Once again, it is impossible to open the newspaper or watch the news without coming across financial news stories that make you want to run screaming for the hills. The key thing to do during turbulent times such as we are facing now is to remember what your long term financial plan is and not make decisions based upon the hysteria resulting from recent events. If you haven't done so, I encourage you to develop or re-evaluate your financial goals and the steps you are taking to reach them. Hopefully, your investment portfolio is diversified and will allow you to weather this current storm.
Remember that savings and checking accounts in FDIC insured banks are guaranteed up to $100,000. If you have investments in a brokerage account they too are insured against the failure of the brokerage company (up to $500,000) but not against declines in the values of your investments. When it comes to the insurance of your financial assets, having access to current statements is critical so that you can prove how much money you had in your savings account or how many shares of a specific stock or mutual fund you own.
Keep your chin up. The financial news is bound to get better eventually.
Julie
Thursday, September 18, 2008
Friday, September 5, 2008
Maximizing Adjustments to Minimize Taxes
The other day at our staff meeting a comment or two (or even three) was made that I am a type A personality. Of course I protested but just now I found myself gleefully punching numbers into Dinky Towns 1040 tax calculator. Because this isn't the first time nor the second that I have happily plugged numbers into this calculator or others like it, I have finally come to the conclusion that the comments about me being an A personality are right. Be that as it may, I hope you can benefit from my love of playing "what if" with numbers.
Before going into the example I used to look at the difference that using pre-tax money for retirement savings and flexible spending accounts would have on a family's tax burden. I think it might be helpful to explain the process that is used to calculate a person's income tax. Calculating your taxes can be a fairly complicated process. If you find that your situation is complex enough or you are confused enough I highly recommend hiring a professional to assist you. Although I have some valuable information to share, I am not a tax professional and don't have the latest information on all the rules and regulations involved in calculating your taxes.
Calculationg your Income Taxes:
Total Income
― Income exclusions =
Gross Income
― Income Adjustments =
Adjusted Gross Income
― Deductions & exemptions =
Taxable Income
Phew, that was a big process and painful. Luckily for those of us working for someone else, we only have to go through it once a year. Okay, back to my little analysis. I used a family of three for my example (two parents and one child) earning a total of $100,000 per year between the two adults. To keep things simple I didn't include any excludable income so their Total Income and Gross Income are both $100,000. What I did include was a number of adjustments to income so that we can compare how changes to Adjusted Gross Income will impact this hypothetical family's tax burdern.
Without any income adjustments (pre-tax retirement savings or flex spending accounts) this family's Adjusted Gross Income will be the same as their Gross Income ($100,000) and their Taxable Income (Adjusted Gross Income - Deductions [standard deduction = $10,900] and Exemptions [$10,500]) is $78,600. Without taking into consideration any tax credits their tax bill would be $12,338.
The next thing I did was to assume this family spends $500 a year on medical bills so I deducted that by putting it into a Flexible Spending Account for Health Care and I assumed they spend $500 per month on child care so I deducted $6000 a year by putting it into a Flexible Spending Account for Dependent Care. I also helped this family put together a spending plan so they can contribute $15,500 to one of their 401(k) plans and $4,000 to a Traditional IRA. Making these changes dropped this family's Adjusted Gross Income down to $74,000 and subtracting out their Standard Deduction and Exemptions gave them a Taxable Income of $52,600 reducing their tax bill to $7,088. A difference of $5,250 a year.
Now for most of us, putting almost $20,000 a year into a retirement account probably isn't feasible but this examples shows what a difference using your adjustments can make to your tax bill. In the case of this family their after tax income wouldn't be reduced by the full $20,000 they put into retirement accounts since they saved over $5,000 in taxes. In essense, Uncle Sam would be putting over $5,000 into this couples retirement account for them.
Even though the money they are putting into a college savings account for their child doesn't decrease their taxes today, they won't have to pay taxes on the interest that money earns when they use it for approved educational expenses.
Again, I would highly recommend that you contact an income tax professional about strategies that you can use to legally reduce your tax burden.
Let me know if you have any questions or would like additional information on this subject.
Julie
Before going into the example I used to look at the difference that using pre-tax money for retirement savings and flexible spending accounts would have on a family's tax burden. I think it might be helpful to explain the process that is used to calculate a person's income tax. Calculating your taxes can be a fairly complicated process. If you find that your situation is complex enough or you are confused enough I highly recommend hiring a professional to assist you. Although I have some valuable information to share, I am not a tax professional and don't have the latest information on all the rules and regulations involved in calculating your taxes.
Calculationg your Income Taxes:
Total Income
― Income exclusions =
Gross Income
― Income Adjustments =
Adjusted Gross Income
― Deductions & exemptions =
Taxable Income
- The first step is to calculate total income. Your total income is all the money, property and services that you received in exchange for any work that you did and any profit that you earned from selling your "stuff".
