12

2016 proposed budget implications for young savers

US Capitol Building

AJ & KJ: Last week the President submitted his proposed budget changes and the implications for retirement accounts. Were the proposed changes to be approved, there are hefty implications for young savers and we’re covering a few that are especially impactful for young savers below. While the point of the article is not at all to take sides in either direction, it is merely to point out some of the proposed changes.

We all plan for our savings and our future, but one of the most uncertain aspects of planning for the long-term is the tax code. It inevitably changes from time to time, and in many cases can be quite sweeping in the changes brought. It’s important to take each proposal below, along with other ones you might read, and understand that the tax laws are likely to change at some point. Status quo just doesn’t exist in this area of our lives!

1. Limit Roth conversion to pre-tax dollars.
Essentially, those fortunate enough from an income standpoint (often used for married couples with combined incomes greater than $181k annually for 2014) who have made contributions to traditional IRAs and have then converted those contributions to a Roth due to exceeding the $181k limit for direct Roth contributions would essentially have their tax benefits eliminated.

This method (often called the “back door Roth IRA contribution”) hasn’t even been around for all that long (since people prior to 2010 couldn’t even convert to a Roth), but this strategy could be closing nonetheless, which has far-reaching implications for couples earning more than $181k annually and contributing in this way.

2. “Harmonize” the RMD rules for Roth IRAs with the RMD rules for other retirement accounts.
This is a serious game changer. This provision would require that distributions from Roth IRAs be taken upon turning 70 1/2, the same as traditional IRAs. This would make us very, very unhappy people. One of the strong benefits of a Roth IRA as part of an overall retirement picture is to not HAVE to take funds out at any required point. Thus, it makes very, very good long-term monies that could be used in very late stages of retirement. Not so much were this to be put in place! Wah wah.

3. Create a 28% tax benefit for contributions to retirement accounts.
If you are in the 28% income tax bracket (or lower), this provision would not directly impact you. However, those who are in a higher tax bracket wouldn’t receive a full tax deduction for contributions or deferrals into a retirement plan. No thank you.

4. Establish a cap on retirement saving prohibiting any additional contributions.
This proposal essentially favors those who save LESS than whatever the established cap on retirement savings is. We’re REALLY not fans of this (even though the time this could even be reached is a long, long way off). We’re pro-savings, especially at a very early point, so this disallows people from saving as much as possible within tax-favored accounts. Sure, the limits proposed are quite high, but still, why create a stigma about accumulating “too much” in a retirement account? Don’t punish those that have been fortunate enough to accumulate such sums!

We’re generally pro-savings, pro-tax benefit planning people, so while these are simply provisions at this point and we won’t know for many months whether they are to become part of our reality, it’s incredibly important to us that we be allowed to maximize our retirement savings without the rules of the game changing mid-stream.

Ultimately, most of these provisions mean more complexity, more nuances, more limitations, etc. that make it all the more cumbersome to navigate your personal finances. Hopefully many of these (as they have been in the past) are nixed and don’t make it to the tax code, but the provisions proposed (these in addition to NUMEROUS others) are just good examples that the tax code is in no way permanent. All you can do is plan the best for the rules you know now, and then adjust course as those changes are thrown your way over the years.

For more information about the budget proposals, read here.

Image courtesy of Vichaya Kiatying-Angsulee / Freedigitalphotos.net 2016 proposed budget implications for young savers is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.

Eight super fun things to do with your tax refund

KJ: With the average tax refund for 2012 coming in at a whopping $2,803 – just shy of the average for 2011 that was even higher at $2,913 – what should you do with your income tax refund? With this very significant sum of money that many families receive, it’s time to reflect on some smart money tips…so, here’s my list of super fun adult things to do with your tax refund. Okay, so maybe “super fun” was misleading for some of these…but hey, in the long-run, heading the advice of the first few before looking at the options that follow will allow you to live financially secure sooner and enjoy much, much more than you thought possible!

Pay down debt – the bad kind
Seems easy, right? If you have some of the bad debt – ongoing credit card debt, lines of credit, etc. – then this should be stop number one for your to apply your income tax refund.

Pay down debt – the better kind
Usually within this category falls home loans, so consider taking a chunk and paying down your mortgage a little bit quicker. If you still have a car payment, then consider making a dent in that loan to get it paid off quicker, so you can start applying that monthly payment toward your goals!

Pay yourself
Fund your emergency fund. If you haven’t already begun saving to it, then start it up now! Get it to $1,000 as soon as you can, then work to $5,000, and then 3-6 months of your living expenses. If you’ve done all this (woohoo for you!), then consider saving more to your retirement accounts or investment/brokerage accounts.

Invest in yourself
Class – or certification – you’re interested in that will help further your career to increase your “human capital” – i.e. earning potential. The payoff in the long-term may surprise you. Plus, many companies reimburse you for those relevant classes and certifications, so think of it as just a temporary deposit that will be returned to you.

Replace that shoddy appliance
So again, not as fun, but it can be! Our vacuum cleaner went kaput a while ago, and we decided it was time to retire our existing one once and for all.

