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24
Sep

September 2014 Monthly Planning Tips

Greetings, and happy Autumnal Equinox!  With day and night at equal length, it’s a great time to think about balance in our lives – balance of work and play, balance of activity and rest, or balance in any other aspect of our lives.  Are you feeling out of balance in certain areas of life?

 

As September is also back to school time, it’s a good opportunity to think about planning for college expenses…for children, grandchildren, or maybe you have thought about going back to school yourself, to further your education or to help facilitate a career change.

And on the subject of balance, there are many variables to consider regarding college expenses, and saving for college.

 

So I am pleased to share this month’s financial planning tips topic:  Saving for College.

 

I hope you find this information to be helpful.  Feel free to forward to anyone who may benefit.  Please contact me with any questions, or if you would like to discuss/would like assistance with any personal financial planning topics such as cash flow/budgeting, health care, taxes, insurance, investing, college/retirement planning, estate planning.

 

Note that planning tips and other info. are now posted on my website, http://www.truenorthfinancialplanning.com/, under Resources/Blog.  Feel free check it out.

 

Even though college costs are high, don’t worry about saving 100% of the total costs. Many families save only a portion of the projected costs–a good rule of thumb is 50%–and then use this as a “down payment” on the college tab, similar to the down payment on a home.

Many families rely on some form of financial aid to pay for college. However, while financial aid can certainly help cover college costs, student loans make up the largest percentage of the typical aid package. Generally, plan on financial aid covering the following percentage of expenses: loans–up to 50%, grants and scholarships–up to 15%, work-study–varies.

  Saving for College

There’s no denying the benefits of a college education: the ability to compete in today’s competitive job market, increased earning power, and expanded horizons. But these advantages come at a price–college is expensive. And yet, year after year, thousands of students graduate from college. So, how do they do it?

Many families finance a college education with help from student loans and other types of financial aid such as grants and work-study, private loans, current income, gifts from grandparents, and other creative cost-cutting measures. But savings are the cornerstone of any successful college financing plan.

College costs keep climbing

It’s important to start a college fund as soon as possible, because next to buying a home, a college education might be the biggest purchase you ever make. According to the College Board, for the 2013/2014 school year, the average cost of one year at a four-year public college is $22,826 (in-state students), while the average cost for one year at a four-year private college is $44,750.

Though no one can predict exactly what college might cost in 5, 10, or 15 years, annual price increases in the range of 4 to 7% would certainly be in keeping with historical trends. The following chart can give you an idea of what future costs might be, based on the most recent cost data from the College Board and an assumed annual college inflation rate of 5%.

Year 4-yr public 4-yr private
2013/14 $22,826 $44,750
2014/15 $23,967 $46,988
2015/16 $25,166 $49,337
2016/17 $26,424 $51,804
2017/18 $27,745 $54,394
2018/19 $29,132 $57,114
2019/20 $30,589 $59,969
2020/21 $32,118 $62,968
2021/22 $33,724 $66,116
2022/23 $35,411 $69,422
2023/24 $37,181 $72,893

Tip:  Even though college costs are high, don’t worry about saving 100% of the total costs. Many families save only a portion of the projected costs–a good rule of thumb is 50%–and then use this as a “down payment” on the college tab, similar to the down payment on a home.

Focus on your savings

The more you save now, the better off you’ll likely be later. A good plan is to start with whatever amount you can afford, and add to it over the years with raises, bonuses, tax refunds, unexpected windfalls, and the like. If you invest regularly over time, you may be surprised at how much you can accumulate in your child’s college fund.

Monthly Investment 5 years 10 years 15 years
$100 $6,977 $16,388 $29,082
$300 $20,931 $49,164 $87,246
$500 $34,885 $81,940 $145,409

Note:  Table assumes an average after-tax return of 6%. This is a hypothetical example and is not intended to reflect the actual performance of any investment. All investing involves risk, including the possible loss of principal, and there can be no guarantee that any investing strategy will be successful.

College savings options

You’re ready to start saving, but where should you put your money? There are several college savings options, and it’s smart to consider tax-advantaged strategies whenever possible. Here are some options.

529 plans

529 plans are one of the most popular tax-advantaged college savings options. They include both college savings plans and prepaid tuition plans. With either type of plan, your contributions grow tax deferred and earnings are tax free at the federal level if the money is used for qualified college expenses. States may also offer their own tax advantages.

