Apr 29 2016

Tax Gain Harvesting

By |April 29th, 2016|Blog|3 Comments|

Hand Putting Deposit Into Piggy BankPerhaps you’ve heard of tax-loss harvesting.  It’s a tax minimization strategy in which you sell stock that you’ve lost money in, in order to capture the tax deduction you get by recognizing the capital loss.  It is a common tactic that can add a little bit to your overall returns.  Let’s say that you own two stocks, ABC and XYZ.  ABC has done really well, and you’ve made $5,000.  XYZ has done pretty poorly, and you’ve lost $5,000.  Generally, it’s a bad idea to sell your ABC stock (all other things equal) because it creates a tax bill.  Selling your XYZ stock can be a good idea (all other things equal) because it creates a tax deduction.

Caveats for Tax Loss Harvesting

There are a couple problems with tax loss harvesting.  Naively it seems bad because if your goal is to “buy low and sell high” you’re always selling lower than you’re buying with tax loss harvesting.  You might be inclined to sell your losing stock then rebuy the stock immediately afterward to gain the tax benefit without having to give up the stock.  Unfortunately, this is called a wash sale.  If you repurchase within 30 days then you don’t get the tax deduction.

As an example, let’s say that you bought 100 shares of Coke stock on April 4th for $4700, then sold the Coke stock April 21st $4300.  If you wanted to keep that $400 tax deduction you wouldn’t be able to repurchase the Coke stock until May 22nd.

Enter Tax Gain Harvesting

Tax gain harvesting on the other hand comes with none of those caveats.  “But Adam,” I hear you cry, “why would you want to sell stock triggering capital gains taxes early!?”

Well, if you’re a Thousandaire like me then you may not be in your highest earning years. (Really we’d like to be millionaires by our peak earning years).  In fact, if you make less than about $47,850 ($37,500 + $10,350 for the personal exemption and standard deduction) you probably don’t have to pay long term capital gains taxes! This means that any stock you own you can sell and keep the income tax free.  You do need to make sure that you don’t sell enough stock to push yourself into the higher tax bracket.

Caveats for Tax Gain Harvesting

This is the part where I warn you again about the wash sale rule, but that’s the good news.  The wash sale rule doesn’t apply to tax gain harvesting.  (Disclosure: Check with your accountant.  I am not an accountant.  I just kind of look like one.) This means that if you have an investment which you have held for more than a year, you could sell it and immediately repurchase it in order to take advantage of a higher cost basis when you sell it in a future year.

For example,  I own 100 shares of Microsoft that I originally purchased three or four years ago at $25 per share.  They now trade for roughly $50 per share.  I could sell them tomorrow and repurchase them immediately.  This would add $2500 of capital gains income to my tax bill in 2016.  Fortunately, I would probably owe $0 on those gains because I am in the 0% bracket for long term capital gains.

Suppose in the future I’m in a higher tax bracket and have to pay 15% on my long term capital gains.  Suppose also that Microsoft shares are trading at $100 per share and I need to sell.  (Maybe a better investment has come up, or I simply need the money for something).  If I don’t use tax gain harvesting then I’ll have to pay taxes on $7500 of capital gains ($1,125).  If I do use tax gain harvesting tomorrow then I’ll have to pay taxes only on $5000 ($750) of capital gains because I already recognized $2500 of it in 2016.   Tax gain harvesting will have saved me $375, well worth the $10 of transaction fees I’ll have to spend buying and repurchasing the Microsoft stock.

Yay?

This is one of those cases where planning your tax situation in advance can have some advantages.  You may also be inclined to do your tax gain harvesting at the end of the year, when you have the clearest picture of how your income will turn out.  Capital gains taxes may not be this low for long and the tax brackets may not be so favorable in the future.

All tax deferred accounts IRAs, Roth IRAs, 401k’s, 403b’s etc are basically equivalent to not paying taxes on capital gains.  You all should know by now how much I love these sorts of accounts.  However, if you already don’t pay taxes on capital gains because you’re in the 15% bracket, then you want to recognize as much capital gains at a 0% tax rate as you possibly can.

 

Disease Called Debt
Apr 24 2016

Advice for Building Your Financial Wellness Toolkit

By |April 24th, 2016|General Personal Finance|1 Comment|

accounting-761599_640Do you feel a knot in your stomach when you sit down to pay bills each month? Ever wondered in the middle of the night when you’ll get out of debt?

Your worry and anxiousness over money is also shared by millions of other people who feel that financial stress is eating away at their sense of security and well-being. Being in debt and dealing with things like rising grocery costs or unexpected life events can drain you both physically and emotionally. It can zap your good health, make you unhappy, and even negatively impact your relationships.

