03/24/2008

Taxation of Investments

It's nice to own stocks, bonds, and other investments, but when it's time to fill out your federal income tax return, you may be scratching your head. Let’s discuss some key issues pertaining to the tax treatment of investments.

One of the first things to determine is if you have ordinary income, capital gain income, or both. The distinction between these is important because different tax rates may apply.

Investments produce ordinary income such as interest or rent. Ordinary income is taxed at ordinary tax rates and must be categorized as taxable, tax exempt, or tax-deferred. Taxable income is income that's not tax exempt or tax deferred. Tax-exempt income is income that's free from federal and/or state income tax. Tax-deferred income is income whose taxation is postponed until the future.

Capital gains income occurs when you sell or exchange an investment. The first thing to understand is your basis in the investment. Basis refers to the amount of your investment in an asset. To calculate the capital gain or loss, you must know how to determine both your initial basis and adjusted basis in the investment. Your initial basis equals your cost--what you paid for the investment. Your initial basis in an investment can increase or decrease over time. Adjusted basis represents the changed investment value from when you purchased it. A capital gain (or loss) equals the amount that you realize on the sale of your investment less your adjusted basis in the asset. If you sell an investment for more than your adjusted basis in the asset, you'll have a capital gain. If you sell an investment for less than your adjusted basis in the asset, you'll have a capital loss.

A capital gain is classified as short term if the investment was held for a year or less, and long term if it was held for more than one year. Long-term capital gain income tax rates are lower than those applied to short-term capital gain income. Short-term capital gains are taxed at the same rate as your ordinary income.

Capital losses from one investment can be used to reduce the capital gains from other investments. You can also use a capital loss against up to $3,000 of ordinary income this year.  Losses not used this year can be used against future capital gains.

Consult your friendly home town banker for investment advice and a personal referral to a professional tax advisor.

03/20/2008

Health Insurance in Retirement

At any age, health care is a priority. When you retire, however, you will probably focus more on health care than ever before. Let’s discuss some key health care issues for those who are retired.

If you are 65 or older when you retire, you are most likely eligible for certain health benefits from Medicare. But if you retire before age 65, you'll need some way to pay for your health care until Medicare kicks in. You may need to buy a private health insurance policy or extend your employer-sponsored coverage through COBRA. If you ever need long-term care, Medicare won’t pay for it. You'll need to pay for that out of pocket or rely on benefits from long-term care insurance (LTCI).

There are choices to be made by recipients of Medicare coverage. You will have to decide whether you need only Part A coverage (which is premium-free for most retirees) or if you want to also purchase Part B coverage. Part A, or the hospital insurance portion of Medicare, can help pay for your home health care, hospice care, and inpatient hospital care. Part B helps cover other medical care such as physician care, laboratory tests, and physical therapy. You may also choose to enroll in a managed care plan under Medicare Part C (Medicare Advantage) if you want to pay fewer out-of-pocket costs. You should also consider joining a Medicare prescription drug plan offered by an insurer that has been approved by Medicare.

Unless you can afford to pay for the things that Medicare doesn't cover, you may want to buy some type of Medigap policy when you sign up for Medicare Part B. There are 12 standard Medigap policies available. Each of these policies offers certain basic core benefits, and all but the most basic policy (Plan A) offer various combinations of additional benefits designed to cover what Medicare does not. When you first enroll in Medicare Part B at age 65 or older, you have a six-month Medigap open enrollment period. During that time, you have a right to buy the Medigap policy of your choice from a private insurance company, regardless of any health problems you may have. The company cannot refuse you a policy or charge you more than other open enrollment applicants.

Contact your home town banker for assistance in determining the health care coverage that is best for you.

03/13/2008

Understanding Risk

Risk is all around us, and we take risks every day when we drive our cars, cross the street, or buy that lottery ticket. Our perception of risk determines our actions toward risk. If we perceive risk as bad, we try to avoid it. If we perceive risk as good, we indulge and accept it. In order for us to have a perception of risk, we must first be able to recognize it. Risk confronts us in various ways and circumstances and in differing degrees of severity. It is the results of risk—the aftermath—that causes us to form our perception of whether a particular risk is good or bad. The result of some risks can be fatal, while the result of other risks may only be painful. Our perception of the result of taking risks determines whether we accept it or avoid it. Bottom line, you can’t live without taking some risks. Since we can’t eliminate risk, we must learn to recognize it and understand how it impacts us.

Such is the case in investing. Most of us invest money today for an opportunity to have more money in the future. However, there is uncertainty in knowing how much more money you will have in the future. There is danger of possible loss, but there is also the challenge and opportunity for huge returns. Simply stated, risk refers to the probability that an investment will make or lose money. Every investment carries some degree of risk because its returns are unpredictable. The degree of risk associated with a particular investment is known as its volatility.

