Business Leaders Offer Wisdom to Graduates

Financial Advice for Graduates

The time you've waited for has arrived. You're a graduate, you've hopefully found a job and you're on the verge of exercising newly gained independence.

The financial responsibilities ahead can be daunting. You will probably have to pay bills, purchase essentials such as food, and save for a house.

In the meantime, if you are like many graduates, you may have to start paying down student loans, take on new debt and deal with credit cards.
On the other hand, time is on your side. One of your biggest assets as you work toward setting and achieving financial goals is the value of compound growth over several decades.

The financial decisions you make now involving spending, saving and budgeting can mean the difference between struggling for the rest of your life or building toward solid financial freedom.

Here's a checklist of some of the important issues you will confront, along with tips on how to maximize the money you have available to retain and reinforce your security.

	A Place to Live
	Can you afford the place you want? Rule of thumb: Roughly one-third of your net monthly take home pay should be used to finance the place you live. Whether it's a penthouse, small house or apartment depends on many factors. Some rental properties include the cost of utilities such as electric, heat/air conditioning, water and sewer. There are other factors to consider. If your starting income is modest, you will likely pay a higher percentage for housing. Where you live is the biggest single factor in the amount you pay for rent. The cost of a studio in a big city could potentially get you a huge place out in the country. Your location is tied to many variables such as job, family and personal preference. Could you pay less by living with a roommate, which would leave extra money for other things?
	Have you factored in the cost of other "utilities" such as your phone (land line, cell or smart phone with various packages), cable TV, Internet access and furniture?
	Do you have renter's insurance to cover your personal belongings in the event of a theft, fire, flood or other disaster? Landlords' insurance is unlikely to cover your goods. What do you need to insure and which items could you simply replace out of pocket?
	Have you read the lease carefully and does it fit into your plans? You don't want to sign a two-year lease if you plan to move again in less than that time. A lease is a legal document so understand all the terms.
	Have you pondered buying a condo, townhouse or single-family home if you are one of the fortunate high-earning graduates? The sooner you purchase, the quicker you start building equity and claiming the tax benefits that come with home ownership.
	Saving and Budgeting
	Are you setting aside money from each paycheck? Once you target the amount you want to save regularly, pay yourself first. In other words, put a specified amount away before paying anything else. That way, you won't think of the money as disposable income and you won't miss it.
	Have you saved enough to cover unexpected expenses? Set enough money aside to cover car repairs or even a job layoff.
	Credit and Debt
	Do you read the fine print? When signing credit card or loan contracts, don't gloss over the details. Will the interest rates change after an introductory period? Can you get out of the contract? How much is the penalty if you make a late payment?
	Have you arranged a student loan repayment plan?  After graduation, there is a grace period before you must start paying back student loans. Although payments are not required during this stage, interest will accumulate.
	Do you need a car loan?  First, check your credit. If it's not stellar, consider a co-signer. Then, shop around for loan rates at your bank, credit union and car dealership. (You'll also need to shop around for insurance.)
	Is a new car essential? Purchasing a brand new car can keep you on a tight budget for years. Consider a slightly used vehicle, which can save you a bundle. You can get a car that looks like new for a lot less. Also, don't let a car sales person get away with emphasizing just the monthly payments. Instead, negotiate based on the overall cost.
	Health and Life Insurance
	Are you covered by health insurance? If you don't have a job with coverage, check to see when your parents' policy stops covering you. (The healthcare reform law may allow you to stay on your parents' policy for a few years.) If necessary, look into a short-term or high deductible policy.
	Do you understand your insurance coverage, protection and deductibles?
	Have you considered life insurance? If you obtain life insurance when you're young and healthy, the rates are generally less expensive. Depending on your need to insure later in life, as well as health issues that can creep up over time, the cost could rise significantly in the future.
	Retirement
	Have you thought about saving for retirement or have you started contributing to a tax-favored account? Retirement is a long way off. However, by saving even small amounts when you're young, you can amass a large nest egg because your contributions have more time to compound. Plus, contributions save money in taxes. Even better, you may be able to borrow from a 401(k) account or take money from an IRA, without paying an early withdrawal penalty, for several reasons, including the purchase of a first home.
	If you contribute to a 401(k) plan at work, does your employer make "matching contributions?" This means the employer adds in a percentage, say 25 percent or 50 percent, of every dollar you contribute.
	Do you know the basics of investing? It's a good time to learn about the stock market.As you begin the road to financial independence, use your young age, education, and earning capacity to build wealth and reach your goals.

