by Daniel Kittell | Accounting News, CPA, IRS, News, Resources, Retirement, Tax, Tax Planning - Individual, Tax Preparation - Individual
Whether you’re working with a robust tax refund, a work bonus, or an inheritance of some kind, here’s a list of positive moves to make with that windfall.
Evaluate Your Debt
There’s “bad” debt and “good” debt. Good debt is an investment that will grow in value or generate long-term income, such as student loans or home equity loans. Bad debt is anything that quickly loses value, doesn’t generate income, and/or has a high interest rate, such as credit cards and cash advance loans. Whenever you come into extra funds, it’s recommended to pay down or pay off bad debt as a top priority.
Consider Your Emergency Fund
Your rainy-day fund should be stocked with at least three months’ worth of living expenses. If yours isn’t there yet, think about boosting it with your refund. If you are a business owner or your income fluctuates, consider shooting for six months’ worth of living expenses.
Fund Your 401(k)
This is a good time to open or boost contributions to your 401(k) or individual retirement account. The 401(k) contribution limit for 2020 is $19,500 for those under age 50, and taxpayers over age 50 are allowed an additional “catch-up” contribution of $6,500.
Open a Roth IRA
If you’re married filing jointly and have a combined adjusted growth income of less than $196,000, you can contribute up to $6,000 to a Roth IRA. The adjusted growth income cap for single filers is $124,000. This is meant to be a long-term money management move, but if you need to withdraw sooner, you can do so tax-free and penalty-fee, though you may owe taxes and penalties on any earnings (not regular contributions) you withdraw.
Invest in Stocks
Assuming you’ve paid off debt, built up your emergency savings fund to three to six months’ worth of living expenses, and boosted your retirement fund, you could think about consulting a financial professional to build a stock portfolio that aligns with your financial goals and personal risk tolerance. Or, if you’re stock market savvy, you can open a brokerage account on your own and start investing in a stock you believe has the potential for growth.
Additional money moves you could make with your refund (again, assuming debt, emergency savings, and retirement funds are taken care of) include making home improvements; opening up a savings account for something big, like saving for a down payment on a house; or donating to charity.
by Jean Miller | Accounting News, CPA, News, Resources, Retirement, Tax, Tax Planning - Individual, Technology
A new scoring model from Fair Isaac Corp., the company behind the FICO score, is set to be implemented later this year by Equifax and other major credit bureaus. The popular score is commonly used by lenders to determine your eligibility and interest rate for certain loans. Read on to find out if it could affect you.
Consumers in Debt
The new model, FICO 10, will start incorporating consumers’ debt levels into its tabulation, which could cause a decrease in score for some overextended consumers, particularly those who have both personal loans and rising debt. This change is speculated to create greater divide to scores in the 600s. If your score is in the 600s and you’re making payments on time and hacking away at debt, your score could increase. On the other hand, if you’re struggling to pay off debt and missing payments, your score could go down.
Combat Credit Card Spending
FICO 10 will give more consideration to how consumers have changed their payment history in the previous two years, benefitting individuals who are making progress in paying off debt and judging more harshly those who show increasing financial strain. Currently, credit card utilization, which is the percent of your available credit lines you’re using, accounts for 30% of your score, but it could become even more important in FICO 10. The goal is to keep your utilization as low as possible, so be sure to pay balances in full each month or at least keep the balances low. One option to paying off credit card debt is to consolidate it by taking out a personal loan, but this only works if you use that loan to pay off debt while refraining from piling new debt on your credit cards.
Create a Monthly Budget
Because delinquent payments will carry greater weight in the new model, it’s crucial to pay bills on time, so if missing payments is a habit or even an occasional slip-up, you’ll want to be more mindful of this. The best way to keep up with payments is to create a monthly budget. This will not only help with keeping payments at the forefront of your mind (and on your calendar), but you’ll have a better overall picture of your finances and whether or not you’re overspending. Also consider enrolling in autopay, with your loan or credit card payments automatically taken from your bank account at the same time each month.
Though banks and lenders decide which credit model they’ll use, Fair Isaac claims that FICO is used in 90% of all lending decisions, so take the next few months to make changes that will start cutting away at high interest rate debt and provide better overall financial wellness.
by Jean Miller | Estate / Trust Tax - Individual, Estate Planning - Individual, News, Tax Planning - Individual
With fall in full swing, it’s the perfect time to start drafting a financial game plan for the holidays in order to avoid overspending, plunging into debt, and piling stress on top of an already stressful season. Here’s how you can hatch a holiday plan for this year and start saving for next year.
