, sponsored on the Internet by the Treasury's Bureau of Public Debt.

Bonds have been available through Treasury Direct since 2002, but investors have been slow to purchase bonds electronically. Only 11% of bonds purchased from October 2010 through June 2011 were bought through Treasury Direct.

Selling bonds exclusively through electronic means will save the government $70 million over five years. The Treasury points out that investors benefit too: electronic bonds are less likely to be misplaced, and they are automatically redeemed when they mature.

The change won't affect outstanding paper bonds.

How grandparents can help with college costs

Are you a grandparent wanting to fund your grandchild's education? You'll find several ways to do this, each with its own limitations and tax consequences.

* Gifts. The simplest is just to make an outright gift of cash to your grandchild each year. In 2011, you can give up to $13,000 without any gift tax liability. If your spouse also wants to join in the gift, you can jointly give each grandchild up to $26,000 each year.

* Direct payments to the institution. There's also a way to give higher amounts and still avoid any gift tax consequences. You can give unlimited amounts if you make the payments directly to a qualified education institution on behalf of your grandchild. But there's one drawback. The payments can only be for tuition. Payments for dormitory fees, meals and accommodations, or books don't qualify. You can still give your grandchild an additional $13,000 for these other items though.

* Education savings accounts. If you decide against making direct tuition payments, consider making part of your $13,000 gift as contributions to a Coverdell education savings account or a Section 529 plan. These plans and accounts generally offer tax-free growth of college savings. Age, income, and contribution limits may apply, however.

Your grandchild's total college savings could affect his or her eligibility for scholarships or other tax benefits. That's why you should coordinate your gifts as part of a comprehensive education plan. Contact our office for help setting up a tax-smart college savings plan.

Take a Break

Does this explain Washington politics?

You're familiar with the names of groups of animals, such as a HERD of cows, a FLOCK of chickens, a SCHOOL of fish, and a GAGGLE of geese.

Less familiar groups include a PRIDE of lions, a MURDER of crows, an EXALTATION of doves, and a PARLIAMENT of owls.

The most aptly named could be a group of baboons, which is either a TROOP or a CONGRESS. Is that what the problem in Washington is these days?

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All information is believed to be from reliable sources, however we make no representation as to its completeness or accuracy. The information contained in this newsletter is provided by Mostad & Christensen, Inc. The information is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information on anything in this newsletter, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.

Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA/SIPC, a Registered Investment Adviser. Mosted & Christensen, Janell Israel & Associates and NPC are separate and unrelated companies.

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