Shaping up your finances in 2017 may seem like a big goal, perhaps even too daunting. But if you take one small step at a time, these small steps will add up. Here are suggestions. * Shift out of automatic. Have you established automatic bill pay at your bank or service provider, or automatic charges to your credit card? Small step: Look for payments for goods or services you no longer use, such as recurring monthly subscriptions, and cancel them. Big goal: Reduce total expenses and increase savings.
* Take the urgency out of emergency. Sure, you know that having an account with enough funds specifically earmarked for emergencies is a good idea. But the amount you need to save seems overwhelming. The good news is you don’t have to immediately fund six months of living expenses. Small step: Set up a separate account with automatic deposits of $5 or $10 per paycheck, perhaps with funds you’ve redirected from those unused recurring monthly subscriptions. Big goal: An emergency fund with enough cash to cover six months of expenses.
* Give yourself credit. Maybe you intend to pay off your credit card debt. But do you have a plan? Knowing where you stand is the first step in getting to where you want to be. Small step: Make a list of your cards, the balances, the minimum payments, and the interest rates. Big goal: Eliminate finance charges by being able to pay off your balance each month.
* Retire your excuses. Does your employer offer a retirement plan? If so, you may be leaving money on the table. Small step: Find out what amount is on offer as “matching” funds. That’s money your employer will add to your account when you make contributions. Big goal: Maximize your retirement contributions.
Small steps can lead to big improvements in your financial well-being. Contact us for more tips.
Although the kids might still be in school for a few more weeks, summer day camp is rapidly approaching for many families. If yours is among them, did you know that sending your child to day camp might make you eligible for a tax credit?
The power of tax credits
Day camp (but not overnight camp) is a qualified expense under the child and dependent care credit, which is worth 20% of qualifying expenses (more if your adjusted gross income is less than $43,000), subject to a cap. For 2016, the maximum expenses allowed for the credit are $3,000 for one qualifying child and $6,000 for two or more.
Remember that tax credits are particularly valuable because they reduce your tax liability dollar-for-dollar — $1 of tax credit saves you $1 of taxes. This differs from deductions, which simply reduce the amount of income subject to tax. For example, if you’re in the 28% tax bracket, $1 of deduction saves you only $0.28 of taxes. So it’s important to take maximum advantage of the tax credits available to you.
Rules to be aware of
A qualifying child is generally a dependent under age 13. (There’s no age limit if the dependent child is unable physically or mentally to care for him- or herself.) Special rules apply if the child’s parents are divorced or separated or if the parents live apart.
Eligible costs for care must be work-related, which means that the child care is needed so that you can work or, if you’re currently unemployed, look for work. However, if your employer offers a child and dependent care Flexible Spending Account (FSA) that you participate in, you can’t use expenses paid from or reimbursed by the FSA to claim the credit.
If your 2015 tax liability is higher than you’d hoped and you’re ready to transfer some assets to your loved ones, now may be the time to get started. Giving away assets will, of course, help reduce the size of your taxable estate. But with income-tax-smart gifting strategies, it also can reduce your income tax liability — and perhaps your family’s tax liability overall:
1. Gift appreciated or dividend-producing assets to loved ones eligible for the 0% rate. The 0% rate applies to both long-term gain and qualified dividends that would be taxed at 10% or 15% based on the taxpayer’s ordinary-income rate.
2. Gift appreciated or dividend-producing assets to loved ones in lower tax brackets. Even if no one in your family is eligible for the 0% rate, transferring assets to loved ones in a lower income tax bracket than you can still save taxes overall for your family. This strategy can be even more powerful if you’d be subject to the 3.8% net investment income tax on dividends from the assets or if you sold the assets.
3. Don’t gift assets that have declined in value. Instead, sell the assets so you can take the tax loss. Then gift the sale proceeds.
If you’re considering making gifts to someone who’ll be under age 24 on December 31, make sure he or she won’t be subject to the “kiddie tax.” And if your estate is large enough that gift and estate taxes are a concern, you need to think about those taxes, too.
