Category: Smart Money

Top 6 Strategies to Protect Your Income from Taxes

Shocked at the difference between your gross and net incomes? Here’s how to soften the blow.

When you get your paycheck, are you looking closely at the itemized list of all the things that are taken out automatically? Typically a paystub shows that nice big gross income amount at the top, and then as you move down the page you’ll notice that your actual net income is significantly smaller after all the taxes and other things have been taken out.

All of the money you earn from your work gets taxed in many ways, and taxes are difficult to legally avoid. However, there are strategies you can apply to help alleviate the high number that is taken from you each pay period. Below are six top ways to protect your income from taxes.

By Barbara A Friedberg

Municipal Bonds
If you have savings or investments, there are ways to avoid taxes on the income from those investments. Most municipal bonds are federally tax-free. When you buy an individual municipal bond or a municipal bond fund from your own state, then the interest payments from that income are also tax-free. The downside of municipal bonds may be the lower income than from comparable taxable bonds. Find out by checking the bond’s tax equivalent yield.

Long-Term Capital Gains
Investing can be an important tool in growing your long-term wealth. An additional benefit from investing in stocks, bonds and real estate is the favorable tax treatments for long-term capital gains. When you invest in mutual funds and individual financial assets, own them for longer than one year and then subsequently sell for a profit, you pay a lower capital gains rate on the money earned. The rate may be as low as zero for those in the 10% or 15% tax bracket. This is an excellent strategy to both improve your financial situation and your tax liability.

Start a Business
In addition to creating additional income, a side business offers many tax advantages. When used in the course of your daily business, many expenses can be deducted from your income, reducing your total tax obligation. Especially important tax deductions are health insurance premiums. Also, if you follow the IRS guidelines, you may deduct part of your home expenses with the home office deduction. The portion of your utilities and Internet used in the business may also be deducted from your income.

Max Out Workplace Retirement Accounts
For 2018, you can reduce your taxable income by $18,500 when contributing to a 401(k) plan or 403(b). If you’re age 50 or older, you’re allowed to add $6,000 to the basic workplace retirement plan contribution. Thus, if you earn $100,000 and contribute $18,000 to a 401(k), then only $82,000 of your income will be taxable.

There are still tax breaks if you don’t have a 401(k) or 403(b) at work. Contribute up to $5,500 ($6,500 if you’re over age 50) to an IRA. Depending upon your income, you may be able to deduct some or all of this contribution from your taxable income.

Go for a Health Savings Account (HSA)
With the preponderance of high deductible health insurance plans, an HSA can also reduce taxes. Similar to a 401(k), you contribute money before taxes to an HSA. In 2018, the maximum contribution amount is $3,450 for an individual and $6,900 for a family. This money then grows without the requirement to pay tax on the earnings. An extra tax benefit of an HSA is that when used to pay for qualified medical expenses, withdrawals aren’t taxed either.

Get IRS Credit
There are many IRS tax credits that reduce your taxes dollar-for-dollar. For example, the earned income credit helps lower-income taxpayers reduce their tax bills. The American Opportunity Tax Credit offers a maximum of $2,500 per year for eligible students. There is the saver’s credit for moderate and lower-income individuals looking to save for retirement. Lastly, the Child and Dependent Care Credit helps offset the expenses of raising your children.

The Bottom Line
A few hours spent at IRS.gov and scouring the internet for tax savings may yield hundreds and even thousands of dollars in tax savings. Although it’s important to pay all that you legally owe to Uncle Sam, you’re not required to pay any extra. Researching the tips above should help.

So which in what ways are you protecting your income from taxes? Let us know in the comments below, and be sure to visit our Services page to see how we can help you in your path to financial success!

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Millennials Can Win The Holidays Without Going Broke!

Do you have a holiday budget in place this year?

Holiday shopping. For some, it’s thrilling to spend hours going from store to store, painstakingly searching for that perfect gift for everyone on your list. For others, the thought of holiday shopping brings on a lot of uncertainty and anxiety.

