Common vs. Preferred Stock – What’s the Difference

But seriously, some investors do think that now is the right time to buy certain stocks. However, there’s more to playing the stock market than knowing which company stocks to purchase and when to sell. Inexperienced investors should take the time to learn the ins and outs of the equity market before beginning.

One thing to consider is whether to purchase common or preferred stock. They are the two classes of stocks that are sold by companies. Each is subject to different financial terms.
Common stocks are securities representing equity ownership in a corporation. Owning them usually gives investors voting rights (voting shares) in influencing the corporation’s objectives and policies, determining stock splits and electing the company’s board of directors. One share of common stock is usually equal to one vote.

Common stock shareholders are entitled to a share of the company’s gains through dividends and capital appreciation. Capital appreciation occurs when a common stock’s value increases and investors make a profit when they sell the stock at its higher market value. Dividends are paid from a company’s retained or current earnings typically on a quarterly basis. This payment is not guaranteed, but rather is linked to the market like the price of common stock.

But if the company tanks and is liquidated, common stock investors can claim rights to its assets only after bondholders, other debt holders and preferred stockholders have been paid. Preferred, like common stocks, represent partial ownership in a company. But preferred stock shareholders do not have any of the voting rights in the business available to common stockholders. Companies that want to separate their investors’ economic interests from the actual governance of the business usually favor preferred stock.

Preferred stocks pay fixed dividends that do not fluctuate with the performance of the company. The downside is that the company is not obligated to pay these dividends if it doesn’t have sufficient financial resources. The main advantage of owning preferred stock over common stock is that investors have a greater claim on the company’s assets in the event the company is liquidated.

Posted on December 21, 2009 Read More

Rx for a tax ache: Deducting medical expenses

The general IRS definition states, “Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease and the costs for treatments affecting any part or function of the body.”

Medical expenses include fees paid to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists and Christian Science practitioners. The costs of equipment, supplies and diagnostic devices needed for qualified medical care services are also tax-deductible medical expenses.

Premiums paid for insurance that covers the expenses of medical care, limited amounts paid for any qualified long-term care insurance contract and amounts paid for qualified long-term care services are tax-deductible.

The cost of transportation to get medical care as well as meals and lodging charged by the hospital, if the main reason for being there is to receive medical care, are includable. Dental expenses are also specifically included as medical expenses.

Among other medical treatment and service expenses includable are:

  • Acupuncture
  • Alcoholism
  • Ambulance
  • Artificial teeth and limbs
  • Body scan
  • Breast reconstruction surgery following a mastectomy for cancer
  • Birth control pills
  • Braille books and magazines

Capital expenses for special equipment installed in a home or constructions for home improvements to accommodate a person with a disabled condition are considered medical care.

Expenses that are merely beneficial to general health are not. These include vitamins, over-the-counter medicines, toothpaste, toothbrushes, toiletries, cosmetics, a trip or program for the general improvement of health and most cosmetic surgery.

Because there is some room for interpretation, it is important to evaluate each situation individually to see whether the expenses fall under this tax benefit provision. For instance, payments for a smoking-cessation program and for drugs prescribed to alleviate nicotine withdrawal are tax-deductible. The costs of nicotine gum and nicotine patches, which do not require a prescription, are not.

Posted on November 1, 2009 Read More

SEP IRAs: Ideal retirement plans for the self-employed and small businesses

The plan has high contribution allowances. Employers can make tax-deductible plan contributions – up to 25 percent of income or $49,000 (for 2009), whichever is less – to each eligible employee’s SEP IRA on a discretionary basis.

Once deposited, the SEP IRA contributions become traditional IRA assets and are subject to many of the rules governing traditional IRAs. Its funds can be invested the same way as any other IRA funds. SEP IRA contributions are tax-free and investment earnings are tax-deferred. Contributions are taxed when the employee receives a distribution from the SEP IRA.

Withdrawals after age 59½ are taxed as ordinary income. A 10 percent IRS penalty may also be charged on top of the income taxes for withdrawals made before age 59½. However, it can be rolled over tax-free to another SEP IRA, traditional IRA or another employer’s qualified retirement plan.

Under a SEP IRA plan, all employees must receive the same benefits. The maximum annual compensation on which contributions can be based is $245,000 for 2009.

SEP IRA plans are ideal for self-employed individuals and small businesses because they are easy to administer. Generally, it does not require the filing of any documents with the government. Additionally, its startup and maintenance costs are very low compared with those of other qualified plans. Some businesses may be eligible for a tax credit of up to $500 per year for each of the first three years for the cost of starting the plan.

SEP IRA contributions are discretionary, meaning that every year the employer can decide if it wants to fund the SEP for that year. This makes SEP IRAs particularly ideal for businesses that are cyclical in nature or during hard economic times. During the good years, a company can make larger contributions for its employees and reduce that amount when profits are not so good.

Posted on October 13, 2009 Read More
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