If you have an individual retirement account, you’re aware of how complicated the rules can get. Here are four to remember as you prepare your 2015 federal income tax return.
1. Are you searching for one more tax deduction? It’s not too late to contribute to your IRA and claim a deduction for 2015. Under current tax rules, you can establish and contribute to your IRA up until April 18, 2016 (April 19 if you live in Maine or Massachusetts). If the IRA is the traditional, tax-deductible kind, you can deduct that contribution on your 2015 federal income tax return. If you’re under age 50, the maximum contribution is $5,500. If you were 50 or older by December 31, 2015, you can contribute up to $6,500.
2. You can make a contribution to a traditional IRA and convert it to a Roth later. Although a conversion now will generate taxable income that’s reportable on next year’s federal tax return, qualifying withdrawals from the Roth will be tax-free when you retire. If your circumstances change, you can choose to “recharacterize” your new Roth as a traditional IRA by moving the funds back within a specified period. You also have the opportunity to “reconvert” the funds to a Roth again after a recharacterization.
3. If you turned 70½ in 2015, you’re now required to take an annual minimum distribution from your IRA (and, unless you’re still working, from other retirement plans also). If you chose to delay taking your first distribution last year, April 1, 2016, is an important deadline. That’s the last day you have to take your initial distribution or you’ll be subject to a 50% penalty on the amount you should have taken.
4. The age of 70½ also lets you benefit from the now-permanent tax break for making charitable contributions from your IRAs. While it’s too late to make a contribution for 2015, you can exclude direct transfers of up to $100,000 from your gross income this year. The donation counts as part of your required minimum distribution.
For more tax breaks related to IRAs and other retirement plans, contact our office.
If you haven’t yet begun saving for retirement, a myRA may be a reason to start. “myRA” is an acronym for “my Retirement Account.” myRAs cost nothing to open, have no fees, and let you start saving with any amount that fits your budget. You can open a myRA even if you have other retirement accounts. Your myRA belongs entirely to you and can be moved to any new employer that offers direct deposit capability.
myRAs generally follow Roth IRA rules. That means the maximum contribution for 2015 and 2016 is $5,500 ($6,500 when you’re over age 50). Contributions to your myRA are invested in a U.S. Treasury savings bond. The balance in your account earns interest and is guaranteed to retain its value.
The Department of the Treasury recently added new ways to fund myRAs. As before, you can choose to fund your account from your paycheck by completing a direct deposit authorization form and giving it to your employer. And now you also have the option of making direct deposits from a checking or savings account or from your federal income tax refund.
To learn more about myRAs, please contact us.
A December 2015 survey by a consumer financial services company showed that 36% of the people who participated said they dealt with their most recent unexpected expense by using savings. Would you be part of that group?Here are tips for starting your “rainy day” fund.
Define how much emergency savings is enough. A good starting point is to plan for your emergency fund to cover three to six months of expenses. Another good starting point: Ask yourself how much you’ll need to cover minimum monthly expenses without resorting to credit cards or lines of credit. Your assessment of an adequate balance will vary based on your financial situation, including the vulnerability of your income. For example, a one-earner household is more vulnerable than a two-earner household when it comes to paychecks, so the one-earner family generally will need to set aside more for emergencies.
Track how much you already have set aside. Include all sources in your accounting. For instance, some companies provide payment for accrued vacation and/or sick leave to laid-off employees. If your company provides this benefit and you maintain significant balances, you may not need as much in an emergency fund to help you weather an unexpected layoff.
Decide whether to pay off bills first. Putting excess cash toward high interest credit card balances might make more sense than funding a savings account that earns a much lower rate of interest.
Keep your funds liquid. Emergency money should be easy to get at. You don’t want to have to sell investments at a potential loss or pay withdrawal penalties in order to cover an unexpected hit to your finances. Look into savings or money market accounts as places to accumulate cash.
We can help you estimate how much to stash away in your emergency fund. Give us a call for help establishing a savings goal for those stormy days.