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What is the Coverdell ESA?

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Introducing the last account type on our quest to find the best way to save for college, the Coverdell ESA.

Without further delay, here’s what you need to know about the Coverdell ESA.

What is it?

Like the 529, the Coverdell ESA is an education savings vehicle for K-12 and secondary education. Coverdell ESA stands for Coverdell Education Savings Account.

It got its name from Senator Paul Coverdell, who introduced the legislation for a similar account, the Education IRA. In 2002, a new piece of legislation was introduced to make the account what it is today.

The 529 and the Coverdell ESA share many of the same characteristics, but there are some things that set it apart. All of these will be listed below.

Advantages

  • Savings and investments in the account grow tax-deferred and are withdrawn tax-free when used for qualified education expenses.
  • When it comes time to withdraw, those funds are not considered income, as long as you are using them for qualified education expenses.
  • Can use in conjunction with other education tax credits, like the Lifetime Learning Credit, as long as there’s no double-dipping.
  • These accounts are self-directed, so your investment options are plentiful. They include…
    • Age-based funds
    • Static mutual funds
    • ETFs
    • Stocks
    • Bonds
    • Real estate

Disadvantages

  • Contribution limit of $2,000 per child per year.
  • The funds inside the account are taken into consideration when you file for financial aid. The assets are considered their parents assets.
  • If the money is not withdrawn from the account by the time the beneficiary is 30, they could be subject to taxes and penalties.
    • After 30, the funds inside the account become fully taxable and you’re penalized 10%.
  • Like the 529, contributions to this account are not tax-deductible.

Unique Characteristics

  • Only eligible to families/individuals that fall below an income threshold ($110,000 for single taxpayers and $220,000 for couples who file jointly).
  • The contribution limit is $2,000 per child per year, so even if a family member opens an account for your child, you still can’t go over that number, or there will be a penalty.
  • Qualified expenses include…
    • Tuition
    • Books
    • Supplies
    • Equipment
    • Tutoring
    • Special needs services
  • And can also include…
    • Room and board
    • Uniforms
    • Supplementary and transportation services
  • With a 529, the account owner has control over the assets. Conversely, with a Coverdell ESA, the beneficiary has control.

Conclusion

Effectively, there are three education savings vehicles used today. The UTMA/UGMA, Coverdell ESA, and the 529 plan. I’ve written about the other two in the past so go check those out.

On paper, the 529 looks like the best option, with a high contribution limit, a large number of qualified expenses, and there’s no penalty for letting funds sit for decades.

That is all true, and honestly, I prefer the 529, but the vast, vast majority of people that are helping their children save for college will not come close to the high contribution limit.

The only drawback to the Coverdell ESA is the penalty if the funds aren’t used before 30. Other than that, I don’t think the $2,000 contribution limit is a factor because most people can’t put that much away, anyway. Not without sacrificing their ability to save for retirement, as well.

That said, they’re both great options and you can’t go wrong with either one.

What are UGMA and UTMA accounts?

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What is a UGMA account? What is a UTMA account? How are they different? What is the purpose of using one over other savings vehicles?

We’re going to dive into those questions and a few others in the following piece.

What are they?

The UTMA and the UTMA are custodial accounts. An adult (the custodian) opens an account for the benefit of a minor.

UTMA stands for Uniform Transfer to Minors Act. UGMA stands for Uniform Gift to Minors Act. The difference has to do with the age of majority, but more on that later.

Characteristics

For all intents and purposes, these accounts are treated the same. As I said, an adult opens the account for the benefit of a minor.

The account itself does not have a limit of how much you can contribute to it, however, there is a gift tax exclusion for the custodian or anyone else that contributes to the account. While I’m here, I should mention that anyone can put money into the account, not just the custodian.

Anyway, the gift tax exclusion is $15,000 per recipient. If the person doing the gifting this amount, they could owe the gift tax.

As far as the age of the majority goes, generally the UGMA is 18 and the UTMA is 21. However, every state is different, so make sure you check to see what the age of majority is in your state.

Prior to the age of majority, the minor is unable to use the funds in the account UNLESS it’s for the benefit of said minor. Once they hit the age of majority, they can use the funds however they want.

Disadvantages

Two of the more common vehicles for education savings are the 529 plan and the Coverdell ESA. Now, I’m not going to go into those two, but they each share one key advantage. Any funds withdrawn for education-related expenses, come out tax-free.