With a college savings plan, you open an individual investment account and select one or more of the plan’s mutual fund portfolios for your contributions. With a prepaid tuition plan, you purchase tuition credits at today’s prices for use at specific colleges in the future–there’s no individual investment component. With either type of plan, participation isn’t restricted by income, and the lifetime contribution limits are high, especially for college savings plans.

Note:  Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about specific 529 plans is available in each issuer’s official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.

Coverdell education savings accounts

A Coverdell education savings account is a tax-advantaged education savings vehicle that lets you contribute up to $2,000 per year. Your contributions grow tax deferred and earnings are tax free at the federal level (and most states follow the federal tax treatment) if the money is used for the beneficiary’s qualified elementary, secondary, or college expenses. You have complete control over the investments you hold in the account, but there are income restrictions on who can participate.

U.S. savings bonds

The interest earned on Series EE and Series I saving bonds is exempt from federal income tax if the bond proceeds are used for qualified college expenses. These bonds earn a guaranteed, modest rate of return, and they are easily purchased at most financial institutions or online at www.treasurydirect.gov. However, to qualify for tax-free interest, you must meet income limits and other criteria.

UTMA/UGMA custodial accounts

An UTMA/UGMA custodial account is a way for your child to hold assets in his or her own name with you (or another individual) acting as custodian. Assets in the account can then be used to pay for college. All contributions to the account are irrevocable, and your child will gain control of the account when he or she turns 18 or 21 (depending on state rules). Earnings and capital gains generated by assets in the account are taxed to the child each year.

Under the kiddie tax rules, for children under age 19, and for full-time students under age 24 who don’t earn more than one-half of their support, the first $1,000 of earned income is tax free, the next $1,000 is taxed at the child’s rate, and anything over $2,000 is taxed at your rate.

A last word on financial aid

Many families rely on some form of financial aid to pay for college. Loans and work-study jobs must be repaid (either through monetary or work obligations), while grants and scholarships do not.

Most financial aid is based on need, which the federal government and colleges determine primarily by your income, but also by your assets and personal information reported on your aid applications. In recent years, merit aid has been making a comeback, so this can be good news if your child has a special talent or skill.

The bottom line, though, is don’t rely too heavily on financial aid. Although it can certainly help cover college costs, student loans make up the largest percentage of the typical aid package. Generally, plan on financial aid covering the following percentage of expenses: loans–up to 50%, grants and scholarships–up to 15%, work-study–varies. The lesson: the more you focus on your savings now, the less you may need to worry about later.

Refer a friend To find out more click here
IMPORTANT DISCLOSURES

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2014.
27
Aug

August 2014 Monthly Planning Tips

Greetings!  I hope everyone has been able to enjoy the great summer weather.

 

I am pleased to share this month’s financial planning tips topic: Should You Pay Off Your Mortgage or Invest?

This is a common question, with no single black or white answer, and many factors to consider.  The right answer will be different for each person or family.  The most important thing is to understand your own situation, so that you can weigh all the variables and make the right decision.

 

I hope you find this information to be helpful.  Feel free to forward to anyone who may benefit.  Please contact me with any questions, or if you would like to discuss/would like assistance with any personal financial planning topics such as cash flow/budgeting, health care, taxes, insurance, investing, college/retirement planning, estate planning.

 

Note that planning tips and other info. are now posted on my website, http://www.truenorthfinancialplanning.com/, under Resources/Blog.  Feel free check it out.

 

Is it smarter to pay off your mortgage or invest your extra cash? Should You Pay Off Your Mortgage or Invest?Owning a home outright is a dream that many Americans share. Having a mortgage can be a huge burden, and paying it off may be the first item on your financial to-do list. But competing with the desire to own your home free and clear is your need to invest for retirement, your child’s college education, or some other goal. Putting extra cash toward one of these goals may mean sacrificing another. So how do you choose?

Evaluating the opportunity cost

Deciding between prepaying your mortgage and investing your extra cash isn’t easy, because each option has advantages and disadvantages. But you can start by weighing what you’ll gain financially by choosing one option against what you’ll give up. In economic terms, this is known as evaluating the opportunity cost.

Here’s an example. Let’s assume that you have a $300,000 balance and 20 years remaining on your 30-year mortgage, and you’re paying 6.25% interest. If you were to put an extra $400 toward your mortgage each month, you would save approximately $62,000 in interest, and pay off your loan almost 6 years early.