The worry probably comes into play when you don’t have an actual firm budget in place to keep your gift spending in check. I for one know it’s so easy to get overzealous and spend beyond your means when shopping for gifts for others. This year, though, I have a gift budget in place and I’m sticking to it! The article below will help you, my fellow millennials, to do the same.

By Jill Cornfield

Plan now and avoid buyer’s remorse.

That’s the advice from personal finance website Money Under 30, which found millennials are less price-sensitive and twice as likely as the general population not to know their credit scores.

The site asked 612 adults, including 159 millennials, in April about their finances and what they thought about their own financial futures.

Overall, the survey confirmed millennials lack much of the basic knowledge a person needs to have healthy financial life, says Yoni Dayan, senior editor at Money Under 30.

A third don’t know their credit scores. Half aren’t contributing to a retirement savings plan, and 10 percent don’t even know whether they’re saving for retirement.

Source: Money Under 30

Dayan calls it an interesting contrast that, while millennials are more dissatisfied with their finances than other generations, they’re also much more optimistic.

Now that the holiday season is coming up, they are also perfectly positioned for financial disaster, given their precarious finances.

Americans, in general, took on more than $1,000 in holiday debt last year – and three-quarters said it was because they didn’t budget successfully for the season.

This year’s holiday spending is slated to top $1 trillion for the first time. In other words, the potential for taking on debt is higher than ever, especially for younger people.

Source: Money Under 30

For younger consumers, convenience rules, and Amazon shares part of the blame for making millennials less sensitive to prices.

“We order almost everything via Amazon Prime, with full knowledge that we could get the items cheaper with a bit more effort, but it’s just so easy to order it and expect it in two days or less,” said Priya Malani, a founding partner at financial planning firm Stash Wealth and herself a millennial.

Another danger of e-commerce: drunk shopping. Yes, that’s a thing, and millennials are the generation most likely to shop under the influence, according to Finder.com. Sixty-one percent of millennials admit to this. In comparison, just about half of Gen Xers shop online after they’ve had a few.

“Combined with our ‘you only live once’ [YOLO] mentality, it’s no surprise that we’re poised to be the biggest spenders around the holidays,” Malani said.

‘Yikes, who’s paying for this?’
Surprised by the holidays? Just kind of snuck up on you? Many people take this as a cue to start racking up some hefty credit card charges, as if they have no choice in the matter. “Then January rolls around, and we’re like, ‘Yikes, who’s paying for this?’” Malani said.

Set realistic goals
Millennial money regret usually results from not planning— and last-minute planning isn’t really planning at all.

Malani recommends automating holiday spending with a small, monthly amount. “When the holidays roll around, they can put all expenses on their credit cards to hack those rewards points,” she said. “They know they have the funds to pay off the bill in full.”

How to do it: Figure out how much you spend or would like to spend. Set up your savings account to automate one-twelfth into a designated account. “The money accumulates all year, and you can blow it guilt-free at the holidays,” Malani said.

Make a list, check it twice. It seems obvious, but every person and animal you plan to buy for needs to be on that list. “Put a dollar value by their name and add up all those numbers,” Malani said. If you don’t have that money now or you won’t have the amount saved up, then you’re making a plan you cannot afford. “Hashtag, harsh but true,” Malani said.

What’s in your wallet?
Don’t spend money you don’t have. “Instead of thinking of your credit card as free money, think of it as a smarter way to spend the money you already have,” Malani said.

Never charge more than you can pay off when the bill comes due.

Treat your credit card like a debit card that pulls the money out of your account once a month. Would your family or friends really want you to go into credit card debt to buy them a gift?

Think outside the gift box
Some gifts, such as a Netflix membership, can be shared by several people in your family.

People who live far from their families might consider attending a family gathering. “The whole ‘your-presence-is-a-present thing,’” Malani said.

Try a gift exchange so you buy one gift versus gifts for everyone. Secret Santa arrangements are popular. Handmade edibles and DIY gifts are also a welcome change from the usual store-bought items.

So how will you be keeping your holiday gift spending in check this year? Leave a comment and let us know!

