IN HOUSE
1ST QUARTER 2014 • HANSEN HOUSE COMPANY • 130 W. SUPERIOR ST., STE. 640 • DULUTH, MINNESOTA
Good idea: Invest your tax return
To many people, an income tax refund is one of the largest single
cash receipts for the entire year. Avoid the temptation to spend your
refund on consumption items. Instead, invest the refund to enhance
your long-term financial goals. You can pay off current debt, invest in
the stock market, make home improvements, or invest in a pension
plan for retirement.
Let’s assume you will be getting a $5,000 tax refund. (Congratulations!) The best return on your investment may be to pay off current
debts with high interest rates.
If you are carrying a credit card balance at 18 percent interest, a
reduction in the balance is the equivalent of earning 18 percent return
on your money. Your $5,000 payment will save you $900 in interest
expense over the next year.
This is an outstanding return when compared to most other investments. If you leave the $5,000 balance on the credit card and make only
the minimum monthly payment, you can pay up to twice that amount
in interest.
A second choice might be to pay down the principal balance on
your home mortgage. A $5,000 reduction in a 4 percent, 30-year loan
will save $8,340 in interest.
Consider putting the cash into your retirement program. Only one
out of five Americans can retire with adequate resources to live independently. That $5,000 invested at an annual 6 percent compounding
return will be worth $28,000 in 30 years. Your retirement fund could
grow to almost $450,000 if you invest $5,000 each year for 30 years at a
6 percent compounding return.
What records to keep and for how long?
The words “tax”and “recordkeeping”don’t
set the stage for a sparkling conversation. But
“tax recordkeeping,” when done properly, can
yield some exciting benefits come April 15th.
Start with learning how to recognize a
tax deduction. Review last year’s return to
see what deductions were claimed, then keep
your eye out for receipts of this sort in the
current year. Obtain a personal tax organizer
to help you keep track of tax-sensitive papers.
And stay aware of any new IRS rules that
might change your financial situation midyear.
Most of your deductions will spring from
your checkbook, so be sure to keep canceled
checks or have ready access to online sources.
Hang on to all receipts for charitable deductions and medical expenses. Year-end state-
ments for mortgage interest, property taxes,
and partnership (K-1) activity should also be
immediately tucked away for safekeeping.
If you own a business, your recordkeeping requirements are probably even more
critical. In addition to the items above, you
will need to keep careful notes on equipment
purchases, operating expenses, and business
mileage.
Stock and bond investors must retain
proof of how much each security cost and
when it was purchased. Keep in mind that
while your broker is now required to keep
track of new purchases, documenting purchases made before 2011 are still your responsibility.
How long should you keep your records?
The IRS requires a three-year retention after
you file your return. Most tax preparers recommend keeping your receipts for at least
seven years. And the actual copy of your return, plus W-2s, should probably be kept at
least until you retire, just in case your social
security wages need to be verified.
Those who are trying to use less paper
in their daily lives may balk at all this recordkeeping, but that need not be the case.
Scanning technology can help you create a
concise, paper-free source of tax records. Your
bank may also offer download features to
help you track expenses on a spreadsheet. Just
keep in mind that if you are ever audited, the
IRS may need to see things on paper.
When it comes to tax recordkeeping,
your goal is fairly simple: get all the deductions you are entitled to, and protect those
deductions if you are ever audited.
INHOUSE 1st Quarter 2014 Page 2
A reverse mortgage could boost retirement income
Reverse mortgages can provide a way for
seniors to tap their home equity for home
improvements, health care expenses, and additional retirement income.
As the name implies, a reverse mortgage is
the opposite of a traditional mortgage. With
a traditional mortgage, you borrow a sum of
money to purchase a home, then pay off the
debt over time. With a reverse mortgage, you
receive loan proceeds — as a lump-sum payout, an annuity, a line of credit, or a combination of all three — but make no payments as
long as you reside in the property. The loan,
with any accrued interest, comes due when
you move out or pass away.
To qualify for a reverse mortgage, you need to be at least
62 years old and own the home outright (or have a balance
that can be paid off with the loan proceeds). How much you
can borrow depends on your age, the home’s market value,
and interest rates. When applying for a reverse mortgage, you
Here’s a ‘TIPS’ for you
TIPS, or Treasury Inflation-Protected
Securities, are U.S. government bonds
with a fixed rate of interest but a principal
value that fluctuates with the consumer
price index (CPI). The interest is paid
semi-annually on the value of the principal at the computation date. When the
bond matures, the Treasury repays the
greater of the inflation-adjusted principal
or the original face value.