Many of us believe that if we work, think, and try harder, we can resolve our financial issues, but sometimes that isn’t the reality. A recent survey found that 40 percent of millennials say they have used payday loans, pawnshops, a tax refund advance, or other finance options in the past five years, and according to Nerdwallet, the average American household is saddled with $129,579 in debt owed against credit cards, mortgages, and various types of other loans.

So before you let money stress get you down, here are three simple ways you can build a financial wellness toolkit to relieve financial stress:

  • Invest and save. Do away with impulsive or indulgent purchases and save or invest at least 10 percent of your income instead. Sounds tough, right? It’s easier than you think and can even be done while you’re paying off debt if you plan accordingly. By cutting the credit and putting yourself on a spending “diet,” you’ll not only chip away at any lingering debt, but can also work to build a nice little nest egg for future savings or purchases. It’s a win-win situation for you and your bank account.
  • Get educated. One of the easiest ways to combat money stress is to know where you stand. Once you become financially literate, you’ll have a better understanding of where you need to make improvements to stabilize your financial future. Don’t know where to start? A good first step is to conduct a financial self-assessment—there are even free resources online you can tap into! Or perhaps you can participate in any number of the available webinars or seminars. If your budget allows, consulting a financial advisor can be a suitable option as well. Regardless, it’s up to you to take control of your situation by using all means necessary!
  • Take action. Use new technology to your advantage. There are a lot of software programs for smart phones, tablets and websites that can offer digital assistance in managing finances to make life more enjoyable and easier. A great financial tool that can help you out is Zebit, a free employee benefit that provides financial education, planning tools, and a worry-free, no-cost credit option called a ZebitLine that helps working Americans take control of their everyday financial lives. By partnering with employers and leveraging advanced technology, Zebit provides a unique financial wellness offering that lowers employee stress. If you are always on the go and always connected through your smartphone, you can download Zebit’s free Instant Budget App—available for download at the Apple App andGoogle Play stores—which takes the guesswork out of budgeting by automatically creating a customized budget based on income, where someone lives, and the number of people in his or her household.

Always remember: your money worries are just that—worries. To beat money stress, it all starts with you. You must realize that having more money is not the real solution; it’s changing your current spending behaviors and perspectives that can help you recover from financial stress and shape your overall financial outlook for the future.

Apr 22 2016

Mortgage Points

By |April 22nd, 2016|Blog|2 Comments|

house-435618_640So you’re thinking about purchasing a home.  Big decision.  Some people at this point say things like “good for you”, or “now you won’t be throwing money away on rent”.  Codswallop.  Sometimes you’re financially better off renting.  It’s just a fact.  People in general would rather own than rent, but that doesn’t alone make it better.  You’re also a Thousandaire and you have all of this extra money after putting down a down-payment (if not, you might be better off renting, a great calculator to help you decide is available here).  The lender starts talking about “points” should you buy them?

What are points?

Points come in two flavors: discount points and origination points.   One point corresponds to 1% of your total loan amount.  So if you are buying a $200,000 home and you put 20% down that leaves you with a $160,000 loan and 1 point is costs $1,600.  Now for that $1,600 what do you get?  Well, for origination points you get the lender to originate your loan.  This is basically a fee they are charging you.  Sucks.  Shop around, but basically if you want the lender to originate the loan you have to pay these.  (Like everything else in life it is negotiable!)  Discount points are usually what folks are talking about regarding points.  You pay that $1,600 and your interest rate gets reduced by some amount (like 0.25% per point or something).

Discount Points

The hope here is that you are able to reduce the interest rate by enough to pay back that money you spent on the discount point. How do we calculate if this is worth it?  Well, any reasonable mortgage calculator will be able to tell you what the reduction in monthly payment will be.  We can work a quick example.  Let’s say that you’re buying that $200,000 house.  The interest rate would be 4%, but you purchase a point for $1,600 and the interest rate is now 3.75% ($1,600 might realistically buy you more or less of an interest rate reduction, ask your lender). The payment at the 4% rate is $764, the payment at the 3.75% rate is $741.  This works out to a difference of $276 per year.

