Category: Taxes

Four Personal Finance Rules We Ignored (And Maybe You Should Too)

This is the first in a series about how we’ve disregarded the advice of popular personal finance personalities to forge our own path to debt freedom and financial independence. 

Personal finance is just that:  Personal.  Your interests, values and dreams may be different than mine, and that’s how it should be.  In How Our Home Is Helping Us Achieve Financial Success, I talk about how we’ve chosen to “live little” in order to prioritize spending on things more important to us, like travel and sampling every bottomless Bloody Mary brunch in the greater metropolitan area.  But if you prefer mimosas at home in your McMansion, there is nothing wrong with that!  So when it comes to charting your course for financial success, it’s important you customize a plan that aligns with your individual goals and timelines, as well as how you personally manage money.

Here are just a few ways we tailored (or ignored completely!) the advice administered by today’s most well known personal finance experts, and took a road less traveled:

1.  Plastic is fantastic

There are popular personal finance personalities who will tell you to cancel your credit cards and only carry cash.  This is fabulous advice if you struggle with charging things you can’t afford.  But, that’s. not. everyone.  Since our written budget is what holds us accountable, we use credit cards as a tool, utilizing the consumer protection that comes with using plastic and leveraging them for free travel (right now we’re working toward the coveted Companion Pass thanks to our Southwest-branded Chase card).  We pay off any balance weekly to hold ourselves accountable and avoid paying interest.

2.  We’re all special snowflakes

The most popular strategy for paying off debt is the snowball method.  This philosophy recommends you pay off your debts in the order of the amount owed.  Continue to make the minimum payments, except on the debt with the lowest balance.  Once you’ve paid off that first debt, you move to the next debt with the lowest balance.  This method assumes you’ll find it easier to stay motivated when you’re rewarded more quickly with the elimination of individual debts.

In lieu of snowballing our debts, we choose the avalanche method, saving us time and money.  Instead of listing debts by amount owed, this philosophy had us prioritizing debts by interest rate, starting from highest to lowest.  You will end up paying less interest and eliminating your debt-load more quickly by tackling your debts by interest rate, so long as you can remain committed without the psychological boost the snowball method offers.

3.  Not all debt is equal

The same personal finance gurus often recommend stopping any retirement savings while you’re getting out of debt.  Sure, if you’re buried in high-interest credit card debt, stopping your contributions may be a smart idea.  But, if you receive a tax benefit from your interest payments (including interest paid on a qualifying student loan or mortgage), or your debts are no-interest or low-interest (like your Prius payment or the mid-century modern living room set you just bought on a store charge card), you may come out ahead in the long run to keep contributing while still paying off debt.

4.  Capitalize on compound interest

Compound interest is when an original deposit or investment earns interest which is then added to the principal amount and reinvested, earning more and more each period as the account balance grows larger from interest earned.  Compound interest means the balance of an account will continue to grow because of interest earned, even if the account owner doesn’t make another deposit.

Even though we were committed to becoming debt free, instead of stopping our retirement contributions while aggressively paying off our $85,000 in student loans, we kept saving.  We understood that the greatest financial advantage we have at this point in our lives is time.  Traditional retirement age is more than thirty years away, meaning anything we contribute now has decades to double.  We also knew most accounts have a minimum annual contribution limit, so in the future we wouldn’t be able to contribute more than the max to make-up for lost years.

Before we dedicated every spare dime in our budget to settle-up with Sallie Mae, we contributed the minimum to get the match in our respective employer-sponsored retirement accounts.  In addition to taking advantage of free money from our employers, we also made sure to fully fund our individual ROTH IRAs.  The distinction of a ROTH is that it maximizes the principle of compound interest by offering tax free growth, meaning that since income tax has already been paid on those dollars before they’re deposited, at the time of withdrawal, those monies will be tax free.

There are hundreds of television and radio shows, books and blogs that dictate a detailed plan for getting out of debt.  It’s great to learn from a variety of sources and smart perspectives, but it’s important for you to discern which parts and pieces will help you achieve YOUR definition of financial success.

Next in the Series:  Our Shocking (Yet Successful) Investment Strategy… Individual Stocks!

The Top 7 Tax Credits to Maximize Your Return in 2017

Recently, Mother Nature temped us with spring temperatures here in the Heartland.  After a few days of open windows, patio drinks and outside workouts, winter weather returned, but that dose of Vitamin D served as a sunny reminder that the seasons are soon to change – and the end of Tax Season is near.