Start establishing relationships with tax, business and legal advisers. It's not too soon to begin working with trusted advisers. During your career, you'll likely need help from experienced advisers who can assist you as your needs grow. By initiating these relationships now, you'll know who to contact for help with business, financial and legal matters.

Update on the Section 179 Deduction Tax Break

The Section 179 deduction is valuable because it allows businesses to deduct as depreciation up to 100 percent of the cost of qualifying asset additions in Year 1 instead of depreciating the cost over a number of years. The American Taxpayer Relief Act of 2012 (better known as the "fiscal cliff" legislation) included several taxpayer-friendly changes to the Section 179 rules.

More Generous Deduction Limits

For qualifying property placed in service in tax years beginning in 2012 and 2013, the fiscal cliff legislation restored the maximum Section 179 deduction to $500,000 (same as for tax years beginning in 2010 and 2011). Without this change, the maximum deduction for tax years beginning in 2012 was scheduled to drop to only $139,000 ($125,000 adjusted for inflation), and the maximum deduction for tax years beginning in 2013 would have been only $25,000.

Example 1: A calendar-year corporation adds $500,000 worth of new and used equipment and software during its 2013 tax year. Thanks to the more-generous Section 179 deduction limit, the corporation can probably deduct the entire $500,000 on its 2013 federal income tax return. Without the fiscal cliff legislation, the corporation's maximum Section 179 deduction would have been only $25,000.

The fiscal cliff legislation also restored the higher threshold for the dollar-for-dollar Section 179 deduction phase-out rule to $2 million for tax years beginning in 2012 and 2013. Without this change, the phase-out threshold for tax years beginning in 2012 would have been only $560,000 ($500,000 adjusted for inflation), and the threshold for tax years beginning in 2013 would have been only $200,000.

Example 2: A calendar-year corporation adds $2,100,000 worth of new and used equipment and software during its 2013 tax year. Under the Section 179 deduction privilege, the corporation can immediately deduct up to $400,000 on its 2013 federal income tax return ($500,000 maximum Section 179 deduction reduced dollar-for-dollar by the $100,000 excess over the $2 million phase-out threshold). Without the fiscal cliff legislation, the corporation would have been completely ineligible for any Section 179 deduction due to the phase-out rule.

Key Point: Thanks to the generous $2 million phase-out threshold, many more medium-sized businesses will be able to claim tax-saving Section 179 deductions in tax years beginning in 2012 and 2013.

Other Favorable Rules Extended

The fiscal cliff legislation also extended several temporary liberalizations in the Section 179 rules through tax years beginning in 2013. For example, most purchased software costs placed in service in tax years beginning in 2012 and 2013 will continue to be eligible for the Section 179 deduction, and Section 179 deduction elections made for tax years beginning in 2012 and 2013 can be revoked. Unless Congress takes action, however, these liberalizations will not be available for tax years beginning in 2014.

Section 179 Deductions for Qualified Real Property Costs

Before 2010, real property costs were generally ineligible for the Section 179 deduction privilege. However for tax years beginning in 2010 and 2011, a temporary exception allowed businesses to claim Section 179 deductions for up to $250,000 of qualified real property costs. The fiscal cliff legislation extended this favorable provision to cover tax years beginning in 2012 and 2013. Eligible property includes qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements. Consult your adviser for details on exactly what types of property fit into these tax-favored categories.

Qualified real property costs that are immediately written off under the temporary Section 179 deduction privilege reduce the taxpayer's overall $500,000 Section 179 deduction allowance dollar-for-dollar.

Section 179 deductions for qualified real property costs are subject to all the other standard Section 179 rules such as the deduction phase-out rule, the taxable business income limitation, and the special rules that apply to Section 179 deductions claimed by pass-through entities. Consult your adviser for details on these rules.

Example 3:  In 2013, a calendar-year corporation places in service $150,000 of eligible personal property assets and $250,000 of qualified real property assets. The corporation's maximum Section 179 deduction for the year is $400,000 ($150,000 for personal property plus $250,000 for real property).