Naively you might be inclined to simply divide the cost of the point ($1,600) by the annual savings ($276) and figure,  “well, if I’m not going to sell the house or refinance for 5.8 years then its a good deal.”  The problem with this is that you aren’t considering what that $1,600 would earn you otherwise.  At the very least you could earn 4% on that money by applying it to your loan immediately! If we’re a little loose and dirty with the calculation we could just go ahead and figure that at 4% $1600 would produce an “income” of $64 annually.  Therefore, let’s go ahead and divide that $1,600 figure by $212 (276 – 64) instead.  This means that the break-even point is pushed out to 7.5 years.  We can do even better if we assume that the money would be invested in the stock market at a rough rate of return of 8% per year.  This gives a break even point of 10.8 years.

So, do I buy points or what?

Probably not.  It seems to me that the lender is simply counting on you refinancing or moving within about 11 years. Frankly, think you’ll move or refinance within 11 years.  The, “or refinance” is an important point here.  I used to think interest rates couldn’t go lower, yet somehow they continue to march downward.  There’s a couple in denmark paying a negative interest rate on their mortgage.  There’s a decent chance that at some point in the next 11 years interest rates will be lower.  Sure, maybe interest rates will be only be higher, but if you know what direction interest rates will move over then next 11 years, buying discount points on your mortgage has got to be the worst way to profit from your powers of precognition.  Of course, this all changes if your lender offers you more than a 0.25% reduction per discount point, but now you have a quick back-of-the-envelope method for figuring if it is in the ballpark of a good idea.

 

Disease Called Debt

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Apr 18 2016

How to Use Your Tax Refund the Smart Way

By |April 18th, 2016|General Personal Finance|Comments Off on How to Use Your Tax Refund the Smart Way|

accounting-761599_640Today we have a guest post for you from Listen Money Matters about how young people can finally get over their fear of investing. Enjoy!

Internal Revenue Service statistics show that in the past two years they have sent out around 40 million tax refunds each year. If you are one of the lucky millions expecting to receive a refund this year, you may be trying to figure out how to use your tax refund the smart way. Here are several options for you to consider:

1 Wait until It’s in the Bank

Have you ever heard the expression, “Don’t count your chicks until they’ve hatched?” It’s true for many things, including tax refunds. Don’t book a non-refundable vacation or go on a shopping spree simply because you are expecting a good sized refund on your taxes this year. One reason not to do this is because your refund could fall short of what you have anticipated resulting in debt. Some better uses for your refund are listed below. Please read on.

2 Start Some Sinking Funds

A sinking fund is an account you have opened for a specific purpose to be used at a future time. You “sink” your money into this account to build a “fund” to be used for whatever purpose you have chosen, such as an emergency fund, a car fund, or a home improvement fund,  just to name a few. Online there are banks that allow accounts to be set up that will pay you interest with no minimum balance and no fees, which are perfect for sinking fund, and a great way to invest in your future needs.

3 Pay Off Debt

Paying off debt is a great way to use your tax refund. A good way to decrease your debt the fastest is to start by paying all or as much as you can of whatever debt has the highest interest rate. Then proceed to the next debt having the next highest interest rate and so on. Next, resolve not to accumulate more debt and follow the same process of debt reduction next year. Continue to do this for several years and you should gain some financial freedom.

4 Invest

There are many different ways to invest your tax refund. For instance, a few ways you could invest are real estate, stocks, bonds, or a Roth IRA. The degree of risk associated with each type of investment differs, so research each to ensure you are making the best choice for your investment dollars.

5 Home Improvements

If you want the greatest return on your investment dollars, think about using your refund for basic maintenance such as siding, a new roof or a new energy efficient furnace rather than a new updated kitchen with all the bells and whistles. Of course, if your home is already in good condition, you could instead use your tax refund to make some updates in other areas. Keep in mind the current value of your home as well as others in your area. The current housing market in your neighborhood will also affect the value of your home. Before doing any remodeling, research other homes in the area in order to make decisions that will give you the greatest return on your investment.

6 Start a College Savings Fund

Another good use of your tax refund dollars would be to start a college saving fund for your children or grandchildren. You can open a 529 plan and save tax dollars on the earnings as well as on any money taken out for college expenses, as long as you follow all of the rules of the plan. The plans vary from state to state, so look everything over carefully before making your decision.

7 Start a Business

Using your refund to start a business could give you an enormous return on your investment if you make sound business decisions. Do your homework before you spend any money and avoid anything that sounds like a get rich quick scheme because if it sounds too good to be true, it probably is.

Hopefully the tips we have provided will enable you to use your tax refund this year in a way that will give you greater financial security in the future.

Do you have other ideas of how to use your tax refund the smart way?

Kayla is a personal finance blogger in her mid-20s who loves to write about money topics of all kinds.