The UTMA/UGMA does not have this capability. What’s more, the taxes on any capital gains made and/or dividends received throughout the year must be paid by the minor.

Also, funds sitting in a UTMA/UGMA, for the sake of the FAFSA, are considered the minor’s assets, and can negatively affect financial aid.

Advantages

There’ve been a lot of negatives so far, and if I’m being honest, there are other savings vehicles available that have more advantages.

The one thing I can think of as an advantage is accessibility.

With the 529 and the Coverdell ESA, any funds not used for education-related expenses are subject to a penalty.

With a UGMA/UTMA, the beneficiary can use the funds for anything that benefits them (while they’re a minor), or they can use them for anything at all once they’ve hit the age of majority.

Conclusion

If you are looking for accounts that are designed around saving for college, then a UTMA/UGMA is not for you. However, if you are looking for an account that is easy to set up, easy to use, and gives you more control, then I definitely would recommend utilizing one.

To make a formal recommendation, I’d go with the UTMA. Again, depending on your state’s rules, this enables you to save more for the beneficiary and prolongs when they can have access to those funds.

If you have any questions about what was said here and for my disclosures, go to my website.

 

If reading this blog post makes you want to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

A Few Tax Tips Suitable for Anyone

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Seeing as how next Monday is tax day, I thought it would be fitting to write about taxes. This article will have little to do with income taxes, however.

Instead, I’ll be focusing on the taxability of retirement accounts and brokerage accounts.

Qualified Accounts

A qualified account is pretty much anything that has a tax advantage. Tax advantage simply means that the investments inside the account grow tax-deferred – you aren’t taxed on the growth within the account, and/or the money can be withdrawn tax-free.

There are several different kinds of qualified accounts. Instead of listing them all, I’m going to list a few of the common ones and link to an article containing all the accounts and what they’re about.

  • 401k – The most common employer-sponsored retirement account. It’s not offered by all employers, but the money going into the account is pre-tax. Additionally, the money grows tax-deferred. However, when withdrawn, the money is taxable as income according to your tax bracket.
  • Traditional IRA – This is an individual retirement account. This type of account is contributed to using post-tax money, but most people are able to deduct the contribution on their taxes. However, there is a level of income when you no longer qualify for that deduction. The money is taxable when withdrawn as income.
  • Roth IRA – Also an individual retirement account, but with three key differences. One, the money that’s contributed is not tax-deductible. Two, the money is tax-free when withdrawn. Three, not everyone is eligible to open a Roth IRA once a certain level of income is reached.

Each of these plans has unique characteristics and rules. I encourage you to give this article a read to learn more about them. (Note: income eligibility for IRAs is listed in this article)

Non-qualified accounts

No bells or whistles. These accounts are designed to hold your cash, securities, and give you the ability to invest and trade.

Qualified accounts do the same thing, but have tax-advantages. Non-qualified accounts don’t.

There are usually two types of accounts: individual and joint. An individual account is for one person. A joint account is for two or more.

With a non-qualified account, there are two things you have to pay attention to.

  • Capital gains/losses – A capital gain is when you sell an investment for more than what you paid for it and a capital loss is the exact opposite. A capital gain comes in two variations. Short-term, which is when you held an investment for less than one year and is taxed at your income tax bracket. Long-term, when you held an investment for longer than one year and is taxed at a reduced tax rate.
  • Dividends/interest – These are paid by the company or fund and are taxed as income.

Tax return as savings

The last thing I wanted to talk about is your tax return and how you use it/view it. There are three types of returns. When you owe, when you break even, and when you get money back.

What I try to do, and what I generally recommend people do, is get as close to breaking even as you can. This just means you paid about the exact amount in taxes that you should have. No more, no less.

Here’s when I’m okay with people getting money back.

As a collective, we are horrible at saving money. The statistics show it. Now if you go through the year and pay more taxes than you need to and want to use that tax return as a makeshift savings account, then have at it.

My philosophy is if it helps you save money and it works for you, then do it. Some people need that type of set up.

Regular savings account don’t work for everyone because often, they are able to access the money whenever they want/need to. If you’re using your tax return as your savings vehicle, you don’t have that opportunity.

Conclusion

Love it or hate it, taxes are a part of life, and they won’t go away. There are certain strategies and certain accounts you can utilize to help make them more manageable/bearable.

If you’d like to learn more about anything discussed here and for my disclosures, visit my company’s website!