By making extra payments and saving all of that interest, you’ll clearly be gaining a lot of financial ground. But before you opt to prepay your mortgage, you still have to consider what you might be giving up by doing so–the opportunity to potentially profit even more from investing.

To determine if you would come out ahead if you invested your extra cash, start by looking at the after-tax rate of return you can expect from prepaying your mortgage. This is generally less than the interest rate you’re paying on your mortgage, once you take into account any tax deduction you receive for mortgage interest. Once you’ve calculated that figure, compare it to the after-tax return you could receive by investing your extra cash.

For example, the after-tax cost of a 6.25% mortgage would be approximately 4.5% if you were in the 28% tax bracket and were able to deduct mortgage interest on your federal income tax return (the after-tax cost might be even lower if you were also able to deduct mortgage interest on your state income tax return). Could you receive a higher after-tax rate of return if you invested your money instead of prepaying your mortgage?

Keep in mind that the rate of return you’ll receive is directly related to the investments you choose. Investments with the potential for higher returns may expose you to more risk, so take this into account when making your decision.

Other points to consider

While evaluating the opportunity cost is important, you’ll also need to weigh many other factors. The following list of questions may help you decide which option is best for you.

  • What’s your mortgage interest rate? The lower the rate on your mortgage, the greater the potential to receive a better return through investing.
  • Does your mortgage have a prepayment penalty? Most mortgages don’t, but check before making extra payments.
  • How long do you plan to stay in your home? The main benefit of prepaying your mortgage is the amount of interest you save over the long term; if you plan to move soon, there’s less value in putting more money toward your mortgage.
  • Will you have the discipline to invest your extra cash rather than spend it? If not, you might be better off making extra mortgage payments.
  • Do you have an emergency account to cover unexpected expenses? It doesn’t make sense to make extra mortgage payments now if you’ll be forced to borrow money at a higher interest rate later. And keep in mind that if your financial circumstances change–if you lose your job or suffer a disability, for example–you may have more trouble borrowing against your home equity.
  • How comfortable are you with debt? If you worry endlessly about it, give the emotional benefits of paying off your mortgage extra consideration.
  • Are you saddled with high balances on credit cards or personal loans? If so, it’s often better to pay off those debts first. The interest rate on consumer debt isn’t tax deductible, and is often far higher than either your mortgage interest rate or the rate of return you’re likely to receive on your investments.
  • Are you currently paying mortgage insurance? If you are, putting extra toward your mortgage until you’ve gained at least 20% equity in your home may make sense.
  • How will prepaying your mortgage affect your overall tax situation? For example, prepaying your mortgage (thus reducing your mortgage interest) could affect your ability to itemize deductions (this is especially true in the early years of your mortgage, when you’re likely to be paying more in interest).
  • Have you saved enough for retirement? If you haven’t, consider contributing the maximum allowable each year to tax-advantaged retirement accounts before prepaying your mortgage. This is especially important if you are receiving a generous employer match. For example, if you save 6% of your income, an employer match of 50% of what you contribute (i.e., 3% of your income) could potentially add thousands of extra dollars to your retirement account each year. Prepaying your mortgage may not be the savviest financial move if it means forgoing that match or shortchanging your retirement fund.
  • How much time do you have before you reach retirement or until your children go off to college? The longer your timeframe, the more time you have to potentially grow your money by investing. Alternatively, if paying off your mortgage before reaching a financial goal will make you feel much more secure, factor that into your decision.

The middle ground

If you need to invest for an important goal, but you also want the satisfaction of paying down your mortgage, there’s no reason you can’t do both. It’s as simple as allocating part of your available cash toward one goal, and putting the rest toward the other. Even small adjustments can make a difference. For example, you could potentially shave years off your mortgage by consistently making biweekly, instead of monthly, mortgage payments, or by putting any year-end bonuses or tax refunds toward your mortgage principal.

And remember, no matter what you decide now, you can always reprioritize your goals later to keep up with changes to your circumstances, market conditions, and interest rates.