Read the full article here.

5 Things You Can Do In Your 30s To Save Your Financial Life

Consider these tips for maintaining financial health in your 30s and beyond.

It’s important to monitor your finances closely no matter what stage of life you’re in. I personally check my bank account and credit score every few days. Although some might say that’s overkill, I say it’s better to keep a firm grasp on your financial health and know your money like the back of your hand! This way, you’ll be less susceptible to financial setbacks and mishaps.

No matter how often you monitor your finances, you should always be prepared for a potential financial setback. First, you should identify the most common hurdles you might encounter for your specific age. If you’re 30-something, you might worry about losing your job or perhaps not earning enough money in your current career.

Once you’ve identified those hurdles, check out the tips below to safeguard your financial life.

By Jill Cornfield

1. Be prepared
“It’s no surprise that job stability can create some anxiety, said Marcy Keckler, vice president of financial advice strategy at Ameriprise.

Shore up your financial situation with an emergency fund. Keckler recommends having at least three to six months’ worth of living expenses saved up. It doesn’t need to be in cash, but use an account that would allow quick access to the funds.

“Most people aren’t as secure as they think,” said Rob Cirrotti, head of investments and managed account solutions for Pershing. “Make sure you continue thinking about ways to develop and grow.” Stay at the top of your game, career-wise, and consider taking a new course or two, or learning a new skill.

Budgeting also doesn’t get enough attention, Cirrotti said. Few people have an actual budget, which can do so many things: It helps you reduce debt and build a rainy-day fund so you can deal with unexpected events, and it’s a great way to get some discipline.

2. Diversify, diversify, diversify
Your top priority? Saving for retirement. But be sure your investments are diversified.

A diverse asset allocation — your investment mix — means you’ll be able to take advantage of different market conditions, Keckler says.

“Diversification can also help you feel confident that your investments are prepared to weather the storm in times of market volatility,” Keckler said. “You’ll want to keep your short-term and long-term financial goals in mind.”

Learn to balance by keeping enough funds and savings on hand to live the way you want to while stashing enough so you can do that in the future.

3. Risky business
Remember, you’ve got time on your side.

Risk is really about personal preference but at this age, Keckler says, it’s OK to have some investments that lean toward being more aggressive with greater opportunity to grow over time.

Only when you’re nearing retirement age and want to rely on income from investments should you think about revisiting your tolerance for risk. That’s when you might potentially think about dialing down the risk level in your portfolio.

4. Hands off your 401(k)
That retirement savings account is for your future retirement.

“If you borrow from it or take money out early it defeats this purpose,” Keckler said.

Need to pay for education, a house or car? You can take out a loan for those expenses, but there is no loan for retirement.

A quarter of people in their 30s who borrowed against their 401(k) said they did it to buy a house, according to Keckler. Another quarter borrowed to pay down debt. “If you need to borrow from your retirement savings for a purchase, it could be a sign that you are not living within your means,” Keckler said.

Borrowing from your retirement account means missing out on the chance to make that money grow, setting back your savings efforts. If you’re unable to repay the loan, it will be treated as a withdrawal. You’ll have to pay income tax on it, as well as the penalty for the early withdrawal.

5. Don’t sweat the stock market
If you’ve been paying attention to the stock market this month, you may have noticed some volatility — in fact, “quite a bit,” as Keckler put it, “which people in their 30s might not have experienced if they started investing during the bull market.”

Keep calm. “During market swings, always keep your long-term plan in mind,” Keckler said.

Don’t let your emotions push you to make decisions in the heat of the moment. “That’s when many people end up locking in losses,” Keckler said.

Instead, look for help. Consult a financial professional or a trusted source of financial information or help in sticking to your goals and developing a solid plan.

Consider what products might protect you, from life and disability income insurance to making sure you have adequate health insurance. “Review your auto and home insurance coverage, and consider renter’s insurance if you don’t own your own home,” Keckler said.

So, how have you applied these tips to your finances? We want to hear from you in the comments below.

Read the full article here.