10 Life Events That Require Financial Planning

Sometimes, even the best events in life – a birth, new job or dream relocation – require a financial plan. They might necessitate the need for more insurance coverage, a new budget or guidance from a financial advisor. Here are 10 positive events that should inspire you to do some financial planning:

1. The opportunity to buy a vacation home.

Summer rental homes can represent bliss; a great escape you’ve had every year. Then, the landlord offers a sweet insider price you can’t refuse. Summer homes are often bought as emotions rise at the end of the season. But purchasing a vacation home – especially one that requires rental income to finance – can be a complicated long-term commitment. A financial planner, not a real estate agent, can tell you what to consider.

2. You got that big raise you’ve been counting on for years.

Pay raises are typically small and incremental if they come at all, so getting a big raise is cause for celebration. They also mean it’s time to do some planning to determine how much you should be saving for the future, too. It might be time to bump up your retirement savings.

3. Wedding bells are ringing, finally.

Couples might be marrying later these days than they used to, so when they finally do tie the knot, combining finances can be even more complicated. Prenups might be a buzzkill, but they can help protect each person’s savings and prevent any misunderstandings. They are especially important if either member of the couple is bringing financial responsibilities like children into the marriage.

4. You got your diploma.

Graduates might not think they have enough money to talk to a financial planner. But they face key money choices as they start repaying their share of the overall $1 trillion in college debt with “starter” jobs. They could use help prioritizing payments for credit cards and student loans.

5. You’re relocating.

The 50 states can be as different as moving to another country. Tax rates differ and cost of living can shift dramatically. There are scores of moving-related expenses. This might be the time to see a financial planner (consider national firms with offices in new and old locations) who offers hourly rates for one-time consultations.

6. You just got an inheritance.

Baby boomers stand to inherit significant wealth in the coming years, and receiving lump sums also carries with it financial responsibility. It can raise questions about spending habits, charitable contributions, tax payments and a slew of other concerns. You might want to get help from a professional as you figure out how to handle the money.

7. You’re expecting a new arrival in the family.

When the baby arrives, life inevitably gets more complicated. It could be worth it to fit in some financial planning alongside baby naming or stroller shopping. You might want to open a 529 account, for example, to start paying for college, as well as take out additional life insurance policies.

8. You got a job.

Parents, consider paying a one-time fee to a planner as a gift to your child (and to yourself, since it makes your child more independent). Kids might act like they just want to have fun, but they often need – and even want – guidance during this key life transition.

9. You get offered a generous severance package.

Emotions often run high when your employer offers a big severance package. Some people want to call a lawyer to get more, others a travel agent to get out. It’s important to understand the complex financial issues associated with severance packages. Most plans are immediately taxable, for example, and you want to make sure you understand all the fine print before you sign on the dotted line.

10. You retire.

Retirement is considered the pivotal financial moment in a person’s life. If you haven’t already worked with a financial planner to figure out your plans and budget, then now is the time. In fact, financial advisors urge even clients in their 20’s and 30’s to start planning for this major life transition, to make sure they’re saving enough along the way, during their peak earning years. It’s also a good time to reflect on what you want out of the final third of life.

If you have any questions about your personal finances or starting a budget, please feel free to contact our office.

4 Tax Deductions/Losses That Can Be Carried Forward or Back

Although the tax code contains some exceptions, income is generally taxable in the tax year received and expenses are claimed as deductions in the year paid. But “carryforwards” and “carrybacks” have special rules. In this case, certain losses and deductions can be carried forward to offset income in future years or carried back to offset income in prior years, providing tax benefits.

Here are four examples:

1. Capital losses. After you net annual capital gains and capital losses, you can use any excess loss to offset up to $3,000 of ordinary income. Remaining losses can be carried over to offset gains in future years. The carryforward continues until the excess loss is exhausted.