For example, if you bought a bond
with a $100 face value and the CPI increased by 3 percent during the subsequent year, the bond would be valued
at $103 at the year’s end. If the assigned
interest rate was 1 percent, the Treasury
would then pay you 1 percent interest on
don’t have to prove you have enough income
to make monthly payments (there aren’t any).
Also, neither you nor your heirs will have to
scrounge for money to repay the loan. That’s
because the loan balance to be repaid can’t exceed the home’s value. If, for example, you pass
away when the home is worth $250,000 but
the loan balance is $300,000, your heirs will
owe the lower amount.
But there’s also a downside. Closing costs
on a reverse mortgage can be very steep, often
as high as 8 percent of the loan amount. In addition, borrowers may have to purchase mortgage insurance, and they’re still on the hook
for property taxes and homeowner’s insurance.
Moreover, some reverse mortgages require full payment of
the loan balance (plus accrued interest) if the home is vacated for a specified period of time. If you end up making a
prolonged, but temporary, stay in a nursing home, your loan
could come due.
$103, or $1.03. If the bond’s value continued to increase until it was worth $110
at maturity, the Treasury would redeem it
for $110 plus accrued interest.
If the CPI decreased by 2 percent
in the preceding example, at the end of
the year the bond would be worth $98
and you would earn interest of $0.98. If
the value continued to decrease and the
bond was only worth $90 at maturity,
the Treasury would still redeem it for its
$100 face value plus accrued interest.
Because their value increases with the
CPI and their interest is computed on
the increased value, TIPS can be a useful
hedge against inflation. If held to matu-
rity, TIPS carry the additional advantage
of a guaranteed minimum payout at face
value in case of deflation.
This guarantee only applies, however,
if the bonds are purchased directly from
the U.S. Treasury. Although TIPS also
may be purchased through mutual or
other private funds, such purchases offer
no assurance that the underlying bonds
will be held to maturity.
Both the interest earned on TIPS
and their periodic increases in value (if
any) are subject to federal income tax
but exempt from state and local taxes.
The interest is paid out as earned, but any
increases in value won’t be paid out until
the bond matures, even though such increases are taxed each year as they accrue.
INHOUSE 1st Quarter 2014 Page 3
Overcome tax hurdles when making family loans
Suppose your adult son or
daughter needs cash to finance
a business venture or pay for an
emergency medical procedure.
If you can afford it, you might
gladly lend the money to your
child. But you should be aware
of the consequences, including
the tax aspects, before cementing the deal.
First, recognize that such
an arrangement can change
the family dynamic. Notably,
it may put a strain on the relationship between you and your
child. Money makes people do
strange things.
Second, consider whether
you want to formalize the loan in writing.
This goes beyond a mere spoken agreement or handshake. In this case, the loan
is legally binding.
Third, watch out for a potential income tax trap. Generally, the IRS won’t
hassle you over an intra-family loan for
About InHouse ...
This newsletter is issued quarterly to
provide you with an informative summary
of current news about business, financial
and tax-planning opportunities. Consult
us for details and assistance in applying
this general information to your specific
situation.
$10,000 or less if the loan isn’t being used
for investment purposes. You don’t even
have to charge any interest. However, if
the borrowed amount exceeds $10,000
and you don’t charge the prevailing interest rate, the IRS may “impute” interest on
the loan. In effect, it treats the transaction
as if you had done the following:
n Charged interest to the child.
n M
ade a cash gift of the interest to
the child.
n A
ctually received the interest in
return.
Therefore, you could be taxed on imputed interest even if you never receive
any cash back.
However, for a loan of $100,000 or
less, the interest you’re treated as receiving annually is limited to your child’s
net investment income for the year.
Furthermore, if the child’s net investment
income doesn’t exceed $1,000, there’s no
imputed taxable interest income
on a loan of $100,000 or less,
even with a zero percent interest
rate.
To sidestep any controversy
over family loans, have the loan
document drafted by a professional and include usual loan
terms, such as a repayment
schedule, interest rate structure
and possibly collateral. If your
child fails to pay back the loan,
you can claim a short-term capital loss when it becomes totally
worthless (i.e., there’s no reasonable prospect of repayment).
