by Jean Miller | Estate / Trust Tax - Individual, Estate Planning - Individual, News, Tax Planning - Individual
Before 1997, once a homeowner reached the age of 55, they had the one-time option of excluding up to $125,000 of gain on the sale of their primary residence. Today any homeowner, regardless of age, has the option to exclude up to $250,000 of gain ($500,000 for married couples filing jointly) on the sale of a home.
What Is Capital Gains Tax?
When you sell property for more than you originally paid, it’s called a capital gain. You need to report your gain to the IRS, which will then tax the gain. Home sales can be excluded from this tax as long as the seller meets the criteria.
Who Qualifies for Capital Gains Tax Exemption?
In order to qualify a seller must meet the minimum IRS criteria:
- You’ve owned the home for at least two years.
- You’ve lived in the home as your primary residence for at least two years.
- You haven’t exempted the gains on another home sale in the last two years.
How to Calculate Gains and Losses
By keeping records of the original purchase price, closing costs, and improvements put into the home (you’ll need to present records and receipts when submitting your taxes), you can avoid being taxed on a significant amount of the profit you make when selling your property.
If, for example, you buy your home for $150,000 and put $20,000 into qualifying upgrades, your cost basis would be $170,000. If you sell the home ten years later for $300,000, the ‘gain’ on your house would be $130,000 (sale price – cost basis), which would have no tax implications because you’d have met the required criteria.
What If You Have More than $250k ($500k for married couples) of Gains?
You’ll be taxed for the amount of gains above $250,000 or $500,000 for married couples filing jointly. To help reduce this amount, keep detailed records of any improvements you put into the home as some improvements can be added to your cost basis, and will thus lessen the amount that needs to be reported.
by Daniel Kittell | News, Retirement, Tax Planning - Individual
“Set it and forget it” is a common approach when it comes to a workplace 401(k), yet it likely will play a substantial role in the financial security of your future. Consistently contributing to your 401(k), and learning how to manage it, will set you on the course to living golden in your retirement years. Below are some tips to help you make the most of your workplace 401(k).
Contribute to the Match
Employers often match contributions up to a certain point, which means you’re getting free money for participating in the program. You should contribute at least up to this point. Beyond this, a typical rule of thumb is to add about 15% to your 401(k) plan each year, including company contributions (i.e. if your company matches 3%, plan to contribute 12%).
Boost Your Investment Savvy
Expense Ratio? Risk Tolerance? Whether you’re going it alone or recruiting the help of a financial professional, you need to have a basic knowledge of investing. Before filing away the information sent to you by your plan, be sure to read through it and look up any terms you don’t understand.
Get Help with Account Management
Of course, having a basic understanding of investment terms will take you only so far. If your investment knowledge is shaky, it might be worth it to recruit the help of a professional. Some 401(k) plans even offer free advice from a professional, or they will provide model portfolios to follow.
Save with a Target Date Fund
The simplest approach to a 401(k) plan is to allocate savings to the target date fund with the date that corresponds to the year closest to the year you reach age 65. With this low maintenance approach, the fund automatically adjusts as you get closer to retirement.
Learn to Rebalance
If you’re not partaking in the target date fund, you will need to perform routine maintenance on your 401(k), which is what “rebalancing” means. Provided you have a mix of stocks and bonds, you will have to buy and sell assets as they move up or down in value. Generally, participants have the option to automatically rebalance through your plan’s website, typically with a quarterly or annual rebalancing.
Rethink Withdrawals
Though you may be able to take a loan from your 401(k), they usually have to be paid back within five years, with interest. The risks of borrowing from your 401(k) come when you lose your job or change employers, because the loan will be due almost immediately. If you can’t repay the loan, you’ll be taxed and burdened with a 10% penalty for early withdrawal. Not to mention, by taking out a loan on your 401(k), you are shortchanging your retirement savings in a way that could be extremely difficult to catch up.
Mix It Up
Your 401(k) should be only one prong in your retirement plan. Your home and other assets, funds from a side hustle, and other investment accounts like an IRA might be additional prongs that make a complete picture of your financial future. Spreading your assets over multiple income streams will yield better returns, so if you switch jobs at some point, consider whether rolling your 401(k) into your new employer’s plan makes the most sense for your situation, or if you should put those funds into an IRA, which may give your more investment options.
by Stephen Reed | Accounting News, News, Retirement, Tax, Tax Planning - Individual
The House of Representatives recently voted to approve the Setting Every Community Up for Retirement Enhancement or SECURE Act, which would expand access to retirement savings programs for part-time workers and people employed by small business owners.
If the SECURE Act Passes…
If the bill passes the Senate, which it’s expected to do, it will be placed on President Trump’s desk. If signed into law, the SECURE Act would implement the most significant changes to retirement plans since 2006.
