Tamila McDonald, Author at The Free Financial Advisor

What Should I Do With the Next Stimulus Check?

March 15, 2021 by Tamila McDonald Leave a Comment

With the new COVID relief bill passed by Congress and signed by President Joe Biden. Many Americans have stimulus checks on the way if they aren’t already in hand. However, figuring out what to do with the money can be surprisingly tricky. Particularly if you have some conflicting needs. Luckily, it is possible to choose the best path for you. If you aren’t sure where to begin. Here are some options for what to do with the next stimulus check.

Handle an Urgent Need

If you have an urgent financial need, such as issues buying enough food for your household or past-due utility bills, using your stimulus check to handle those costs is your best bet. It ensures you can continue to live without undue hardship, and that’s important during this pandemic recovery period.

Additionally, if you have secured debt – like an auto loan – and you’ve fallen behind on payments, putting the asset at risk of seizure, it may be a solid target. By catching up, you may be able to avoid the repossession or foreclosure. Depending on the asset involved, that might be crucial.

However, before you send stimulus money toward any bill, you may want to see if there are other programs available that may reduce that burden. For example, utility companies, mortgage lenders, certain state or county offices, and many other organizations have relief programs to help those who are struggling due to the pandemic. If you’re eligible for their assistance, don’t hesitate to use it. Then, you can direct your stimulus check toward other needs.

Pay Your Taxes

If you have filed (or are about to file) your federal taxes and owe money to the IRS, using your stimulus check to handle that burden isn’t a bad idea. Unlike for the 2019 tax year filings, the IRS isn’t postponing 2020 tax filings this year. If you want to avoid fees and interest, then you need to pay what you owe in full by April 15.

Even if the stimulus check only covers part of your obligation, using it to handle some of your taxes reduces this total burden. Then, if you need to enter into a payment plan with the IRS to address the rest, what you’ll need to pay could be easier to shoulder.

Create an Emergency Fund

If you don’t have any cash – or very little money – set aside in an emergency fund, using your stimulus check to get one started is a good idea. It’s wise to have a little cash available for unexpected events, something that the pandemic made abundantly clear for many.

Ideally, you want at least $1,000 set aside initially. Then, you can work your way up over time, aiming to save a minimum of three to six months’ living expenses.

Pay Down High-Interest Debt

Using your stimulus check to tackle high-interest debt is always a good idea. Not only will it reduce the amount of money you’ll pay over the life of the debt, but it could potentially boost your credit.

For many people, starting with high-interest credit cards is the best way to go, especially if the cards are close to being maxed out. However, for others, a high-interest personal loan could also be a good target.

Finally, if you have a payday loan, focusing on that might be your ideal option. Payday loans usually come with astronomical interest rates, making them a wise debt to tackle with stimulus money.

Boost Your Retirement Savings

By using your stimulus check to boost your retirement savings, you not only do something to help secure your financial future, but you may also get a tax benefit. You have until April 15, 2021, to finish up your 2020 retirement investing. If you contribute your stimulus to a tax-advantaged account, you might be able to lower your 2020 tax burden.

However, you can also use the money for your 2021 retirement savings. You may be able to get a jump start on it or even fully fund an IRA, depending on how much you receive in your stimulus check.

Handle a Large Purchase

If you have a solid emergency fund, fully funded retirement accounts, no high-interest debt, and have your financial house otherwise in order, then using your stimulus check for a large purchase is certainly an option. It may give you the ability to buy high-cost items in cash, allowing you to potentially avoid high-interest debt.

Even using stimulus money to fund a vacation can be a smart move if you’re in good financial shape otherwise. Again, it lets you avoid the need for debt and could give you something fun to look forward to once you feel comfortable traveling.

Invest, Invest , Invest

If you want to put your stimulus check to work but already have a fully-funded retirement account, then you could always invest separately. There are many options that can help people get started, including full-service brokers, robo-advisors, and anything in-between.

You will need to do some research if you don’t currently have an investment account, ensuring you choose the right brokerage for you. Additionally, if you aren’t sure where to invest the money, you might need professional guidance or to conduct more research.

In many cases, focusing on individual stocks isn’t wise for beginners. Instead, options like index funds may be a better bet, as they come with an innate level of diversification.

Save Money for College

Whether you have children or may go back to college yourself, setting your stimulus check aside in a 529 college savings plan could be a smart move. It lets your money grow tax-free, and any withdrawals you make for qualifying expenses aren’t taxed either. In the end, this option can help make college more affordable, allowing you or your child to potentially avoid or reduce the need for costly student loans.

Do you already have plans for your next stimulus check? Share your thoughts in the comments below.

Should You Be Investing in SPACs?

March 8, 2021 by Tamila McDonald Leave a Comment

Many investors are constantly on the prowl for new options that could help them make a bit of cash. If SPACs have recently made their way onto your radar and you’re wondering if you should be investing in them, here’s what you need to know.

What Are SPACs?

