May 2015 Letter

pring is in the air and before you know it summer will be upon us. Summer is when many enter the job market for the first time and receive an introduction to the world of taxes. In this month's issue is an outline of what to expect. There are also articles on creative ideas to help reduce the burden of college costs, a review of consumer inventions, and ideas to help improve your financial condition.
As always, should you know of someone who may benefit from this information please feel free to forward this newsletter to them.

A First Job Your Introduction to Taxes As school winds down, a number of students will hit the job market for summer employment. When this is a first job, it is often one of the first times you experience the world of taxes. If this is you or someone you know, please use this information to help make the move to the workforce a little more understandable. Your I-9 information. When you get the job, your new employer will have you fill out tax form I-9, Employment Eligibility Information. This is a legal requirement to show you have the right to work and it confirms your tax information. You will be asked to provide proof of identity, including showing your Social Security card. Your W-4. You will also be asked to fill out a tax withholding form. This form gives employers instructions on how much they should withhold from your paycheck to send in to taxing authorities like the IRS. By filling out the form correctly, enough will be withheld from your pay to ensure you do not owe too much in tax when you file your tax return. Other Taxes. You will notice your check amount is also reduced for your contributions to Social Security and Medicare. Your paycheck will be reduced by 6.2% for Social Security and 1.45% for Medicare payments. You are not in this alone. Your employer matches your payments and sends both of them to the government. On your own? If you start up your own summer business like mowing lawns or providing nanny services you will have tax obligations similar to those as an employee. In addition to income taxes, you will need to file estimated tax statements to cover Social Security and Medicare taxes. These two taxes amount to 15.3% of your net income so plan accordingly. But also remember to save receipts for your job related expenses. They can help reduce your taxable income. Tips are taxed. If you receive any tips, these too are taxable. Most employers that have tip-earning employees will help you file the appropriate forms. If they do not, you will need to ask for help to ensure your taxes are paid on your tip income. Review your pay. Remember to review your initial paycheck. Often times there are errors in setting up employee records. Should you find an error or need an explanation, feel free to ask your employer for help. Errors not caught early can become expensive surprises later on during the year. Review your tax-filing obligation. Remember to review the need to file a tax return at the end of the year, even if you do not owe tax. Often your W-2 has pay withheld from your check. If you do not file a tax return you cannot get excess withholdings paid back to you.

Five Interesting Consumer Inventions Here are five inventions that have the potential to impact you and those you know during the upcoming year. Will they be in your near future? 3-D printers. While the ability to print three-dimensional objects has been around for a while, the affordability and flexibility of recent offerings is making this invention more accessible. Now virtually anything can be created with these new devices. Things like plastic parts, toys, food, and even medical applications are being created with these printers. Smart Watches. From newcomer Pebble, to big manufacturers like Sony, Google, Microsoft, and Apple it seems like everyone is getting into the smart watch game. A smart watch puts popular phone technology onto your wrist. Besides telling time, this new device can set appointments, play music, and many other applications previously only found on computers, tablets, or smart phones. Ringly. An alternative to the smart watch is Ringly, a "smart" ring. The ring flashes different colors to alert you to an email, text, or message from someone you know. With this new development, your phone can stay in your purse until Ringly signals you someone important is trying to contact you. Selfie-Stick. This new product is popping up all over. The selfie-stick allows you to attach an extension onto your phone to take the ultimate selfie photo. A simple button on the handle or on a remote allows for candid photos without the need of assistance. 3D video gaming. Immersing yourself into your video world is now becoming a reality. 3D technology is moving to headgear that brings you into your gaming world. Are you ready to experience total immersion into your video games?

Change a Little... Save a Lot Changing your financial situation can seem to be an overwhelming task. Like most large problems, the best way to address them is to break them down into smaller, more manageable problems. The same holds true with your financial well being. Here are five small ideas that can yield big results to help improve your financial health. Make incremental payments on debt as soon as possible. Make extra principal payments on your debt as often as possible and as soon as possible. The way bank amortization schedules work, you pay most of your interest during the early months of your loan repayment. Example: $200,000 loan; 30 years repayment; 4.5% interest. The monthly payment is approximately $1,013. Payment Interest Principal First $750 $263 Last $4 $1,009 Cut out one annuity bill. Gone are the days when you buy something and then you are done. Now you pay a monthly fee for as long as you use a service. Examples of this are software licenses, cloud storage, television viewing, cell phone services and more. Why not cut out one such service. Put the savings aside for a better use. Eliminate one add-on service. Take a look at bills that have a number of add-on services. Cell phone and internet bills are likely candidates. Do you need that special cable package? Do you fully use your cell phone data plan? Look for ways to cut a little bit out of each of your bills. Pay yourself. When you pay your bills, pay yourself. Place the funds in a hard to reach banking account. Ideally one that does not have internet access. Set a financial goal for this money. It might be to pay for a fun vacation or a special purchase. You will receive a double benefit from this approach. One for hitting your savings goal and one for the joy of purchasing something you want without going into debt. Conduct a competitive review. Key suppliers rely on our inertia. When was the last time you reviewed your auto and home insurance? What about other service providers like cell phones or trash pick up. Choose a service and solicit three vendors to provide competitive quotes. Your current supplier might still be the best, but you will never know if you don't periodically check.