Create a Holiday Budget
You’ll first need a solid understanding of your financial situation. How much do you have in savings, and how much of that can be allocated to holiday spending? Or maybe you don’t have enough in savings, or you don’t want to dip into savings, preferring to rely on your discretionary income after monthly bills have been paid? Once you have a full picture, create a budget that works with your current financial circumstances.
It also helps to be mindful of optional spending over the next couple of months. For example, cut back on dining out and retail therapy. You could even cancel some monthly subscription services until after the holidays.
Next, using your budget as a guide, make a list of the items that you’d like to get for everyone on your list along with a set price point for each item. This might take a little research, but having a specific gift in mind and knowing the average market price will help to avoid making impulse purchases. This will also help to cut through the noise of holiday ads and promotions and hone in on sales and discounts for only the items on your list.
Don’t Lose Sight of Additional Holiday Spending
Keep in mind that gifts aren’t the only expense that will cut into your budget. Plan to be frugal with holiday meal shopping, including extra treats and baked goods. Don’t purchase something simply for the sake of tradition and try instead to tailor your holiday meal planning around the actual likes of the people who will be attending your get-togethers. This cuts back on both food waste and money waste. Other often overlooked expenses include gift wrap, holiday cards, mailing costs, and travel expenses.
Make a Plan for Next Year
To make a plan for next holiday season, start by tracking your spending during this holiday season to get a blueprint for average expenses. Then, decide on which strategies you’ll employ for next year’s savings. Here are a few suggestions:
- Open a holiday savings account. These are typically offered by credit unions, and they are often locked so you can’t access them until the holiday season.
- Set aside a portion of every paycheck specifically for holiday spending. You can even set up automatic transfers into a separate savings account, building the habit of saving in a “set it and forget it” way.
- Try the popular 52-week savings challenge. Start by saving $1 the first week of December, then $2 the next week, $3 the following week, and so on. By next holiday season you’ll have nearly $1,400 saved.
With a little foresight and preparation, holiday expenses don’t need to add stress to the festivities of the season.
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 | Accounting News, IRS, News, Tax, Tax Planning - Individual
While it can be difficult to live debt-free in today’s world, many American adults attribute a majority of their debt to educational loans. In fact, recent statistics show that Americans owe approximately 1.48 trillion in student loan debt and about 44 million Americans are currently paying on their student loans.
The recent conversations around tax reform had many students and those still paying their loans concerned about what the tax changes would mean for their debt-to-income ratio. Early proposals suggested the repeal of student loan interest and educational assistance deductions, as well as tax-free tuition waivers, which certainly left many feeling uneasy. The proposed changes would have removed around $2,500 in deductions and would have considered tuition waivers and employer-assisted tuition as taxable income, effectively bumping many into higher tax brackets.
Luckily, when the final legislation was passed in December of 2017, none of these changes were included. But, what changes were in the final bill that could affect your education and how you save for it?
One significant amendment is the expanded usage allowed under Section 529 accounts, which are tax-advantaged savings and prepaid tuition plans intended to encourage taxpayers to save for college sponsored by educational institutions, states or state agencies under Section 529 of the IRS code. As of 2018, qualifying distributions from Section 529 accounts include tuition for elementary and secondary schools as well as tuition for private, public or religious college institutions. At the federal level, funds are limited to $10,000 per student during a taxable year, however, states have the option to enact a different approach at a state income tax level.
While Section 529 accounts saw expanded usage, Coverdell Education Savings Accounts, which allowed taxpayers to set aside up to $2000 a year in tax-free money for college education, will be phased out under the new tax laws. Since employer-assisted tuition was left unchanged under the new code, employers can still contribute up to $5,250 a year to an employee’s qualified continuing education. The student loan interest deduction of up to $2,500 was also left intact, however, if you make more than $80,000 as a single filer or $165,000 as joint filers, you no longer qualify for this deduction.
While many deductions and educational credits were kept under the new legislation, taxpayers should still be wary of the implications of long-term loan repayment options and deferring loans. Determining the best strategy for repaying loans quickly and educating yourself on ways to reduce the tax implications on current loans will likely leave your credit and your taxes intact and manageable in the future.
