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Category Archives: Tax Issues

The End to Beginning

I can’t believe how fast time flies.  Here we are at the end of another year, which coincides for a brief moment with the beginning of the New Year.  As such it is time to take stock of where we are financially.

Taxes:

  • If you’ve some capital gains in your portfolio, look for some capital losses to offset those gains and remove them from income taxation. You may deduct an additional $3,000 in losses (above your capital gains) from your ordinary income.
  • Americans are addicted to income tax refunds. Like other addictions, you need to control your impulse to loan Uncle Sam money for the year while not charging him interest.  Seriously, if you have a substantial refund coming each year, reduce your withholdings by filing a revised W-4 with your employer.  If you’ve changed your family structure; divorce, marriage, or children, a tax estimator like this one from the IRS:  https://apps.irs.gov/app/withholdingcalculator/ may help.
  • On the other hand, if you’ve underpaid your taxes and think you’ll owe taxes, prepay additional taxes to avoid being charged a penalty. The final date for prepayment is January 15, 2016.
  • If your income is dropping next year, move as many deductions as you can legally move to this year. On the other hand, if you expect next year’s income to exceed this years, you will benefit from moving deductions to next year.
  • If you have a flexible spending plan for child care and/or medical care expenses and have over $500 in these plans that is not carried forward by your employer, spend the balance on qualified expenses. For a list of allowable expenses read https://www.irs.gov/pub/irs-pdf/p502.pdf
  • If a favorite charity accepts gifts of appreciated securities, such as stocks, donate some from those which have appreciated. You receive the entire deduction for the full market value on the day of the gift and you do not have to pay taxes on the gains.  If your favorite charity does not accept the gift of securities, set up a donor advised fund which allows you to deduct the gift and you can decide on the beneficiary later.  Charitable gifts from an IRA of those 70-1/2, in lieu of taking distributions from the IRA, is no longer allowed under most cases.

Investments:

  • Be cautions when buying mutual funds in December. Many funds make their annual distributions to shareholders in December and this flow of money is taxable in the year they are paid.  Thus, some of the money you’ve already been taxed on will be taxed again and the value of the mutual fund will fall by the amount of the distribution.
  • Rebalance your portfolio to assure that it reflects the diversification you want. You may have to sell some securities that have appreciated (taxable event) while others may have gone down in value.  This forces you, in a small way, to sell high and buy low.  Proper diversification is important for long-run investment success, but rebalancing too often can lead to greater costs of investing which removes some of the benefits of rebalancing.
  • Calculate your net worth to see if the difference between you assets and debts is greater than it was the year before. If you did not do this last year, you will not know.  Yet doing this year after year is a great way to keep score in your financial life, as we want to see your net worth grow by at least the rate of inflation each year.
  • Review your savings. Are you saving enough money for your goals; retirement, education, second home, vacation, and etc.?  This year the market has been relatively flat for the year with the SP500 standing at 2058 in January and 2052 at the time of this writing. If this indicates that you need to add to savings to reach your goals, add to your savings.

Debts:

  • Which of your debts have the greatest interest rate (APR)? Add to your monthly payment to the one with the greatest APR until it is paid off. Then, pay more to the next highest APR loan.  Keep doing this until all your loans are repaid with the exception of, possibly, your mortgage.  Yet even a modest mortgage interest rate represents money that you’re paying out instead of taking in.   In the process do NOT skip payments on any loan for it will reduce your credit rating.
  • If you’ve many debts with some at high rates, it may pay to consolidate them into a home equity loan since rates are relatively low. You must have home equity to do this. (That is, you must be a home owner with a home worth substantially more than the mortgage.)  In this way, the interest you pay may be reduced and is tax deductible, in most cases.

 

Much of the above is common sense and has been repeated in other weekly Tips.  It is good, however, to ask ourselves the question of what we can do differently to improve our lives, beginning with our finances. That said, we might find that we are successful in our financial lives but lacking in our personal lives.  Money is not everything, yet it is a long way ahead of what comes after it.  Be a good shepherd of your money and remember to be grateful for the gifts you’ve been given. The writer William Arthur Ward once said, “Feeling gratitude and not expressing it is like wrapping a present and not giving it.”  So, wrap your presents to give to others.  As a gift to yourself, freely give your thanks for those you love and believe that they love you.  Be grateful for your financial success and celebrate the diversity of our great nation.