Financing for College? Be Creative. Can you or your child manage to graduate from college without having a mountain of debt? The Federal statistics suggest it is unlikely. But if you are creative, perhaps you can reduce the financial burden you are facing. Creative funding does not replace the basics Remember to fill out the FAFSA and submit it on time. This is the federal blueprint to get your aid package. Also check reliable sources to ensure you are taking advantage of the common available support. High School guidance counselors and prospective colleges are great resources to help you understand what is available for you. A web site like the non-profit Collegeboard.org is a great place to start. This site has resources to help walk you through the financial aid process and it has tools to help search for scholarships. Some creative ideas Here are some, beyond the obvious, ideas to help augment money to pay for school. Tutor. If you are good in math, writing, or any other subject consider tutoring others to earn some additional income. You can schedule this around your class time and can feel good about helping other students. Work study. Some financial aid packages include a work study element. But if you don't qualify for traditional work study think creatively. Are there privately run businesses on or by campus? Perhaps the local coffee shop needs help. Is there a little retail store students go to for supplies? Go where the students go, they are targets for employment. Be an entrepreneur. Campuses are like small towns. The students need services. Computer repair, transportation, hair services, running errands, and more. Is there a little business opportunity for you? If this is an avenue for you, make sure you understand the local rules for running your small service business. Leverage your youth activity. If you danced or played soccer as a youth, consider offering your services as a paid teacher or coach. Local clubs and studios would love to have trained help in their organization. And if you have a passion for the activity, it is a great way to recharge. Set up your own internship. Many schools will have programs to support internships with businesses. For every one formal program the school offers, there are hundreds of small businesses in the same field that could use the same type of help. Why not contact local businesses in the field of your choice. Perhaps it is a small accounting firm or a free-lance graphic design company. Can your graphic and web skills be used at a local business that cannot afford their own staff? If you think creatively, there are many opportunities to reduce the financial burden of college. Just ensure the time spent in augmenting your finances does not get in the way of performing well in the classroom.

As always, should you have any questions or concerns regarding your situation please feel free to call.

April 2015 Letter

Happy tax filing month. To help celebrate, this month's newsletter has a fun tax quiz surrounding our first 1040 tax form introduced for the 1913 tax year. Also included is an article reviewing better alternatives for money parked in traditional bank accounts and an insightful article helping determine when filing a tax extension may make sense.

Should you know of someone who may benefit from this information please feel free to forward this newsletter to them.

1913 Form 1040 Quiz

How well do you know tax history?

As April is tax month, included here is a short quiz to see how well you know your tax history. While Abraham Lincoln's administration introduced the income tax to finance the Civil War, the first modern 1040 Individual Income Tax form was introduced in 1913. How well do you know what was on this original 1040? Enjoy!

What was the original due date of the initial 1040 tax form? March 1st, 1914. Failure to file on time could lead to a fine of between $20 and $1,000. A 30-day extension by reason of sickness or "absence" could be granted by the tax collector. Today we have an additional 45 days to file our tax returns (April 15th) and can file for a six-month extension. What was the tax rate applied to most individuals' income? The "normal" tax applied to most 1913 tax returns was 1%. If you had Taxable Income of over $50,000 you became subject to the "Super Tax". What was the maximum tax rate on these excess earnings?

Six percent. 2% was owed on income from $50,000 to $75,000. The maximum tax rate of 6% was owed on Taxable Income over $500,000. The 1913 tax brackets were; 1%, 2%, 3%, 4%, 5% and 6%. Compare this to our current tax brackets of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. Was there a marriage penalty built into the  original Form 1040? Yes. If single (or married but not living with your spouse) your exemption amount was $3,000. If you lived with your spouse your exemption amount was only $4,000. If both you and your spouse worked (a rare event in 1913), you could divide the $4,000 exemption any way you wished to minimize your taxes. Name two things that are currently taxed, but were not  taxed on the original 1040 tax form? There were many, but perhaps the most common untaxed items were dividends and net earnings from corporations that were already taxed. The double taxation of corporate earnings that we experience today would be added later. True or False. All the original tax returns required a signed affidavit  before an authorized officer of the government prior to being filed. True. All properly filed tax returns required affidavits made before an officer authorized by law to administer an oath of accuracy. This could be a justice of the peace, a magistrate, or a certificate of the clerk of the court. Mailing in your tax return was not an option in 1914.