For example, suppose you have a net capital loss of $10,000 for 2015. After using $3,000 to offset ordinary income on your 2015 return, you carry the remaining $7,000 to 2016. The excess loss is first applied to your 2016 capital gains, and then to as much as $3,000 of your ordinary income. Any remaining loss is carried forward to 2017 and future years.

2. Charitable deductions. Your annual charitable deductions are limited by a “ceiling” or maximum amount, as measured by a percentage. For example, the general rule is that your itemized deduction for most charitable donations for a year cannot exceed 50% of your adjusted gross income (AGI). Gifts of appreciated property are limited to 30% of your AGI (20% in some cases) in the tax year in which the donations are made. When you contribute more than these limits in a year, you can deduct the excess on future tax returns. The carryover period for charitable deductions is five years.

3. Home office deduction. If you qualify for a home office deduction and you calculate your deduction using the regular method, your benefit for the current year cannot exceed the gross income from your business minus business expenses (other than home office expenses). Any excess is carried forward to the next year. Caution: No carryforward is available when you choose the “simplified” method to compute your home office deduction.

4. Net operating losses (NOLs). Business NOLs can be carried back two years and forward 20 years. Here is how it works. Consider you had a $50,000 NOL in 2015. Under the general rule, you will use the loss first to offset taxable income in 2013 and 2014. Then you will carry the remainder forward, potentially until 2035. Tip: As an alternative, you may opt to forego the carryback and instead carry the entire NOL forward.

If you have any questions about your personal or business taxes, please feel free to contact our office.

Summer time is a good time to start planning and organizing your taxes

You may be tempted to forget all about your taxes once you’ve filed your tax return, but that’s not a good idea. If you start your tax planning now, you may avoid a tax surprise when you file next year. Also, now is a good time to set up a system so you can keep your tax records safe and easy to find. Here are some tips to give you a leg up on next year’s taxes:

Take action when life changes occur. Some life events (such as marriage, divorce, or the birth of a child) can change the amount of tax you pay. When they happen, you may need to change the amount of tax withheld from your pay. To do that, file a new Form W-4 (“Employee’s Withholding Allowance Certificate”) with your employer. If you make estimated payments, those may need to be changed as well.

Keep records safe. Put your 2014 tax return and supporting records in a safe place. If you ever need your tax return or records, it will be easy for you to get them. You’ll need your supporting documents if you are ever audited by the IRS. You may need a copy of your tax return if you apply for a home loan or financial aid.

Stay organized. Make tax time easier. Have your family put tax records in the same place during the year. That way you won’t have to search for misplaced records when you file next year.

If you are self-employed, here are a couple of additional tax tips to consider:

Employ your child. Doing so shifts income (which is not subject to the “kiddie tax”) from you to your child, who normally is in a lower tax bracket or may avoid tax entirely due to the standard deduction. There can also be payroll tax savings; plus, the earnings can enable the child to contribute to an IRA. However, the wages paid must be reasonable given the child’s age and work skills. Also, if the child is in college, or is entering soon, having too much earned income can have a detrimental impact on the student’s need-based financial aid eligibility.

Avoid the hobby loss rules. A lot of businesses that are just starting out or have hit a bump in the road may wind up showing a loss for the year. The last thing the business owner wants in this situation is for the IRS to come knocking on the door arguing the business’s losses aren’t deductible because the activity is just a hobby for the owner. If your business is expecting a loss this year, we should talk as soon as possible to make sure you do everything possible to maximize the tax benefit of the loss and minimize its economic impact.

Please feel free to contact our office for a mid-year tax review.

Winning Social Security’s Waiting Game

As more baby boomers move into their 60’s, there is increased interest in Social Security retirement benefits. In particular, seniors must decide when to start. Currently, the full retirement age (FRA) for Social Security is 66. That age applies to people born from 1943 through 1954. FRA gradually increases for younger workers, reaching 67 for those born in 1960 or later.