– Rob Weagley

Tax Tips

By Wendy Brumbaugh

April 15, the typical tax deadline, is over for most people and we are not thinking about taxes. However, now is a good time to start thinking about next year. After all, the topic is fresh on our minds.

There are a few things we can do to make the process easier:

First of all, keep good records. Whether that means filing receipts or keeping your QuickBooks up to date, the end of the tax year will be less of a burden.

Second, don’t procrastinate. Stay on top of your financial responsibilities. You may want to complete a net worth statement each year at this time.

And third, do your homework. Tax laws change and it pays to know about certain tax credits, exemptions, and deductions.

If you have questions, call your CPA before you make the appointment for filing your taxes. It will make your life simpler as well as his/hers.

Wendy Brumbaugh, Family Financial Education Specialist
Headquartered in Shelby County, NE Region

2015 Tax Filing Season Tips

I usually write a post about this time every year talking about the changes to the tax code, especially as people file their prior year taxes. 2014 is very similar to 2013 with the slight addition of the Affordable Care Act. So, below I’ve listed some old tips and new tips for the current tax season.

Affordable Care Act Quick Summary

Health care: individual responsibility. You must either:

  • Indicate on your 2014 federal income tax return that you, your spouse (if filing jointly), and your dependents had health care coverage throughout 2014 (all you have to do is check a box);
  • Claim an exemption from the health care coverage requirement for some or all of 2014 and attach Form 8965 to your return; or
  • Make a shared responsibility payment if, for any month in 2014, you, your spouse (if filing jointly), or your dependents did not have coverage and do not qualify for a coverage exemption.

Premium tax credit. You may be eligible to claim the premium tax credit if you, your spouse, or a dependent enrolled in health insurance through the Health Insurance Marketplace.

Advance payments of the premium tax credit. Advance payments of the premium tax credit may have been made to a health insurer to help pay for the insurance coverage of you, your spouse, or your dependent. If advance payments of the premium tax credit were made, you must file a 2014 return and Form 8962.

There is a great deal more nuance about the Affordable Care Act, but the above sentences summarize it nicely. If you are looking for more information, the IRS has a website full of information. However, if you prefer a more relaxed reading of the tax implications of the Affordable Care Act, I recommend Publication 5157, the resource that IRS created for individuals that volunteer to help others with their taxes. It covers most of the topics in a narrative form that I find easier to read than the regular Publication 17 or the instructions for the individual forms.

Use a Volunteer Income Tax Assistance (VITA) site or a Tax Counseling for the Elderly (TCE) site

These free federal and state tax assistance sites help prepare and file returns for their target audiences. VITA focuses on people who make $53,000 or less. TCE focus on people over 60 years of age. To find the VITA or TCE site near you, visit the IRS locator tool; if you’re looking for sites in Columbia, view our times and locations online. If you are looking for the online alternative to a free tax preparation site, the myfreetaxes.com website can help prepare free federal and state tax returns for people with incomes of less than $60,000.

File a tax return even if you are not required to

There are three excellent reasons to file a tax return even if you do not have a filing requirement:

First, you might get a refund! You may be able to receive a refund of income taxes withheld from your paycheck or pension; this is money that was withheld to pay tax, but no tax is actually due on the return. Also, there are several refundable tax credits that can generate a refund even if you have no tax to offset with the credit. Some examples include the Earned Income Credit, the Additional Child Tax Credit, and the American Opportunity Credit. You can read more about these refundable credits by clicking the links above.

Second, you can lower the chance that the IRS will audit you later. The statute of limitations for a tax return is generally three years from the latter of the due date of the return or the date the return was actually filed. If a taxpayer omitted over 25% of their gross income, then the limitation is extended to six years. If the taxpayer files a fraudulent return, the statute never expires. The statute also never expires if you never file an income tax return. If your income is low enough that you do not need to file, then it is extremely unlikely that the IRS would later request that you pay tax. However, by just filing a simple tax return, the statute of limitation starts to run out, and the extremely unlikely chance that the IRS will request that you pay tax will become a 0% chance (unless you committed fraud).

Finally, you may uncover situations where your identity is stolen. If you are not required to file because of a known circumstance (unemployed, receiving only Social Security income, too young to work, etc.), identity thieves that have your name and Social Security number may file a return with you listed as a spouse or dependent. I recently had an older client whose return was rejected by the IRS because a return had already been filed for that tax year with her listed as a spouse; however, her husband had died several years earlier. Thieves had guessed that she would not file a return and filed a fraudulent return listing her as a spouse. I helped the client prepare a Form 14039 Identity Theft Affidavit that she could file with her paper return alerting the IRS to the fraud. To help combat this theft, the IRS issues Identity Protection PINs that the taxpayer must file with their return. These PINs provide greater security by requiring another layer of authentication before the return is processed. The IRS is piloting a program to provide this extra security to all taxpayers.

