Get the job done? By this I mean provide cash (liquidity) in the event one passes at an early age. Or, at an age when the man or woman has debts, financial obligations, and “people to take care of.” In theory, as a person enters retirement age, debts should be paid off. Or, at least, the value of assets should exceed liabilities, i.e., a positive net worth. As such, the need for life insurance wanes as a person gets older, dependents become self-sufficient, and one’s assets and investments exceed liabilities.

But the insurance industry developed – to its own great benefit – insurance products that offer additional features. Mainly, saving and investment features. And with heavy marketing, primarily person-to-person, the industry has sold hundreds of billions of whole and variable life policies. Yes, the mandatory monthly payment requirement of said can provide a “forced saving” mechanism that can lead to wealth creation, but if one can be disciplined enough to save on his or her own without the help of an “intermediary,” and invest wisely, one would be well ahead of the game by cutting out the high-priced salesman and insurance “middleman.” Term life insurance is comparatively inexpensive.

Before You Buy

Whether you buy term, whole or variable life insurance, you should only buy insurance and annuity products from highly rated companies. Check the financial health, i.e., rating, before doing business with them. The primary rating firms are Moody’s, S&P, and Fitch. You’ll want to buy insurance only from companies rated “high” or “prime.” For Moody’s, that’s an Aa3 rating or better. For S&P and Fitch, it’s AA- or higher. See the accompanying ratings table.

Shelter Proceeds from Tax

Life insurance policy benefits are paid out at the time of death of the insured. That’s why it’s called a “death benefit.” But with death comes estate tax, commonly referred to by opponents of the tax as the “death tax.”

Sure, the wealth of a deceased passes to his or her spouse tax-free, but the result is a mere delay in the estate tax because Uncle Sam will get his cut when the surviving spouse passes. That means less for the children and grandchildren if the value of the estate exceeds certain thresholds.

So why have a life insurance death benefit paid into an estate that’s soon to be taxed? One can hold the policy in an irrevocable life insurance trust (ILIT) and avoid the tax altogether. When the insured passes, the death benefit is paid into the trust. The proceeds are then invested as directed by the trustee (as stipulated by the trust document). Funds are then periodically distributed to the surviving spouse, once again as directed by the trust document. Then, upon the spouse’s death, the money that remains in the trust is distributed to the heirs.

Canceling a Policy

Don’t cancel a life insurance policy without first determining the annual net cost, i.e., the annual premium less the annual buildup in cash value plus any annual dividends. You may find that the policy does not cost as much as you think. To determine the net cost, request what is called an “in-force illustration” from your agent. Do not arbitrarily cancel or cash in an annuity or life insurance policy. The move can result in substantial taxable income and, possibly, tax penalties. Get a letter from your agent and insurance company on the tax consequences before taking such an action.

Also, don’t risk having your life insurance unintentionally lapse for nonpayment. Notify the insurers on all policies that the cash value of the policies (or any earned dividends) is to be automatically used to pay for any missed premiums.

Cautions on Beneficiaries and Co-Owners

Don’t arbitrarily designate irrevocable beneficiaries or co-owners. You’ll need their approval to borrow from the policy, apply dividends to premium payments, change ownership, or effect other important policy amendments.
Tax and estate planning is complex. Always secure the aid of a skilled and experienced financial advisor – someone that’s not also the insurance salesperson!

Growth

Establish a track record of consistent revenue and earnings growth. A look at the valuation equation clearly demonstrates the impact growth has on price:

The discount rate is also referred to as the “required rate of return.” Required rates of return for buyers of small and mid-size private companies are in the 25% to 33% range. So, if the growth rate is zero, earnings are $100K and the required rate of return is 25%, the price (value) is $400K. Use the same data but a growth rate of 20% and the value becomes $2 million [$100K / (25% - 20%)].

Yes, growth is sexy. Just ask Bruce MacRae, Managing Director of Hastings Equity and a serial business buyer. “Without a doubt, we want growth” is what he’ll tell you.

Branded, Proprietary Products

Do you sell a commodity product at a price determined largely by your competitors, or your own product – under your own label – at a premium? If you raised prices, could your customers easily buy elsewhere?