- The next step is to calculate Gross Income. Gross Income is calculated by subtracting out the income from total income that is supposed to be excluded. For many of us, the two figures are the same.
- The third step is to calculate Adjusted Gross Income. This is the number that I will be "playing" with in my example below. Adjusted Gross Income is calculated by subtracting your adjustments to income (flexible spending accounts and tax-deductible retirement accounts fall in this category) from Gross Income.
- Next your subtract either your standard deduction or your itemized deduction from your Adjusted Gross Income.
- Then you subtract out your exemptions for your family members. This gives you your Taxable Income.
- Now you use the tax table or a tax-rate schedule to determine what taxes you are responsible for.
- But before you finish you subtract out any tax credits you might have.
- And finally you figure out how much you owe or are owed based upon what you have already paid.
Phew, that was a big process and painful. Luckily for those of us working for someone else, we only have to go through it once a year. Okay, back to my little analysis. I used a family of three for my example (two parents and one child) earning a total of $100,000 per year between the two adults. To keep things simple I didn't include any excludable income so their Total Income and Gross Income are both $100,000. What I did include was a number of adjustments to income so that we can compare how changes to Adjusted Gross Income will impact this hypothetical family's tax burdern.
Without any income adjustments (pre-tax retirement savings or flex spending accounts) this family's Adjusted Gross Income will be the same as their Gross Income ($100,000) and their Taxable Income (Adjusted Gross Income - Deductions [standard deduction = $10,900] and Exemptions [$10,500]) is $78,600. Without taking into consideration any tax credits their tax bill would be $12,338.
The next thing I did was to assume this family spends $500 a year on medical bills so I deducted that by putting it into a Flexible Spending Account for Health Care and I assumed they spend $500 per month on child care so I deducted $6000 a year by putting it into a Flexible Spending Account for Dependent Care. I also helped this family put together a spending plan so they can contribute $15,500 to one of their 401(k) plans and $4,000 to a Traditional IRA. Making these changes dropped this family's Adjusted Gross Income down to $74,000 and subtracting out their Standard Deduction and Exemptions gave them a Taxable Income of $52,600 reducing their tax bill to $7,088. A difference of $5,250 a year.
Now for most of us, putting almost $20,000 a year into a retirement account probably isn't feasible but this examples shows what a difference using your adjustments can make to your tax bill. In the case of this family their after tax income wouldn't be reduced by the full $20,000 they put into retirement accounts since they saved over $5,000 in taxes. In essense, Uncle Sam would be putting over $5,000 into this couples retirement account for them.
Even though the money they are putting into a college savings account for their child doesn't decrease their taxes today, they won't have to pay taxes on the interest that money earns when they use it for approved educational expenses.
Again, I would highly recommend that you contact an income tax professional about strategies that you can use to legally reduce your tax burden.
Let me know if you have any questions or would like additional information on this subject.
Julie
Kids and Money
Saving--the ability to set aside some money routinely from a stream of income--is at the heart of household asset development. It is the springboard to investing in property or stocks. Though one may believe that people in poor households absolutely cannot save, research has refuted this notion repeatedly.
So how do we learn how to save? I learn alot about how kids see money from talking with families in our 4-H program. There seems to be two different paths parents set their children on one allows kids to spend what they have on their wants, the other encourages kids to think about what they really want and plan their purchases.
The life-long benefits of teaching your children good money habits makes it well worth the effort. Parents can begin to teach the money concepts of earning, spending and saving when children can talk in sentences. Spending refers to how kids decide to use money.
A couple of spending concepts to teach include:
The difference between wants and needs. Help them find a balance between these two spending motivations . Let your child know you know you can't afford to buy everything you want, either. This could be brought out while window-shopping together.
Explain the bigger financial picture. For example, a movie involves not just the price of admission, but gas for the car, popcorn, pop, time and energy.
I'm noticing it's this latter concept, the bigger financial picture that has many young people planning movie nights at each other's houses ----renting a movie, popping some popcorn and sharing a liter of soda is a way to enjoy a Friday evening and still save some of their allowances.
And in my own life, as I work to practice what I preach, I'm learning to filter my purchases through my needs or wants conversation with myself, and trying very diligently to spend less on the wants category. Several years ago I taught a class "Saving Dollars When You Don't Have a Dime to Spare" which helped me better understand my impulsive purchases. i.e. magazines at the grocercy check out; eating lunch out everyday rather than brown bagging, buying from the vending machines. I think there's many teachable moments available to us as we have conversations with young people about needs and wants----theirs and ours.