Collect your tax documents in one place

This tip is simple, but many clients come to the tax site missing a document. Forgetting a W2, photo ID, 1099 INT, last year’s property or real estate tax receipts, etc… is common. Putting a folder or large envelope where you open your mail can help organize the documents before you have your taxes prepared. If you receive electronic documents, print them out and place them in the folder or envelope.

Never spend your refund before it arrives

Most refunds arrive in client’s accounts quickly. Some, however, take much longer. The IRS is very concerned about fraud, so some returns may be subject to more intense scrutiny. Spending your refund before it arrives in your bank account (or in your mailbox) may leave you in a precarious financial position. This could include paying high rates of interest on a short term loan or even having the collateral on your loans repossessed or sold.

If choosing Direct Deposit, triple check your routing and account number

If you or your tax preparer mistypes your routing or account number on your tax return, then the IRS will likely try to deposit your refund in a bank account that does not exist. In this case, the IRS will usually try to deposit the money several times. If the account does not exist, the money will be returned to the IRS, and a paper check will be mailed to the taxpayer. However, it is possible to mistype your routing and account numbers and have the money deposited in an account that does exist that is not your account. If this very unlikely event occurs, there is no formal system for retrieving the money. From the website: IRS assumes no responsibility for taxpayer error. I find it good to repeat that: IRS assumes no responsibility for taxpayer error.

Your public pension may not be taxed in MO

If you are receiving a public pension from any local, state, or federal entity, you may not have to pay MO state tax on the income. This includes PSRS/PEERS, MOSERS, LAGERS, the University of Missouri, and even public plans from other states. See the MO Department of Revenue webpage for more details.

As always I welcome your feedback. I would also be interested in your tax time tips. What would you like to share?

2014 Tax Season Tips

I usually write a post about this time every year talking about the changes to the tax code, especially as people file their prior year taxes. Thankfully, the 2013 tax year looks very similar to the 2012 tax year. There are some small changes, especially if you make more than $200,000, so if you are interested, you can visit the IRS for a concise summary of the 2013 changes.

With no major changes to cover, I wanted to share some tax season tips that I have gleaned from my experience in a Volunteer Income Tax Assistance site:

Use a Volunteer Income Tax Assistance (VITA) site or a Tax Counseling for the Elderly (TCE) site

These free federal and state tax assistance sites help prepare and file returns for their target audiences. VITA focuses on people who make $52,000 or less. TCE focus on people over 60 years of age. To find the VITA or TCE site near you, visit the IRS locator tool. If you are looking for the online alternative to a free tax preparation site, the myfreetaxes.com website can help prepare free federal and state tax returns for people with incomes of less than $58,000.

File a tax return even if you are not required to

There are three excellent reasons to file a tax return even if you do not have a filing requirement:

First, you might get a refund! You may be able to receive a refund of income taxes withheld from your paycheck or pension; this is money that was withheld to pay tax, but no tax is actually due on the return. Also, there are several refundable tax credits that can generate a refund even if you have no tax to offset with the credit. Some examples include the Earned Income Credit, the Additional Child Tax Credit, and the American Opportunity Credit. You can read more about these refundable credits by clicking the links above.

Second, you can lower the chance that the IRS will audit you later. The statute of limitations for a tax return is generally three years from the latter of the due date of the return or the date the return was actually filed. If a taxpayer omitted over 25% of their gross income, then the limitation is extended to six years. If the taxpayer files a fraudulent return, the statute never expires. The statute also never expires if you never file an income tax return. If your income is low enough that you do not need to file, then it is extremely unlikely that the IRS would later request that you pay tax. However, by just filing a simple tax return, the statute of limitation starts to run out, and the extremely unlikely chance that the IRS will request that you pay tax will become a 0% chance (unless you committed fraud).

