by Pete McAllister | Accounting News, News, Tax, Tax Planning - Individual
A new year is upon us, and many individuals use that as an opportunity to start fresh on aspects of their life: their workout routines, eating habits, social calendars and often times their finances. Studies have shown that financial resolutions may pay off more than their fitness counterparts, but having a specific action plan is a vital part to ensuring those resolutions are met.
Below is the beginning of a three part series where we will outline 12 smart money strategies for 2018, one for each month.
JANUARY
To start the year off right, think about saving. January’s strategy is to automate your contributions to savings. Although more and more Americans are contributing to 401(k)’s or IRA’s as auto-enrollment by companies increases, automating deposits to retirement and savings accounts will help you reach goals before retirement.
If you are not already contributing to a retirement fund, start planning for your future and talk to someone in your payroll department about automatic contributions to a 401(k). Or, if that is not offered at your place of work, find a reputable brokerage firm and set up an IRA, using your bank or the broker’s online features for automatic contributions on payday.
If you already have a retirement fund, consider increasing your contributions in the new year, even by just $20 each paycheck. Assuming you start contributing by at least age 35 and receive a 7% return, increasing contributions by $40 each bi-weekly paycheck could land you with an additional $110,218 in your 401(k) by age 65.
While you’re taking the time to look over retirement contributions, consider setting up automated transfers to a savings account for more current goals or dreams, such as a vacation, a house, a new car or just an emergency fund. Setting up automations on payday will help you begin to live without the money and put funds away toward your future rather than hoping there’s enough left at the end of the month to save.
FEBRUARY
Month two is all about budgeting or creating a realistic spending plan for yourself. Studies have shown that only about 35% of workers follow a firm spending plan, while around 44% of workers could be classified as impulsive spenders who often have credit card debt and are living paycheck to paycheck.
A great start is to track your spending for 30 days to see where your money is going, then consider where you can cut down or save more to develop a realistic plan that fits your life. A simple budgeting plan is to allocate 20% of your paycheck to savings, 30% to “entertainment” spending and 50% to necessary spending such as housing and bills. There are also more detailed spending plans, both paper and digital, that help you specifically allocate all of your funds to categories such as utilities, rent/mortgage, groceries, savings, other loans or debt and more. However you decide to budget, having a plan for your money each month can help you have more peace of mind and put you on track to a financially freer life.
MARCH
In March, try tackling your credit card debt. One option is to explore ways to lower your interest rate(s). Some balance-transfer credit cards offer special 0% promotional rates for the first 12-18 months. If you think you can pay off the transferred balance before this promotional period concludes, these are a great option to drastically lower your interest. Another viable option is to consolidate your credit card debt to a personal loan with a lower interest rate.
If you are without credit card debt but do have a card, make sure you are making the most of whatever rewards your card offers. Look for cards that offer rewards that match your spending habits (flight points, cash back, etc.) and make sure you understand exactly how the rewards work so you can take full advantage. And, if you current card has annual fees, consider calling to request those be waived or lowered since a study showed that 82% of individuals who asked had annual fees reduced or waived completely.
APRIL
Since tax day is in April, this month is all about taking advantage of your tax refund if you receive one. According to the IRS, the average income tax refund in 2016 was $2,795, but use whatever money you might receive wisely.
If you do receive a refund, putting that money toward any high interest debt you may have should be the top consideration, whether that’s school loans, credit card debt, a home loan or more. If you are debt free, consider starting an emergency fund, putting that money toward a retirement fund, putting the money into a specific saving fund (house, car, etc.) or investing in a course or seminar that will help you to advance in your career.
If you do get a large refund though, that likely means that you are overpaying on your taxes throughout the year. Although many people enjoy getting a large check from the IRS every spring, having that money available to you during the year allows you to pay down more debt or invest, so consider updating your W-4 withholding information with your employer. With the passage of the new tax laws, there is a chance you may have to update this form anyway so now is an ideal time to ensure you’re not giving the IRS money you could be using throughout the year.
Stay tuned for parts 2 and 3 of the Smart Money Series in the coming months.
by Pete McAllister | Construction, News, Tax
2017 has been a more promising economic year including higher wages, a lower unemployment rate and booming markets. The housing market, however, has proven to be a stumbling block for many, particularly those looking to purchase their first home. This year has brought an increase in home prices and a decrease in available homes.
Although it seemed that new buyers were beginning to take their place in the market again, that ratio has dropped to a low 34 percent of overall home sales. In years past, first time buyers have made up closer to 40 percent of the overall market, but there seems to be a correlation between rising student loan debts and falling first time homeowners.
Of those who did purchase a home for the first time in 2017, 41 percent recorded they had student debt, and half of buyers owed at least $25,000. The average amount of student loan debt increased from $26,000 in 2016 to $29,000 in 2017 as well. Many said this increase in debt has hindered their ability to save for a down payment. Conversely, the average home cost hit a new peak in August at $282,000, which means down payment costs rose as well.
Not only are fewer buyers purchasing for the first time, but it seems that those who did paid more for less house. In 2016, first time buyers averaged a 1650 square foot home for $182,500, but in 2017, first time buyers averaged a 1640 square foot home for $190,000. Across all buyers, 42 percent paid the list price or more for their home, which is the highest in survey history.
Although it is possible to have student loan debt and still be approved for a mortgage, many first time buyers are afraid to even apply, fearing a stressful, long-winded process that will result in them not being approved.