You can start as early as age 62, but your benefits will be reduced. Alternatively, you can start as late as 70, which will entitle you to a higher benefit. If you start at 62, you’d get 75% of your FRA benefit; waiting after FRA increases your benefit by 8% a year. (Starting younger than FRA also will generate a reduction in benefits for those with substantial earned income, followed by a makeup in later years.)

Example 1: John Anderson is entitled to a Social Security benefit of $2,500 a month at age 66, his FRA. If he starts at age 62, with little or no earned income, John will receive $1,875 a month (75% of $2,500). As another option, John could wait as late as age 70 to start and receive $3,300 a month (132% of $2,500).

Thus, waiting from 62 to 66 increases John’s benefit by 33.3%. Waiting still longer, from 66 to 70, increases his benefit by 32%. By the eyeball test, John will get a benefit increase of about 8% a year for waiting. That government-backed hike may sound extremely appealing, when bank accounts and money market funds pay next to nothing.

Closer look

Running the numbers through a calculator, it turns out that the higher benefit is really a compound annual increase of just over 7%. That’s still appealing, in these low-yield times.

However, the percentage increase actually fluctuates as John moves through his 60s. The periodic increases are fixed, as a percentage of FRA, but the deferred benefit increases in size as John grows older.

Example 2: At age 63, John would receive 80% of his FRA amount: $2,000 a month. That’s an increase of $125 a month, from his age 62 benefit of $1,875, so John’s boost for the year is about 6.7%. By starting at age 64, though, John would get $2,166 a month, 86²⁄₃% of his FRA amount. That’s an 8.3% increase for waiting that year, from age 63 to 64.

Crunching through the numbers, the annual percentage increase drops, rises again, and drops again until reaching a 6.5% hike from age 69 to a start at age 70.

Measuring the trade-off

Another way to make a decision on when to start Social Security is to see how much you give up by waiting, and how long the make-up period will be. If John waits from 62 to 70, he will relinquish 8 years of benefits (96 months) at $1,875 a month, or $180,000. He’d then collect $3,300 a month, an extra $1,425, so he’d catch up in 127 months. By the time John reaches age 81, he’d be ahead in total dollars collected, and the gap would grow in each succeeding month.

Example 3: For another perspective, consider Kate Bennett, who also has an FRA benefit of $2,500 a month. Kate continues to work, so starting before her FRA doesn’t make sense. As mentioned, Kate could get a Social Security benefit of $3,300 a month by waiting until age 70.

However, Kate doesn’t need to wait that long. By age 69, Kate could start Social Security and receive $3,100 a month. In the first year, she’d collect $37,200 in benefits. By waiting until 70, she’d get an extra $200 a month, so it would take her 186 months ($37,200 divided by $200) to catch up: 15½ years. Kate wouldn’t be ahead in total benefits until she’s approaching age 86.

Revising your outlook

The bottom line is that the ideal time to start Social Security can be a moving target. Starting at 62 might be a good choice if you need the cash immediately, have health concerns, or just want to get something back for all the taxes you’ve paid while you’re young enough for active pursuits. If you decide not to start at 62, you might consider waiting until at least age 64 to start to get the sizable 63-64 bump in benefits.

On the other hand, if you’re in relatively good condition, physically and financially, you might decide to defer after you reach FRA to get a larger Social Security benefit. Remember that you’re not locked in to an age 70 start if you can delay; you can start any time in between 66 and 70, if waiting is no longer practical.

Keep in mind that these calculations are relatively simple as they ignore taxes on benefits, cost-of-living adjustments, and any interim investment earnings. If you want to explore this topic further, our office can provide detailed projections for your specific circumstances.

Keeping Your Company After A Divorce

Going through a divorce can be financially as well as emotionally devastating. That’s especially true for business owners.

Example: Jack Barnes has built his small company into a thriving enterprise. However, the time he spent on the business has taken its toll. Now Jack is going through a divorce, and his wife, Sharon, stands to receive part of the company in a property settlement. Jack does not relish losing absolute control of the company, and he does not want to have to deal with his ex-wife as a co-owner. In this situation, what can Jack do to avoid such results?