Do you want to really simplify
matters? As an alternative, you
might just give the cash to your child.
Under the annual gift tax exclusion, you
can give each recipient up to $14,000
in 2014 without paying any federal gift
tax, plus there are no imputed interest
concerns.
Let us assist you with family loans
and gifts.
InHouse
© 2014 Hansen House Company
130 West Superior Street, Suite 640
Duluth, Minnesota 55802
(218) 722-1161
FAX: (218) 720-6909
www.hansenhouseco.com
INHOUSE 1st Quarter 2014 Page 4
CLIENT PROFILE: Sandra E. Butterworth, Attorney at Law n [email protected]
T
Change, yes — but not so much
his is a time of transition for the
law practice of Sandra Butterworth. Not that Sandy, as she is
generally known, is in the midst of profound
change. But she has left her former downtown Duluth office in the Alworth
Building after 34 years and is now
working solo. Butterworth’s new office
is at 501 Lake Avenue South. She has
an office-sharing arrangement with
Robert “Bob” Magie III, a good friend
and former partner with whom she
worked while first establishing herself
in Duluth. They also share a top notch
support staff.
From her new digs she can really
hear the horns of the Aerial Life Bridge
and ships that pass under it. She also
has a most stunning view of the Duluth
piers and Lake Superior.
And, while she is now a little farther
away from the skywalk system than she
used to be, you’ll still find her there every day
on brisk lunchtime walks. She just gets a little bonus exercise getting to the skywalk. In
warmer weather, she walks Duluth’s lovely
Rose Garden.
For the last 25 years, Sandy practiced
with attorney Charles “Huck” Andresen.
The change occurred as a part of Andresen’s
decision to cut back on work. The former
partners still consider themselves friends
and colleagues, even if they no longer work
together.
As for Sandy’s practice, her work has
changed not a whit.
She has helped shape countless businesses and partnerships, startups and buyouts. She can be counted on for sound guidance on the intricacies of how to structure
a business, whether a partnership or a sole
proprietorship.
On the non-corporate side of her work,
she is the source of trusted and invaluble
counsel with estate planning, wills and trusts,
probate and establishing guardian and conservatorships.
Sandra Butterworth
She is excellent in the technical parts of
lawyering. But what she really enjoys, and
what sets her apart from many, is the satisfaction she gains in putting down the bound
volumes of corporate and civil law and getting to be face to face with those who depend on her not just for sound legal advice
but also for compassion and insight into the
decisions they face.
Her work doesn’t make headlines, but it
does earn respect and gratitude.
“I enjoy working with people,” she says.
“I think I relate well to my clients, and I
don’t speak ‘legalese.’ I use real language.
“I keep in mind, and I help my clients
understand, that wills and trusts and related
matters aren’t just for my clients; they’re for
the people who they’ll leave behind.
“It’s nice when I see them breathe a sigh
of relief when they know they’ve got their
ducks in a row.”
nnn
To be sure, there’s a real person behind
the butterworth name on her office
door. Sandy was born in Kansas City,
Kansas, the daughter of a father who
worked as a land-acquisition administrator for the National Park Service.
Her father didn’t stay in Kansas very
long; nor did Sandy. She can document
16 moves in the first 18 years of her life.
One of those moves took her to
Ashland, Wisconsin, as a high school
kid, and that’s where she met Brian
Butterworth, the fellow who is now
her husband and a research chemist
with the EPA Water Lab on Duluth’s
eastern edge.
Sandy and Brian have two adult
children: Charlie, a civil engineer in
the Twin Cities, and Bob, an auditor with
Essentia in Duluth. It’s important to note
that Brian and the boys are also fishermen.
Make that avid fishermen. Well, you could
say fanatical fishermen.
As Sandy and Brian begin to contemplate a life after fulltime work, they envision
carving out a little more free time, buying a
new boat and sailing again, traveling, getting
outside and being in the woods, checking
off items on what she says is a “long bucket
list.”
And maybe she’ll spend a few moments
reflecting on being among the first wave of
female attorneys to have established a legacy
of professionalism and service in Duluth.
Not that she considers herself to have
been a pioneer. “At first,” she says, “I was just
happy to get a job.”
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