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2016 Year End Tax Tips

The end (of 2016) is near. Still, you can do a lot to help your finances before the ball drops on Saturday and we ring in the new year. Let’s look at some of my top year end tips –

  • The Charitable RMD is part of the tax code that allows those who are 70-1/2 and taking RMDs from their IRA to donate directly to a charity. In effect making a donation deductible even though the donor doesn’t itemize.
  • If you are retired already, and are not too close to the next tax bracket consider a Roth conversion to “top off” your current bracket. Say you are at a taxable $65K. You have an additional $9,900 you can withdraw or convert to Roth, and pay just 15%. By converting to Roth, you help to keep from breaking through the 25% rate as your withdrawals increase in the future.
  • Are you getting a big refund (I know, big is relative) every April? Has no one told you that Big Tax Refunds Are Really Bad? Let me be the first.
  • Do you have an FSA (flexible spending account) at work? If there’s a bit of money left, you should consider a quick purchase, typically, eyeglasses come to mind as they are an easy expense, and have a wide range of cost from simple reading glasses at $100 to a fancy pair of glasses well over $500. Don’t let that money get forfeited.
  • Year end is a good time to look at how much you are depositing to your 401(k) account. Can you bump the deduction up by a percent or two? You won’t regret it. Are you at least depositing enough to grab the matching amount? If not, do this now.
  • Did 2016 bring you any change in family members? Marriage, new child, divorce,  family member pass away? It’s time for an annual review of the beneficiaries on all of your accounts. It’s never to soon to see if your new spouse has a former spouse of their own as a beneficiary. Pretty important to get that updated asap.
  • See if the Tax Loss Harvesting can help you. You can read the full article, but the important thing to know now is that you can take stock losses against up to $3000 of ordinary income each year. Hopefully, you are making a profit, but this is an easy way to get a bit of money back on a stock you are holding at a loss and are wanting to sell.
  • Last, it’s not too late to beat the standard deduction. This strategy depends on your current situation, of course. It’s ideal for a couple who just misses the required minimum for itemizing, $12,600 for 2016. Pulling some of these deductions into the current year can allow them to itemize. Check out the article I wrote earlier this month, and see if this strategy can help you.

That’s all for this year, Happy 2017

 

Financial Planning 101 for Young Adults and Why You Need to Pay Attention in Class

A Guest Post today –

You’re young and the world is your oyster; nobody is disputing that. The one mistake that a majority of young adults make, however, is failing to take their finances seriously. You’ve just completed four (or more depending on your major) years of college. During that time, you worked hard to earn your degree, but you also partied hard. It’s time to get serious, because failing to do so will cost you right away and over time.

Why Financial Planning Is So Important

Financial planning might seem like something you needn’t worry about until you are in your 40s or 50s but it’s important now. Your place within the global economy will directly affect your future. It’s never too early to start saving for your retirement, much less plan for unforeseen circumstances. What if you become ill and cannot work? What if something worse happens? You don’t have to be in debt for the first 20 years of your adult life if you plan accordingly.

Some Ways to Put a Financial Plan in Place

As you start your new adult life, you’re already in debt. You have student loans that must be paid off and you have a new form of independence to maintain. You’ve said sayonara to your dorm life and must now pay for your own pad, which will cost you significantly more. Yes, you’re starting out in your new career, but this won’t cover your expenses right away unless you’re extremely lucky and earned a CEO position with a Fortune 500 company upon graduation, which, face it, you didn’t.

The key to financial planning is start working on your budget and savings now. Don’t make the mistake of assuming you have time. The more you plan now, the better off you’ll be later, and your first step is assessing your student loans. How much of your monthly budget are they taking up and is there a way you can refinance them to save you money? If you can refinance them into a lower interest rate, you’ve just added thousands of dollars to your personal finances.

Another thing you should do is set a monthly budget and stick to it. Keep track of how much you spend. This helps you see where there is hemorrhaging, which will enable you to take steps to stop the financial bleeding. For example, are you paying excessively for insurance coverage you don’t need? Do you really know what insurance coverage you need? Enlist the expert guidance of a local insurance agency to see where you can save precious dough.

Avoid Luxury Expenses Until Later

Your college graduation present to yourself should not be a luxury vehicle or downtown pad. You can’t afford it, unless you secured that Fortune 500 management position discussed above. Start off small, because you will have better financial resources to go big later. When just starting out, it does you no good to exceed your financial capabilities, because stretching yourself too thin will land you residency back home with mom and dad.

You don’t want that when you’re proving to them and yourself that you’re a responsible adult now. Take your finances seriously, plan wisely, and reap the benefits in your future. You’ll be glad you did.

Spread Betting as a Money Making Exercise: A Brief Guide

A Guest Post today –

When you think of financial market trending, your mind is almost always invariably drawn to live shares and corporeal assets. From company stocks to commodities such as oil, these physical entities once dominated the market and served as the staple of any successful trading portfolio.

The market has changed considerably over time, however, with diversification having created a host of innovative product derivatives and new methods of training on the financial markets. Take spread betting, for example, which is now a particularly popular trading method and one that has empowered novice investors across the globe.