SPAC stands for “special-purpose acquisition company.” Also referred to as “blank check companies,” SPACs are publicly-listed, but are considered non-operating. Instead, they exist solely to purchase private companies, allowing the company that has been acquired to have a connection with a publicly listed stock.

Generally, the process of becoming a publicly-listed is cumbersome. By going the SPAC route, a private company can avoid the challenges associated with an initial public offering (IPO). The SPAC is already public. Plus, by using a reverse merger after the acquisition, the once private company can transition to a public one while maintaining autonomy.

Are SPACs a Good Investment?

Like any part of the investment landscape, there is certainly risk associated with investing in SPACs, even if there doesn’t appear to be any on the surface. While it’s true that if a SPAC doesn’t find a private company to scoop up, investors get their money back after a set amount of time, your money may not be working for you as hard as it could going another route.

Additionally, there’s no guarantee that the private company a SPAC grabs is going to be successful once it is part of the market. As recent history has shown, not all IPOs go well. If the SPAC selects the wrong company, you can certainly experience losses.

Finally, by design, SPACs benefit the SPAC sponsors far more than individual investors. Generally, the sponsors get a significant stock allocation for the SPAC IPO, and the founder shares can dilute common stockholders.

In many cases, a SPAC’s performance can be subpar. When there is a high-valued private company serving as a potential target, it can generate competition among SPACs. When that happens, the price may inflate, causing the SPAC that “wins” to overpay, something that doesn’t work in investors’ favor.

SPAC Overpays

However, the sponsors – due to the nature of the arrangement – can still come out ahead even if the SPAC overpays, creating a level of conflict of interest. The decisions may not be in the best interest of individual investors. Instead, only the sponsors serve to gain.

Ultimately, it’s wise to be cautious about investing in SPACs. You may not know exactly what the SPAC will scoop up when you invest, which isn’t ideal. Additionally, there can be issues with transparency, as well as potential conflicts of interest.

In many ways, a SPAC is riskier than a traditional IPO. If you’re risk-averse, that’s far from ideal. However, even if you are open to some risk, the low historical performance should give you pause. If you do think SPACs are right for you, research is your ally, as it may give you an indication about the SPAC’s ability to choose the right private company. Make sure you really dig in, as that may be your only way to determine if a SPAC has potential.

Do you think investing in SPACs is a smart move? Do you plan on adding them to your portfolio? Why or why not? Share your thoughts in the comments below.

Annuities and Taxes: Here’s What You Need to Know

March 1, 2021 by Tamila McDonald Leave a Comment

Annuities can be a reliable source of income in retirement. Once you begin receiving benefits. You’ll receive a set amount of money each month or year for the rest of your life. Even if you live for decades more. However, annuities can come with tax implications. Both on the front and back ends. If you want to find out more about annuities and taxes. Here’s what you need to know.

Annuities and Taxes – Qualified vs. Non-Qualified Annuities

First, it’s important to understand that how an annuity is taxed does vary depending on the type of annuity involved, especially how it was funded.

Qualified annuities are funded with pre-tax dollars. In most cases, these involve principal payments from a type of tax-deferred retirement account, like a 401(k) or a traditional IRA. However, there may be other approaches available, as well.

When you make withdrawals from a qualified annuity, you pay taxes on the money just as you would other traditional kinds of income. Since none of the money has been taxed, every dollar in the withdrawal is treated the same.

Non-qualified annuities are funded with after-tax money. With those, when you make withdrawals, you’ll only owe taxes on earnings, not the deposited amounts. The money used to fund the annuity has already been taxed, so it won’t be taxed again. However, the earnings haven’t, making them subject to taxation.

Usually, with non-qualified annuities, the taxed amount is determined by the exclusion ratio. This calculation determines how much of an annuity income payment is taxable by separating the portion of the payment funded with the principal from the part funded by interest earnings.

In some cases, annuities purchased with funds from a Roth 401(k) or Roth IRA are tax-free. However, very specific conditions have to be met for that to happen.

Tax Rates on Annuities

When you’re receiving income from an annuity, the taxable amount is taxed based on traditional income tax rates. Annuities aren’t eligible for capital gains rates, which are often lower than income tax rates.

If you need to estimate how much you’ll owe, use the traditional tax tables from the IRS. That will give you the most accurate picture, at least on a federal level.

In some cases, you’ll also need to pay taxes on the state level. State income tax rates vary, and some may exclude annuities – as well as other kinds of retirement income – while others do not. Additionally, not all states have an income tax in the first place. As a result, you’ll need to research rules in your area to determine how much you may owe.

Depending on where you purchase your annuity, you may also owe a state premium tax. Some states tax insurance premiums, including during the sale of annuities. If you live in one of those states, you may see a 1 to 3.5 percent tax. However, some states waive the fee under certain circumstances, such as if you make the purchase using funds from a qualified retirement plan.

When Withdrawal Timing Impacts Taxes on Annuities

Another factor in how money from an annuity is taxed is when withdrawals are made. Usually, if you take any money out before you reach the age of 59 ½, you’ll owe a penalty of up to 10 percent to the IRS. However, by waiting until you’re at least 59 ½, you can avoid this entirely.

