Season of Giving
It is already widely known that the passage of the Tax Cuts and Jobs Act means fewer taxpayers will be itemizing deductions on their tax returns early next year. This means that I will not be spending a lot of time over the next month or so talking about last-minute moves one can make to improve your tax picture. For many, those options have been decrease. This also unfortunately means that I will not be steering as many people to make some late-year charitable donations and then enjoy the tax benefit.
Hopefully, most thought of that latter benefit as a corollary bonus and not the main impetus behind making those donations, for they are still needed.
Giving Tuesday just passed this week, and we are in the time of year when donations reach high levels as feelings of goodwill and hopes of peace drive many to help others. It is not the only time we have had those thoughts this year, though, as recovering from traumatic events like hurricanes and wildfires also necessitated leaning on the generosity of others.
And when you look at the amount of money that can be raised for such wonderful and worthy causes, it can be very heartening. So even if there is a larger chance that making such donations may no longer affect your tax picture, I still want to express the hope that it will not affect your inclination to give if you have the ability to do so.
At the same time, though, there are scammers out there trying to take advantage of this goodwill. It seems that every time a disaster comes along, there are stories of fraudulent people and organizations that pop up to collect money and not pass it along to those they were claiming to help. That is only bound to happen in this more general season of giving, too.
Although it may feel bad to question someone who is claiming to be doing a selfless act, it can do you good to implement a little due diligence and look up the credentials of an organization before making a donation. Sure, there are some large charities that we all know about and trust, but many smaller ones are also doing great work. You may support their mission and just not have known they existed.
So just to ensure that you can feel confident about where your money is going, the IRS offers a Tax Exempt Organization Search online. It provides information on an organization’s tax status, allowing you to confirm it is a tax-exempt entity and eligible to receive tax-deductible charitable contributions. It is an easy check at legitimacy, for if it is a legitimate entity, there is no reason why it would not have formally received tax-exempt status through the agency.
And as always, remember that if something feels fishy, it is worth investigating before you commit to anything. But when things don’t feel fishy, they can instead feel great and wonderful, so please commit to helping there.
Connect to Us ~ Facebook ~ Twitter
I promise I understand that this is a time when you don’t want to read much, so that this will be a short blog post. I also understand, though, if you want to pretend to take a long time to read it, for no one wants to work much this week and you can use it to kill time.
But I did want to talk a little bit about the concept of Thanksgiving. It is a time when we get to count the blessings in our life, often including wonderful things like our friends and family, but not always including work. This makes sense as we tend to revel in the things we choose to do and not the things that we often feel we have to do.
I, however, am very thankful for the work that I do.
And that is because of you, those of you who I get to serve as clients and those who think enough about what I have to say to read those words.
My job comes with the luxury of getting a first-hand view of the benefits that our work does for our clients. Whether it’s just clean, easy bookkeeping or guidance toward ever-growing profits, it is heartening to work with good people that I admire and to help good things happen for them. A lot of that work has felt extra special this year, too, as we prepare together to navigate a new tax landscape.
So this seemed an appropriate time to give a simple thanks for that opportunity.
Now get back to work … or at least make it look like you did.
Connect to Us ~ Facebook ~ Twitter
Tips and Taxes
It is hard to believe that it has been almost a year since the Tax Cuts and Jobs Act was passed. Because of that, much of what has been discussed in tax circles throughout 2018 has been new rules. Today, though, I think it is worth giving some time to an issue that is a perpetual one – tips.
I think a big part of why this is such an endearing question is because those who make tips tend to see them as separate from their wages. And this makes a lot of sense - they are received in a different way, aren’t always received in a paycheck, and seem to be earned from a customer instead of an employer. In the end, though, the disappointing answer to how tips are handled is that they also are subject to taxes.
I am now going to be even more disappointing for this taxation is supposed to happen no matter how the tips are received. Whether they are received in cash, part of a credit card transaction, or divvied up with coworkers in a sharing arrangement, they are all supposed to be reported and subject to tax withholding.
Legally, employees are supposed to report cash tips received to their employer by the 10th of the following month. That amount is then to be recorded as part of one’s pay so that the appropriate taxes can be withheld.