Is an Extension a Good Idea?

The clock is ticking down to the pending tax-filing deadline of April 15th. Here are some examples when filing an extension might make sense other than rushing to meet the filing deadline.

Incorrect Form 1095-A. If you received health insurance through the new Healthcare (Marketplace) Exchange, you may have received an incorrect Form 1095-A recapping this activity. Over 800,000 of them were sent out in error. If it impacted you, it might make sense to wait for a corrected form. Other Form Errors. If you receive a W-2 or Form 1099 that has errors, you may also wish to wait until you receive a corrected form. This delay may help you avoid a tax form mis-match with IRS records if you file your tax return before the form is corrected.

	Missing K-1. If you have ownership in a small business, you should receive a K-1 summarizing your share of profits or losses. If the business entity is an LLC, you may have not yet received your necessary K-1. If this happens a tax extension may be necessary.
	Conflicting Dependents. If an ex-spouse or other individual used one of your dependents in error, you may wish to have the error corrected prior to filing your tax return.
	Self-employed Retirement Contributions. If you are self-employed you have until you file your tax return (including extensions) to fund your retirement account. This tax provision applies to SEP IRAs, solo 401(k)s, and SIMPLE accounts. By filing an extension, self-employed individuals give themselves up to six more months to fund a retirement account. This provision does not apply to Traditional or Roth IRAs.
	Recharacterizing Roth IRA Conversions. If you transfer funds from a Traditional IRA to a Roth IRA, tax is due based on the fair market value of the assets at time of transfer. If, after transferring the funds, the value of the investment goes down, you may be required to pay tax on an over-inflated value. By delaying the filing of your tax return, you can buy time to convert the funds back to the original retirement account and avoid paying taxes on the higher value.

Extensions Are a Last Resort

	Start the audit clock. It is usually best to file your taxes by the April 15th due date. By doing so, it starts the Federal audit clock. Remember the window to audit your federal tax return is generally the later of three years after the due date OR when you actually file your tax return.
	Pay your tax. If you decide an extension is the right course of action for you, the form must be filed on or before April 15th for an automatic six-month extension. While this extension does not delay the requirement to pay the taxes owed on or before the April 15th deadline, it does eliminate a possible late filing penalty.

Is There a Better Use for Your Bank Funds?

With interest rates at banks hovering near zero is there a better use for your savings besides traditional bank accounts? Here are a few ideas to consider. Remember to seek the advise of a trusted financial advisor prior to taking action to ensure the approach you wish to take is right for your situation. Fully fund an emergency account. Prior to doing anything else, review or establish your emergency fund. This fund should be sufficient to tide you over if you lose your job or have an unexpected need for cash. The amount needed varies from person to person but is typically from six months to twelve months of cash needs.

	Pay off credit cards. Why pay a bank or financial institution 9 to 20% on credit card debt when you only receive ½% on your savings account? So pay off all your credit card balances and then work to keep them at zero.
	Pay off other debt. Most interest expense is not deductible on your tax return. So paying down debt almost always provides a better return than holding funds in a low interest bank account.
	Put more into retirement accounts. Use excess cash to fully fund tax advantaged retirement savings options. This might include an employer provided 401(k) or a variety of IRA account options.
	Mortgage principal pay down. Even paying more principal on home mortgages and home equity loans can provide a better return than your bank savings account options. While these interest rates are now low and provide an itemized deduction opportunity on your tax return they are still a better return than parking excess cash in a bank account.
	Ladder CDs. Purchase a number of quality Certificates of Deposits (CDs) with different maturity dates. As each CD matures, roll the funds into a new longer-term CD. This way some CDs will mature each year making cash available, while still taking advantage of higher long-term interest rates. Example: purchase a one-year, a two-year, a three-year, a four-year and a five-year CD. When a CD matures, reinvest the funds into a five-year CD. Once built, your CD ladder will have one of your CDs maturing each year.
	Alternatives to banks. There are now opportunities to make direct loans to consumers and small businesses through alternative lending options. These alternatives to banks allow you access to those needing to borrow funds. While more risky, it is a way to give you access to those who need to borrow money.

There are many alternatives to leaving your money parked in low interest bank accounts. Just remember to conduct the proper research and seek professional help prior to taking any action.

As always, should you have any questions or concerns regarding your situation please feel free to call.