True value

One approach is to begin by determining a likely outcome of any divorce agreement. Speak with an attorney—one who specializes in family law, not necessarily your cousin with a general practice—about your state’s treatment of marital property. What portion of the company’s value is likely to go to your spouse, considering its worth when you went into the marriage and its growth since then?

At the same time, you should get a realistic valuation of your company from a reputable source. Depending on what’s practical, you might use an appraiser who is acceptable to both spouses or just hire one on your own. Either way, this should help you to get an idea of what your obligation might be when terms are finalized.

Say your attorney indicates that your spouse could be awarded half the value of your company, and the business is valued at $3 million. You’ll know that your spouse could receive in the neighborhood of $1.5 million from your company’s value after a divorce.

Setting goals

With such knowledge, you can decide how to proceed. Should you put your company up for sale and divide the proceeds, pursuant to the divorce settlement, then start a new business of your own? Sell some shares to a more desirable partner to raise cash to buy out your spouse? Just hand over the shares and live with your ex as a co-owner? Or do you really want to maintain your current ownership in your existing firm?

Assuming you want to keep your company and not have to work with your former spouse, you’ll have to make some arrangement to provide your portion of other assets instead of company shares. That could mean giving up real estate, securities, bank accounts, retirement accounts, vehicles, collectibles, and so on. Keep in mind that tax-deferred retirement accounts may have a low value to you in the future, if you expect to be in a high tax bracket when taking withdrawals.

If you lack enough assets for a full trade-off, you might have to borrow against your company’s value to fulfill your part of the agreement. Another possibility is to enter into a property settlement note, sometimes known as a structured settlement. In effect, this is a buyout over time, using anticipated cash flow from the business to make up for the assets (shares in your company) you’ll be retaining. As is the case with any note, this arrangement should have a market rate of interest and a definite term, which might be over many years.

Be pre-prepared

Ending a marriage is seldom pleasant, but the financial damage may be reduced if you gather the facts and make thoughtful decisions. Aim for an agreement that’s fair to both parties; proceed as quickly as possible, so you can hold down legal costs and get back to work without divorce on your mind.

Often, the best way that a business owner can minimize the financial fallout from a divorce is to plan ahead. If you own a company and plan to get married, suggest a prenuptial agreement that designates your company as an asset you’ll retain. Bringing up a prenup before a wedding may not be the most romantic move you can make, but you might be able to deflect the blame by telling your intended spouse that such an agreement is your CPA’s idea.

If you have any questions, please feel free to contact our office.

Tax planning is essential for second marriages

Wedding bells bring rejoicing – and financial changes. If you’re marrying for the second time, the changes might seem overwhelming. On the surface, tax and financial planning for a second marriage is similar to that of a first marriage.

For example, no matter what month you hold the ceremony, the IRS will consider you married for the full year. That means employer-provided fringe benefits and taxes withheld from your paychecks could require adjustment. Depending on how much each of you earns and your past financial history, you’ll have to decide what filing status will be most beneficial, and how best to take advantage of tax breaks that may become available.

With a second marriage, you have even more decisions to make, including how you’ll merge your assets. Will you purchase a new home? If both of you already own separate homes, you may each qualify for a $250,000 federal income tax exclusion on the profit from the sale, as long as you have lived in the home for at least two of the last five years. If only one of you meets the requirements for the exclusion, consider selling the qualifying home and living in the other for a while.

You or your spouse might also have substantial debt or financial obligations. Discuss your financial histories, including alimony or child support still owed and past bankruptcies. Decide who will provide for the college expenses of the children in your now-combined household. Depending on your age, you may want to investigate the effect of the marriage on your social security benefits.

A second wedding is a joyful event for you, your new spouse, and your extended families. To give your marriage an added advantage, call us before you say, “I do.” We’ll offer our congratulations – followed by useful financial and tax planning advice.