Even with a few extra days to file, this year’s deadline of April 18 is just a page on the calendar away, so if you haven’t already finished your return it’s time to get started!  As with most areas of personal finance (and life in general), being organized and allocating enough lead time to assembling and preparing your return will reward you in the end.

When you’re pulling together all of the important paperwork to document and include in your return, there are two considerations to keep in mind that will help you maximize your tax return and ensure you’re paying only what you owe or getting the biggest refund back:  deductions and credits.

A deduction is a qualifying expense which reduces your taxable income by the same percentage as your tax rate.  This means, if you fall into the 25% tax bracket ($37,651-$91,150 for a single person or $75,301-$151,900 for married couples filing jointly) a $1,000 deduction saves you $250.  We detailed common deductions earlier this year in the post The Top 7 Tax Deductions to Maximize Your Return in 2017.

A credit lowers your tax bill dollar for dollar, so a $1,000 credit reduces your tax bill by $1,000 no matter your tax bracket.  There are two types of credits, refundable and nonrefundable.  Nonrefundable credits allow you to reduce your tax liability to zero, but any overage will not result in a tax refund.  Any surplus from refundable credits can come back to you as a refund.

Child Tax Credits – This is a nonrefundable credit of up to $1,000 for each qualifying child. Qualifying children must be related to you, under 17 years old, eligible for you to claim as a dependent, and live with you more than six months out of the year. You must also provide at least half of the financial support for the child. 

Earned Income Tax Credit (EITC) – Offers savings to lower income workers and families. The Internal Revenue Service website provides resources for determining your eligibility for this refundable credit.

Adoption Credit – If you adopted a child domestically, internationally or from foster care, you may be able to take a nonrefundable credit of up to $13,460 for qualified expenses incurred, including adoption fees, court costs, attorney fees, and travel expenses. If you adopted a special needs child, you may be able to take the credit even if you didn’t incur any adoption expenses.  Step-child adoptions are excluded from this benefit.

Energy Savings Credit – You may qualify for a credit if you installed a solar, wind or geothermal mechanism for energy collection and use in your home, or purchased a fuel cell or electric vehicle.

Retirement Savings Contributions Credit (Saver’s Credit) – This credit rewards lower income tax payers for making eligible contributions to their traditional or ROTH IRA or employer-sponsored retirement plan. The amount of the non-refundable credit is 50, 20 or 10 percent of retirement contributions up to $2,000 (or $4,000 if married filing jointly), based on adjusted gross income.

Child and Dependent Care Credit – If you have a child under the age of 13 or are responsible for a physically or mentally disabled adult who required and received day care by a non-related provider while you and your spouse worked or looked for work, you may qualify for this credit.

The amount of your credit is based on how much you spent (less any employer provided child or dependent care benefits, including pre-tax flexible spending account dollars), as well as your income.  The higher your income the lower the percentage of costs you can claim, though even those in the top tax bracket can claim 20% of their costs.  Maximum credit is $3,000 for one child or dependent adult enrolled in day care, or $6,000 for two or more.

American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) – AOTC is a credit for tuition paid by you or through borrowed funds, such as student loans, for the first four years of college.  You can get a maximum annual credit of $2,500 per eligible student in your family. If the credit brings the amount of tax you owe to zero, you can receive 40 percent of any remaining amount of the credit (up to $1,000) as a refund.  To qualify for the AOTC, the student must be pursuing a college degree, be enrolled at least half time for at least one academic period during the calendar year, not have claimed the AOTC or the former Hope Credit for more than four years, and not have a felony drug conviction.

Non-degree seeking students may claim the LLC for courses taken at an accredited institution to develop or improve their job skills.  There is no limit on the number of years you can claim the non-refundable LLC, which is worth up to $2,000 annually.  Between the AOTC and the LLC, the LLC has a much lower income maximum.  You cannot claim the AOTC and the LLC in the same year.  You cannot claim either the AOTC or the LLC if your education expenses were reimbursed by an employer or funded through grants or scholarships.

The deadline for filing your 2016 return is April 18, so you have three extra days this year to make sure you’ve accounted for every single credit and deduction that will benefit you.   

And if you’re filing online, don’t forget to use a portal!  Both Ebates and offer cash back from H&R Block and TurboTax online or you can earn 1,000 miles by going through Southwest’s Rapid Rewards shopping portal.

Disclaimer:  Many of the credits mentioned above have income minimums or maximums, as well as other qualifying criteria not expressly mentioned.   I am not a tax or accounting expert, so I encourage you to seek the advice of a professional to confirm your individual eligibility for these and other credits and deductions.