 

IMPORTANT DISCLOSURES

 

This information does not provide investment, legal, or tax advice.  The information presented here is not specific to any individual’s personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice

20
Jun

June 2014 Monthly Planning Tips

Greetings, and Happy Summer Solstice!  I hope everyone has been able to enjoy the nicer weather.   I am pleased to share this month’s financial planning tips topic: Systematic Savings to Establish or Increase Cash Reserves Developing savings discipline is vitally important to building wealth and achieving many financial goals.  An important characteristic of wealth is that it’s not what you earn, but what you have that matters.  So, save early, save often!   I hope you find this information to be helpful.  Feel free to forward to anyone who may benefit.  Please contact me with any questions, or if you would like to discuss/would like assistance with any personal financial planning topics such as cash flow/budgeting, health care, taxes, insurance, investing, college/retirement planning, estate planning.

Systematic Saving to Establish or Increase Cash Reserve What is systematic saving?As its name implies, systematic saving is the process of saving a portion of income on a regular basis. It is important because establishing or increasing a cash reserve should be the first savings objective of a financial plan. Further, most people do not save on any systematic or regular basis, so the plan’s long-term success is likely to benefit from early development of this excellent habit. Pay yourself first For those who do not yet have financial security and independence, systematic saving and building a cash reserve are the first steps (managing debt is a close second, except in dire situations). You should look at systematic saving as paying yourself before you are tempted to spend it elsewhere. Money spent is money that usually must be replaced by working for it. As the adage goes, a penny saved is a penny earned. The benefits of automatic savings With an automatic savings plan, you formally arrange with an employer or financial institution to set aside periodically a specified amount of money from your income or an existing account. This is different from simply planning to save regularly on your own, which requires that you take action on your own to set aside the specified amount each time. Automatic plans are preferable because the transactions are made by others and the temptation to divert funds (out of sight, out of mind) is reduced. However, planning for periodic savings, which is often part of a budgeting process, is better than not saving at all, especially if the routine savings amount is viewed as a mandatory bill payment. Automatic savings also is more convenient, since it’s handled by others. Automatic payroll savings plans Today, many companies offer a payroll savings plan as an employee benefit. These plans automatically withhold an agreed-upon amount from each paycheck and deposit it in an account on behalf of the employee. The employee usually is free to start and stop the withholding process and to change the amount withheld, provided changes are within reason and according to the plan’s established guidelines. Automatic account transfers Most financial institutions offer depositors an opportunity to have funds automatically moved between accounts on a periodic basis. While not a savings plan as such, automatic transfers provide a convenient way to save, regardless of the objective. These plans tend to offer significant flexibility in starting, stopping, and altering the amount being transferred, plus a selection of several types of accounts. Banks and credit unions–Many people keep a checking account and a savings account at the same institution, usually to capitalize on fee discounts and other benefits. In addition to basic savings and checking accounts, financial institutions also often offer money market deposit accounts. They also may have other types of term deposit accounts. Having multiple accounts at one institution can facilitate having a specified amount transferred periodically to an account you designate for cash reserve savings. Example(s): Jane arranged with her employer for the automatic deposit of her paycheck into her checking account at the ABC Bank. She now can request that the bank automatically transfer $500 each month to a money market deposit account that she also has set up as part of her cash reserve. Brokerage firms–More and more, brokerage houses and large mutual fund companies offer accounts and services similar to those of banks (the reverse is also true). Consequently, you will often find opportunities for automatic payroll deposit and automatic account transfers outside of banks. If you hold investment securities with a brokerage, for example, you might arrange to have earnings from those securities automatically deposited to a money market mutual fund rather than automatically reinvesting the earnings. However, be aware that unlike bank accounts, these accounts do not qualify for insurance by the Federal Deposit Insurance Corp. (FDIC). Caution:  Don’t confuse a money market deposit account with a money market mutual fund; a money market fund–even one sold by a bank–also is not FDIC insured. It’s possible to experience a loss in a money market fund, though funds typically will go to great lengths to avoid letting their share price drop below the standard $1 per share. Obtain and read a fund’s prospectus (available from the fund) so you can find out about its investment objectives, risks, charges, and expenses, and consider them carefully before investing. Caution:  Be cautious of tax implications here. Tax laws change frequently. Budgeting for regular savings Whether or not you use formal budgeting to manage your financial activities, you can plan to contribute a specific sum regularly to your cash reserve. If you do use a budget, think of the amount you save as a regular expense, similar to other high-priority expenses. Match your savings approach to your needs When implementing a systematic saving plan, begin by selecting an approach that best matches your needs. Example(s): Jane’s bank offers money market deposit accounts whose interest rates are higher than those in her employer’s payroll savings plan. The deposit account’s minimum balance requirement of $2,000 is not a factor for Jane, so the bank option is her best choice. You may find that you need a more aggressive approach to saving than a single-step approach can provide. You can increase your savings rate by adding a new approach to those already in place. Example(s): If the automatic savings that Jane arranged with her bank is insufficient to achieve her goal within her time frame, she can also arrange for dividends from stock shares she inherited to be automatically held in her account instead of being reinvested. She can then move these funds into her cash reserve once a significant sum has been accumulated.
IMPORTANT DISCLOSURESBroadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2014.
1
May