If you have any questions about your personal taxes, please feel free to contact our office.

Using the Home Sale Gain Exclusion for More than Just Your Home

With careful planning, and provided the rules are followed, the tax code allows the home sale gain exclusion every two years.

Let’s assume you own a home, perhaps a second (vacation) home, or maybe are even thinking about buying a fixer-upper and flipping it. With careful planning, it is possible to apply the full home sale exclusion to all three of the properties.

Here is how it works. The tax code allows you to exclude up to $250,000 ($500,000 for married couples) of gain from the sale of your primary residence if you have lived in it and owned it for two of the five years immediately preceding the sale and you have not previously taken a home sale exclusion within the two years immediately preceding the sale. In addition, there is no limit on the number of times you can use the exclusion, as long as the requirements are met.

It makes sense to start off by selling the home you currently live in because you probably already meet the two-out-of-five-years ownership and use tests. The next step, if you have a second home, would be to move into it and make it your primary residence. After you have lived there for two full years and it has been more than two years since the previous home was sold, you can sell the property and take the home sale exclusion again. If you are handy, and find the right property, the next possible step would be to purchase and occupy a fixer-upper while you make repairs and improvements in preparation for its eventual sale after the two-year ownership and occupancy rules have been met. When that time is up, you can sell the fixer-upper and take the third exclusion. This makes it possible for a married couple to exclude as much as $1,500,000 of home sale profit in just over four years if they follow the rules carefully and time the sales correctly.

If you own a rental property, and you occupy the rental for two years prior to its sale, you will be able to exclude a portion of the gain for that property as well. Because so many rental owners were occupying their rentals before selling them and taking a home sale exclusion, Congress enacted a law barring the exclusion of gain attributable to rental periods after 2008. Thus, the home sale exclusion can only be used to exclude gain attributable to periods before 2009 and periods after 2008 in which the home was used as a primary residence.

Example: You purchased and began renting a residence on July 1, 2005. On July 1, 2013, you occupied the property as your primary residence; and, on August 1, 2015, you sell the property for a gain of $230,000. You had owned the property for a total of 121 months, of which 67 were before 2009 or during which you occupied the property as your primary residence after 2008. Thus .5537 (67/121) of the gain is subject to the exclusion. As a result, $127,351 (.5537 x $230,000) of the gain qualifies for the exclusion.

In the preceding example, had the gain exceeded the exclusion limits, $250,000 for single taxpayers and $500,000 married taxpayers, the exclusion would have been capped at the exclusion limits.

There is one final issue to consider. If any of the residences were acquired though a tax-deferred (Sec 1031) exchange from another property, then the residence must be owned for a period of five years prior to its sale to qualify for the exclusion.

Since situations may differ, we highly recommend that you consult with our office prior to initiating such a plan.

Five Basic Financial Tips for Young Couples

For young couples starting out, money can be tight. Most likely, you’re starting a new career or a family; paying back college loans; or simply suffering though a slow job market in a sluggish economy. Utility bills, credit card debt, car payments, rent and other expenses can add stress to your relationship and your budget. If only one partner works outside the home, the budget can be further strained.

When you’re young, it’s tempting to live for the moment. Taking care of work, kids and busy schedules can blot out any well-intentioned thoughts of careful financial planning. But if you neglect basic financial planning principles during these early years, you could find yourself paying for it later in terms of subpar credit, debt, a lack of college funding for your kids or inadequate retirement income.

Following are five simple tips that can help young couples manage basic financial planning needs.

Think Like a Couple

When you were single, you only had to worry about your own financial health. If you spent too much, you could simply decide to spend less. Now that you’re living as a couple, you will share income, debt, expenses and, for better or worse, spending and saving habits.

To encourage a successful financial future, agree to work toward financial stability together. Make a habit of calmly discussing your finances. Create a realistic but strict budget you can both live with, and then stick to it. This will help avoid future financial crises and prevent unnecessary stress and worry about money.