Do your customers ask for your product by your own proprietary name that you own or by its commodity name (or worse, your competitor’s proprietary product name)?

Branded means it’s not just soup; it’s Campbell’s Soup. Customers will ask for it and pay a bit more because they trust they’ll get what they expect. Proprietary means it’s your design. Your mix. And they have to come to you to get it.

Barriers to Entry

Can competitors easily begin offering a product similar to yours and sell to your customers and prospects, or would they have a pretty hard time pulling it off? The creator of a new FDA-approved drug has barriers to competitors’ products…until the patent runs out. If you own a residential lawn service, anyone with a truck and a mower and Weed Eater® can knock on your customer’s door and offer to do it for $5 less. If, however, you have a long-term lease on the only rock quarry in the region, you might have a pretty defensible competitive position and, therein, the ability to price high enough to earn a decent profit. Even more reason to expect you’ll be able to earn a decent profit for the foreseeable future (so long as demand for the rock remains).

Switching Costs

How easily can your customers dump you and go with a competitor? Ideally, they’d have to incur a burden that would make it untenable. Like, say, the software company whose software you license for your company database. Sure, you could switch to another database software company but it’d be a huge pain in the ankle. You’ll continue to pay them their annual fee and tolerate their poor service until it becomes absolutely unbearable.

Recurring Revenue

Buyers like revenue they don’t have to work for. Or, at least, they only have to sell once and it keeps on producing. As in the above example, software license revenue. Or like the company that monitors your home security alarm. Once you sign up with them and they install your system, you pay them $29 every month forever (or at least a very long time). What do they have to do? Call you twice a year when you trip your alarm?

The opposite of evergreen revenue is, say, capital equipment, construction or other “bid work” and “job shop” work. A customer orders, you do the work, they pay you, and it’s over. Business buyers are not real keen on this type of revenue. It also tends to be very cyclical, i.e., it ebbs and flows with the economic cycles. Business owners in these types of businesses should find ways to garner recurring revenue such as expanding into maintenance and repair. Or, better yet, long-term contracts for the delivery of maintenance and repair services.

Scalable

“Scalable” means revenue can be grown rapidly without incurring significant expense. If you have to spend $250,000 or hire and train six new people to support a $1 million increase in revenue, you’re not scalable. Back in the late 80s, when the Internet was exploding and Internet commerce was taking hold, my uncle worked out a deal to sell a unique line of proprietary, hand-carved duck calls via an online retailer. He’d buy the calls from the whittler for $25 a piece and sell them for $200. He boasted of the size of the market – worldwide – and of the money he could make if sales took off. And so I asked, “How fast can this guy whittle?” After pondering for a minute he replied, “About one a week.” This little venture was NOT scalable.

Short Sale Cycle

Does it take you nine months to close a sale and your close rate is 10%, or is your product or service an automatic or “quick” sale? Smart business buyers like short sales cycles and automatic purchases – like a snack food distribution business. Long sales cycles combined with large-dollar orders scare business buyers. These companies always seem to be six months from hitting it big, but rarely do.

Short Cash Cycle

If you sell to billion-dollar corporations that require you to extend 90-day terms and pay in 120, you have a long cash cycle. If you also have to buy inventory in advance and keep it in stock before you sell it on credit, growth will suck up a lot of cash. Buyers like a quick cash conversion cycle. Cash is king. Cash at the point of sale for an intangible product is ideal.

Easier said than done? Of course. To the few go the spoils. If you want the spoils of the few, you have to build what few are able.

How could they do that? It’s crazy, and very sad.

Sure, one must take some risk to get ahead. To step out and try to make progress. And we also all desire to help others, especially our loved ones. But in most cases, if the bankers require extensive personal guarantees, even from minority investors, it’s a warning sign. Sure, bankers are not entrepreneurs. By nature, they are not risktakers. It’s their job to be conservative. But if a deal makes sense and has sufficient cash flow coverage and collateral, personal guarantees are not often required of ALL the shareholders (let alone third parties). But if you must, don’t agree to joint and several liability! This means that the lender can go after any single guarantor for the entire amount. Or pursue all of ’em at the same time!