Finally, you may uncover situations where your identity is stolen. If you are not required to file because of a known circumstance (unemployed, receiving only Social Security income, too young to work, etc.), identity thieves that have your name and Social Security number may file a return with you listed as a spouse or dependent. I recently had an older client whose return was rejected by the IRS because a return had already been filed for that tax year with her listed as a spouse; however, her husband had died several years earlier. Thieves had guessed that she would not file a return and filed a fraudulent return listing her as a spouse. I helped the client prepare a Form 14039 Identity Theft Affidavit that she could file with her paper return alerting the IRS to the fraud. To help combat this theft, the IRS issues Identity Theft PINs that the taxpayer must file with their return. These PINs provide greater security by requiring another layer of authentication before the return is processed. The IRS is piloting a program to provide this extra security to all taxpayers.

Collect your tax documents in one place

This tip is simple, but many clients come to the tax site missing a document. Forgetting a W2, photo ID, 1099 INT, last year’s property or real estate tax receipts, etc… is common. Putting a folder or large envelope where you open your mail can help organize the documents before you have your taxes prepared. If you receive electronic documents, print them out and place them in the folder or envelope.

Never spend your refund before it arrives

Most refunds arrive in client’s accounts quickly. Some, however, take much longer. The IRS is very concerned about fraud, so some returns may be subject to more intense scrutiny. Spending your refund before it arrives in your bank account (or in your mailbox) may leave you in a precarious financial position. This could include paying high rates of interest on a short term loan or even having the collateral on your loans repossessed or sold.

If choosing Direct Deposit, triple check your routing and account number

If you or your tax preparer mistypes your routing or account number on your tax return, then the IRS will likely try to deposit your refund in a bank account that does not exist. In this case, the IRS will usually try to deposit the money several times. If the account does not exist, the money will be returned to the IRS, and a paper check will be mailed to the taxpayer. However, it is possible to mistype your routing and account numbers and have the money deposited in an account that does exist that is not your account. If this very unlikely event occurs, there is no formal system for retrieving the money. From the website: IRS assumes no responsibility for taxpayer error.

Your public pension may not be taxed in MO

If you are receiving a public pension from any local, state, or federal entity, you may not have to pay MO state tax on the income. This includes PSRS/PEERSMOSERS, LAGERS, the University of Missouri, and even public plans from other states. See the MO Department of Revenue webpage for more details.

As always I welcome your feedback. I would also be interested in your tax time tips. What would you like to share?

The Importance Of Personal Financial Planning For College Graduates

 by Ryan H. Law

Over the past 5 weeks we have had more than 350 graduating seniors come through our doors to receive student loan exit counseling. By the time the semester is over we will have visited with more than 500 of them.

Seeing all these seniors come through our doors has caused me to reflect on my own graduation and some things I did well as well as some things I wish I had known or done upon graduation.

Today’s tip will focus on some specific steps that I think all graduating seniors should take (but don’t worry – it’s good advice for everyone – even if you haven’t graduated yet or graduated years ago).

Become financially literate

Financial literacy in the United States is, unfortunately, not widespread. Most high school students fail a personal finance exam (less than 50% of questions answered correctly) and college students score just 62%[1]. One of the best things you can do for your future is to become financially literate. If you can take a college course in personal finance I highly recommend it. In a 3-credit personal finance class you will learn about everything on this list and you will be more financially literate by the end of the course than most people in America. If you don’t have the option to take one on campus look into one of the many excellent Open Courseware classes – you won’t get any college credit for it, but you can’t beat the price tag – free![2]

As a part of becoming financially literate I recommend you learn the fundamentals of how the U.S. economy works. Learn about the business cycle, unemployment rates, inflation and interest rates. All of these things affect your personal finances, so a basic understanding of them is helpful.

Don’t get your financial advice from amateurs

Financial advice can be found almost anywhere – it is prolific on the internet and on the bookshelves at libraries and bookstores. However, I would caution you to be careful that you are not getting your financial advice from amateurs. For example, a few years back there was a taxi driver who “figured out the system to wealth” day-trading stocks. A lot of people lost a lot of money following his advice. Be careful of advice received from friends or family about the latest “hot tip” on a stock. This tip, like all the others, will take you back to the first recommended suggestion – a good solid class will teach you much about how to win at personal finance.

Establish financial goals and take action to achieve them

You need to start thinking about some short and long-term financial goals. How soon do you want to pay off your consumer debt? How much money do you need at retirement? Do you plan to buy a home eventually? Do you plan to have children and send them to college? What are your plans for increasing your earning potential? I recommend you take some time to sit down and make some decisions about where you are financially, where you want to be, and how you plan to get there.