 

If reading this blog post makes you want to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

How to Make Long-Term Investing Decisions

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One of the most valuable attributes of successful investors is being able to stick to their guns and trust their analysis even when the market is tanking.

How do you invest for the long-term? Are there certain strategies and mindsets that can be used to your advantage?

We’ll explain that and more in the following article.

Know what you are willing to risk

Whether you are someone that allocates your assets between a select few mutual funds but are looking to use a small portion of your account to enhance your returns or an investor that owns a handful of stocks, you need to be wary of how much of your total portfolio is in one security/strategy.

With either scenario, the decision of how much of your portfolio you are willing to risk in an individual security is whatever you are comfortable with. Personally, if I were in your position, I wouldn’t use more than 5% in this type of situation.

Taxes matter

If you are investing in a qualified account (tax-advantaged account) taxes don’t really have any effect on whether you should buy or sell something, or what type of security you invest in.

You’re either taxed before you deposit the funds or you pay taxes when you withdraw, otherwise the account grows tax-deferred.

If you’re investing in a non-qualified account (standard brokerage/investment account) the taxes and what securities you invest in, matters.

For example, when you invest in a mutual fund, at the end of the year, that fund will pass capital gains to the investors. It’ll come in similar to a dividend, but a much bigger number (depending on the year). You have to pay taxes on that, just like you would a dividend.

Another example, if you invest in a security and sell it for more than you bought it, you have a capital gain. If you held the security for less than 1 year, it’s a short-term capital gain. If you held it for more than 1 year, it’s a long-term capital gain. A long-term capital gain is taxed at a lower rate than a short-term gain.

Asset allocation is important

Stocks/bonds/cash. They are the three most important asset classes in investing.

I’ve written about stocks and bonds before, but the cliff notes version is stocks are risky and can reward you with high returns. They get hit hard during bear markets.

Bonds are generally less risky so you usually get a lower return. However, they tend to hold up a little better during bear markets.

Depending on where you are in life and what you’re comfortable with determines how much (by percentage) you should have in each asset class.

Someone in their 20s should have almost all stocks and a little in bonds. Maybe 90/10 or 80/20. I’d only recommend cash if they were waiting for a significant pullback and wanted to put money to work at lower prices.

Conversely, someone in their 60s that has less time to make back what they lose, would be much more conservative. Their allocation could be 40/50/10 or somewhere around there.

Keep in mind these are general rules of thumb. The most important thing with any investment is your comfort level. If you are 25 and aren’t comfortable with hanging on to your stocks during a 40% decline, be more conservative.

Fees will eat your returns

There’s no denying that trading fees, advisor fees, and the various other types of fees will reduce your returns over the long-term.

On average, expense ratios on mutual funds are much higher than expense ratios on ETFs. Though I believe paying your advisor their fee (I don’t think it should be higher than 1%) is well worth the expense, not everyone needs an advisor.

If your financial situation is relatively simple, you’re comfortable and confident with how you handle things, and you don’t foresee making any significant changes, then it’s probably not worth it.

However, it might not be a terrible idea to see one every few years to have an objective set of eyes review everything.

What’s your exit strategy?

When you invest in a security, and this is more than just asset allocation, you need to have your exit already planned. Too often, people will invest in a stock, see it climb 10% higher and then fall back down. Instead of selling with a small gain or at cost, they’ll hang onto it in hopes it’ll climb back up, even if it keeps falling.

Our emotions and our behavior is our worst enemy in investing. Having a plan and a strategy in place before you even get started is a great way to help mitigate those things from getting in the way.

Regular contributions

If you have time to ride out down markets and are comfortable with the investments you chose/the asset allocation you picked, then hang onto what you have.

An added bonus is if you are regularly contributing and adding to those positions. In a down market, those securities you invested in will get cheaper. When you regularly invest at lower prices, you effectively lower your average purchase price.

Conclusion

Investing can be very difficult, but it doesn’t have to be. In my opinion, keeping your investment plan as simple as possible paired with a unique ability to keep your emotions out of the equation is a recipe for success.

For more information about investing and for my disclosures, visit www.crgfinancialservices.com.