Additionally, if you take a lump sum instead of annuity income payments, at a minimum, all of your earnings are taxed right away. If you funded the annuity with pre-tax dollars, then the entire lump sum, including both the principal and earnings, are taxed immediately.

Inherited Annuities and Taxes

If you inherit an annuity from another person, the same tax rules apply to you as would to the deceased. As a result, if the annuity was qualified because it was funded with pre-tax dollars, you’ll owe taxes on the entire value of any withdrawals. If it was non-qualified, then you’ll only owe taxes on the earnings.

Ultimately, annuities are fairly simple to understand from a tax perspective. Earnings are typically taxed as income, and withdrawals from principal only are if the annuity was funded pre-tax. While your income tax rates may vary depending on your total income level, how your annuity factors in is reasonably straightforward.

Is there anything else people should know about annuities and taxes? Share your thoughts in the comments below.

Don’t File Bankruptcy Due to Medical Debt-Do This Instead!

February 22, 2021 by Tamila McDonald Leave a Comment

Medical debt can create a serious financial hardship. Many health-related bills are surprisingly high, and you may not be presented with a lot of options for handling it in a manner that feels manageable. However, that doesn’t mean that you have to turn to bankruptcy to address these debts. There are other approaches that can work. If you aren’t sure where to begin, here’s a look at what you can do instead of filing for bankruptcy due to medical debt.

Review Your Medical Bills for Accuracy

First, before you do anything, you should review all of your medical bills to make sure the charges are accurate. If the healthcare facility didn’t send an itemized bill automatically, request one. Then, review every single line item and charge to make sure you are only billed for services you actually received.

If you find an inaccuracy, reach out to the facility and dispute it. That way, you can ensure that any medical debt you have is genuine.

Ask About Cost-Reduction Programs

If you are part of a low-income household, you may be eligible for financial assistance programs through the healthcare facility that are designed to eliminate your medical debt burden. Some will reduce the amount you owe by a specific percentage based on your income level and the amount owed.

With those programs, you usually need to complete some paperwork to prove eligibility. Additionally, if you don’t have health insurance, you may be required to apply for Medicaid to qualify. However, once that is done, all or a portion of your debt is essentially eliminated.

Negotiate for a Lower Rate

In some cases, you can actually negotiate your medical debt down. This is especially true if you are able to make a substantial lump sum payment but can’t cover the full amount. Some facilities may accept what you can offer in exchange for closing out the bill. They’ll consider it paid-in-full, even though you paid less.

At times, you may be able to use other approaches as well. For example, if you can prove that other nearby healthcare facilities charge less for an item or service, you may be able to leverage that into a discount if the difference was significant.

If you aren’t comfortable negotiating yourself, you can opt to hire a medical bill advocate. These professionals can assist with the process, ensuring you get the best deal possible.

Work Out a Payment Plan

Most large healthcare facilities have payment plan options. Some are income-driven, while others are purely time-based. With the former, how much you pay each month is derived from your income, ensuring that you don’t have to pay more than a specific percentage of your income each month. With the latter, the amount you owe determines how long you can repay. Then, the debt is divided by that set number of monthly payments.

Usually, you can find out about these programs by contacting the provider directly. In some cases, simply requesting to be placed on a plan is enough. In others, you may need to complete paperwork and provide supporting documentation, though the process tends to be straightforward.

Now, even if there is a set payment plan formula, that doesn’t mean you can request something outside of the norm. This is especially true if what you owe is close to crossing the threshold for a better deal.

For example, if the facility offers an 18-month payment plan for debts of $5,000 or more and a 12-month plan for debts under that amount, if you owe $4,925, they might honor your request for the 18-month plan. However, not all facilities will, though that doesn’t mean you should ask.

Do you have any other tips that can help someone avoid bankruptcy and deal with medical debt? Share your thoughts in the comments below.

How Do I Get a Mortgage as a Solopreneur?

February 15, 2021 by Tamila McDonald Leave a Comment

Buying a house can be exciting, but the process is also incredibly complex, particularly if you are a solopreneur. When a traditionally employed person needs to secure financing for a home purchase, they typically have little difficulty demonstrating the stability of their income. For solopreneurs, that’s much more challenging. However, that doesn’t mean you can’t get a mortgage as a solopreneur. If you want to buy a home, here’s what you need to know.

Verifying Employment

When you’re a solopreneur – as well as a freelancer of a self-employed individual – proving your employment is a bit tricky. While people who work regular jobs have documents like paystubs and can often get a statement of employment from their employer, that isn’t’ the case with solopreneurs.

Usually, solopreneurs will need to go the extra mile to verify their employment. They may need to secure documentation from clients, supply a copy of a business license or insurance bond, or provide other kinds of proof. Past tax returns may also be viable sources of information.

In many cases, the lender can tell you before you apply what type of documentation might be necessary. That way, you can work on gathering it before you submit your application for a mortgage.