Apr 18 2016

How to Create an Effective Financial Plan

By |April 18th, 2016|Personal Finance Tips|1 Comment|

wallet-1010601_640

An effective financial plan is one that incorporates all aspects of financial life and that includes goals that are specific, measurable, achievable, realistic and time-bound (SMART).

The 4 basic elements of an effective financial plan are situation analysis, goal setting, implementation and assessment. Each of these elements are important and interrelated and should be given proper attention.

The key to achieving financial freedom and success lies not only in the quality of the financial plan, but in the implementation of those plans. In addition, your financial plan must be documented and updated on a regular basis and should include short, medium and long term goals.

The following is an example of a financial plan template that is easy to use and that is color coded for short, medium and long term financial goals:

effectivefinancialplan

A simple financial plan such as this one may be created using Excel. In this example, short term goals are coded in yellow, medium term goals are coded in green and long term goals are coded in blue.

Situation Analysis

An effective financial plan begins with a current situation analysis. Since each person’s financial situation is different depending on income, financial obligations, and stage of life; the financial plan should be tailored to take those particular circumstances into account. For example, someone who is heavily indebted would need to take a different approach to financial planning from someone who has little or no debts at all. Similarly, someone who has more than one source of income may be able to take on more financial responsibilities than someone with only a single source of income. Situation analysis should involve taking a look at where you are financially in terms of your assets, your liabilities, your income and your expenses. This exercise will form the basis of all your financial planning decisions. At the end of the day, the aim of financial planning should be to at least put yourself in a situation of positive net worth and sufficient liquidity to comfortably cover your daily expenses. The situation analysis will help you to determine how hard you have to work to get to where you want to be and what it will require financially to get there.

Goal Setting

Goal setting is an essential aspect of financial planning. As mentioned earlier, your financial goals should be specific, measurable, attainable or achievable, realistic and time-bound. The example above is an excellent example of effective goal setting. Being specific means that you need to establish definite dollar figures for your financial goals. In the example, definite dollar figures were established for each and every financial goal eg. $30,000 for an emergency fund. This is a much more powerful and effective goal than simply saying that you want to set up an emergency fund. Also, you should be able to state exactly what you are working to achieve. For example, I want to save 6 months income as an emergency fund.

Establishing a dollar figure also means that your goal is measurable. A goal that cannot be measured is almost impossible to achieve because you will never know whether or not you have achieved it.

Your financial goals should also be attainable and realistic. In other words, if you earn $3000 per month, it may not be realistic to try to save $2500 per month. You must take your current reality into account as well as your future expectations. Goals that are not realistic or achievable will cause frustration and eventual failure. So be realistic even if it means that you will not achieve your goals as quickly as you would like to.

Your financial goals must have definite target completion dates. You must have a timeline within which you plan to achieve your financial goals. Otherwise you are likely to lose your motivation for accomplishing them. Setting a deadline gives you something to work towards and something to look forward to. It will allow you to make adjustments along the way if necessary so that you are still able to achieve your goals within the established timeframe.

Implementation of the Financial Plan

A financial plan without implementation is just a useless dream or wishful thinking. Unless you actually implement your plans, you will never achieve your financial goals. You must put measures in place to ensure that everything goes according to plan. Setting up an arrangement where your employer automatically deducts an amount from your salary for savings on your behalf, is a great idea if you don’t have the discipline to save on your own. Also, you can always make arrangements with your bank to transfer funds from your checking account to established savings accounts on your behalf. If you have a side job or do freelancing to make extra income, you need to develop the discipline to set aside amounts that will help you to achieve your goals. Funds that have been earmarked for something should never be used to do something else. Implementation of your financial plan will require great discipline.

Progress Assessment

For any financial plan to work, you must do periodic assessment to ascertain whether or not you are on track towards achieving your goals as planned. This assessment will give you the chance to make changes if necessary in order to ensure that your goals are met as intended. If your financial situation changes during the process, you may need to make adjustments to your goals. It is advisable that you conduct assessments at least on a monthly basis.

Insurance

Life Insurance is essential for any financial plan. Since nobody knows with 100% certainty what will happen in the future, it is important that you obtain life insurance so that your dependents will have a source of income should you pass on unexpectedly. Disability insurance and medical insurance are also great to have to help with unforeseen disability or terminal illness.

At the end of the day, a financial plan is only as good as the quality of the plan and your ability to implement those plans effectively. Each step in the financial planning process is important and careful attention should be dedicated to carrying out each step efficiently and effectively. Follow these steps and you will be well on your way towards achieving your financial goals.