What is Spread Betting? A Brief Guide

If you are new to the concept of spread betting, it is a derivative trading vehicle that does not deal with live shares. It also does not require traders to own an underlying asset or commodity, affording them flexibility in terms of how and when they are able to generate a profit. Instead, it enables investors to take a position against the value of an underlying financial instrument (and back it to either rise or decline in the prevailing market). This is similar to the concept of standard betting, where customers back one of two potential outcomes relating to a specific asset class.

This is therefore a speculative trading vehicle, and one that offers a clear, competitive advantage to spread-betters. After all, it is possible for traders to profit in a depreciating market through spread betting, as investments do not always require the price of the underlying asset to rise if they are to be successful. If you speculate that the price of a stock or asset will fall, for example, you can make money as the market declines and burden of ownership begins to take its toll on traders.

Interestingly, this method of trading is not restricted to stocks in the modern age, with online brokerage platforms such as ETX Capital offering access to diverse asset classes such as indices, currencies, gold and oil.

The Last Word

In terms of popular application, spread betting as become a preferred trading vehicle in markets such as the foreign exchange. After all, volatile markets of this type are notoriously complex, while only traders with an appetite for risk and a keen sense of determinism are able to prosper. Spread betting simplifies the complexities of this market and minimizes the risk of forex trading, however, so long as you approach the market with some understanding and an ability to analyze real-time trends.

Note: This type of trading is not yet approved in the US, but I have a worldwide audience, many of whom are interested in CFD (contract for difference) and spread betting.

The Standard Deduction and How to Beat it

Last time, we talked about the potential new tax rates. Much of my concern focussed on the standard deduction, which looks to rise quite a bit at the peril of personal exemptions. schedulea

But, as I hinted, there are opportunities to shift things around to our advantage. Let’s look at Schedule A (you can click the image to view it regular size). It starts with medical deductions. When working, our insurance premiums were deducted pre-tax, so this line never really mattered much. Now, the full tab is our cost and it’s above 10% of our income, but it occurred to me – why lose that 10% every year? Say the insurance cost is $10,000, but only $5,000 can be deducted. By paying the full 2017 premium before the end of this year, the entire insurance bill can be added to the Schedule A. This results in $2500 saved tax for paying the 2017 insurance an average of 6 months early. Think on this, it’s not paying a year early, since the payments aren’t due next December, they are due each month. The return on that $10,000 is actually close to 50%.

The same strategy can be applied to property taxes. Even if the bill for the second half of next year hasn’t been issued yet, the town is probably happy to take your money early. Depending on the size and cost of your house, this can be $4,000-$10,000 (or more), in a deduction pulled into this year.

The third, and last, deduction I’ll mention is charitable contributions. Schwab, Vanguard, and Fidelity all offer a way to make your donation and deduct it this year, but disburse it to charities at a future time. This is a great way to consistently support your favorite charities, while maximizing your tax saving.

If the new tax code passes, and you had $25,000 or so in itemized deductions, this strategy might help you group your deductions so that the $50,000 2 year total is split to $45,000 in odd years and $5,000 in even years. In other words, you take the $30,000 standard deduction one year, but pull in all you can to take $45,000 the next year. That’s nearly a $4,000 benefit by juggling the timing a bit.

Keep in mind, I wrote this with my thoughts toward the new tax code, but this strategy can help people now. A couple who looks at their tax return and realizes they have just $12,000 in itemized deduction, vs the standard deduction of $12,600, can use this method of pulling in deductions from 2017. I know that I’ll be writing a check next week for our entire 2017 medical insurance premium.

Let me know if this strategy is something that can save you some money on your taxes. More year end tax thoughts coming.

The new tax code?

Our new president hasn’t been sworn in yet, but he does have a tax overhaul proposal that has a decent chance of passing. Every change has winners and losers. Even changes that seem positive when first announced. One key provision of the new plan is to bump the standard deduction, from $6,350 single / $12,700 joint to $15K/$30K. Sounds great, right? But as they say, there’s no free lunch, and the personal exemptions are taken away. $4050/yr per person in 2017. Sounds simple, but it impacts taxpayers very differently, based on their circumstances.

  • A couple who doesn’t itemize – Their exemption + deduction (E&D) rises from $20,800 to $30,000. $9,200 less taxable income.
  • A couple that has $35000 in itemized deductions – They still itemize, but lose their exemptions. $8,100 higher taxable income.
  • A 3-child couple who doesn’t itemize – Their E&D drops from $32,950 to $30,000. $2,950 higher taxable income.
  • A 3-child couple that has $35000 in itemized deductions. They still itemize, but lose their exemptions. $20,250 higher taxable income.
  • Single Parent with 3 kids, taking Std deduction – Their E&D drops from $25,500 to $15,000. $10,500 higher taxable income. Ouch.

The plan also collapses the marginal rate structure a bit. trumptaxplan A couple with a taxable $75,000 in 2017 would have a tax bill of $9000 vs the current (2017) $10,317. For the first couple above, the non-itemizer, it’s just gravy, a bit of extra savings. For the itemizers with kids, it only offsets a tiny bit of the high total tax due.

For my family, our deductions are above the new standard deduction amount, so we will see a loss of the $12,150 in exemptions if the new code takes effect. On the flip side, there’s an interesting strategy that might help those who are in a similar position, with itemized deductions that are over this new (proposed) limit. A topic for the next article.

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