Income vs. Profit

Most solopreneurs work diligently to claim every potential deduction available to limit their tax liability. While this can be beneficial financially, it will have an impact on your ability to secure a mortgage.

Solopreneurs and self-employed individuals don’t have traditional paystubs to showcase their income. As a result, lenders typically request copies of two years of tax returns (sometimes more), along with other financial documents, like bank statements.

Depending on whether you operate as a business or sole proprietorship, you might need to provide personal and business tax return records and bank statements. Usually, the lender can outline what’s required before you apply.

When reviewing the information, the lender is concerned about your income, not profitability. If your cunning use of tax deductions significantly lowers your taxable income, that lower figure is what they’ll use to determine how much you can afford to pay.

Interest Rates

Some lenders view solopreneurs and self-employed professionals as riskier borrowers than those who have traditional employment. Often, with an increased risk level comes higher interest rates.

Now, precisely how much your solopreneur status will matter depends on a range of factors. If you have an excellent credit score, intend to put at least 20 percent down on the home, and need a small loan amount in comparison to what you could potentially afford, the impact may be less significant. However, if you’re looking for a large loan, can only put a small amount down, and have only a good or fair credit score, it could make a difference.

Tips for Getting a Mortgage as a Solopreneur

If you’re a solopreneur, there are things you can do to increase your odds of getting a mortgage. First, formalize your business with a license, and pay yourself as a W-2 employee instead of taking an owner draw. This can make it easier to show your employment and income, as well as separate some of your business finances from your personal situation.

Additionally, reduce your debt load, build a solid emergency fund, and make a larger than necessary down payment. You may also want to bypass certain tax deductions, allowing you to increase your income on your tax returns.

It’s also smart to shop around for your mortgage. Some companies are more welcoming to solopreneurs than other lenders. If you can find one that commonly works with self-employed professionals, freelancers, and solopreneurs, you may have an easier time meeting their requirements.

Do you have any other insights that can help someone get a mortgage as a solopreneur? Share your thoughts in the comments below.

The Best Way to Do Your Taxes When Running Your Own Business

February 8, 2021 by Tamila McDonald Leave a Comment

Filing your taxes each year can be a daunting experience. Even if you’re only handling an individual income tax return. When you operate a business. The situation is often significantly more complex. Whether you run a sole proprietorship, limited liability company (LLC), or any other kind of corporation. You will need to file forms with the Internal Revenue Service (IRS) – and possibly your state, as well – covering that organization’s financial activities. If you are wondering what’s the best way to do your taxes when running your own business. Here’s what you need to know.

Preparing to Do Your Federal Taxes When Running a Business

Start with Record Collection

Generally speaking, your first step any time you need to file your taxes is to gather the various financial documents that you’ll need to complete the forms. In most cases, this is any receipts, statements, financial records, or other kinds of paperwork that demonstrate your business earnings, losses, and expenses.

Without the records, you won’t be able to fill in all of the details that need to be present on your tax forms. As a result, it’s best to handle this in advance. Thus, ensuring that, once you sit down to take care of your filing. You will have everything you need available.

Select the Right Forms

The forms you need to file with the IRS vary depending on the type of business you operate. If you’re a sole proprietorship, then you’ll usually need to attach a Schedule C to your personal income tax return. The same goes if you are operating an LLC, are the sole owner of the business, and want to treat the company like a sole proprietorship, which is an option.

However, if you prefer to treat the LLC as a separate entity, you’ll need to use Form 1120. The same is true for C-Corps.

For S-Corps, a different form is necessary. When you file, you’d need Form 1120S. Partnerships also require a different form, as those use a Form 1065 when they need to file.

If you use software or a tax professional to file, you’ll usually get some assistance when it comes to choosing forms. If you’re doing your taxes by hand on actual paper, then you’ll need to make sure you get printed copies of the correct forms.

Learn the Deadlines

Different filing deadlines may apply depending on the kind of business you run. For sole proprietorships, the deadline is the same as it is for personal income taxes. As a result, you typically need to complete your filing by April 15 to be on time.

C-Corps have to file by the 15^th day of the fourth month following the closing of the tax year being filed. Typically, that means filing by April 15, as well.

S-Corps have to file Form 1120S by the 15^th day of the third month following the closing of the tax year. As a result, that means having to file by March 15, in most cases.

By knowing the deadlines that impact you, you can make sure that you file in a timely manner. Since filing late can have consequences, this allows you to avoid fees, penalties, or other issues.

However, if you need more time beyond the deadline, it lets you know the cutoff for requesting an extension. If you file for an extension by the initial due date – usually by submitting a Form 4868: Application for Automatic Extension of Time to File U.S. Individual Income Tax Return or Form 7004: Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns, depending on your type of business – you can typically get yourself more time to handle your business tax filing.

Research Tax Breaks

Before you move forward with completing your forms, it’s wise to do a little research into business tax breaks. By spending some time looking into what may be available, you increase your odds of securing every deduction or credit that may be available to you, ensuring you can reduce your tax burden while using the correct options.