So how do we learn how to save? I learn alot about how kids see money from talking with families in our 4-H program. There seems to be two different paths parents set their children on one allows kids to spend what they have on their wants, the other encourages kids to think about what they really want and plan their purchases.
The life-long benefits of teaching your children good money habits makes it well worth the effort. Parents can begin to teach the money concepts of earning, spending and saving when children can talk in sentences. Spending refers to how kids decide to use money.
A couple of spending concepts to teach include:
The difference between wants and needs. Help them find a balance between these two spending motivations . Let your child know you know you can't afford to buy everything you want, either. This could be brought out while window-shopping together.
Explain the bigger financial picture. For example, a movie involves not just the price of admission, but gas for the car, popcorn, pop, time and energy.
I'm noticing it's this latter concept, the bigger financial picture that has many young people planning movie nights at each other's houses ----renting a movie, popping some popcorn and sharing a liter of soda is a way to enjoy a Friday evening and still save some of their allowances.
And in my own life, as I work to practice what I preach, I'm learning to filter my purchases through my needs or wants conversation with myself, and trying very diligently to spend less on the wants category. Several years ago I taught a class "Saving Dollars When You Don't Have a Dime to Spare" which helped me better understand my impulsive purchases. i.e. magazines at the grocercy check out; eating lunch out everyday rather than brown bagging, buying from the vending machines. I think there's many teachable moments available to us as we have conversations with young people about needs and wants----theirs and ours.
Wednesday, September 3, 2008
Lost account information
Recently, several banks in Wyoming were affected by a lost bag with a data tape containing account information. It sounds unlikely that the information will be misused however all account holders of the affected banks received a letter explaining protective measures to take including a free one-year membership to Identity Guard Credit ProtectX3sm.
If anyone ever becomes a victim of identity theft, a helpful four-step guide is outlined at the Federal Trade Commission website, http://www.ftc.gov/.
If anyone ever becomes a victim of identity theft, a helpful four-step guide is outlined at the Federal Trade Commission website, http://www.ftc.gov/.
Tuesday, September 2, 2008
Confused about how to save for your child's college education?
Well you're not alone.
Over the weekend our good friends and their 4 year old daughter came to visit us. In addition to the hiking and horseback riding we also ended up discussing taxes and college savings plans. Not having children of my own, I haven't spent a lot of time looking into the details of tax-deferred college savings plans but I know how important they can be for a family with young children.
As a result of our conversations I decided to do some research to help my friends out and figured that you might be interested in what I came up with.
Liz Pulliam Weston on MSN Money does a great job explaining the difference and the benefits of the college savings options that are available in her article "College plans for the rich, poor and in-between" and provides what she considers the top 5 college savings plans in her article "The 5 best college-savings plans".
Check out the two articles and let me know what you think.
Later this week I'll explain how college savings plans and other investment choices can help to reduce your taxes. Less taxes = more money in your pocket.
Julie
Over the weekend our good friends and their 4 year old daughter came to visit us. In addition to the hiking and horseback riding we also ended up discussing taxes and college savings plans. Not having children of my own, I haven't spent a lot of time looking into the details of tax-deferred college savings plans but I know how important they can be for a family with young children.
As a result of our conversations I decided to do some research to help my friends out and figured that you might be interested in what I came up with.
Liz Pulliam Weston on MSN Money does a great job explaining the difference and the benefits of the college savings options that are available in her article "College plans for the rich, poor and in-between" and provides what she considers the top 5 college savings plans in her article "The 5 best college-savings plans".
Check out the two articles and let me know what you think.
Later this week I'll explain how college savings plans and other investment choices can help to reduce your taxes. Less taxes = more money in your pocket.
Julie
Wednesday, August 27, 2008
Upcoming Money Management Workshops
As you may have noticed the topic for the October session of the Fall Money Management Series has changed slightly. Given the expectation of rising heating costs we thought it would be timely to include tips on how to control your home heating expenses at the same time that we talk about strategies to make the most of your money. The two just seem to go hand in hand. Be sure to mark your calendars for October 15th. The workshop will start at 6 PM.
Along these same lines. The Wyoming Home Performance Alliance is hosting a Home Energy Makeover Workshop & Expo in Cheyenne on October 4th. Tickets will be available at the Laramie County Extension Office.
I will keep you posted with more information as we get closer to the date of the Money Management Workshop and the Home Energy Makeover Workshop & Expo.
Julie
Along these same lines. The Wyoming Home Performance Alliance is hosting a Home Energy Makeover Workshop & Expo in Cheyenne on October 4th. Tickets will be available at the Laramie County Extension Office.
I will keep you posted with more information as we get closer to the date of the Money Management Workshop and the Home Energy Makeover Workshop & Expo.
