Step 1

Choose which return to file the interest on, the parents’ return or a separate return with the child only. This avoids the need for filing a separate return for your children. The other option is to file a return for the child in addition to your return.

Step 2

Determine the amount of interest earned. This would be the amounts of all 1099 INTs issued in the child’s name. If the amount is more than $1,900, it’s possible that a Form 8615 would be required. This form would be required under the following conditions:

1. that the child would be under age 18 (or age 24 if a full time student).
2. Another condition exists that would require the child to file his or her own tax return.
3. That the child does not file a joint tax return. And, 4. that at least one of the child’s parents be alive at the end of the tax year. The Form 8615 includes calculations for figuring a child’s taxable interest payments. If the amount earned is less than $9,500 the parents can opt to include that amount on their own tax return without needing a separate one for their child.

They may do so on the following conditions:

1. The age requirements are similar in that the child must be under the age of 19 or 24 if a full time student.
2. There was no other income earned outside of interest payments or investments. 3. The child’s gross income can’t exceed a total of $9,500.
4. The child is required to file a return unless this election is made to include it on the parent’s return.
5. The child cannot file a joint return for the year.
6. There can have been no estimated taxes paid throughout the year or federal with-holdings from the earnings. Making this election requires the Form 8814 which must be filed with the 1040 long form.

Step 3

Decide which option to pursue. By far claiming your child’s interest on your return is easier than paying to have one more return prepared. If you are required to file two returns there are a couple of things to remember.

One, your child’s return can be filed and you can still claim the child as an exemption and a dependent by indicating you wish to do so on his return. File both together or e-file yours and mail the child’s return.
Two, this is not a return you can have filed by the simple basic return preparers at a local tax preparation franchise. More than likely, they’ve never seen an 8814 or 8615 in all their years of practice. The disadvantage to this option is that the child’s earnings will get taxed at a typically higher rate, yours.

The other option (filing two returns) may save you on taxes paid out of your child’s earnings, but the requirements are strict and must be followed to the letter. The additional costs to prepare two returns will increase the actual cost of this option as well.

Having a budget is the foundation of managing your money. Making budget is easy when you have a dependable income that’s the same every month. But what do you do when your income varies from one month to the next? This is the case for many contractors and freelancers. Your expenses remain the same, but your income doesn’t. You still need a budget and you can make one. You have to go about it differently.

Total your expenses

When you’re making a variable-income budget, start by totalling your income as you would if your income was fixed. Add up the things you spend money on every month. This includes rent/mortgage, utilities, car note, car insurance, health insurance, life insurance, phone bill, loan payments, credit card payments, and taxes. You should even calculate how much you’ll spend on variable expenses like gas and food.

Average your income

If you had a variable income last year, too, use your last tax return to come up with an average monthly income. Just divide your gross income by 12 to come up with an average monthly income. If you don’t have a year’s worth of income, average the months you have. For example, if you’ve been freelancing or contracting for 7 months, add up the last 7 months of income and divide it by 7. This will give you an average income to base your budget on.

Does your average monthly income exceed your expenses?

Your average monthly income needs to meet or exceed your expenses. If not, you’re going to run into a cash flow problem. Adjust your expenses to fall below your average monthly income. Some examples of places you can cut back are: gas, food, utilities (save on electricity), and entertainment. For more ways to cut your expenses, go through each category and decide whether it’s a need or a want. Wants can be cut out.

Your budget in practice

You’ll need to have at least three accounts – one checking account and two savings accounts.

The checking account will hold your monthly income that you use to cover bills and other expenses.

One savings account will hold your income then be used to “pay” yourself at the end of the month.

The other savings account will be for savings. You will only deposit money into this account. You will never withdraw money from it unless it’s to invest it in a higher interest rate account.

Start your budget at the beginning of the month. Your checking account needs to have enough in it to cover your expenses for the month.

As you get paid throughout the month, put the money into Savings Account #1. You shouldn’t have to touch your savings account during the month. If you do, then you didn’t budget enough for your expenses or you’re overspending (or you ended up getting paid less than average, see below). At the end of the month, around the 28th, transfer $2500 (or what you need to cover your expenses) into your checking account.

Less than average months vs. higher than average months

When your income varies, some months will be less than average and some will be higher than average. Once you’ve been using this variable-income budgeting method for a few months, you won’t notice the ups and downs of your budget as much. The surplus months will build up your savings account to help offset the “famine” months.

However, if you experience a “famine” month in the first 1-2 months of using this variable-income budgeting method, you might have trouble meeting all your financial obligations. In this case, you have a few options. Cut back on some of your expenses (the best option). Pull from your emergency fund (which ideally has 6-12 months of living expenses). Pull from your savings (only when options 1 & 2 don’t work).