The number of available IRS business tax credits is extensive, covering anything from hiring workers from specific demographic groups to using alternative energy vehicles as part of your company’s operations. These give you credits and deductions beyond your business expenses, and they can potentially add up quickly.

Depending on the tax break involved, this can also mean needing another tax form. Many require the use of a Form 3800: General Business Credit, so you want to make sure you have this available if you plan on filing a paper return.

Decide How You Want to File

When it comes time to file, you can usually either file electronically or mail your return to the appropriate office. Either approach is allowed, even if paper returns are largely falling out of favor.

Electronic submission is usually the preferred method. With an electronic filing, you can easily track when the information is received. Plus, you don’t really have to worry about your return being lost or damaged along the way.

Even if there’s an issue with an electronic submission, you’ll typically get an alert, allowing you to correct the problem quickly. If a paper return gets lost in the mail or is damaged to the point it becomes unreadable, you likely won’t know that anything has gone wrong. As a result, you could face penalties for a late or missing filing simply because your tax forms weren’t officially received or couldn’t be processed when they arrived.

Preparing to Do Your State Taxes When Running a Business

In many cases, the process of preparing to complete your state taxes when you run a business is similar to the approach you need to handle your federal tax filing. You’ll need to gather documents, research forms, and filing requirements based on your business type, learn about any potential tax breaks, and go over the deadlines in advance.

However, the exact process may vary from one state to the next. As a result, you’ll need to do some additional research regarding your state’s specific requirements. That way, you can follow any required processes, ensuring you handle this obligation correctly as well.

Filing Your Taxes When You Run a Business

When the time arrives for you to actually file your taxes, you have two choices. First, you can tackle the work yourself, completing your own documents and handling the submission.

Usually, if you are going the do-it-yourself route, the best option for small business owners is to take advantage of tax software. This can include downloadable options or web-based services, as both of them typically offer a similar experience.

You can follow the prompts to fill in the needed sections. Typically, you won’t have to worry about doing any math by hand, as the software will complete the calculations for you.

Now, that doesn’t mean you don’t want to review the figures for accuracy. While tax software typically won’t make a math mistake, if you incorrectly enter information, choose the wrong options, or there happens to be an error in the software, it could result in incorrect numbers. You’re ultimately responsible for the accuracy of your returns, which is why you should always look at the details closely before you finalize the filing.

Then, once all of the details are in place, and you’ve reviewed them for accuracy, you can file electronically or print out the forms and mail them. With electronic filing, you can apply a digital signature, sign up for notifications that will let you know when your documents were received, and save a copy of the documents for your records.

You Could Hire A Tax Professional

Alternatively, you can hire a tax professional to handle the paperwork and manage the submission of taxes. This method may be better if your tax situation is particularly complex or you simply don’t have the time, energy, or desire to take care of the filing yourself.

Generally, filing through a tax professional will cost more than doing it yourself. However, it does give you direct access to a tax expert who may be able to help you find credits, deductions, or approaches that may benefit you.

Additionally, just because you use a tax professional, that doesn’t mean filing electronically won’t be an option. Many tax preparers have the ability to submit your taxes electronically. However, some may rely on the paper approach, which means putting your return in the mail.

If you want the benefits of an electronic submission but also wish to use a tax professional, speak with them before you begin the process. That way, you can confirm the preparer can meet that need before you hire them to handle your tax filing.

Do you run your own business? What approach do you use when tax time rolls around? Share your thoughts in the comments below.

How to Protect Your Assets When Merging Households

February 1, 2021 by Tamila McDonald Leave a Comment

When you and another adult decide to cohabitate. A significant portion of each of your financial lives end up merging. You’ll often share or split household bill responsibilities. In some cases, your assets may become a bit entangled. If you’re worried about protecting your assets when merging households. There are things you can do to maintain the needed amount of separation. Here are some options that may work for you.

Don’t Add Anyone to Your Accounts

With joint accounts, both parties have legal access. While this may not be problematic for living expense-related bills like utilities. If the account is tied to an asset, like a bank account, retirement fund, investment account, or home equity line of credit (HELOC). It could become an issue.

Generally, you shouldn’t add another person to any of your asset-based accounts if you want to keep them protected. That way, no one else has access but you.

Create a Legal Agreement

Usually, when people think of legal agreements for protecting assets, prenuptial agreements are what spring to mind. If you plan on getting married, then a prenup may be your ideal solution. It allows both parties to formally outline ownership of pre-marital assets, ensuring that, if they ultimately divorce, specific assets go back to the party who brought them into the relationship.

If you aren’t getting married, it may seem like that form of protection isn’t available. However, that isn’t necessarily the case. When you merge households, you can create contracts that operate similarly to a prenup even if you aren’t intending to marry. In these, you would essentially agree to who has legal ownership of what, allowing both parties to protect any assets that matter to them.

If you go this route, it is usually wise to work with a legal professional. That way, the agreements can be formal and aligned with local law.

Define Ownership with New Assets

If you need to acquire a new asset, you and other household members may need to define ownership in advance. This is especially true for assets that are purchased by one person but are made available to the household for use, like furniture, vehicles, or home purchases.