Julie
Friday, August 22, 2008
CREDIT CARDS CAN BE A COSTLY LESSON
Credit card debt continues to increase across the nation and savings accounts continue to decline. This is not a good omen when the cost of consumer goods continues to increase. During the holiday season the pressure to buy increases greatly. It’s important to evaluate your financial standing and your credit card debt and communicate your financial plans to your spouse and children.
Credit card balances should be kept low and paid off monthly. Resist the temptation to buy more than your income can support. In 2001, the average family had a credit card debt of $7,000; in 2004 this amount had grown to $12,000. This includes the 40% who paid their debt off each month. Those who carry a $7,000 debt balance pay approximately $1,400 annually in interest. Using this example, if you were in your 20’s, and if the average monthly payment of $116 could instead be invested in a retirement account, it would grow to approximately $180,000 at 5% interest or $330,000 at 7%, by the time you reached retirement.
Credit card companies are targeting young people, especially those of college age. The more immediate consequences of misuse of credit include being rejected for a car or student loan or even a home loan. It is important to budget your money and make a plan, determining budget categories and following your budget.
Every time you prepare to make a purchase ask yourself whether it is a need or a want. Much of what we buy falls in the “want” category. These things are okay to buy as long as they will fit in our budget and we can live within our income. If we have to purchase them with a credit card, with no clear-cut payoff plan, we are starting down a troubled path.
Here are 15 things that indicate credit card trouble:
Your credit card balances are rising while your income is stable or decreasing.
You are only paying the minimum amounts required on your accounts, or maybe even less than the minimums.
You are juggling bills and applying for new credit cards to pay off old ones.
You have more credit cards than a gambler has poker chips.
You are at or near the limit on each of your credit cards.
You consistently charge more each month than you make in payments.
You are working overtime to keep up with your credit card payments.
You don’t know how much you owe and you really don’t want to find out.
You have received phone calls or letters about delinquent bill payments.
You are using your credit card to pay necessities like food or gasoline.
Your credit cards are no longer used for the sake of convenience, but because you don’t have money.
You are dipping into your savings or IRA to pay your monthly bills.
You are hiding the cost of your purchases from your spouse.
You are playing the card game by signing up for every credit card that sends you an offer.
You have lost your job, or are fearful that you are about to, and are concerned about how you are going to pay all your bills.
If you feel you need assistance in developing a plan to deal with overwhelming debt there are free credit counseling services available. Be sure they are accredited by the National Foundation for Consumer Credit (http://www.nfcc.org/). Find a service near you by going to http://www.debtservice.org/.
Credit card balances should be kept low and paid off monthly. Resist the temptation to buy more than your income can support. In 2001, the average family had a credit card debt of $7,000; in 2004 this amount had grown to $12,000. This includes the 40% who paid their debt off each month. Those who carry a $7,000 debt balance pay approximately $1,400 annually in interest. Using this example, if you were in your 20’s, and if the average monthly payment of $116 could instead be invested in a retirement account, it would grow to approximately $180,000 at 5% interest or $330,000 at 7%, by the time you reached retirement.
Credit card companies are targeting young people, especially those of college age. The more immediate consequences of misuse of credit include being rejected for a car or student loan or even a home loan. It is important to budget your money and make a plan, determining budget categories and following your budget.
Every time you prepare to make a purchase ask yourself whether it is a need or a want. Much of what we buy falls in the “want” category. These things are okay to buy as long as they will fit in our budget and we can live within our income. If we have to purchase them with a credit card, with no clear-cut payoff plan, we are starting down a troubled path.
Here are 15 things that indicate credit card trouble:
Your credit card balances are rising while your income is stable or decreasing.
You are only paying the minimum amounts required on your accounts, or maybe even less than the minimums.
You are juggling bills and applying for new credit cards to pay off old ones.
You have more credit cards than a gambler has poker chips.
You are at or near the limit on each of your credit cards.
You consistently charge more each month than you make in payments.
You are working overtime to keep up with your credit card payments.
You don’t know how much you owe and you really don’t want to find out.
You have received phone calls or letters about delinquent bill payments.
You are using your credit card to pay necessities like food or gasoline.
Your credit cards are no longer used for the sake of convenience, but because you don’t have money.
You are dipping into your savings or IRA to pay your monthly bills.
You are hiding the cost of your purchases from your spouse.
You are playing the card game by signing up for every credit card that sends you an offer.
You have lost your job, or are fearful that you are about to, and are concerned about how you are going to pay all your bills.
If you feel you need assistance in developing a plan to deal with overwhelming debt there are free credit counseling services available. Be sure they are accredited by the National Foundation for Consumer Credit (http://www.nfcc.org/). Find a service near you by going to http://www.debtservice.org/.
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