Example 4: This year, a calendar-year corporation places in service $350,000 of eligible personal property assets and $550,000 of qualified real property assets. The corporation's maximum Section 179 deduction for 2013 is $500,000. The $500,000 can be comprised of any combination of eligible personal property costs and qualified real property costs, as long as the separate $250,000 limitation on qualified real property costs is not exceeded. For example, the corporation could expense $250,000 of real property and $250,000 of personal property. Or it could expense the entire $350,000 of personal property costs and $150,000 of real property costs.

Conclusion

The current favorable Section 179 rules can be a big tax-saver for eligible small and medium-sized businesses. However, there are a number of tax-law restrictions that are not covered in this article. For example, the Section 179 deduction cannot exceed the taxpayer's business taxable income calculated before the Section 179 deduction. As another example, special limitations apply to partnership and S corporation businesses and their owners.

Consult your adviser for details and strategies on how to take advantage of today's taxpayer-friendly Section 179 rules, which are scheduled to be unavailable in tax years beginning after 2013 -- unless Congress acts to extend them.

Did You Get an IRS Notice with a Late Payment Penalty?

 The IRS is granting penalty relief to some taxpayers who are affected by 31 forms that were delayed this year due to legislation passed at the beginning of the year. (IRS Notice 2013-24)

As you may recall, on January 2, 2013, Congress passed the American Taxpayer Relief Act of 2012 (also known as the "fiscal cliff" law). The wide-ranging law affected a number of tax provisions and the IRS forms used to report them. After the law passed, the IRS had to revise and release certain forms, which resulted in delays for some taxpayers.

Some individual and business taxpayers requested tax-filing extensions because they were attaching to their returns forms that couldn't be filed until after January.

Deadlines and Late Payment Penalties

Generally, individuals, estates, and trusts are required to file income tax returns and pay any tax due by April 15. Corporations and certain other entities must file returns and pay tax by March 15. Taxpayers can receive an extension using IRS Forms 4868, 7004 or other forms depending on the situation.

Under tax law, there generally is a late payment penalty of 0.5 percent monthly (up to 25 percent), for payments made after the due date. The IRS automatically assesses the penalty and sends a notice and demand for payment.

However, this year, the IRS announced that it will abate the late payment penalty for taxpayers who requested an extension to file a 2012 income tax return that includes one of the forms listed below, which were delayed until February or the first week of March in 2013. (Interest still applies.)

The American Institute of CPAs (AICPA) had requested that the IRS grant penalty relief. The AICPA was concerned about the effect the delays had on partnerships, S corporations, C corporations and other business tax returns.

Important: Contact your tax adviser if you receive a late payment penalty notice from the IRS and believe you are eligible for penalty relief. The IRS will still automatically send late payment penalty notices. Taxpayers and their advisers will have to apply for relief under IRS Notice 2013-24.

Delayed 2012 Forms ·    Form 3800, General Business Credit; ·    Form 4136, Credit for Federal Tax Paid on Fuels; ·    Form 4562, Depreciation and Amortization (Including Information on Listed Property); ·    Form 5074, Allocation of Individual Income Tax to Guam or the Commonwealth of the Northern Mariana Islands; ·    Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations; ·    Form 5695, Residential Energy Credits; ·    Form 5735, American Samoa Economic Development Credit; ·    Form 5884, Work Opportunity Credit; ·    Form 6478, Alcohol and Cellulosic Biofuels Credit; ·    Form 6765, Credit for Increasing Research Activities; ·    Form 8396, Mortgage Interest Credit; ·    Form 8582, Passive Activity Loss Limitations; ·    Form 8820, Orphan Drug Credit; ·    Form 8834, Qualified Plug-in Electric and Electric Vehicle Credit; ·    Form 8839, Qualified Adoption Expenses; ·    Form 8844, Empowerment Zone and Renewal Community Employment Credit; ·    Form 8845, Indian Employment Credit; ·    Form 8859, District of Columbia First-Time Homebuyer Credit; ·    Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits); ·    Form 8864, Biodiesel and Renewable Diesel Fuels Credit; ·    Form 8874, New Markets Credits; ·    Form 8900, Qualified Railroad Track Maintenance Credit; ·    Form 8903, Domestic Production Activities Deduction; ·    Form 8908, Energy Efficient Home Credit; ·    Form 8909, Energy Efficient Appliance Credit; ·    Form 8910, Alternative Motor Vehicle Credit; ·    Form 8911, Alternative Fuel Vehicle Refueling Property Credit; ·    Form 8912, Credit to Holders of Tax Credit Bonds; ·    Form 8923, Mine Rescue Team Training Credit; ·    Form 8932, Credit for Employer Differential Wage Payments; and ·    Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit

Will the Healthcare Law Increase Your Costs?