In some cases, you may need to craft legal agreements to protect any of your new assets. For unmarried couples, this may be especially true in states with common law marriage or other cohabitation-related legislation directed at unmarried couples that give the other household member rights to newly acquired assets.

For married couples, whether new assets acquired during the relationship can be protected may depend on local law. Community property states have rules that usually make certain (but not all) new assets jointly owned, even if only one spouse handles the acquisition. However, that doesn’t mean there aren’t options available.

Final Note on Protecting Your Assets While Merging Households

If you aren’t sure about your state’s laws, contact a legal professional. They can help you review the state’s views on the ownership of the asset and provide you with guidance about any steps you may need to take to protect it, suggesting that it is actually a possibility legally.

Do you have any other tips that helped you when protecting your assets when merging households? Share your thoughts in the comments below.

Should You File for Bankruptcy? These Are The Telltale Signs That You Should

January 25, 2021 by Tamila McDonald Leave a Comment

In many ways, filing for bankruptcy can give you a fresh financial start, at least to a degree. However, it’s almost universally viewed as a last resort as the long-term impact of filing is significant. Additionally, filing for bankruptcy is a complex process, so much so that the mere idea can be overwhelming. But while there are consequences for moving forward, that doesn’t mean it isn’t the right move for many people. If you’re trying to decide if you should file for bankruptcy. Here are some telltale signs that maybe you should.

Telltale Signs That You Should File for Bankruptcy

You’re Using Debt to Pay Bills

If the only way to pay your bills – including general living expenses – is to use debt, filing for bankruptcy may be a wise move. When you have to use credit cards, payday loans, or personal loans to handle your daily life. You’re only getting deeper into debt with each passing month. This creates a cycle that can be difficult, if not impossible, to break on your own.

With bankruptcy, many unsecured debts can potentially be erased. This allows you to bring that vicious cycle to a halt. Essentially eliminating debts that you feasibly could never repay.

You Can’t Afford Your Minimum Payments

Once your minimum debt payments become unmanageable. You’re usually in an incredibly tough financial position. Missed payments commonly trigger fees, penalty interest rates, and other debt-increasing activities. This often makes a hard situation worse.

At times, missing a single payment on one debt may not mean bankruptcy is the best move. Sometimes, a shortfall is due to a situation that you know will pass. But, you may be able to catch back up.

However, if missing multiple payments is either already happening or likely to happen for the foreseeable future. Bankruptcy could be worth considering. Payments that are so unmanageable that you know you can’t handle them is a sign that you may be over your head financially, and bankruptcy could help you get back on your feet.

You’re Being Sued for Unpaid Debts

When traditional debt collection efforts fail, some creditors will take the next step and sue you for what’s owed. When this happens, you’re already in a tough situation. Often, heading to court to deal with the lawsuit means taking on additional expenses – such as hiring a lawyer or other court costs – making it financially unviable for many who are already struggling.

If you’re being sued for unpaid debts, filing for bankruptcy can pause those efforts. All collection activity legally has to stop while your case is being considered, giving you a reprieve. Plus, the outcome of your bankruptcy filing could erase many unsecured debts. If the lawsuit involves an unsecured debt, such as a credit card or personal loan, it could come to an end based on the bankruptcy decision.

You Can’t Escape Debt Collectors

Debt collection efforts can be intimidating and overwhelming. If you’re being hounded by debt collectors, receiving demanding phone calls and repeated aggressive letters, and you know you can’t pay off the debt, you might want to put bankruptcy on the table.

During bankruptcy, the accounts that are in collections may be eliminated. That will bring a permanent end to the calls, as well as let you have a fresher financial start.

You’re About to Lose Your Home or Car

Traditional home and auto loans are secured debts. The house or vehicle serves as a form of collateral, and the rules of the loan allow for the seizure of collateral under specific circumstances. If you fail to meet your repayment obligations, the lender has the ability to take action and potentially assert their claim on your home or car.

When you file for bankruptcy, any repossession efforts have to be temporarily halted. This can give you time to assess the situation without risking losing your house or vehicle.

Depending on the type of bankruptcy you file, these debts aren’t necessarily erased. However, you may be able to keep your home or vehicle if part of the decision includes revised repayment plans, allowing you to catch up on what you owe.

Now, it is important to note that even if a house or car is paid off, that doesn’t mean it can’t be at risk during a bankruptcy filing. The value of the property is compared to local exemption rates. If the value is high enough, your property may have to go toward settling debts. But if it is below the exemption, they are protected.

How to File for Bankruptcy

Once you’ve decided to file for bankruptcy, you want to move quickly. The bankruptcy process can be quite lengthy, for one. For another, the longer you wait, the longer you have to deal with a financial situation that’s harming you.

In most cases, getting a bankruptcy lawyer is a must. Since many attorneys require at least an initial payment upfront, you’ll either need to gather up enough cash to cover the fees or search for a pro bono lawyer. In some cases, legal aid centers can help low-income individuals or households access free or low-cost representation. However, many of these resources are overburdened, so there’s no guarantee you’ll get a pro bono bankruptcy lawyer.