Get Out of Debt – and Stay Out

When you became a couple, you not only combined your incomes, but you also combined your debts. Being constantly in debt drains your monthly income, creates stress and puts you in an unstable financial situation. If one person loses an income and you can’t make the credit card payments, your credit rating will decline and you will pay higher interest rates on future loans – and even possibly fail to qualify for car or home loans.

Make it a priority, as a couple, to get out of debt as soon as possible. Develop a strategy to pay off your debts that have the highest interest rates or that don’t qualify as a tax deductible expense first.

Start Saving for Retirement Now

Even while eliminating debt, do not neglect saving for retirement. When you’re in your 20s, retirement seems far away, but the earlier you start saving, the better. Because you’re young, you can be more aggressive with your investments, take more risks in an effort to reap higher returns. Even modest investments can grow exponentially over the decades leading to retirement, meaning that you can sacrifice less each month and end up saving more for your retirement. Compound interest and the historically upward trend of the financial markets are vehicles you can climb aboard early and ride to retirement success.

Start a College Fund for Your Kids

If you have children, now is the time to start putting away money for their college education. College tuition is on the rise, and there is no reason to expect that trend to reverse. A 529 college savings plan is a great way to save. Contributions are tax deductible in some states, but not on your federal tax return. However, investment earnings in a 529 college savings plan are tax exempt when used for qualifying college expenses. States also offer prepaid plans that let you lock-in college tuition at today’s prices. Either way you go, the key is to start early to maximize your savings. Talk to a financial planning professional about options in your state and start saving now.

Plan for Your New Home

You will need to start saving for a new home if that is one of your goals. Buying a new home can be a good investment and can provide a solid anchor for your family and financial life. Down payments are usually a substantial sum, so it is essential that you start saving early.

Make sure you pay your bills and credit card payments faithfully and on time each month to boost your credit rating, which will lower your interest rate and monthly payment and make it easier to qualify for a home loan.

Finally, buy a home within your means. Just because you can make the monthly mortgage payment under ideal circumstances doesn’t mean it’s a smart financial decision. Buy a home you can comfortably afford now, and move up to a larger, more expensive home later when you’re in a better position.

A Smart Strategy

Laying a solid financial foundation when you’re young is a smart strategy. It’s easier to maintain your financial situation than it is to fix it after it’s broken. If you’re a young couple, start now to gain control of your debt, create a budget and save for retirement, education expenses and your first home.

If you have any questions about starting a budget, please feel free to contact our office.

Financial Tips For The 20-Something Generation

The earlier you start, the easier it will be to get ahead financially. Here are some recommendations for those in their early twenties.

1. Pay yourself first. Every time you get paid, put something aside in a savings or investment account. As a general rule, save 10% of your income. Even smaller amounts add up over time.

2. Watch your plastic. Credit cards are an expensive form of debt, and it’s easy to lose control of them. Try to pay your entire credit balance every month, even if it’s a stretch. If you’ve been carrying a balance, buy nothing more on credit until the balance is zero.

3.Keep a clean credit record. If you plan to own a home, buy a car, or start a business, you’re going to need squeaky-clean credit. Keep all of your financial obligations current, and never make a financial commitment that you can’t keep. If you fall behind on any obligation, talk to the creditor immediately to make alternative arrangements.

4. Make sure you have adequate medical coverage. You may not see a doctor even once this year. But if you do need medical care, it could be for something serious and expensive. Anything less than a good major medical policy could ruin you financially.

Watch your expenses. At this point in your career, you may not receive large or frequent pay raises, but you can achieve the same effect by cutting expenses. Shop before you buy. Very similar – and sometimes identical products – are sold at widely varying prices. Wise shopping can be the equivalent of having a good-paying second job.

For assistance with financial strategies suitable for your particular age and situation, contact our office.