May Monthly Tips

retirement-planning

Retirement Plan Options

There are a variety of retirement plan options available for small business owners and self-employed folks. Each one has its own set of rules. Which option someone picks, and how a particular plan is utilized, can make a big difference in retirement savings. The key is to find the plan that is right for you, and to take advantage of the savings and tax features as much as you can. Retirement plans generally allow for tax-deferred growth of contributions and investment returns (tax free growth for Roth-type plans).

You will also want to clearly define your goals before choosing a plan. For example, do you want:

  • To maximize the amount you can save for your own retirement?
  • A plan funded by employer contributions? Employee contributions? Both?
  • A plan that allows you and your employees to make pretax and/or Roth (after-tax) contributions?
  • The flexibility to skip employer contributions in some years?
  • A plan with the lowest costs? Easiest administration?

Here is a summary of the major retirement plans available to small businesses the self-employed:

SEP IRA

– Allows you to set up an IRA (a “SEP-IRA”) for yourself and each of your eligible employees. You can contribute a uniform percentage of pay for each employee, although you don’t have to make contributions every year, offering some flexibility with varying business conditions. SEP plans provide for employer contributions only. Contributions for 2014 are limited to the lesser of 25% of pay or $52,000 for each eligible employee. Most employers, including those who are self-employed, can establish a SEP.

SEPs have low start-up and operating costs and can be established using an easy two-page form.

Caveat – if you start a SEP IRA as a self-employed person (e.g., S Corp. or LLC owner, or sole proprietor) then later hire employees, you must make contributions for all eligible employees (age 21 or older, employed by you for at least 3 of the last 5 years), as well as yourself…because the money you put into a SEP counts as an “employer” contribution.

SIMPLE IRA

– Available to employers with 100 or fewer employees. Employees can elect to make pretax contributions in 2014 of up to $12,000 ($14,500 if age 50 or older). Employers much either match your employees’ contributions dollar for dollar – up to 3% of each employee’s compensation – or make a fixed contribution of 2% of compensation for each eligible employee.

SIMPLE IRA plans are easy to set up. You fill out a short form to establish a plan and ensure that SIMPLE IRAs are set up for each eligible employee. A financial institution can do much of the paperwork.

401(k)

– The 401(k) plan has become a hugely popular retirement savings vehicle for small businesses and the self-employed. Employees can make pretax and/or Roth (after-tax) contributions in 2014 of up to $17,500 ($23,000 if age 50 or older). Employers can also make contributions – either matching (typically up to a specified percentage of employee pay) or discretionary profit-sharing contributions. Combined employee and employer contributions can’t exceed the lesser of $52,000 (plus an additional $5,500 if age 50 or older) or 100% of eligible employee compensation.

Note that unless a 401(k) plan is a “safe harbor” variety (involving specified, fully-vested percentages of employee pay contributed by employers), somewhat complicated discrimination testing is required each year.

Note: – “Solo” 401(k) plans are available for the self-employed. However, any employees (if eligible) later hired by the self-employed person must be allowed to participate in a 401(k) plan set up under the self-employed person’s/small business owner’s business (similar to SEP-IRA caveat noted above).

Profit-sharing plan

– Typically, only employers contribute to a qualified profit-sharing plan. Contributions are discretionary – there is usually no set amount you (as employer) need to contribute each year, and you have the flexibility to contribute nothing at all in a given year if you so choose (although your contributions must be nondiscriminatory, and “substantial and recurring”). The plan must contain a formula for determining how your contributions are allocated amongst plan participants, and a separate account is established for each participant. Contributions for 2014 can’t exceed the lesser of $52,000 or 100% of employee compensation.

Some varieties of profit-sharing plans can be structured to favor older or highly compensated employees; however, this approach can involve complicated calculations and may require actuarial consulting (though typically less expensive and more flexible than a defined benefit plan).