Don’t let a famine month discourage you. Like I said earlier, once you have a couple of months where your income is at or above your average income, your savings will build up and the bumps will smooth out. Give it six months and you’ll be happy you did.

The money we earn is partly spent and the rest saved for meeting future expenses. Instead of keeping the savings idle we may like to use savings in order to get return on it in the future. This is called Investment. Investment means putting our money to work to earn more money. We needs to invest to earn return on our idle resources, to generate a specified sum of money for a specific goal in life and to make a provision for an uncertain future. One of the important reasons why one needs to invest wisely is to meet the cost of Inflation. Inflation is the rate at which the cost of living increases. The cost of living is simply what it costs to buy the goods and services you need to live. Inflation causes money to lose value because it will not buy the same amount of a good or a service in the future as it does now or did in the past. For example, if there was a 6% inflation rate for the next 20 years, a Rs. 100 purchase today would cost Rs. 321 in 20 years. This is why it is important to consider inflation as a factor in any long-term investment strategy. Remember to look at an investment’s ‘real’ rate of return, which is the return after inflation. The aim of investments should be to provide a return above the inflation rate to ensure that the investment does not decrease in value. For example, if the annual inflation rate is 6%, then the investment will need to earn more than 6% to ensure it increases in value. If the after-tax return on your investment is less than the inflation rate, then your assets have actually decreased in value; that is, they won’t buy as much today as they did last year.

Mutual Fund

Mutual funds also offer good investment opportunities to the investors. Like all investments, they also carry certain risks. The investors should compare the risks and expected yields after adjustment of tax on various instruments while taking investment decisions. The investors may seek advice from experts and consultants including agents and distributors of mutual funds schemes while making investment decisions.

LITERATURE REVIEW

Mutual fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money invested by them. Investors of mutual funds are known as unit holders.The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public.

Fig. referred to mutual fund.com(Mutual Fund Operation Flow Chart)

Unit Trust of India was the first mutual fund set up in India in the year 1963. In early 1990s, Government allowed public sector banks and institutions to set up mutual funds. In the year 1992, Securities and exchange Board of India (SEBI) Act was passed. The objectives of SEBI are – to protect the interest of investors in securities and to promote the development of and to regulate the securities market. As far as mutual funds are concerned, SEBI formulates policies and regulates the mutual funds to protect the interest of the investors. SEBI notified regulations for the mutual funds in 1993. Thereafter, mutual funds sponsored by private sector entities were allowed to enter the capital market. The regulations were fully revised in 1996 and have been amended thereafter from time to time. SEBI has also issued guidelines to the mutual funds from time to time to protect the interests of investors. All mutual funds whether promoted by public sector or private sector entities including those promoted by foreign entities are governed by the same set of Regulations.

A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset Management Company (AMC) and custodian. The trust is established by a sponsor or more than one sponsor who is like promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unit holders. Asset Management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund. SEBI Regulations require that at least two thirds of the directors of trustee company or board of trustees must be independent i.e. they should not be associated with the sponsors. Also, 50% of the directors of AMC must be independent. All mutual funds are required to be registered with SEBI before they launch any scheme. However, Unit Trust of India (UTI) is not registered with SEBI (as on January 15, 2002).

1. Schemes according to Maturity Period:

A mutual fund scheme can be classified into open-ended scheme or close-ended scheme depending on its maturity period.

Open-ended Fund/ Scheme
An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity.

Close-ended Fund/ Scheme
A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.

2.Schemes according to Investment Objective:

A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows:

Growth / Equity Oriented Scheme
The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time.

Income / Debt Oriented Scheme
The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations.

Balanced Fund
The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds.

Money Market or Liquid Fund
These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.

Gilt Fund
These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes.

Index Funds
Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc These schemes invest in the securities in the same weight age comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as “tracking error” in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme. There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges.

3. Sector specific schemes

These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. E.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time. They may also seek advice of an expert.

4. Tax Saving Schemes

These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like any equity-oriented scheme.

Load or no-load Fund
A Load Fund is one that charges a percentage of NAV for entry or exit. That is, each time one buys or sells units in the fund, a charge will be payable. This charge is used by the mutual fund for marketing and distribution expenses. Suppose the NAV per unit is Rs.10. If the entry as well as exit load charged is 1%, then the investors who buy would be required to pay Rs.10.10 and those who offer their units for repurchase to the mutual fund will get only Rs.9.90 per unit. The investors should take the loads into consideration while making investment as these affect their yields/returns. However, the investors should also consider the performance track record and service standards of the mutual fund which are more important. Efficient funds may give higher returns in spite of loads. A no-load fund is one that does not charge for entry or exit. It means the investors can enter the fund/scheme at NAV and no additional charges are payable on purchase or sale of units.