A better form of guarantee is pro-rata. So, if you are one of five guarantors, for example, the lender can only come after you for 20% of the note.

Please, take great caution before you personally guarantee (or co-sign). Try just saying no. Shop around. Look for alternatives. Ask the lender for alternatives. Yes, most lenders will require the majority owner of a small business to provide a personal guarantee, but give it up only if you have to. And try to avoid having your spouse sign as well.

While we’re on the topic, please don’t pull money out of retirement accounts. It’s your safety net. Retirement account funds are supposed to be for retirement. Money should go in but not come out except to live on during retirement. Funds held in retirement accounts are protected from creditors. It’s the risktaker’s best friend. You need, and deserve, the most comfortable and secure retirement possible. I have seen too many disasters – throwing good money after bad.

Yes, it’s a free country. Yes, you are an adult and can do what you wish. But please, take great caution in these matters. And when the deal is so tight that your gut says, “No,” don’t do it!

Step 1: Write down the amount of your current monthly payment.

Step 2: Call your banker and find out:

A. what rate you might be able to get today

B. an estimate of your closing/refinance costs (including any points)

Step 3: Calculate the monthly savings you will enjoy via the refinance (old monthly payment vs. the new), ignoring the refinance costs.

Step 4. Divide the total refinance cost estimate by the monthly savings. The result is the number of months it will take for you to earn back your refinance costs.

Step 5: Is the payback duration shorter than the maturity of the existing note? If so, it makes sense to refinance.

Weighted average rate of initial mortgage interest rates paid by home buyers on conventional fixed and adjustable rate mortgages.

Source: Mortgage-x.com.

Interest rates are at historic lows. Commercial banks are making fixed-rate term loans in the 5% and 6% range to small and mid-size companies, depending on the particular credit characteristics. And according to Nick C. Perkins, mortgage banker with Eagle Bank and Trust Company of Missouri, rates for conforming residential mortgages are under 3% for a ten-year maturity, and well under 4% for 20- and 30-year maturities.

Alternatively, do you have a line of credit that’s never fully paid off? Consider taking out a term loan and using the proceeds to pay off the portion that doesn’t revolve. You may want to consider doing the same with credit card debt.¹

The table below shows how a change in interest rate can affect annual interest expense paid on a loan. Over the life of a loan, the interest rate impact is even more significant. For example, a 2-percentage-point interest savings on a $1 million, 25-year note is $390,000 over the life of the mortgage.

The best method for comparing loans with varying terms is net present value (NPV). A simple NPV calculator can be found online at www.datadynamica.com/ IRR.asp. The loan with the lowest NPV (all loans have a negative NPV) is the least expensive and therefore most attractive.

Another way to compare loans with varying terms is to calculate effective interest rates (EIR). It entails amortizing up-front costs over the life of the loan, i.e., adding the cost to the interest expense and recalculating the rate. Although this method is simple, it is not as desirable as NPV because it doesn’t take into account the time value of money. One thing that makes up-front costs so expensive is they’re due up front. Given a choice, you would rather pay in installments over the life of the loan. That’s what the effective interest rate calculation assumes, but not how it is in real life. So the EIR method understates the true cost of up-front fees.

The two tables above display the effective rate calculations for various points paid on loans with 5-year and 25-year amortizations. One point is simply 1 percent of the loan value. So, for a $100,000 loan, two points is $2,000. Comparing the two effective interest rate tables, you can see that up-front expenses have a far more substantial impact on short-term loans compared to long-term loans. When points are required to “buy down” an interest rate, doing so is far more attractive when the loan term is long.

Many loan terms include prepayment penalties. Calculating their effect can be tricky because they come into play only if you need to pay off the loan before its natural expiration date. This most often occurs when interest rates fall and you wish to refinance. The chances of this happening to you on a loan you close today are slight, but you should consider this feature nonetheless.

If your current note has a prepayment penalty, simply add the prepayment penalty amount to the cost of the new loan.