The Top 7 Tax Deductions to Maximize Your Return in 2017

The daughter of a CPA, my memories of tax season growing-up weren’t great – my dad spent most nights and weekends at the office, and was stressed from New Year’s Day to Tax Day.  I’m not kidding when I say April 16 was celebrated as a holiday in our home.

Which is why, as an adult, it’s a wonder I actually enjoy preparing our annual return.  Seriously… every year I eagerly anticipate the receipt of each form and ritualistically on January 1st, I start compiling a file of all our other paperwork.  I get giddy over completing our yearly 1040 form for the same reason that points, miles and portals get me excited: I enjoy seeing how my savvy can save or make us money.

Investing time into preparing for and compiling the necessary documents well before visiting your tax professional or logging-in to your online software of choice will help you get a larger refund or owe less, depending on your situation.  If you’re one of the millions of Americans who benefit from itemizing qualifying expenses on their return (versus taking the standard deduction), here are a few common deductions to consider:

Mortgage interest, insurance and points – Interest paid on your primary owner-inhabited residence is  typically deductible.  Points paid during refinancing can be deductible.  And in limited instances, if you pay private mortgage insurance (PMI), that expense may also be deductible.

Student loan interest – You can deduct up to $2,500 of interest paid on some types of student loans.  This is claimed as an adjustment to income, so you don’t even need to itemize to benefit.  However, the amount of your deduction is reduced if your modified adjusted gross income (MAGI) is between $65,000 and $80,000 as a single person, or between $130,000 and $160,000 if filing jointly.  Singles with a MAGI of $80,000 and married couples with a MAGI of $160,000 no longer qualify for this benefit.

Charitable giving – If you made donations to your church or a qualifying charity, you can deduct those full amounts so long as you have a written record of the qualifying donation and no goods or services were received by you for the gift.  In addition to monetary gifts, you can also deduct in-kind donations like clothes and home goods.  Websites and apps like ItsDeductible can tell you the deductible value of these items.  And even though your time spent volunteering isn’t deductible, your mileage driving to and from volunteering is deductible.  Since 2016 was an election year, it’s important to note that campaign contributions are not deductible, neither are gifts to individuals even if they’re given through sites like Go Fund Me.

Medical, dental, vision and mental health expenses – If they exceed 10 percent of your MAGI, you can deduct your expenses associated with the prevention, diagnosis and treatment of injury or illness.  You can also deduct the cost of transportation, health insurance premiums, prescription drugs, and non-cosmetic procedures.

Taxes paid and tax return – Eligibility varies, but you may be able to deduct personal property taxes, such as those paid to the state for a vehicle or boat.  While you might be able to deduct this and other state taxes, federal taxes, including penalties and interest owed are not deductible.

If this cost combined with other miscellaneous deductions (several of which are mentioned below) totals more than 2 percent of your income, you can deduct the cost of tax preparation software or the fees associated with hiring a Certified Professional Accountant (CPA) to prepare your annual return, provide advice on tax issues, or assist you during an audit.

Job search and moving expenses – If you are applying for positions in the same line of work as your previous job and the combined costs exceed of this and other miscellaneous deductions total 2 percent of your MAGI, you can deduct unreimbursed recruiting and employment agency fees, the cost of printing business cards, advertising and resumes, and travel and hotel expenses.  Unfortunately, the same expenses cannot be deducted if you’re new to the workforce and looking for your first job.

If you moved more than 50 miles for a new job or to start a business, you can also deduct your out-of-pocket moving expenses, including mileage, parking fees and tolls.  Obviously, if you received a relocation stipend from your employer, you are ineligible for this deduction.  You can take this deduction for your first job.

Educator expenses – Teachers can deduct up to $250 (or $500 if both spouses are eligible educators), for unreimbursed purchases like books, supplies and equipment, including computers and software, as well as the cost of relevant professional development courses.

The deadline for filing your 2016 return is April 18, so you have three extra days this year to make sure you’ve accounted for every single deduction that will benefit you.   

And if you’re filing online, don’t forget to use a portal!  Both Ebates and offer cash back from H&R Block and TurboTax online or you can earn 1,000 miles by going through Southwest’s Rapid Rewards shopping portal.

Disclaimer:  Many of the deductions mentioned above may have other qualifying criteria not expressly mentioned.   I am not a tax or accounting expert, so I encourage you to seek the advice of a professional to confirm your individual eligibility for these and other deductions and credits.