However, the Realtor’s report did mention that more buyers said the mortgage application and approval process was easier than expected, a positive note in the mix of rising debt and home prices. Unfortunately though, mortgage rates are on the rise, so first time buyers may choose to consider waiting for the new year in the hopes that rates and home prices will drop, and hopefully their down payment savings will increase.
by Pete McAllister | Accounting News, IRS, News, Resources, Tax
When disasters strike the American people, it can be a beautiful thing to witness the country coming together to support and rally around those affected. Unfortunately though, there are many who choose to take advantage during times of need.
The IRS issued a recent warning cautioning against potential charity scams in the wake of Hurricane Harvey (and likely Hurricane Irma as well). Some individuals may attempt to impersonate charities in an effort to either receive money or valuable personal information from taxpayers. Scammers may contact you via email, social media, telephone or even approach you in person. The largest percentage of scamming attempts are often made through email, though.
Fraudulent parties can masquerade as charities or associate themselves with known charitable causes by either using similar names or imitating the website of a legitimate charity. These emails may encourage taxpayers to give money or provide private financial information that can be used to apprehend your financial resources, or even your identity. The IRS has provided a set of helpful tips and resources to avoid being taken advantage of:
- Make sure you are donating to recognized, and reputable, charities.
- Do not give or send cash. Most reputable organizations will ask for a check, credit card or some form of reliable online payment system such as PayPal. These avenues provide you with specific documentation of the payment given for both tax and security purposes.
- Be cautious of charities with names similar to known charities, but with just a small difference, or with a different logo. Visit the IRS website for a list of qualified, tax-exemptible charities.
- NEVER give out personal information such as passwords, bank account numbers or Social Security numbers. Trustworthy organizations should not ask you for this type of information in order to donate, so take caution when these particulars are requested.
- Keep records of all charitable donations made. Not only could this help you in the event of fraudulent behavior, but it will be beneficial come tax season when it’s time to make deductions. The IRS website provides a free booklet that includes details on what records to keep and specific tax rules for making tax-deductible donations.
If you suspect you have been a victim of fraud, or been contacted by scammers, visit the IRS website to report phishing schemes.
by Pete McAllister | Accounting News, IRS, News, Resources, Tax
Although the Indiana state legislative session began back in January and concluded in late April, there were many changes made that have just recently taken effect, namely, 45 different taxes and fees that have either been increased or newly imposed.
One increase that has many Indiana residents talking is the 10 cents-per-gallon gasoline tax that took effect July 1. Funds from this tax and the $15 increase for new vehicle registrations will go toward funding a variety of road construction projects around the state.
Other increases or new fees include some imposed on college students, school employees and certain service positions. If they do not have health insurance, college students will now have to pay between $100 and $150 for a mandatory meningitis vaccine, while school employees could see a cost between $30 and $40 for a renewed background check every 5 years if their employer chooses not to cover the cost. Some service positions, such as massage therapists, manufactured-home dealers and social workers, have seen minimal regulation in the past, but will now be required to have state licenses, which could cost anywhere between $10 and $400.
Other fee increases include several within the court system, including DNA sample processing fees, the automated record-keeping fee and notary fees.
A valuable new law enacted during the legislative session is one that requires professional motorsports competitors and other athletes to pay taxes when they work in the state. Although anyone who works in Indiana already incurs income tax liability, many athletes live in other states and have often ignored their Indiana tax obligations. The new law streamlines the process for these athletes to pay their taxes.
Unfortunately, the addition or adjustment of taxes and fees annually is a common occurrence, but state lawmakers try to avoid general tax increases on sales or incomes. Thus, Indiana residents should expect similar fee increases each year to assist with a variety of state projects and deficits, but can hope to avoid large annual income tax hikes, which are a more regular financial burden for most taxpayers.
If you have any questions about the new taxes or how they may impact your taxes or business, please feel free to contact me: [email protected].
by Pete McAllister | Accounting News, News, Retirement, Tax Planning, Tax Planning - Individual
Often, for Baby Boomers or older generations, starting your career meant finding a company in your desired field and, unless there were layoffs or the company went bankrupt, staying there until you retired. Today, we live in the land of the Millennial, who now make up almost 35% of today’s workforce. But, for the Millennial generation, staying with the same company, and sometimes even in the same career, is grossly uncommon. According to analysis performed by LinkedIn, those who graduated college between 2006-2010 had, on average, three different jobs within their first five years in the workforce.
So what does that mean for retirement? You may find yourself asking, even if you’re not a Millennial, does that mean I should never switch companies? Will I ever be able to retire? Although finding a new career path or taking a leap of faith with a new company should not be discouraged in any way, too much jumping around may put you, and your retirement funds, at a greater risk, and here’s how:
- Waiting periods for 401(k)’s – Many companies require you to be employed for anywhere from three months to a year before they allow you to join their retirement program, meaning you are missing out on months you could be contributing if you move jobs too frequently.
- Distribution of Employer Matches – Many retirement plans also require you be with the company for a certain amount of time before you can take employer-matched funds out when you leave, a requirement you may never meet if you don’t stick around long enough.
- “Cashing out” can hurt your wallet – If you have only been with a company for a short time, but already began contributing to a 401(k), it may seem more appealing to simply cash out the small funds you have in the account. However, cashing out that money will mean you not only get taxed on the sum, but will also receive a 10% early distribution penalty.
Solutions to combat retirement fund shortage include opening an IRA, rolling your 401(k) funds into an IRA if you leave a company, or rolling funds into a 401(k) plan at your new company if your new employer permits transfers. Although the annual IRA contribution allowance is lower than that of a 401(k), any advisor would tell you that putting something into a retirement fund is better than not contributing at all. Many might say to just remain in your current role, but if a switch is needed, or gets you closer to your personal or financial goals, then consider your future beyond the workforce and take your retirement into your own hands.
If you have any questions, please contact me at [email protected].