Finally, talk to someone knowledgeable about SBA programs. There are some aggressive and attractive programs that were put in place during the recession. Some expire this September, so get with it!

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^{1 Term loans require collateral and, quite often, personal guarantees. Credit card debt is unsecured, of course, so you should take this into consideration before refinancing credit card debt with term debt.}

Charging too little and squandering profit? Too much and losing sales?

Pricing is a tough job. Not necessarily laborsome, but troublesome. It’s hard to know where to set the price. And there’s no real feedback other than whether the product sells. If it’s not selling, is it the product, the marketing, the sales efforts or the price point?
And just because it IS selling doesn’t necessarily mean it’s optimally priced. For example, if expectations for a product or service are low, a suboptimal price point will deliver the expected results, and lead one to conclude that the product is maxing out its potential. You’ll never know what could have been.

Even when a product is successful, a different price point or smarter segmentation strategy might improve results. And so I ask: What’s the optimal price for a product or service? How does one determine the “right” or the “best” price?

Searching for answers, I found there are people and firms that specialize in the art and science of pricing. In fact, there’s a trade association – the Professional Pricing Society. Interested, I perused their “pricing expert directory” and ended up talking to Per Sjofors, president of Atenga, Inc.

“The greatest opportunity for companies to raise their revenue and profit today is through enhanced pricing strategies,” said Mr. Sjofors almost immediately. He explained that almost every owner and management team has worked hard in recent years to wring out expense. There’s little left to squeeze. Opportunity today lies in improving the pricing of ones products and services. Few small and mid-size companies know how to price, so it’s a real opportunity to gain advantage.

“So, how should one price?” I asked.

“Let me respond first by giving you a few examples,” he said. “A client of ours had developed an innovative software product. They priced it at $79, a figure that ‘felt right’ to the executive team. Sales stagnated. They came to Atenga and our research found two distinct market segments for the software: consumer and professional. The $79 price was too high for the consumers and too low for the professionals,” Mr. Sjofors continued. “Consumers were used to paying $29 to $49 for this type of product, and professionals were used to paying $119 to $159. Professionals viewed the $79 offering as ‘not a serious tool,’ so they avoided it. We suggested it unwise to attempt to serve both customer segments with the same product, and that there was more profit opportunity (and less competition) in the professional segment. We suggested a price of $129. They added marketing information that catered to the specific wants and needs of the professionals, and sales soared.

“Another company decided to lower the price of its core product from $2,499 to $1,800 in an attempt to boost sales and ‘beat the competition.’ This is a common error. The result was catastrophic. Sales volume declined forty percent, as customers and channel partners perceived the lower price as signaling lower quality. As is always the case, their impressions endured and prevented the company from reversing the price decrease. It was not until a new product was designed and released – eighteen months later – that the company began to recapture its former price point and sales volume.”

From my discussions with Mr. Sjofors, here’s the basic formula for developing the optimum price:

1. Study the market for your products or services and attempt to identify subsegments such as “consumer,” “small business,” “institutional,” “educational” and “power-user.”
2. Assess each subsegment’s size, ability to pay, product attributes most important to them, and how well each subsegment is being served by competitive offerings.
3. Assess your own product/company and determine which subsegments you’re set up to serve best.
4. Pick a customer subsegment (or subsegments) to target.
5. Communicate to your target market that your product has the features they want (differentiation).
6. Price optimally for your chosen customer subsegment(s).
7. Sell value, not price.

Selecting a Customer Subsegment

As business strategy guru Michael Porter taught us many years ago, customer segmentation is about providing “the very best option for a subset of the entire customer population.” A “me too” product that has all the basic features but is not perfect for any sub-group is referred to as a “middling strategy.” You risk being “not just right”  for anyone. You also leave yourself exposed to competitors that employ a segmenting strategy. Again, when selecting a subsegment, one must consider the size of the subsegment, their willingness and ability to pay, current product offerings (one’s own and competitors’), etc.