Under the sweeping Affordable Care Act (ACA), which passed in 2010 and was upheld by the Supreme Court last year, the healthcare system in the United States will be overhauled and millions of uninsured Americans will become covered.

The ACA has numerous provisions -- some that have already taken effect and some major changes scheduled to kick in next year. Among the provisions are:

• Restricting insurance companies from denying coverage, excluding individuals with pre-existing conditions, or charging more based on a person's health status.
• Creating state health insurance exchanges that will cover uninsured individuals and those currently covered under state high-risk pools.
• Requiring large employers to offer health coverage to full-time employees or be charged a penalty.
• Imposing a tax penalty on individuals who do not buy sufficient health insurance coverage.

How will the ACA affect your individual healthcare costs -- and the cost for employers providing healthcare coverage? Recently, some predictions were made in a new study published by the Society of Actuaries, a professional, educational and research organization.

The study, which focused on the individual (non-group) market, predicted that by 2017, insurance companies will have to pay an average of 32 percent more for health coverage claims on individual polices. The increased costs will come from the changes in composition of the people being covered by insurance.

Those increased costs could be passed on to certain parties in the form of higher premiums.

Other predictions from the study, titled "Cost of the Future Newly Insured under the Affordable Care Act:"

- Moving from the group market to the individual market - A significant number of people currently insured through state-sponsored high-risk pools or through the temporary Pre-Existing Condition Insurance Plan high-risk program will move into the individual market. In other words, more sick people will be covered. In states that operate a high-risk pool, the impact of these higher-cost individuals has been spread over a wider pool through approaches that vary by state.

"Under the ACA, the impact of these members' higher costs will be concentrated in the individual market," the Society of Actuaries study states.

- Employer coverage - A number of people currently insured under employer-offered plans will move to the individual market, either because employers stop offering coverage or because the people perceive more value in the individual market than in their employer-provided plan. According to the Society of Actuaries research, even small shifts from the employer-provided market will have a significant effect on costs in the much smaller individual market.

- The individual market size - Currently, most people don't buy insurance as individuals. But the size of the individual market will more than double, the study predicts, driven in part by people who are below 200 percent of the federal poverty line coming into the market. "This group of people are considered to be 'good risks' and are generally expected to bring down average costs. But other changes in composition of the individual market will drive average costs up," the Society of Actuaries states.

Specifically, shifts of currently insured people from high-risk pools, the employer market, and previously uninsured persons who must pay for individual market coverage, "will overwhelm the expected lower costs anticipated by the influx of newly-insured persons in the exchanges receiving federal benefit and premium subsidies," according to the Society of Actuaries.

As a result, the underlying claims cost of insurance in the individual market will increase by an average of 32 percent nationally, when compared to what it would have been without the reform law.

- State differences - The change in individual market costs will vary substantially across state lines. This can be attributed to factors including whether the state has a high-risk pool, demographic/ income differences in populations and underwriting practices.

States that are currently low cost could see increases of up to 80 percent, while states that are now high cost could see double digit decreases.

Top Five State Increases
Ohio	80.9 percent
Wisconsin	80 percent
Indiana	67.6 percent
Maryland	66.6 percent
Idaho	62.2 percent
Top Five State Decreases
New York	13.9 percent
Massachusetts	12.8 percent
Vermont	12.5 percent
Rhode Island	6.6 percent
New Jersey	1.4 percent

Note: After the study was released, White House officials disputed its findings stating that it was speculative and didn't address all financial aspects of the law. In response, a Society of Actuaries spokesperson said the study did not attempt to address all factors affecting cost increases. The goal was to look at claims -- described as the "most important driver of health care premiums."