 

If reading this blog post makes you want to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

Resisting Temptation: 5 Smart Ways to Use Your Tax Refund

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By trusting instinct and intuition, the right decision can become obvious from the wrong one. But desires are hard to resist. Now that your tax refund is sitting in your account, don’t let temptation overrule a smart monetary choice, and follow what your financially responsible gut tells you to do. Use five percent of your refund for a fun purchase, and feel good about investing the remaining 95 percent in any of the following:

Build Your Savings

The broken record singing “build your savings” is as tiresome as the one saying “eat a healthy breakfast.” But really, build a savings. Ideally, an emergency fund should support three to six months worth of necessary living expenses. Last year about 49 percent of employees lacked a personal safety net, according to Forbes. Use your refund to establish a savings account, and then use an app such as Saving Made Simple to help make saving a financial habit.

Get Reliable Transportation

“Car maintenance avoidance” is a real syndrome. It stems from the fear of taking your car into an auto repair shop for a brake check and coming back with 10 other costly repairs. Cushioned with your refund, a brake check shouldn’t be so daunting.

Proper maintenance helps improve the reliability, safety and longevity of your vehicle. Brake pads, rotors and tire replacements are worth the cost. After an inspection, you may even decide that buying or leasing a new car is a better investment than a repair spree. For example, use a $2,000 refund for a down payment to reduce monthly payments. A higher refund used as an initial down payment while signing can also leverage a better lease deal.

Improve Your Credit Score

Your credit score is a measurement that indicates whether you’re a good candidate for a mortgage, a loan or a credit card. The score also helps lenders determine the interest rate to charge you. A higher score provides you with better rates and more favorable terms.

Consider using your tax refund to pay off a credit card and substantially reduce your debt; it can boost your credit score, explains The Nest on Budgeting. Improve your credit by keeping the account open and lowering your credit card utilization rate, which is how much you charge/owe (outstanding balances) vs. your total available credit limit. The lower your utilization rate and balances, the higher your credit score. A utilization rate of below 20 percent is good and an average of 7 percent is best, according to FICO.

Pay off Debt

A tax refund can serve as a negotiation tool to achieve a settlement with a debt collector. Improve your financial management by offering the creditor an upfront lump sum in exchange for a smaller amount owed. Negotiate a lump-sum payment, and you could cut your debt significantly. While bargaining, exert power and hold firm. Know your rights and be aware of fictional scare tactics. Nolo, an online small business and legal website, offers a collection of articles on how to negotiate with creditors, handle tax consequences and strategize negotiations.

Make a Career Investment

Invest in your education and complete online courses to increase your future earning power and employee marketability. Expanding your skill set and advancing your education can also help you land a promotion or change careers.

Make sure that you choose a career that has a positive outlook in the future. For example, those who earn a Master of Administration degree will have multiple career paths available for them with each of them expected to experience significant growth in the coming years. These careers also pay very well, making it more likely that your investment will pay off in the end. Once you have your MBA, you can pursue jobs as a marketing manager, financial analyst, operations manager, or an IT expert, giving you a number of different options within an organization.

Last year, U.S. News & World Report broke down the cost of an online class. Writer Devon Haynie found three-credit courses that ranged between $935 and $1,320 for out-of-state students, and one community college class cost about $515. Also, university online courses cost between $300 and $400 per credit hour. While researching your options, also look for in-state colleges and apply to scholarships to keep costs even lower.

Use Tax Write-Offs to Start Your Business Off Right

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Small businesses provide 55 percent of all jobs in the United States, notes the SBA, proving the American dream is certainly alive and well. You might feel like competing with big business is not worth the hassle, but since 1990, big business has cut 4 million jobs, while small business has accounted for 23 million net new jobs since the 1970s.

But you know success does not come easy. There is always more to do and more to learn. Follow these stress-free measures to make a smashing debut as the most effectively managed small enterprise in America.

Startup Costs and Documentation

You do not need millions of dollars to start up your business. Once you have a concept in mind, create a plan for minimizing startup costs. The IRS recognizes the time and energy spent on creating a business and offers up to $5,000 in deductions for every $55,000 spent on organizing, planning and starting your business.

Be sure to keep accurate records so your deductions can be granted. Many people cringe at the prospect of documenting expenses for a business, in addition to personal expenses. Balancing your own budget is hard enough, and separating yourself from your enterprise can be daunting.

Separate Business Versus Personal Expenses

A simple solution to this common problem is creating a business expense account to track your expenditures. Certain credit card companies make this task easier by offering deals specific to small business owners. Every time you make a purchase for your business, use your business card and save yourself the hassle of juggling several bank accounts. Don’t make the mistake of combining personal expenses with your business endeavors and your purchasing history will speak for itself.