Optimized Pricing

The goal of price optimization is, in most cases, profit maximization. In some cases, one might want to focus on market share or revenue (as a strategy to maximize long-term profits). The question is, at what price will your product garner maximum profit (or unit volume or revenue). In talking to Mr. Sjofors, there are a lot of variables to consider when pricing a product, such as the features and benefits of one’s own product(s) compared to the competition, and one’s other products and the price points of each, just to name a few. One thing to keep in mind, he explained, is that for any price point there will be two groups of potential customers that won’t buy:

1. Those that refuse because the price is too high
2. Those that refuse because the price is too low

For example, some men won’t pay less than $20 for a haircut. They assume the quality is below their standards. Other men will never pay more than $20. It’s too expensive. It’s the same for every price point. Some would never pay more than $8. Some would never pay less than $60. And so one objective when pricing strategically, i.e., optimizing price, is to select a price at which the fewest number of potential customers fall into either one of these two “lost customer” groups.

Independent Analysis Needed

For any product or service, the optimal price is determined through an analysis of the customers and their preferences and buying habits.

Another important concept missed by business managers when setting a price is this: the price point that optimizes unit volume is almost always different from the price point that optimizes revenue (or profit). As an example, Sjofors’ firm researched the market for a client and plotted their estimate of unit volume for an automobile accessory. As depicted in Chart A, unit volume is greatest at the $199 price point.

However, revenue is maximized at the $399 price point (see Chart B). Unit volume is 30% lower at the $399 price point but revenue is 20% greater. How much would a 20% revenue increase mean for you?

Don’t lose sight of the fact that in addition to higher revenue, gross profit margins at the $399 price point will be much higher. If we estimate that revenues rise from $10 million to $12 million and gross profit margin expands from 35% to 40%, you’re talking an additional gross profit contribution of $1,300,000! Gross profits rise 37%! For most companies, this would all drop to the bottom line. More than that, SG&A expense would most certainly decline as lower unit volume would require smaller facilities and less overhead.

The customer behavior data in these graphs, i.e., the unit sales volume estimates at various price points, is determined by research conducted by, in this case, Atenga, Inc. The research involves in-depth customer interviews and behavior- and feature-preference research. Per Sjofors says large public companies pay millions for this type of research. His firm specializes in working with small and mid-size companies. Still, it’s a laborsome and time-consuming process that costs his clients between $25,000 and $100,000 per study. He claims payback periods measured in months, even weeks.

For more information and resources on price optimization and pricing strategy, visit www.PricingSociety.com and www.atenga.com.

The study, by Harvard University economics professors Michael Kremer and Dan Levy, examined 1,357 students at a large state university that randomly assigns freshman roommates. They found no meaningful correlation between any other roommate characteristics, including: high school grades; admissions test scores; family economic, social or educational background; religion; personal habits; and degree of similarity with the roommate.

In addition, the apparent “alcohol effect” only occurred for boys. The grades of girls did not seem to be affected by having a freshman roommate who was a drinker. Find the paper at www.nber.org/papers/w9876.pdf.

Answer: The federal Age Discrimination in Employment Act (ADEA) applies only to employers that have “twenty or more employees for each working day in each of twenty or more calendar weeks in the current or preceding calendar year.” However, most states have their own laws governing discrimination, so you need to be familiar with the laws of the state(s) in which you operate.

Question 2: What should I do to steer clear of age-based discrimination lawsuit risks?

Answer:

1. Understand the federal and state laws under which you operate.
2. Avoid making implied promises of job security in recruiting materials, personnel policy manuals, and handbooks.
3. Make sure your employees who are responsible for making offers of employment do not make statements that can be construed as guaranteeing employment.
4. Avoid statements during disciplinary action, hiring procedures, or other discussions such as “I don’t think you can do the job like you used to”; “We are going to get some new/fresh faces in here”; and “We would like to hire someone who is going to be here a long time.”
5. Ensure that employees over 40 years old receive the same discipline as those under 40 for like or similar conduct.
6. Verify that pay rates for equal jobs are comparable with the various age groups within the company.
7. Closely monitor all policies and procedures as they relate to discipline, promotions, pay increases and interviews to make sure they are administered in a fair and nondiscriminatory manner.

Question 3: Is there some standard that the court uses to gauge whether age-based discrimination has occurred?