Apr 14 2016

5 Tax Filing Tips for the Newbie Freelancer

By |April 14th, 2016|General Personal Finance|Comments Off on 5 Tax Filing Tips for the Newbie Freelancer|

macbook-577758_640Whether you want to supplement the income from your 9 to 5 job or escape that job altogether, freelancing comes with some definite perks. You’re in charge of your schedule, you can set your own rates and every day is Casual Friday.

While freelancing can give you a new level of freedom professionally, it does have a downside. Instead of relying on your employer to take taxes out of your paycheck, it’s up to you to make sure you give Uncle Sam his fair share.

If you’re new to the freelancing game, learn a few things about taxes to avoid landing in hot water with the IRS. Here are some tips to help you keep your filing as hassle-free as possible.

Understand the filing requirements

Freelancing, whether you work part-time as an independent contractor or full-time as a sole proprietor, means you’re self-employed in the eyes of the IRS. Being self-employed adds a new layer of responsibility where your tax filing is concerned.

Generally, you have to file an income tax return if you make $400 or more from self-employment. On top of income tax, you also have to pay self-employment tax. Self-employment tax is similar to the Social Security and Medicare withholding that your employer would take out of your paycheck at a regular job.

As of 2016, the self-employment tax rate is 15.3%. This tax applies to your net freelance earnings, which is your gross income minus any deductions for business expenses. The IRS also impose an additional 0.9% Medicare surtax for single filers who make more than $200,000 annually or married couples who break the $250,000 income mark.

Be clear on which forms you have to file

Once you know (generally) what taxes you’ll be on the hook for, find out which tax forms you need to fill out. Generally, if your freelance business is set up as a sole proprietorship or an LLC or if you’re just doing it as a side hustle in addition to a day job, you’d use Form 1040 and file a Schedule C.

If you freelance on a larger scale incorporating might make more sense, but that will means more paperwork to fill out at tax time. For example, if you set up an S-corp, you have to file Form 1120S and create a Schedule K-1. This form is what you use to prepare your 1040. Remember, any forms you file for your federal taxes also must be filed for your state.

Know the due dates

For most taxpayers, the only deadline they worry about is April 15th, which is when federal and state returns are due. If you’re freelancing, however, your calendar’s going to look a little different.

When you’re self-employed, the IRS expects you to spread out your tax payments throughout the year. Estimated payments of what you think you’ll owe are due on a quarterly basis. Here’s how the due dates break down:

  • For income earned between 1/31 and 3/31 – April 15th
  • For income earned between 4/1 and 5/31 – June 15th
  • For income earned between 6/1 and 8/31 – September 15th
  • For income earned between 9/1 and 12/31 – January 15th of the following year

If you still owe regular income tax after you prepare your return, that money will also be due on April 15th. Underpaying estimated taxes or paying them late can result in a tax penalty. The same is true if you don’t file your annual income tax return on time or fail to pay what you owe by the April deadline.

If you plan to pay your tax bill with a credit card, understand the fees and interest. Pay the card on time each month to avoid damage to your credit score.

You can check your credit report and score for free with Credit Sesame.

Figure out what’s deductible

The IRS has two basic requirements for deducting business expenses as a freelancer. First, they have to be ordinary, which means it’s something that’s common for the kind of business you have. Second, the expense has to be necessary for doing business. If you’re a freelancer writer, for example, a laptop is something you’d likely need to do your work.

Some of the most common expenses a freelancer may deduct include:

  • Domain or web hosting (if you have a personal website or run a blog)
  • Telephone and Internet expenses
  • Advertising costs
  • Computer software
  • Equipment
  • Home office expenses
  • Office supplies
  • Business-related vehicle expenses (i.e., mileage, gas, etc.)
  • Education and training expenses
  • Professional membership fees
  • Business meals and travel

Aside from these work-related expenses, freelancers have a few other write-offs at tax time. If you pay out of pocket for your health insurance, for example, you can deduct the cost of the premiums as long as you’re not eligible for coverage under your spouse’s insurance plan. Retirement plan contributions are also deductible if you’re socking money away into a SEP IRA, Simple IRA or Solo 401(k).

Document your expenses

Claiming every deduction you’re eligible for is a smart way to cut your tax bill, but you have to be able to prove those expenses were related to self-employment. If you write off a bunch of expenses and the IRS decides to take a closer look at your return, you could end up owing money without a paper trail to show what you spent the money on.

If you don’t want to keep up with piles of paper, use an expense tracking app. The good ones allow you to photograph and then discard your receipts. Either way, establishing a solid record-keeping system is the best thing you can do if you want to get your freelance career started on the right foot tax-wise.

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