Assured return scheme
Assured return schemes are those schemes that assure a specific return to the unit holders irrespective of performance of the scheme. A scheme cannot promise returns unless such returns are fully guaranteed by the sponsor or AMC and this is required to be disclosed in the offer document. Investors should carefully read the offer document whether return is assured for the entire period of the scheme or only for a certain period. Some schemes assure returns one year at a time and they review and change it at the beginning of the next year.

Considering the market trends, any prudent fund managers can change the asset allocation i.e. he can invest higher or lower percentage of the fund in equity or debt instruments compared to what is disclosed in the offer document. It can be done on a short term basis on defensive considerations i.e. to protect the NAV. Hence the fund managers are allowed certain flexibility in altering the asset allocation considering the interest of the investors. In case the mutual fund wants to change the asset allocation on a permanent basis, they are required to inform the unit holders and giving them option to exit the scheme at prevailing NAV without any load. Mutual funds normally come out with an advertisement in newspapers publishing the date of launch of the new schemes. Investors can also contact the agents and distributors of mutual funds who are spread all over the country for necessary information and application forms. Forms can be deposited with mutual funds through the agents and distributors who provide such services. Now a days, the post offices and banks also distribute the units of mutual funds. However, the investors may please note that the mutual funds schemes being marketed by banks and post offices should not be taken as their own schemes and no assurance of returns is given by them. The only role of banks and post offices is to help in distribution of mutual funds schemes to the investors. Investors should not be carried away by commission/gifts given by agents/distributors for investing in a particular scheme. On the other hand they must consider the track record of the mutual fund and should take objective decisions.

The performance of a scheme is reflected in its net asset value (NAV) which is disclosed on daily basis in case of open-ended schemes and on weekly basis in case of close-ended schemes. The NAVs of mutual funds are required to be published in newspapers. The NAVs are also available on the web sites of mutual funds. All mutual funds are also required to put their NAVs on the web site of Association of Mutual Funds in India (AMFI) http://www.amfiindia.com and thus the investors can access NAVs of all mutual funds at one place. The mutual funds are also required to publish their performance in the form of half-yearly results which also include their returns/yields over a period of time i.e. last six months, 1 year, 3 years, 5 years and since inception of schemes. Investors can also look into other details like percentage of expenses of total assets as these have an affect on the yield and other useful information in the same half-yearly format. The mutual funds are also required to send annual report or abridged annual report to the unit holders at the end of the year. Various studies on mutual fund schemes including yields of different schemes are being published by the financial newspapers on a weekly basis. Apart from these, many research agencies also publish research reports on performance of mutual funds including the ranking of various schemes in terms of their performance. Investors should study these reports and keep themselves informed about the performance of various schemes of different mutual funds. Investors can compare the performance of their schemes with those of other mutual funds under the same category. They can also compare the performance of equity oriented schemes with the benchmarks like BSE Sensitive Index, S&P CNX Nifty, etc. On the basis of performance of the mutual funds, the investors should decide when to enter or exit from a mutual fund scheme

As already mentioned, the investors must read the offer document of the mutual fund scheme very carefully. They may also look into the past track record of performance of the scheme or other schemes of the same mutual fund. They may also compare the performance with other schemes having similar investment objectives. Though past performance of a scheme is not an indicator of its future performance and good performance in the past may or may not be sustained in the future, this is one of the important factors for making investment decision. In case of debt oriented schemes, apart from looking into past returns, the investors should also see the quality of debt instruments which is reflected in their rating. A scheme with lower rate of return but having investments in better rated instruments may be safer. Similarly, in equities schemes also, investors may look for quality of portfolio. They may also seek advice of experts.

Almost all the mutual funds have their own web sites. Investors can also access the NAVs, half-yearly results and portfolios of all mutual funds at the web site of Association of mutual funds in India (AMFI) http://www.amfiindia.com. AMFI has also published useful literature for the investors. Investors can log on to the web site of SEBI http://www.sebi.gov.in and go to “Mutual Funds” section for information on SEBI regulations and guidelines, data on mutual funds, draft offer documents filed by mutual funds, addresses of mutual funds, etc. Also, in the annual reports of SEBI available on the web site, a lot of information on mutual funds is given. There are a number of other web sites which give a lot of information of various schemes of mutual funds including yields over a period of time. Many newspapers also publish useful information on mutual funds on daily and weekly basis. Investors may approach their agents and distributors to guide them in this regard.