The Ticket Is Record-Keeping

Along with startup costs, there are other ways you can deduct expenses from your taxes. According to the IRS, you can write-off the business use of your home and vehicle. Some expenses, such as rent for an office, employee pay and even interest charged on money borrowed toward your business, are eligible for deductions. This is why it is profitable to keep accurate records of your transactions. Services like Intuit calculate federal and state payroll tax for you, so you’ll have a better idea of what to expect. When tax time comes, you can provide the proof needed to reap the benefits of being a small business owner.

The Public Has Spoken

Our economy depends on small business to survive. Pew Research group found 71 percent of the public held a positive view of small business, while only 25 percent thought of large corporations in the same light. Perhaps the American public is supportive of small business owners because they are like everyone else — working hard to make a living. There has never been a better time to be the owner of your own business. Go ahead, quit your day job and begin the journey of a lifetime— but don’t forget to keep your record books straight, as it will pay off in the end.

How to Cut Your 2012 Tax Bill Today

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Did you know there are still ways to save on your 2012 taxes?  Many people (mistakenly) believe that once the clock strikes midnight on January 1, all tax strategies need to be in place–hardly!  Here are two ideas you can take to the bank today (assuming you meet some requirements) to keep your Uncle Sam from digging deeper into your pocket.

 

 

Good Old Fashioned IRA

 

Sit down, kid, and Grandpa OG will tell you a story….

Long before all the Roth IRA hoopla, there was just an”IRA.”  Now, to distinguish them, we called one a ‘traditional’ IRA. That’s where your opportunity lies. In 2012, the maximum contribution to an IRA was $5,000 ($6,000 if over age 50).  However, you have until whenever you file your taxes, or April 15, whichever is earlier, to contribute to an IRA and count it for your 2012 tax bill. Contributions are tax deductible, which means it lowers your overall income that is taxed (page one of the 1040), thereby reducing your tax. If you were in the 25% bracket, a $5,000 contribution would reduce your income taxes by $1,250. Not exactly dollar-for-dollar, but it’s better than a sharp stick in the eye!

 

Traditional IRA Deduction Limits

 

Here’s where the funky requirements come into play: first, as long as you’re under age 70 1/2 and have earned income, you’re eligible to contribute to an IRA. Whether or not it’s deductible will depend on a couple of things:

If you’re covered by a company sponsored plan (401k, etc) then your contribution’s deductibility is phased out as follows:

-Single: $58,000-$68,000 AGI

-Married Joint Filer: $92,000-$112,000

-Married Separate Filer: $0-$10,000

If you not covered by a company plan, then there is no phase out.

Your spouse is covered by a company plan? then your phase out is $173,000-$183,000.

 

Small Business Owner Plans

 

If you’re fortunate enough to own your own business, there’s another way for you to cut into your tax bill. It’s called a SEP IRA, which stands for Self-Employed Pension, and its available to most business owners. They work very much like traditional IRA’s, but the limits are much different.

Small business owners would first calculate their profit. The maximum SEP contribution is 25% of that profit number (up to a maximum of $50,000).  The tricky part of small business plans? You must offer all your employees the same thing you offer yourself. For example, let’s say your profit is $50,000 and you decide to contribute the maximum, 25%, into your SEP. That’s $12,500–nice job!  But, if you have employees, you must contribute 25% of their salaries into a retirement plan for them, too!  That can add up quickly–so be careful!

 

Bonus Tax Savings

 

In 2012, eligible lower-income taxpayers can claim a nonrefundable tax credit for the applicable percentage (50%, 20%, or 10% depending on filing status and AGI) of up to $2,000 of his or her qualified retirement savings contributions as outlined in the Saver’s Credit chart.

 

So there you have it-a couple of last-last minute tax strategies to lower even last year’s tax bill!

Photo: Philip Taylor

Year End Tax Planning: A (Surprising) System of Cleaning My Closet

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On the way home from this Thanksgiving weekend in Michigan, I finally reached my limit with the situation in my closet.

For the last four years it’s become bigger and bigger mounds of….clothing. Just as I get the closet organized, it becomes a mess yet again. Being a recovering financial advisor, I loathe messes. Everything should be in neat and tidy rows, not thrown on the closet floor.

Historically, at this point I’d decide to get rid of clothing. I’d pick up stuff and make the “stow or go” draft move:

“No,” the hoarder in me said, “I’ll wear that some day.”