Maybe your fridge is on the fritz. Might be time to invest in a newer, more energy efficient model. You might be surprised what monthly energy savings you would have by getting a newer model!

Pad your vacation fund
Maybe a nice relaxing getaway is what you and your significant other need. Hopefully this year’s refund can get you closer to those relaxing days on the beach sipping [insert drink of choice]!

Buy energy efficient light bulbs
Time to upgrade those crappy bulbs that die every couple years with some energy efficient lightbulbs. LED are the latest craze for energy efficiency. We’ve bought a lot of the Cree lightbulbs for our house, and it’s made a huge difference on our energy bills. Not only do they burn about 1/6 the energy, they last much longer than regular lightbulbs, plus they also produce less heat which indirectly means less cooling costs in the summer! A bit of an initial investment, but if you’re going to be in your house for a number of years, then it will be well worth the investment!


Pay it forward
Consider paying it forward. Donate to your favorite charity or use it to support someone in need. Not only will you feel good about it, but chances are it may help your tax bill this year too – win/win!

    What will you be doing with your income tax refund?
    Have you already spent it?
    What do you typically do each year?

How you can afford to travel is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.

Too much or not enough withholding, how to know

Stick figure yelling "Yeah, taxes!"KJ: So with as complex as the tax code is – kind of like being asked to do differential equations while performing brain surgery on top of a tight rope stretching across the grand canyon – one of the things that impacts you on a regular basis that you don’t necessarily stop to think about is your income tax withholding. And so with that brief introduction, I present to you one great (very quick) resource: the IRS withholding calculator. You enter some basic information about your income, payment frequency, dependents (i.e. any little ones running a muk), etc. and in about 5-10 minutes it provides you with a projection for your taxes owed for the year. While it is just that – a projection – it is a useful tool to see if you’re where you should be as well as start to look at how next year may turn out.

Given that it’s about time to close out this year and start planning for next year, it would be helpful to see if any withholding adjustments might needed in January with your employer on your W-4 or if a modification to your quarterly tax payments are needed. Waiting until you file your taxes in the spring to realize “uh oh, I need to make a change!” is not really the best solution.

While this calculator is a good resource, it is not THE calculation with all factors for determining your income tax, so give yourself a little bit of wiggle room just in case. Ideally, you would like to finish your tax return with as close to $0 due or refunded. Huge refunds = giving the government an interest free loan for a year, and huge tax payment = depressing budget fail. If you have a complex tax situation with lots of investments, complex income arrangements, and multiple support obligations, then maybe it’s better to let your CPA do the heavy lifting. In either case, consider a few factors:

Have you switched jobs?
Maybe you found a great opportunity or maybe you were needing a change of pace. Either way, having varied income throughout the year can make it a challenge to keep up! Run the numbers and see if your new job is withholding what they need to be, and see if it’s enough for a full year at the new (higher or lower) level.

Have you been promoted?
First off, congratulations! With the economy improving these last four years, maybe you were in line for a big promotion? Higher income = higher taxes, so plan ahead and make sure you’re not caught off-guard when the tax man cometh to taketh away.

Did you or a spouse stop working?
With one less income (hopefully by choice and not a surprise!), your tax situation may change drastically. Understanding what adjustments can be made is a good start to making sure you stay on track.

Did you acquire a little one?
The stork could have brought your family a little one. While certainly not an offset to the additional food/diaper/toys/you-name-it costs you will incur, you get a little bit of a tax benefit to support a dependent (sounds very grown up, doesn’t it?).

Did you sell a house and are now renting?
With some of the advantages of home ownership (potential deductibility of mortgage interest, taxes, etc.), you might find that even having a similar outlay for rent each month could end up costing you more in federal income taxes each year. Understanding why and how this may impact you is critical!

For us, we sold a home and bought a home, so we’ve got to dig a little deeper into next year’s plan to see if any tax implications may change from what we had experienced these last five years. Plus, with housing prices recovering in most areas around the U.S., look to see this reflected on next year’s real estate tax bill – boo for taxes, but yeah for higher prices, why can’t all the increases just come in the year you sell it!?…

Unfortunately, we didn’t cover any of you that are impacted by a STATE income tax…I’m sure there are calculators out there that can help with those too, so please leave us a comment if you’ve found any tools that help you and your family!

    What do your results show?
    Do you need to make any changes for next year?
    Share with us what you do to try and stay on top of this each year.

Too much or not enough withholding, how to know is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. target="_blank">Read more about our commitment to providing quality product recommendations.

Tax preparation tips to make now

someecards.com - I never appreciate my kids more than when I'm doing my taxes.

KJ: Now that we’re a little past the halfway point in the year and approaching the final stretch of the year, we thought this article we read is a good summary of ten midyear tax moves to make now. With this year yielding higher taxes for many – whether it’s higher real estate taxes from a rising real estate market, higher Social Security payroll taxes with the expiration of the tax cuts January 1st, Medicare surtax on higher incomes, or higher income tax rates on top earners – it’s more important to plan ahead for the rest of the year and make adjustments to your budget before it’s too late!