Books:

Beri, GC (1996), “Marketing Research”, Tata Mcgraw- Hill., New Delhi. Kothari,C R (2005),”Research Methodology: Methods & Techniques”, Vishwa publication., New Delhi. Kotler & Keller,(2006), “Marketing Management”, Printice Hall Of India Ltd., New Delhi. Saxena, Rajan. (2003), ” Marketing Management”, Tata Mcgraw- Hill Publishing Company Limited, New Delhi.

Have you ever completed your tax return to find out that you owe the federal government thousands of dollars? If so, I expect it was because you raided your pension or retirement plan. If you haven’t learned this painful lesson yet, you should read this article so that you don’t end up owing the IRS thousands.

“NEVER TAKE MONEY OUT OF YOUR RETIREMENT PLAN!” read the sign that hung in the tax accountant’s office. I knew this was an overstatement, but understood why the accountant had such a sign in his office. Too many times did I, as a tax accountant myself, have to console crying or angry clients after explaining to them that they owed the government thousands of dollars because they withdrew money from their retirement or pension plan. The worst part is that these people that withdrew were often already facing immense financial problems – job losses, foreclosures, and bankruptcies.

If you take money out of your pension or retirement plan, you will first find out that the law requires retirement plan administrators to withhold 20 percent of your money for the federal government. Most people are upset by this news and believe withholding this amount will cover their tax bill. After all, it is a lot of money. What’s important for you to know is that it’s only the beginning.

Most taxpayers still need to worry about more federal and state taxes due. If you’re in the 28 percent tax bracket, you’ll owe the federal government another 8 percent of the amount you withdraw. Worse yet, if you’re under 591/2 years of age, you’ll most likely be penalized another 10 percent. In addition, most states will tax you 5 to 10 percent.

How will this affect your tax bill? If you withdraw $20,000, the plan administer will withhold 20 percent, leaving you with $16,000. By April 15 you’ll realize that you owe another $3,600 to the federal government and $1,500 to the state. So by taking out $20,000 of retirement savings, you end up with only $10,900. Now you’re probably beginning to understand why that tax accountant hung the sign “NEVER TAKE MONEY OUT OF YOUR RETIREMENT PLAN!”

Sure, there are exceptions. There are a number of ways to avoid the 10 percent penalty – using the retirement proceeds for tuition, medical costs, or to buy your first time home (up to $10,000). Some states don’t have an income tax. And, of course, these penalties and taxes don’t apply to ROTH Individual Retirement Accounts.

What’s important to remember is that your tax advisor will be able to explain to you the financial consequences that specifically pertain to your situation. He or she may even be able to suggest alternatives, such as taking a loan out against your retirement plan. Remember, contributing to a retirement account is a wise choice, just don’t make the very unwise choice by liquidating your account before speaking to a tax professional.

If you have a small business you know that you have to keep all of your financial records as organized as possible to ensure that you can make payroll accurately as well as file an accurate and timely tax return. There are many different programs for you to choose from, which can make the process of getting organized a bit overwhelming. Most programs today are very easy to use, and once you get the hang of it you can make payroll as well as tax payments very easy to deal with.

If you need help with payroll taxes you might want to look at a program such as QuickBooks. This program is manufactured by Intuit and is one of the leading programs for small businesses that need accounting software. There are several different versions available such as QuickBooks Basic, the QuickBooks Pro, as well as QuickBooks Premier. This online tax program has time tracking software that is nice, and the program is available for both Windows and Macintosh based computers. Many find that this has all of the features that they need because it allows them to do tracking, banking, invoicing, statements, and more all in one program.

Another great small business software is Small Business Money by Microsoft. This software has been created with business in mind and allows for users to create invoices, track spending, manage cash flow, handle payroll and so much more. There are different versions of this software available so that small business owners can find the version that best suits them and their specific needs. Many report that they like Money because it is very easy to use, without all kinds of extra bells and whistles that simply get in the way.

If you need help with payroll taxes and accounting you may also want to check out Peachtree. This is a great accounting software that will allow you to track spending, handle payroll, and do basic account management very easily. The software is meant to be used by small and medium sized companies and works much like Quicken and QuickBooks, though some prefer this program and its small differences that it has.

As you can see, there are many different programs on the market today that can help small and medium sized companies handle their payroll taxes and other day to day business maintenance. Many find that trial and error is the best way to find the program that works for them. Making a list of your basic needs will help you find the program that is best for you.