Once you secure an attorney, you may need to go through credit counseling. There will also be other steps, like filing the paperwork and attending a meeting or two. However, if you have a lawyer, they will be able to walk you through the steps.

Type of Bankruptcy to File

Additionally, you’ll need to determine the type of bankruptcy you’ll be filing. Usually, Chapter 7 or Chapter 13 filings are the most common. Again, your attorney can help you assess each option, ensuring you move forward with the right approach based on your unique situation.

Ultimately, bankruptcy is a big financial step, one that will impact your financial life for years to come. However, while the hit to your credit score hurts, being able to refresh your financial situation could make it a worthwhile move if you’re already in deep.

Have you ever contemplated bankruptcy? Did you ultimately go through with it? If so, what was the tipping point for you? If not, what led you to change course? Share your thoughts in the comments below.

Here’s What You Should Do If Your Accountant Has Plead Guilty to Tax Fraud

January 18, 2021 by Tamila McDonald Leave a Comment

If your accountant pleads guilty to tax fraud, they’ve done more than make an honest mistake. Tax fraud involves the willful attempt to reduce the filer’s tax obligation through false statements, documents, or claims. These include underreporting income, inflating deductions, and similar acts. Tax fraud is a crime and is treated seriously. However, the impact your tax preparer’s actions have on you can vary. If your accountant pleads guilty to tax fraud. Here’s what you need to do.

Understand Your Responsibility

First and foremost, it’s critical to understand your level of responsibility when it comes to your taxes. Regardless of who prepares your documents. You are ultimately responsible for your tax return. If you benefited from your accountant’s actions, and those actions were deemed fraudulent. There will be ramifications. This is true even if you weren’t aware of your tax preparer’s illegal acts.

Know What Can Occur

The exact ramifications you’ll face for fraudulent tax returns prepared by your accountant will vary depending on your situation. If you can prove that you had no knowledge of the fraud and played no role in it being committed. The impact is usually purely financial. The IRS will require you to pay any taxes that should have been paid had the returns been correct. Additionally, you may owe interest on the back amount, as well.

If you did play an active role in the fraud. The outcome could be different. Along with having to pay the amount owed. You could face criminal charges. The exact nature of the charges would depend on your fraudulent actions. If found guilty, you could owe additional fines and penalties or even end up with jail time.

Gather and Review Your Tax Returns

Once you know that your accountant has pled guilty. You should gather up every past tax return they handled. While the IRS can only audit your returns for three years. A guilty plea on the part of your accountant can extend the review window. Thus, giving the IRS the ability to look at more past filings.

The IRS will review these returns to look for fraudulent activity and other discrepancies. So it’s wise to start that process yourself. As a result, it’s best to review every one you possibly can. Which allows you to identify fraudulent activity and estimate the impact.

Usually, you want to conduct reviews yourself. However, you may also want to enlist help from a tax professional. This is especially true if you aren’t fully aware of tax law or don’t understand some of the information contained in your return. Who you turn to for assistance is up to you. Although you may want to consult with a tax attorney or a reputable tax accountant as a starting point.

Consider Amending Past Returns

If during your review you find fraudulent information on your returns. You may want to amend them. Using Form 1040-X, you can submit updated tax calculations, allowing you to correct the issues proactively.

However, you should only file the amendments proactively if you have not received a notification that an issue has already been identified by the IRS. If you’ve received a notice that a given tax year’s return has already been reviewed and a decision regarding whether additional money is owed is being (or has already been) made. Filing an amended return may either not be necessary or could complicate the situation further.

If you’re uncertain about whether to amend a past return after your accountant pleads guilty to tax fraud. Consult with an expert. A tax attorney could provide you with guidance. Thus, helping you determine which approach is best based on your current situation.

Don’t Avoid the IRS

While you may want to take time to review any tax returns that may be impacted by fraud, don’t actively avoid the IRS. Generally speaking, it’s better to engage sooner rather than later.

Precisely how you may want to engage could vary depending on any communications you’ve received from the IRS. If you’ve been notified about specific dollar amounts of back taxes being owed or other penalties related to your returns, the process may be fairly simple. If you don’t disagree with their assessment and they aren’t pursuing criminal charges against you, you may choose to simply pay the amount (or make payment arrangements if the amount is too large to cover) to end the matter.

However, if you disagree with the assessment or are concerned about criminal liability, you might want to contact a tax attorney first. While this can cost a tidy sum of money, it ensures you have access to a professional who understands the nuances of what you’re going through and can speak to the IRS on your behalf.

Additionally, if you’re simply uncomfortable speaking with the IRS, you can enlist support from a tax lawyer. They can help you navigate the situation and find a reasonable resolution.

Exploring Additional Legal Avenues

If your tax accountant’s actions left you with a significant financial liability, you might want to consider suing the preparer for damages. While this can be costly in its own right, as you usually need assistance from an attorney, it is an option on the table.