Answer: The Supreme Court of the United States set forth the framework for establishing a case of intentional age discrimination. The plaintiff, who claims that he/she was not hired because of their age, must demonstrate:

1. The plaintiff is a member of a protected age group.
2. The plaintiff was qualified for the position in question.
3. Despite being qualified, the plaintiff’s employment was adversely affected; and
4. Someone younger, with similar or lesser qualifications, replaced him/her.

If the plaintiff successfully establishes elements 1 through 4, the burden then shifts to the employer to articulate a legitimate, nondiscriminatory reason for the adverse employment action. The plaintiff will then have the ultimate burden to establish that the employer’s reasons are “pretext” for discrimination (i.e., not worthy of belief).

Question 4:

If a suit is filed against my business, what should I do first?

Answer: Contact your attorney immediately.

Question 5: If I am found to have violated the ADEA (Age Discrimination in Employment Act), what penalties can I expect?

Answer: The penalties may be any one or more of the following:

• Require managers to sign a statement regarding the ADEA and undergo EEOC training.
• Provide neutral and fair employment references to a prevailing plaintiff.
• Payment to employee of compensation lost because of age discrimination (“back pay”).
• Reinstatement.
• Liquidated damages of double the back pay award.
• Payment of plaintiff’s attorney’s fees, in full or in part.

Costs of defending an ADEA case vary dramatically, depending on the underlying facts, number of individuals involved in the case, whether the EEOC is a party to the action, whether the case is before a judge or jury, whether the case goes through appeal, and the attorney representing the plaintiff. The costs of these cases can range between $45,000 (no jury) and $150,000 (or higher).

Michael J. Lissau is a labor and employment law specialist at Hall, Estill, Hardwick, Gable, Golden & Nelson, P.C. He may be reached at mlissau@hallestill.com

Loyalty and satisfaction are two different things. Customer satisfaction is an opinion. The only activity associated with customer satisfaction is the completion of a survey.

Customer loyalty is an activity. Loyalty is the specific activity of your customers coming back to buy from you again and again. Customers vote with their pocketbooks. Many customers are totally satisfied with a product yet buy a different product from a different seller at the next opportunity. They are satisfied but they are not loyal. Satisfaction does not pay the bill unless it translates into loyalty.

Customer satisfaction is a worthwhile goal, but it won’t automatically create loyalty. Businesses that want to create lasting customer loyalty must concentrate their efforts and instruct their front-line employees on five principles.

The Five Principles That Create Lasting Customer Loyalty:

1. People do business with people. Businesses look like they are made up of buildings, machines, products, services and supplies. But the heart and soul of every business is people. How you deal with people determines your success.
2. Differentiation. Differentiation distinguishes one business from another. If there is no difference between you and the competition, your customers have no reason to choose you. Just being different is meaningless. Differentiation only works when you differentiate with value that has meaning to your customer.
3. Value and assurance. A customer’s specific tastes and preferences determine value. Every customer applies his or her own definition of value. If you know how to listen carefully, customers are always willing to tell you what they value.
4. Effective communication. Customers want straight talk. What you say to your customers and how you say it is critical in creating loyalty. Effective communication builds consensus and leads the customer. Effective communication involves listening, learning and speaking.
5. Focus. Focus is the object of your current attention. If you are most interested in new customers, your attention will be focused there. If you are most interested in creating loyalty, your attention will be focused on existing customers.

Some people ask, “What’s the big deal about customer loyalty? Isn’t a dollar from a new customer the same as a dollar from a repeat customer?” The answer is an emphatic, “No.” Repeat customers are predictable. Predictability allows you to staff, inventory and schedule with greater efficiency and productivity. Repeat customers already know about your business. There is no cost to attract people that are already doing business with you.

Repeat customers are easier to do business with. You already know about them and they already know about you.

These advantages mean profit to your business. The cost to attract, the lack of predictability, and the difficulty in doing business with someone the first time consumes any profit you might have made. Your only source of profit is from loyal customers.

The five principles are working for you or against you all the time. Your business is prospering from the abundance, or suffering from the lack, of loyal customers right now. These principles are impacting your business whether you recognize them or not.