“I got that at my favorite 5k in 1998. I can’t get rid of the Pickle Run shirt!”

“If I get that stain out I’d wear it all over the place.”

I should have been saying, “Some day bell bottoms will come back in style!”

Sometimes–not often enough–I’d find a piece that definitely had to go. Whenever I brought home new clothing from holidays or trips to the mall, old stuff stacked up. The “donation” pile contained a lonely piece or two. I was adding clothing at a 2:1 rate over donations.

On the way home I snapped. Suddenly I formulated a plan:

 

The Plan

 

It was so easy, I can’t believe I hadn’t seen it earlier.

Clothing decisions (and by extension “stuff” in general”) isn’t about whether I like each “thing” or not; of course I loved them all. I wouldn’t have bought them if I didn’t like them. They all had sentimental value AND my mind needed to justify the reason I’d added them to my collection in the first place.

In short: using my current criteria, there was no way I’d ever clean out the closet.

In my a-ha moment, I flipped my thinking: the closet wasn’t a place to store all the cool stuff I wanted to keep. It was a place to store things I needed.

Following that train of thought led me to the real question:

How much did I really need?

 

The List

 

I made a list of things I really needed:

10 Long Sleeve Running Shirts (probably don’t need 10, but that was a start)

10 Short Sleeve Running Shirts (closer to the number)

4 Pairs Running Shorts

3 Pairs of Jeans

4 Pairs of Dress Pants

3 Suits (again, probably too many for my lifestyle, but I could cut more later)

6 Ties

6 Button down shirts

5 Pullover sweaters

….and so on.

 

…and Action!

 

Sunday was a bloodbath in my closet. I tore everything out and placed it on the floor. I was making Top 10 lists of each type of clothing. Soon I was at the difficult portion: there were pieces I liked, but they didn’t make the  Top 10 (or 5, or whatever….). At this point it didn’t matter how much I liked the shirt: there were enough pieces for me to wear without it in my closet. Better to gift it to someone who really needs it this holiday than to keep it sitting in my closet with 10+ items I’d rather wear.

I created a gigantic mound of clothing to donate.

 

Itemized Charitable Donation Deductions: Bonus Time!

 

If you itemize your taxes, you are probably eligible for charitable donations to 501c3 organizations. If you aren’t sure whether the place you want to donate clothing is a 501c3, just ask them. They’ll know.

If your organization is eligible and you itemize deductions on your taxes, you may be able to write off your charitable contributions. I received a receipt at Goodwill that listed all of the items I’d donated to them. I’ll use this at tax time next year.

Bonus!

 

The Lesson

 

I’ve learned this lesson 100 times and still continue to struggle with it daily. Don’t get caught in one line of thinking about a problem….especially nagging ones like cleaning out a closet. Turn the question around. Search for a better answer. Scour the web for strategies….soon you’ll have a clean closet, better decisions and possibly tax deductions!

 

This is another in our list of systems for busy people. Want more? Check out our budget plan for busy couples. It’s another play-tested system (that one OG uses with couples all the time and I used when practicing…it’s worked magic for non-budgeters.)

What are you waiting for? Go clean out that closet and cha-ching on the tax deductions!!!! What system do you use for weeding out old clothes you still love but should probably chuck?

Five Money-Saving Tasks That’ll Help You Cha-Ching! in the 4th Quarter

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I love the sound of the cash register ringing, don’t you?

If you’re going to be successful in your financial life, treat it as if it’s a business and you’re trying to hear that awesome cash register sound. If you don’t, you’ll always prioritize yourself behind more “important” activities like your job (nevermind that the job is there to help your net worth…that’s probably the subject of another post).

Every business has a mandatory list of activities that can’t be ignored. So does your financial life.

Here are five items that MUST be on that list this quarter:

1) Mutual fund capital gains. Even if you don’t have mutual funds outside of an IRA now, you should learn how these rules work. When the manager (or system, for an index fund) trades stocks or bonds inside of the fund a capital gain is generated. Someone has to pay it, and there’s no real fair method, so the mutual fund company declares a date and divides the gain among shareholders of record. Even if you didn’t sell the fund, you’re responsible for your portion of the manager’s buying and selling.

With results so far in 2012 looking up, there’s a good chance you might get hit with a tax bill this year. Avoiding this tax is legal and easy. Find the dates the fund declares capital gains and transfer your money to a different fund in the same family. This avoids fees for switching and the manager’s capital gains tax.