When you invest, you plan to make money on that investment or, earn a return. Risk and return are directly related. The greater the risk, the higher the potential return. The length of time that you plan to remain in a particular investment vehicle is known as your investment planning time horizon. The longer your time horizon, the more you can afford to invest more aggressively, in higher-risk investments. This is because the longer you can remain invested, the more time you'll have to ride out fluctuations in the hope of getting a greater reward in the future. Of course, there is no assurance that any investment will meet your desired expectations of return.

Consult your friendly hometown banker to help you determine how your perception of risk impacts your investment.

03/10/2008

Business Continuity & Buy-Sell Agreements

If you're a partner or co-owner of a business, you've spent years building a valuable financial interest in your company. Establishing a buy-sell agreement to ensure your surviving family a smooth sale of your business interest is important. Let’s discuss some types of buy-sell agreements and ways to fund them.

The three basic types of buy-sell agreements are entity purchase, cross purchase, and wait and see purchase.

In an entity purchase buy-sell agreement, the business itself buys separate life insurance policies on the lives of each of the co-owners. The business usually pays the annual premiums and is the owner and beneficiary of the policies.

In a cross purchase buy-sell agreement, each co-owner buys a life insurance policy on each of the other co-owners. Each co-owner pays the annual premiums on the policies they own and are the beneficiaries of the policies.

In a wait and see buy-sell agreement combines features from both the entity purchase and cross purchase models. The business can buy policies on each co-owner, the individual co-owners can buy policies on each other, or a mixture of both methods can be used.

One of the best methods used to fund buy-sell agreements is life insurance. The life insurance that funds your buy-sell agreement will create a sum of money at your death that will be used to pay your family or your estate the full value of your business ownership interest. If the value of your business grows over time, the insurance proceeds could be less than the value of your business interest, causing your surviving family members to get less than full value for your business interest. Because of this, you should specify how the valuation difference will be handled. Should the insurance proceeds be greater than the value of your business interest when you die, you should have addressed this potential situation upfront to specify whether the excess funds will belong to the business, the surviving co-owners, or your family or estate. Either way, if all goes well, your family gets a sum of cash they can use to help sustain them after your death, and the company has ensured its continuity.

Consult your friendly home town banker to assist you with business continuity strategies, business entity selection, business financing, and professional referrals for the purchase of all business-related insurance products.

Back to President's Articles

03/24/2008

Taxation of Investments

It's nice to own stocks, bonds, and other investments, but when it's time to fill out your federal income tax return, you may be scratching your head. Let’s discuss some key issues pertaining to the tax treatment of investments.

One of the first things to determine is if you have ordinary income, capital gain income, or both. The distinction between these is important because different tax rates may apply.

Investments produce ordinary income such as interest or rent. Ordinary income is taxed at ordinary tax rates and must be categorized as taxable, tax exempt, or tax-deferred. Taxable income is income that's not tax exempt or tax deferred. Tax-exempt income is income that's free from federal and/or state income tax. Tax-deferred income is income whose taxation is postponed until the future.

Capital gains income occurs when you sell or exchange an investment. The first thing to understand is your basis in the investment. Basis refers to the amount of your investment in an asset. To calculate the capital gain or loss, you must know how to determine both your initial basis and adjusted basis in the investment. Your initial basis equals your cost--what you paid for the investment. Your initial basis in an investment can increase or decrease over time. Adjusted basis represents the changed investment value from when you purchased it. A capital gain (or loss) equals the amount that you realize on the sale of your investment less your adjusted basis in the asset. If you sell an investment for more than your adjusted basis in the asset, you'll have a capital gain. If you sell an investment for less than your adjusted basis in the asset, you'll have a capital loss.

A capital gain is classified as short term if the investment was held for a year or less, and long term if it was held for more than one year. Long-term capital gain income tax rates are lower than those applied to short-term capital gain income. Short-term capital gains are taxed at the same rate as your ordinary income.

Capital losses from one investment can be used to reduce the capital gains from other investments. You can also use a capital loss against up to $3,000 of ordinary income this year.  Losses not used this year can be used against future capital gains.

Consult your friendly home town banker for investment advice and a personal referral to a professional tax advisor.

03/20/2008

Health Insurance in Retirement

At any age, health care is a priority. When you retire, however, you will probably focus more on health care than ever before. Let’s discuss some key health care issues for those who are retired.

If you are 65 or older when you retire, you are most likely eligible for certain health benefits from Medicare. But if you retire before age 65, you'll need some way to pay for your health care until Medicare kicks in. You may need to buy a private health insurance policy or extend your employer-sponsored coverage through COBRA. If you ever need long-term care, Medicare won’t pay for it. You'll need to pay for that out of pocket or rely on benefits from long-term care insurance (LTCI).