Whether it’s the right move for you will depend on the nuances of your case. Additionally, you may want to take the accountant’s financial situation into consideration. If the accountant has no way to pay any amount awarded – either through cash, assets, or other sources – even if you win, you may not see any financial reward for the favorable judgment. This could leave you in a tougher situation, as you could still be responsible for your attorney’s fees, at a minimum.

Have you ever worked with an accountant who was later convicted of tax fraud? Has your accountant ever put you in a sticky financial situation? Share your thoughts in the comments below.

Should You Report Income from the Sale of Your Home on Your Income Taxes?

7 Tips to Get The Most Out Of Your 401k v/s Pension

January 11, 2021 by Tamila McDonald Leave a Comment

When it comes to company-sponsored retirement plans, 401(k)s are likely the most common offering. While pensions were once fairly widely used, that isn’t the case any longer. For some professionals, this is incredibly frustrating. Pensions – also called defined benefit plans – come with a level of stability and predictability that you don’t always find with a 401(k). Investment returns can be volatile, and some earnings may be eaten away by fees and other costs. However, that doesn’t mean the results in a pension vs 401k calculator can’t come out in favor of the latter. If you want to know how to pull that off, here are seven tips that can help.

1. Contribute Early and Consistently

With 401(k)s, compound interest is your friend. By contributing at a younger age and continuing to do so for as long as you are eligible, you’re allowing the magic of compound interest to work for you.

Additionally, by making regular contributions, you can offset some of the impacts of volatility. While some of your money will be invested when the market is strong, you also get to invest when prices in the market are low. In the end, this often balances your investing out over time, which does work in your favor.

2. Contribute the Maximum Amount Every Year

Each year, the IRS sets a maximum contribution limit for 401(k)s. Ideally, you want to contribute up to that amount, ensuring you can stash away as much money as possible.

For 2021, the employee 401(k) contribution limit is $19,500. For individuals who are 50 years old or older, they can also add in catch-up contributions up to an additional $6,500.

It’s important to note that employer contributions aren’t counted toward that limit. Only what you save is used to determine if you’ve hit the limit, so employer contributions can send you above and beyond those amounts.

Ultimately, contributing the maximum amount gives you the best chance of coming out ahead in the pension vs. 401(k) debate.

3. Capture Your Full Employer Match

In many ways, employer matches are like free money. They add to your savings without impacting your income, but only if you’re actively contributing enough to qualify for the match.

If you’re contributing the maximum amount each year, you save more than enough to get the full match. However, if you can’t set aside the maximum amount, work to dedicate enough of your funds to receive your full employer match. That way, you get as much free money as possible, increasing your odds of having enough in savings to have your 401(k) perform at least as strongly as a pension.

4. Aim for 15 to 20 Percent

Another option for winning the pension vs. 401(k) game is to make sure you are stashing away at least 15 to 20 percent of your income. Now, this can include your employer match. So, if your employer will match up 3 percent, that means you need to dedicate 12 to 18 percent to hit that mark.

Precisely how much you need to set aside may vary on either your current income level or your target retirement annual income amount. Some professionals may be able to get by with saving less if they tend toward frugality, plan to retire in a low-cost area, or have outside investments or retirement income sources that will bolster their financial security during their golden years.

However, it typically doesn’t hurt to over-save a bit. Worst case, your retirement will be more comfortable than you initially hoped, and that isn’t necessarily a bad thing.

5. Diversify Your Portfolio

While diversifying your portfolio won’t automatically lead to gains, it can help protect the value of your 401(k). Typically, when markets shift, some sectors are affected more than others.

By diversifying, you create a level of stability by ensuring you don’t keep all of your eggs in one basket. Usually, when some of your investments are trending downwards, others aren’t. You end up better equipped to ride out normal market fluctuations, ensuring your portfolio as a whole is heading in the right direction no matter what a portion of your individual investments are doing.

6. Reconsider Your Risk Level

The risk-level represented in your 401(k) plays a role in how much your savings may grow over time. Higher risk investments typically have the potential to yield greater growth. However, there’s also a chance for more significant losses.

If your portfolio is diverse, you can often afford to take on additional risk. This is especially true for younger professionals who have enough time to ride out a degree of volatility.

While you don’t want to take on so much risk as to keep yourself up at night worrying about your 401(k), consider being as aggressive as you can while still feeling comfortable about your choice. That way, you’re giving your portfolio a chance to grow.

7. Reevaluate Your Portfolio Annually

Investment decisions you make when you first start with a 401(k) may not be ideal down the road. Economic conditions change, sectors shifts, and the value of various investments will move around.

If you want to make the most of your 401(k), review your portfolio annually. See if your allocations still make sense or if making an adjustment is a smart move. Not only can this allow you to alter your strategy based on economic shifts, but it also gives you a chance to reassess your risk level and portfolio composition. You can make changes to make sure you are diversified and that your risk level feels appropriate based on your life stage.

Do you have any other tips that can help someone get the most out of their 401(k) vs. pension? Share your thoughts in the comments below.