The bill aims to entice non-savers to participate in workplace retirement programs, such as a 401(k), so some of the provisions include:
- Raising the age that American workers must start withdrawing from retirement savings, known as the required minimum distribution age, from 70 ½ to 72. This is to reflect the fact that more Americans are working longer, and in this vein, the bill also stipulates more years for people to contribute to retirement accounts.
- Increasing tax incentives for small business employers to offer retirement plans by increasing the tax credit for new plans from the current cap of $500 to $5,000, or $5,500 for plans that automatically enroll new workers.
- Allowing part-time workers to participate in 401(k) plans. The current minimum requirement for part-time employees is 1,000 hours in a 12-month period, but the SECURE Act would amend this requirement to 500 hours, effective January 2021. However, this isn’t mandatory, so it would be at the discretion of the employer.
The SECURE Act would also permit parents to withdraw up to $5,000 from retirement accounts penalty-free within a year of birth or adoption for qualified expenses. Parents could also withdraw up to $10,000 from 529 plans to repay student loans.
What Does the Federal Reserve Say?
According to the Federal Reserve’s annual study, only 36% of Americans feel that their retirement savings are on track, while 25% of Americans have no retirement savings to speak of. Part of this is due to the fact that, because of the cost and complexity of putting retirement savings plans in place, many small businesses don’t offer such plans to their employees. The SECURE Act aims to incentivize small business owners to offer retirement plans by making it easier for small businesses to implement multi-employer retirement plans—where two or more employers join together to offer a plan. This would potentially give small businesses access to lower cost plans with better investment options, thereby possibly giving millions more workers an opportunity to save at work.
In short, this legislation is important because it would remove some barriers that have kept American workers from saving for retirement, specifically through employer-provided plans and incentives. If you have questions or would like to talk about how the information in this article may impact you personally, please reach out to me at sreed@mkrcpas.com and we’ll schedule a time to talk.
by Jean Miller | Accounting News, News, Retirement, Tax, Tax Planning - Individual
According to a 2017 study from Career Builder, nearly 78% percent of people live paycheck to paycheck, with little to no money left over after financial obligations are paid. This means that nearly 8 out of 10 workers may not be able to handle even a $500 emergency. Here’s how to break the paycheck-to-paycheck cycle.
Build a Budget
Yes, this tired old budget thing is rearing its head again, but every financial plan needs to start here. You simply must know where your money is going. Start by creating a simple spreadsheet in Google Docs, which can be shared if you have dual contributors to your household income. If you’re ready for something a bit more sophisticated, Mint.com is a great online tool for budgeting. It will even send you notices and alerts, creating a more personal budgeting experience.
In order to know where your money is going, you need to also track your spending. Document every single purchase for two to four weeks. You’ll be surprised at how seemingly insignificant purchases can quickly add up. Typically, this exercise helps consumers to be more mindful of how they’re spending.
Establish and Emergency Fund
If you approach saving by promising to set aside whatever’s leftover after your financial obligations are paid, you’ll never make a dent in creating an emergency fund, let alone heftier savings goals. Funds intended for saving should come before any other spending. Aim to initially save the equivalent of one month’s paycheck.
Quick fix: put saving on autopilot. If your company offers a 401(k) plan, make sure you’re participating in it. You can also set up an automatic transfer on paydays to have some money automatically transferred from your checking account into a savings account.
Pay Down Debt
Nothing perpetuates the paycheck-to-paycheck cycle like having debt looming over your head. Control and monitor your spending by discontinuing the use of credit cards until you’ve paid them off. To streamline this process, you can consolidate your debt by transferring all your credit onto one card. While you’re focused on paying off debt, avoid taking out any kind of loan. If you can chip away at your debt while simultaneously building up an emergency fund, you can use that fund to pay for any unexpected expenses that may crop up instead of relying on credit cards.
Examine Your Lifestyle
Sometimes fixing the paycheck-to-paycheck cycle is as simple as taking a hard look at your lifestyle and making adjustments where necessary. Is your monthly car payment too high? Does your monthly mortgage payment exceed 28% of your monthly gross income? Are you paying for subscriptions or memberships you don’t use? You get the idea. Examine your monthly costs and find ways to scale back.
Stop Treating Raises and Bonuses as Fun Money
If you’re stuck in the paycheck-to-paycheck cycle, upticks in earnings such as raises, bonuses, and tax returns should be stashed away in savings, not spent on wants and splurges. Likewise, you shouldn’t rely on bonuses as part of your budget. These earnings should be used to increase your emergency savings or retirement funds.