Take a look at your withholding (or quarterly estimated tax payments)
Run a few numbers based on the exemptions, deductions, and your estimated income for the year and see if you should consider changing your W-4 form at work to have more taxes withheld if needed. If you have a more complex situation, your CPA can assist you with this, but if your situation is a little bit more simple, try plugging the estimated numbers into TurboTax or building a handy dandy spreadsheet. In the wake of higher taxes, consider contributing more to a retirement plan that you can deduct from your taxes.

The IRS website has a great W-4 estimator to help you with this process, so check it out and see if it can help you with this process.

Finalize last year’s taxes
Whether by choice from extending your taxes or by circumstances of quite a complex tax structure, what better way to focus on this year than to finally get passed last year?

Start your tax file
Begin making your list of tax documents you will need for this year:

    1) W-2′s, 1099′s from contract work or savings and investment accounts
    2) 1098′s for mortgages (don’t forget you may have more than one if you refinanced throughout the year and took advantage of the low interest rates),
    3) K-1′s,
    4) real estate taxes – did you sell your house this year? Don’t forget you will need information from closing on your home for real estate taxes paid, but you’ll also have a summary for your new home.

Take note of any life changes
Have you had a baby, moved to a new home, moved states (maybe you now GET to pay state income taxes too!…), moved jobs, received a promotion, or anything else that may impact your earnings or tax situation? Now is the time to do a little research (Google is a useful tool, but it’s not a substitute for solid tax advance if your situation is complex) and make any last-minute adjustments while it’s still time.

    What is holding you back from planning for next year’s taxes?
    Have you had to make any significant adjustments from last year?
    Tell us what you do to plan for your taxes each year.

Tax preparation tips to make now is copyrighted by TheSimpleMoneyBlog.com without consent to republish. Card courtesy of www.someecards.com.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.

Tax preparation tips

KJ: It’s tax time, and what’s more fun than doing your taxes? Pulling teeth or giving a cat a bath have got to be top contenders with filing your taxes for the most entertaining thing to do on a weekend. Seeing as how we’re almost to that all-time favorite moment of the year, we thought we would pull together some tips on helping this time of year be a little less stressful.

The biggest question around taxes is: do you prepare them yourself or do you solicit the help of someone else? We’ve done our own taxes (helps to have a CPA mom for guidance!), but the question you have to ask yourself is if your CPA is worth the time spent. If you are spending a few hundred $’s for a CPA to prepare your taxes, then it might be time to see if your CPA is finding you several hundred $’s in tax savings you wouldn’t have found yourself. Sure, convenience can be a factor, but when you’re looking to cut expenses, this area might be one area to consider depending on how complex your taxes are.

Make a list
It helps to start by making a list of what you need to watch for. This list could include:

    1099′s from brokerage and investment accounts,
    1099′s from any saving accounts,
    1099′s generated for any contract work,
    1099′s from any retirement plan distributions,
    W-2′s from any employers throughout the year,
    donation receipts,
    1098 if you own your home and have a mortgage,
    documentation showing real estate taxes paid,
    itemized receipts for sales tax if you live in a state like Texas that allows you to take this itemized deduction,
    listing of all medical expenses throughout the year (noting you have a pretty hefty hurdle to overcome – now 10% of your adjusted gross income for 2013),
    K-1s for any partnerships.

While this list is not intended to be a comprehensive list (otherwise, it would probably be 20 pages long, and we thought it best to not bore our readers to tears!), once you have identified what you need to be on the lookout for, then it makes tax time all that much quicker.

Make use of technology
Especially if you use a program like TurboTax, many of these forms and documents can be imported directly into the software come tax time. Some of our 1099′s imported directly into the program this year, which made filling out the forms a breeze.

Also, we use ItsDeductible.com to keep track of our donations throughout the year. It’s a free website that is powered by TurboTax, and it’s a great way to keep track of any cash or non-cash donations.

Turn the complex into something simple
With so many thousands of pages to the tax code, it helps to have a program like TurboTax walk you through the very important questions that impact your taxes: have you moved, did you have any children, did you purchase energy efficient items throughout the year, or did you generate any self-employment income? What better way to make sense of the tax code than to ask a series of simple questions? Then, based on your answers, the program guides you through step-by-step on any additional information needed to file the proper tax forms. Plus, they have a support staff to help answer your questions…oh, and that’s free! Getting TurboTax can cost about $20-60, but when you compare that to what many of the other services charge (let alone a CPA), you may find that you are coming out way ahead. Don’t get me wrong, there are many reasons why you would want a CPA’s oversight – particularly if you have a complex tax situation with business interests, complex investments, etc. – but the average person can turn this part of their life to DIY!

Preparing taxes can be particularly frustrating at times, but if you’re equipped with the right tools, it can become a much less burdensome task.

    Do you prepare your own taxes?
    Tell us about the tools you use.

Tax preparation tips is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.

12