Learn to budget

No company would go one day without a good, solid budget. They understand how much is coming in, how much is going out and exactly where those dollars are going. You should likewise have a budget. A budget is not a record of where your money went (though that is important as well); it is a plan for where you want your money to go. Learn the process for budgeting then discipline yourself to take action and stick to your budget[3]. A key component of your budget should be to spend less than you earn and to pay yourself first. As part of your budget you should work diligently to build up a 3-6 month emergency fund.

Develop a net worth statement and update it annually

A net worth statement is a snapshot of a particular moment in time. It should list all of your assets (everything you own that is worth money) and all of your liabilities (debts). Minus your liabilities from your assets and you will come up with your net worth. You should update this annually to see how you are doing. Over time this number should increase.

Care about your credit

You should know what your credit report contains[4], what your credit score is and what steps you can take to improve that score[5]. Your credit score determines what interest rate you pay on loans, what your auto insurance will cost, if you can rent certain apartments, and in some cases if you can even get a particular job.

Pay off consumer debt as quickly as possible

Carrying consumer debt, especially credit card debt, is toxic to your financial goals. Pay it off as quickly as possible by paying more than the minimum and refusing to take on additional unnecessary debt[6].

Start saving now for retirement and take advantage of employer-sponsored retirement plans such as a 401(k) or 403(b)

If your employer offers a tax-advantaged retirement savings plan, such as a 401(k) or 403(b), take advantage of it! You will save on taxes now and can often get free money through a company “match” of your savings.

Time is your best friend when it comes to saving for retirement. If a 23-year old saves $3000 a year at 8% interest until he or she is age 65 they will have about $912,000 in the bank. If a 33-year old does the same thing they will have about $402,000. That is the power of compound interest!

Understand taxes, insurance and basic estate planning

Even if you pay someone else to prepare your tax return for you, you need to understand your own taxes. You should know your average tax rate, your marginal tax rate, and some steps you can take to reduce your tax burden. You should understand the difference between taking the standard deduction and itemizing deductions.

You also need to understand your insurance products. We spend a lot of money on disability insurance, life insurance, auto insurance, renter’s or homeowner’s insurance and other types of insurance. You should understand what your policy covers, what it doesn’t cover and how much you are paying for each one. You should occasionally check around to see if you can get lower cost insurance.

Everyone needs to do some basic estate planning. Even if you are single with no dependents you at least need a basic will, healthcare directives and a power of attorney. As your situation changes you should review these documents and update them and add other important estate planning documents as necessary.

Start an uncomplicated financial record-keeping system

You and your loved ones should know where important financial documents are and what each one is for. For example, if I were to pass away today I would want my wife to know exactly where my life insurance policies are and how to begin the process of collecting that money. The system I use is a fireproof file box with the HomeFile Organizer system[7]. With this low-cost system I can file and find auto titles, insurance policies, medical records, warranties and any other financial documents.

Give yourself an annual financial checkup

I recommend that you set aside a day each year to give yourself a financial checkup. Review your goals, your budget, your net worth, your insurance and estate policies, your savings and your debt level and determine some steps you can take to improve in each area. As part of the review I recommend you choose a new personal finance book to read over the next year. Take this opportunity to reassess where you are and determine a plan for how to get to the next level.

Conclusion

Hopefully you got some good ideas about improving your financial situation from this list. I recommend you choose just one or two things from this list that you can take action on today. As that becomes a habit you can incorporate another item until you have implemented all of them that fit your situation.

Ryan H. Law, M.S., CFP®, AFC®
Personal Financial Planning Department
Office for Financial Success Director
University of Missouri Center on Economic Education Director
162 Stanley Hall
University of Missouri
Columbia, MO 65211
573.882.9211 (office)
573.884.8389 (fax)

[2] If you are looking for an excellent course I recommend Alena Johnson’s Family Finance course from Utah State Open Courseware: http://ocw.usu.edu/Family__Consumer____Human_Development/Family_Finance/index.html. This is the course I took that convinced me to change my major and helped determine my life’s work.

[3] www.Mint.com is a great, free resource for budgeting. The software I personally use can be found at www.YNAB.com. It isn’t free, but I highly recommend it.

[4] www.AnnualCreditReport.com is the only place to get a free copy of all three of your credit reports annually

[5] www.MyFico.com has a great explanation of credit scores and is the most reliable place to purchase your score.

[6] www.PowerPay.org is a great free resource to figure out how you can pay your debt off quickly