Practical Tips To Enhance Your Financial Freedom

Are You Tossing Out Tax Documents Too Soon? 

The rule of thumb for individual tax filers has been to keep federal tax returns and all supporting documents for 3 full years. This is based on the principle that the IRS can audit your last 3 returns only if they believe that you made a good-faith error. However, be aware that the IRS can audit your returns for up to 6 years if they suspect that your income was misrepresented on any tax return by 25% or more. Therefore, to be completely safe, keep tax returns and supporting documents for 7 years before shredding them. In addition, it's a good idea to keep a permanent copy of your 1040 forms from each year's return.

The Pitfalls of Plastic

Credit cards are a great tool when it comes to building up a good credit history. However, according to a recent report, credit card debt in America reached nearly $800 billion in 2005. How can you obtain the benefits while avoiding the pitfalls? Here are some dos and don'ts:

• Monitor your balances: Credit card usage and management makes up 30% of your credit score. Keep each account balance below 50% of the available credit limit at all times to maintain your score, and below 30% to improve your score.
• Read everything: Credit card companies can change the terms of your account at any time with only a simple written notification. Carefully review monthly statements along with any correspondence received throughout the life of the account.
• Evaluate special rewards programs: Generally, "rewards" cards charge higher rates as well as annual fees. Unless you consistently pay off your balance in full, the programs aren't usually worth it.
• Watch for universal penalty fees: If you fall behind on one credit card payment, other companies can charge you their highest penalty rates as well, even if you're in good standing with them.
• Avoid special offers with introductory rates, delayed payments, or balance transfers combined with similar offers: These programs are tempting, but you will pay for it in the long run once temporary rates change and interest comes due.

The New Tax Bill & You

In May, the President signed a $69 billion tax bill which could positively impact your investment and savings strategies. The bill eliminates the modified adjusted gross income requirement for converting a traditional IRA or SEP IRA to a Roth IRA, so higher-income investors who were previously locked out will have access to this retirement vehicle beginning in 2010. There are certain restrictions and tax implications involved, but the benefits could be substantial.

In addition, the new tax bill expands the duration of the tax rate reduction for long-term capital gains and dividends for an additional two years, so now it won't expire until 2010. The bill also raised the Alternative Minimum Tax (AMT) income exemption levels for the 2006 tax year. This, in combination with other AMT modifications, will help to keep millions of taxpayers from having to pay more to Uncle Sam in April of next year.

Meet with your accountant or financial planner to learn more about this new legislation and how it could impact you.

College Savings Plans

Saving for your child's education just became a bit more complex as a result of the new tax bill passed in May. The Uniform Gifts to Minors Act (UGMA) is a popular program which allows minors to own stock in their name and, if they fall between the ages of 14-17, to pay taxes on the proceeds exceeding $1700 at their own lower tax rate. Under the new legislation, however, these proceeds will be taxed at the parents' higher rate, challenging the growth potential of this investment plan.

Other popular college savings plans include the 529 State College Savings Plan, the Prepaid 529, Coverdell ESA, and Financial Aid. The 529 and Prepaid 529 Plans offer special tax breaks to anyone (not just a relative) who opens an account on behalf of the future college student. Contributions are kept in a trust fund earmarked for a child's education.

Visit www.collegesavings.org and www.finaid.org for more details about the various savings plans available.