There are choices to be made by recipients of Medicare coverage. You will have to decide whether you need only Part A coverage (which is premium-free for most retirees) or if you want to also purchase Part B coverage. Part A, or the hospital insurance portion of Medicare, can help pay for your home health care, hospice care, and inpatient hospital care. Part B helps cover other medical care such as physician care, laboratory tests, and physical therapy. You may also choose to enroll in a managed care plan under Medicare Part C (Medicare Advantage) if you want to pay fewer out-of-pocket costs. You should also consider joining a Medicare prescription drug plan offered by an insurer that has been approved by Medicare.

Unless you can afford to pay for the things that Medicare doesn't cover, you may want to buy some type of Medigap policy when you sign up for Medicare Part B. There are 12 standard Medigap policies available. Each of these policies offers certain basic core benefits, and all but the most basic policy (Plan A) offer various combinations of additional benefits designed to cover what Medicare does not. When you first enroll in Medicare Part B at age 65 or older, you have a six-month Medigap open enrollment period. During that time, you have a right to buy the Medigap policy of your choice from a private insurance company, regardless of any health problems you may have. The company cannot refuse you a policy or charge you more than other open enrollment applicants.

Contact your home town banker for assistance in determining the health care coverage that is best for you.

03/13/2008

Understanding Risk

Risk is all around us, and we take risks every day when we drive our cars, cross the street, or buy that lottery ticket. Our perception of risk determines our actions toward risk. If we perceive risk as bad, we try to avoid it. If we perceive risk as good, we indulge and accept it. In order for us to have a perception of risk, we must first be able to recognize it. Risk confronts us in various ways and circumstances and in differing degrees of severity. It is the results of risk—the aftermath—that causes us to form our perception of whether a particular risk is good or bad. The result of some risks can be fatal, while the result of other risks may only be painful. Our perception of the result of taking risks determines whether we accept it or avoid it. Bottom line, you can’t live without taking some risks. Since we can’t eliminate risk, we must learn to recognize it and understand how it impacts us.

Such is the case in investing. Most of us invest money today for an opportunity to have more money in the future. However, there is uncertainty in knowing how much more money you will have in the future. There is danger of possible loss, but there is also the challenge and opportunity for huge returns. Simply stated, risk refers to the probability that an investment will make or lose money. Every investment carries some degree of risk because its returns are unpredictable. The degree of risk associated with a particular investment is known as its volatility.

When you invest, you plan to make money on that investment or, earn a return. Risk and return are directly related. The greater the risk, the higher the potential return. The length of time that you plan to remain in a particular investment vehicle is known as your investment planning time horizon. The longer your time horizon, the more you can afford to invest more aggressively, in higher-risk investments. This is because the longer you can remain invested, the more time you'll have to ride out fluctuations in the hope of getting a greater reward in the future. Of course, there is no assurance that any investment will meet your desired expectations of return.

Consult your friendly hometown banker to help you determine how your perception of risk impacts your investment.

03/10/2008

Business Continuity & Buy-Sell Agreements

If you're a partner or co-owner of a business, you've spent years building a valuable financial interest in your company. Establishing a buy-sell agreement to ensure your surviving family a smooth sale of your business interest is important. Let’s discuss some types of buy-sell agreements and ways to fund them.

The three basic types of buy-sell agreements are entity purchase, cross purchase, and wait and see purchase.

In an entity purchase buy-sell agreement, the business itself buys separate life insurance policies on the lives of each of the co-owners. The business usually pays the annual premiums and is the owner and beneficiary of the policies.

In a cross purchase buy-sell agreement, each co-owner buys a life insurance policy on each of the other co-owners. Each co-owner pays the annual premiums on the policies they own and are the beneficiaries of the policies.

In a wait and see buy-sell agreement combines features from both the entity purchase and cross purchase models. The business can buy policies on each co-owner, the individual co-owners can buy policies on each other, or a mixture of both methods can be used.

One of the best methods used to fund buy-sell agreements is life insurance. The life insurance that funds your buy-sell agreement will create a sum of money at your death that will be used to pay your family or your estate the full value of your business ownership interest. If the value of your business grows over time, the insurance proceeds could be less than the value of your business interest, causing your surviving family members to get less than full value for your business interest. Because of this, you should specify how the valuation difference will be handled. Should the insurance proceeds be greater than the value of your business interest when you die, you should have addressed this potential situation upfront to specify whether the excess funds will belong to the business, the surviving co-owners, or your family or estate. Either way, if all goes well, your family gets a sum of cash they can use to help sustain them after your death, and the company has ensured its continuity.

Consult your friendly home town banker to assist you with business continuity strategies, business entity selection, business financing, and professional referrals for the purchase of all business-related insurance products.

Back to President's Articles