1. Understand what the IRS knows about your business – A new law took effect last year that gives the IRS more information on what business owners earned in 2011. Banks and credit card companies must begin telling the IRS how much your business received in total payment card (and PayPal) receipts during the year. So, keep this in mind when you file your 2011 return that the IRS knows exactly how much your business made through debit and credit card transactions, plus any payments received from online payment processors like PayPal!
2. Deduct interest on a mortgage of up to $1.1 million – The limit has increased on the amount of tax-deductible debt you can have on your home (and second home)! For many years, courts and the IRS interpreted the tax code to limit your deduction to the interest on up to $1 million in debt used to buy, build, or improve your home, while allowing you to deduct interest on an additional $100,000 in home equity debt only if it was not used to acquire the home. The IRS recently changed its position, and you can now deduct $1.1 million in mortgage interest even if all of it was used to purchase or build the home.
3. Consider filing electronically – Filing electronically will speed up your refund and can save you from simple mistakes. Before the IRS accepts an electronic return, it checks for several critical errors. The IRS gives you the chance to correct the problems before it accepts and processes your electronic return.
4. Check your numbers twice – Avoid math errors and make sure to get your Social Security numbers right. IRS computers automatically match all Social Security numbers and check for simple math mistakes. If you wrote down the wrong Social Security number for one of your dependents, the IRS will disallow the dependent, recalculate the return and usually send you a brand-new tax bill. Millions of returns also generate math error notices that often come as unwelcome surprises to unsuspecting taxpayers. These problems can be a hassle to unwind.
5. Don’t miss the deadline for filing an extension – Filing for an automatic extension with Form 4868 is painless and will spare you penalties for missing the deadline. But remember, extending the filing deadline does not extend the time for making a contribution to an individual retirement account (IRA), and it does not extend the time for payment. Generally, by the filing deadline, you must have paid at least 90 percent of your 2011 tax liability through withholding, estimated payments and any payment made with your extension.

The tax experts at Grant Thornton are pleased to offer these tips to help you successfully get through the 2011 filing season.

• Failure to report income
• Claiming fictitious or improper deductions
• Improper allocation of income to a related taxpayer in a lower tax bracket

Every tax planning strategy is based on structuring a transaction to accomplish one or more of the following often-overlapping goals:

A. Lower Taxable Income

By lowering taxable income, you lower the amount of taxes due. Many strategies to reduce taxable income will simply delay or defer recognition of income. This alone is valuable, of course, given the time value of money. Other tactics include increasing tax-deductible expenses, moving income to entities that enjoy lower tax rates and finding losses to offset investment gains.

B. Claim All Available Tax Credits

Tax credits are dollar-for-dollar reductions to your tax bill. Deductions are dollar-for-dollar reductions of your taxable income. There is a big difference. Tax credits are much more valuable than deductions because a $100 credit reduces your tax bill by $100, regardless of your tax bracket. In contrast, a deduction simply reduces your taxable income by the product of the deduction amount times the applicable tax rate. For example, if you are in the 33 percent tax bracket, a $100 deduction will reduce your taxes by $33.

C. Lower the Applicable Tax Rate

Such strategies include rationalization of taxable income between tax years in light of marginal tax rates; moving income to persons or entities that are taxed at lower rates; moving income into accounts that are non-taxable or tax deferred; or conducting transactions in a way that qualifies for lower rates (such as long-term vs. short-term capital gain rates). See also “Lower Your Applicable Tax Rate”.

D. Control the Effects of the AMT

The AMT was established in 1986 to ensure that higher-income individuals and corporations pay at least a basic level of tax, regardless of the number of tax credits and deductions that they garner. It requires that federal income taxes be calculated by two separate and distinct methods — regular tax laws and AMT laws. You pay the higher of the two. C-corporations with annual revenues under $5 million (and in some cases up to $7.5 million) are exempt. Individual taxpayers who have incomes over $75,000 face heightened risk of triggering AMT taxes. AMT tax rates are lower, such as 26 percent and 28 percent for individuals, but far fewer credits and deductions are allowed.