Some people, it seems, go to extremes just to avoid paying taxes.
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Consider L. Dennis Kozlowski, who recently resigned as chief executive of troubled Tyco International Ltd., a man who had been rolling in dough as one of America’s highest-paid bosses.
He has been indicted on charges that to avoid $1 million in sales tax on artwork he conspired with art galleries and consultants.
The plan, according to law enforcement authorities: Pieces valued at more than $13 million, including Monet and Renoir paintings, were bought using a company loan and shipped to Tyco corporate headquarters in New Hampshire instead of Kozlowski’s Manhattan home. The 8.25 percent New York combined city and state sales tax was thereby avoided.
The result: Kozlowski faces a 12-count indictment that includes 11 felony counts, each punishable by up to four years in prison. He has entered a plea of not guilty and posted a $3 million bond.
Schemes of the rich and powerful aside, millions of Americans face a serious money crunch, with paying too much in taxes only one issue they’re fretting over. The financial planning profession is adapting to try to better meet current needs.
Emergency funds, education funding and credit/debt management have recently been given greater emphasis in the two-day, 10-hour examination of the Certified Financial Planner (CFP) Board of Standards. That’s the test all CFPs must pass.
“Especially with aging Baby Boomers, these things are just coming to the fore,” explained Lance Ritchlin, an executive with the Certified Financial Planner Board of Standards in Denver. “Financial planning is a very holistic process with everything you decide having an effect on every other aspect of your life.”
With the economy not what it once was, demand for financial planners is on the rise. Last year, the CFP exam was administered 5,360 times to first-time and repeat applicants, a 17 percent rise over four years ago when the bull market was raging. There are also more questions on the current exam about planners’ liability for their advice, since the industry faces greatly increased complaints when operating in a depressed market.
Slowly but surely, Americans are realizing they must budget and plan for a rainy day, whether through a planner or on their own.
“The generation that went through the Depression looks at budgeting, saving and spending very differently from the generations that came after them, with the philosophy that if they didn’t need something, they would save,” said Mark Balasa, certified financial planner, certified public accountant and co-president of Balasa Dinverno Foltz & Hoffman financial advisers in Schaumburg. “Later generations have tended to want nice things now, overspend for them and not save at all.”
Making a family budget is important but “not a popular topic” among most people, Balasa acknowledges.
Come up with a credible budget you can follow, not some pie-in-the sky example that will quickly be tossed aside. Start by putting together a balance sheet of your assets and how much you owe. If the ratio between those two looks manageable, construct your budget to make it easier for you to save. If you’re overburdened with a lot of debt, your budgeting will then help you get out from under that debt.
Next, closely examine your cash flow for a full month, including the pocket cash that most folks forget about.
“Even people who are wealthy are astonished at what they spend when they actually stop and take a look at it,” said Balasa. You can use either a simple ledger or a financial software package to track your habits. Calculate the percentage of your income that goes to various expenditures. It’s best if no more than two-thirds of monthly income goes for necessities such as food, utilities and housing. Try to keep monthly bills for car and credit installments under 10 percent of your income.
Once you’ve got all the numbers in front of you, assess where you’re spending too much and where you may be able to cut back. Set goals. Go over past tax returns to track what’s coming and going. Taxes are always a key consideration.
“Budgeting for taxes includes maximizing your company 401(k) plan, maximizing your individual retirement account contributions and taking advantage of flexible spending accounts,” said Martin Nissenbaum, national director of personal income tax planning for Ernst & Young in New York. “In addition, for those who don’t have tax withheld at work because they’re self-employed, there’s the need to put aside money regularly each month toward paying quarterly estimated taxes.”