Grab a calculator before you move any money. You’ll still be on the hook for capital gains taxes you generate by selling as well. The cost of switching might outweigh the savings you’ll realize from avoiding any taxes created by the fund manager.

2) The lemon drop. Hoping to skim off some of that skyrocketing Apple stock? Cover a portion of your capital gain by also selling your brother in law’s “can’t lose” loser. There’s no time like now to weed your portfolio of positions that aren’t going anywhere. Although you’re only allowed to show $3k in net capital losses each year, leftovers can be carried over to deduct in future years.

3) Charitable giving. Hopefully you’ve given to your favorite community non-profits throughout the year, but if not (and especially if you itemize), you’ll want to make cash and in-kind donations in before December 31. Keep receipts for your gifts. The IRS has tightened charitable giving laws in recent years.

4) Estimate your taxes and decide when to pay property taxes. If you own a home winter taxes are deductible either in December or January, your choice. Did you receive a big bonus this year? Take the extra deduction now to help lower your tax due. If you make too much, it might be a better idea to wait until next year. High income earners aren’t allowed to claim all of their itemized deductions (ask your accountant about whether you’re subject to phaseouts).

5) Goal evaluation and setting. The 4th quarter is the perfect time to begin thinking about your short and long term goals. Did you hit your benchmark in 2012? If not, what are you going to change in 2013?

While people generally talk a good game about benchmarking, most of my clients were surprised when I pulled the actual number out of their plan to see if they’d hit the mark during a year. By sticking with actual data and avoiding the “Yeah, it feels like I had a good year” you’ll be able to make the necessary course corrections to save the right amount of money in the upcoming year.

I’ll be addressing each of these areas in more detail during the course of the quarter, but do yourself a favor and schedule these tasks now. These are five activities that you don’t want to miss!

What other events are on your 4th quarter financial calendar?

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Oops…I Forgot to File My Taxes

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Whew!  You’ve filed your taxes…or did you?

Most of America now have the 2011 tax year “in the books” so-to-speak…but what happens if you…ahem…’forgot’ to file?  What should you do?

Extensions

First of all, let me exclude all those who, like me,  filed an extension.  If you filed an extension, your taxes are due no later than October 15, 2012, but the tax bill (any money still owed to the government) was due yesterday.  An extension to file is just that: an extension to file, not to pay.  If you filed an extension and didn’t pay, but think you may owe money, it’s best to pay as soon as possible to avoid more penalties.

Get Moving!

What happens if you just didn’t file?  You didn’t file an extension, you didn’t file anything. What now?  Most professionals would recommend that you get filing done as soon as possible.  If nothing else, print out form 4868 and file for an extension.

Five Steps to File Your Taxes Quickly

Step 1:  Determine the reason you didn’t file.  Was it because you didn’t receive a form you needed?  Or, was it due to laziness?  Perhaps apprenshension?  Do you owe money and don’t know what to do?  Acknowledge why it happened and move on.  If you were lazy, get out your calendar and schedule a couple hours to work on them.  If you’re scared of the taxes you owe, work on filing the appropriate tax forms first, then worry about the bill.

Step 2:  Call your accountant, CPA, or other tax preparer and get in their schedule for when they return from vacation.  It’s likely they’re headed out of town to enjoy a much-needed vacation, but they have plenty of time available in May.  Call today and get your appointment scheduled.  What about doing them yourself?  Listen: You’ve had 4 months to get them done on your own.  Acknowledge that you won’t do it if you have 400 months and hire someone.

Step 3:  Set aside a 30-90 minutes to gather your tax-related documents and throw them in an envelope for your tax meeting.  Don’t think about it – just put stuff in the envelope.  Accountants will have more time to spend with you after they get back in May.  Don’t know if you should include that form?  Yes, you should.

Step 4:  Make sure you attend your tax appointment.  I know this sounds obvious, but hey, it’s been since January and you haven’t got them done.  You’re not the best time manager.  Commit to attending this meeting.

Step 5:  Begin 2012’s tax planning now.  Go to Office Max or Staples and buy a box of manila envelopes.  Every week, go through your paperwork and put the necessary receipts in this month’s envelope.  By the time taxes roll around next winter, you’ll be 90% done.

Remember, it’s a criminal offense to not file your taxes.  Not being able to pay them is civil.  Don’t be a criminal.