If you have questions or would like to talk about how the information in this article may impact you personally, please reach out to me at jmiller@mkrcpas.com and we’ll schedule a time to talk.
by Daniel Kittell | News, Tax, Tax Planning - Individual
Spring cleaning isn’t just for closets, windows, and garages. After tax season is a great time to take a look at your personal finances and spending habits, and make adjustments where needed.
Organize Spending Habits
Take stock of your spending routines and target changes you want to make. Always treat yourself to a latte on Fridays? Meet friends for dinner on Saturdays? How about using coupons or promo codes before the expiration date for FOMTS (Fear Of Missing The Sale)? When you take a keen eye to your spending habits, you’ll be able to spot target areas where your spending reflects nothing more than routine. Now is the time to change up that routine to better reflect your financial goals moving forward.
Polish Your Budget
If you have no budget to dust off, now is the time to create one. Come up with a plan for how you want to save and spend your money, and track your spending habits to help reach your financial goals. The key is to be consistent and stay on budget. Make sure you’re polishing—er, updating—your budget monthly or even weekly.
Catch Up on Late Payments by Turning Trash into Dollars
Are you behind on any payments? Now is the perfect time to slow down and work on a plan to pay things off. Tried-and-true methods for getting some quick cash to help jumpstart this plan is to host a garage sale, post unwanted items on your local Facebook Marketplace, or sell on eBay. A spending freeze—a temporary pause on purchasing anything but essentials—can also help with with saving funds for paying off old bills.
Pare Down Debt
Staying in debt is like trying to swim against the current: you might be moving your arms and kicking your feet but you’re not moving forward. Now is the time to draft a debt repayment plan: make a list of all your debts and rank them in the order you want to pay them off (some people rank from lowest to highest amount owed, while others rank from highest to lowest interest rate). Whichever way you choose, build your plan into your budget, focus on one debt at a time, stay diligent, and watch your debt diminish each month.
Clean out clutter
In most cases you only need to hold onto your tax returns documents for three years, but the IRS has up to six years to initiate an audit if you’ve neglected to report at least 25% of your income. For this reason, taxpayers who receive multiple 1099s from a variety of income sources might want to hold onto documents for at least six years as it can be easy to miss or overlook reporting some income. Keep documents for seven years if you filed a claim for worthless securities or a bad debt deduction.
Maintenance Cleaning: Plan for your Future
Now is the time to plan for your financial future by creating or updating a financial plan with clear goals set on a timeline. A certified CPA or financial planner can help you identify areas of improvement and keep you on track to meet your financial goals.
by Pete McAllister | News, Retirement, Tax Planning - Individual
You don’t need a high-bracket income when it comes to saving more for retirement. What you need, regardless of income level, is discipline. The following tips can help average workers save more and build the kind of wealth that will support them after leaving the workforce.
Automate the Process
A lot of employers offer the option of diverting a percentage of your paycheck directly into your 401(k) account. This takes the guesswork and mental energy out of saving for retirement and puts the process on autopilot. And employers will often match your contribution up to a certain percentage.
Contribute to an IRA
If you don’t have access to an employer-sponsored account, or want something in addition to your 401(k) account, you might think about opening an individual retirement account. You can contribute up to $6,000 per year ($7,000 for those 50 years and older) to an IRA. Keep in mind, while single employees are able to contribute the maximum to a 401(k) and an IRA in the same year, married couples may have some limitations if both participate in a work-sponsored plan. The rules may also be slightly different for a Roth IRA account.
Be Resourceful
Part-time gigs and side hustles are more popular than ever thanks to the internet and smart phones. If you’re diligent with saving the earnings from a secondary income, it can grow over time. You can also use the funds from side gigs to pay off debt, which will open up your budget to allocate more for retirement savings. For example, bringing in an extra $100 a week equals out to $5,200 a year. From selling your possessions on eBay or Facebook Marketplace to offering a service such as dog walking, car detailing, or tutoring, the possibilities of earning extra income are dependent upon your time, talents, and abilities, but the monetary results have real potential to make an impact on your financial future.
Take Control
According to a 2016 study by U.S. Bank, nearly three out of five American families don’t utilize a budget, but a planned budget can cut down on excessive spending and keep your finances in check on a weekly or monthly basis. Impulse buys (no matter how large or small), add up, as do regular dinners out, pressure to keep up with the Joneses, and unforeseen expenses that crop up here and there. Without a budget and a plan for dealing with the unexpected, it won’t take long for your financial grip to unhitch, sometimes leading to seemingly unsurmountable debt. And debt has the power to undermine your retirement savings potential, either temporarily or for much longer.
With free online budgeting plans, myriad ways to earn some extra income, and a commitment to saving, almost anyone can make saving for retirement an attainable goal.