Defined benefit plans

– Qualified retirement plans that guarantee employees a specified level of benefits at retirement (for example, an annual benefit equal to 30% of final average pay). In 2014, a defined benefit plan can provide an annual benefit of up to $210,000 (or 100% of pay if less). The services of an actuary are generally required, and these types of plans are generally too costly and complex for most small businesses. However, defined benefit plans can be attractive to businesses that have a small group of highly compensated owners who are seeking to contribute as much money as possible on a tax-deferred basis.

I hope you find this information to be helpful. Feel free to forward to anyone who may benefit. Please contact me with any questions, or if you would like to discuss/would like assistance with any personal financial planning topics such as cash flow/budgeting, health care, taxes, insurance, investing, college/retirement planning, estate planning.

1
Mar

March Monthly Tips

spring_tax-planning

Last Minute Tax Planning Tips

Greetings, and Happy Spring (sort of) to everyone! Someday in the hopefully not-too-distant future, the temperature will rise above freezing, snow will melt, flowers will bloom…

But in the meantime, I am pleased to share my Financial Planning Tips email for this month: Last Minute Tax Planning Tips.

As the April 15 tax filing deadline approaches, it can be very advantageous to take last-minute planning steps, and to focus on accuracy and completeness of tax returns and supporting documentation. Below are a few things to consider as you look to wrap up your 2013 taxes:

Money Saving Ideas

Contribute to an IRA or HSA plan

For tax year 2013, you can contribute up to $5,500 ($6,500 if age 50 or older) to an IRA. An IRA can be a great retirement savings vehicle, and anyone can contribute to a traditional IRA. Whether you can contribute to a Roth IRA (where your money grows tax free) depends on your income; contributions by higher income taxpayers to a Roth IRA are limited or not allowed.

Contributions to a traditional IRA may be tax deductible, depending on your income, and whether you participate in an employer’s retirement plan.

NOTE: IRA contributions for 2013 can be made until April 15, 2014.

Health Savings Account (HSA) contributions

If you bought your own health insurance in 2013 and it is HSA-compatible (those of you who attended my Health Care Reform class will know what that means!), you may make a tax-deductible contribution to a HSA account (regardless of how high your income is), which provides tax savings on eligible health care expenses, as well as tax-free growth on earnings (interest, dividends) of HSA funds. 2013 HSA contribution limits are $3,250 for individuals and $6,450 for families. Like IRA contributions, HSA contributions for 2013 can be made until April 15, 2014.

NOTE: The use of HSA accounts should increase significantly in 2014 and beyond because of the Affordable Care Act (“Obamacare”).

Child Care Expenses

If you have kids and you pay for daycare so you can work outside the home, you may be eligible for the Child and Dependent Care Tax Credit. The maximum credit is $3,000 for the first child, or $6,000 for two or more children. The credit amount that any taxpayer is eligible for is highly sensitive to income – the higher your income, the lower the eligible credit. And note with a tax credit, taxes are reduced dollar for dollar, making credits much more valuable than deductions.
So, if you have eligible daycare expenses, don’t miss out on this potentially valuable tax savings benefit!

Check for Donations

For one last-minute tax tip, dig through your bank statements and receipts for any donations you made to charities last year. These donations can really add up, and are often overlooked as tax deductions. Remember, however, that to write off any charitable contributions, you have to itemize. Often, if you own a home, mortgage interest and property taxes (as well as State income taxes) add up to enough to surpass the standard deduction – $6,100 for individuals and $12,200 for a couple married filing jointly in 2013 – and allow you to itemize deductions.

It’s also important to keep good records. Larger charities will typically send you a year-end statement of your deductions, but smaller charities often don’t, so you’ll want to keep a copy of your receipts and/or bank or credit card statements.

 

Check for Accuracy and Reasonableness

Lastly, it is important to actually read through and check your tax returns and supporting schedules for accuracy and reasonableness before filing. Follow up on any errors or anything that doesn’t look right, e.g., your taxes are much higher than the prior year; your deductions seem too low; your Social Security number is incorrect. With most tax returns now prepared using software, these important steps are often overlooked.

If you are not ready to final your final returns by tax day, consider filing an extension. But be careful – to avoid penalties, you will still have to pay by tax day (April 15 for most people) at least the amount of tax you will ultimately owe…so if you don’t have your final tax liability calculated by tax day, consider making a conservative (high) payment with your extension. It’s better to get a refund back later than to get hit with penalties.

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