But yes, I knowingly prefaced the last paragraph with “legally.” I’m not going to be naïve enough to pretend that some do not report all of their tips, or that there possibly unspoken arrangements in an establishment to not speak of all the tips that come through. So if some tips have never been reported, that is out of our hands here when tax time comes. I am just making it my job to speak of the legal obligations, what you choose to do with that information is in your hands. But yes, when cash is simply handed over, reporting can be tricky and spotty.
When these tips are reported, they are subject to income tax, employee Social Security tax, and employee Medicare tax. It is quite understandable how it can feel it like a hit when you have to pay into multiple areas out of money that already reached your hand. If you keep up with reporting this month by month, though, you can learn to estimate how it will affect your paycheck. Possibly more importantly, though, is that you the regular reporting keeps there from being any big surprises come tax reporting time. When things are done monthly, payments are being made, preventing large ones being needed come April.
The rules on tips can get a little more complicated when you reach higher numbers, but I will not discuss those here. Those don’t tend to be the questions I get when it comes to this area anyway. Instead, it is almost always about whether tips are taxed at all, and now you know the answer.
Connect to Us ~ Facebook ~ Twitter
No matter what you do for a living, all of us have some sort of “retirement” plan in our minds. It might be part-time consulting in your field for a premium or it could be retiring to Lake Havasu and acting like your grandparents did, but planning is key to realizing whatever dream you have for retirement. There are tons of resources on how to plan that, but lets look at the hard costs involved and how you might be able to effectively calculate how big your nest egg needs to be.
According to data from the Bureau of Labor Statistics (BLS), here’s a breakdown of the biggest average annual expenses among older households.
Though it might be intimidating at first, there are some things you can do now to get a rough estimate of what you will need in retirement — even if there are still some unknowns.
1. Take a look at your budget.
This step is possibly the most tedious, but if you get through this step, the others will be a breeze!
If you already have a budget, this part will be much easier, since you’ll be basing your future spending on your current spending. But if you don’t yet have a budget, take your current expenses from the last month and record them, either on paper or an Excel spreadsheet.
For variable expenses, such as an electricity bill, use the average of a year’s bills — so add up all the bills, divide by 12 and use that number as your estimate.
For expenses that don’t require payment every month, such as an auto insurance premium, divide up the amount to determine approximately how much you’d be spending every month.
The great thing is, some expenses, such as a mortgage or other debts like student loans, should disappear by the time retirement hits!
2. Figure out how much you’ll spend in retirement.
In another column on the spreadsheet, write down what you think your budget will be in retirement, minus paid off debts. But be realistic — there may be fun items you’d like to create a budget for, such as travel, golf, eating out, or ballroom dance lessons. Once you’ve added up these expenses along with your monthly bills, you’ll have an estimate you can use to plan out what you’ll need in retirement.
But, that’s not all — you’ll also need to use something called projected spending to calculate your estimated spending in retirement.
How projected spending works
Projected spending multiplies your current income by a certain percentage to determine how much you’d need in retirement. Though this method is not completely accurate, it does give you a good estimate to begin with when you start thinking about your retirement. Most often, the 80% rule is used, which says you should have a goal of replacing 80% of your pre-retirement income — or your average income you expect to earn 10 years before retirement.
If you’d rather be on the more conservative side when it comes to spending, use the 90% rule — or, if you think you’ll definitely spend much less in retirement, calculate 70% of your pre-retirement income. Adding in social security can move the percentage down more. But keep in mind — this number is just an estimate to get you started.
The 4% rule. Once you’re in retirement and you’ve got a bunch of money stashed away, you’ll want to keep something in mind: The 4% rule. The 4% rule maintains that you can safely withdraw 4% of your retirement savings each year without running out of money.
Here’s a sample calculation to put this idea into perspective. Say you have retirement savings of $1 million, and your projected spending has been calculated to be around $3,000 a month. Using the 4% rule, you could safely withdraw $40,000 per year from your retirement account, giving you about $3,333 per month to live on. Since you may also receive other supplemental retirement income such as Social Security or pension payments, you’d be well above the $3,000 per month needed to fund your retirement.
3. Find out if you’re on track.
But, how can you know if you’re on track NOW for retirement? If you want to figure out if you’re on track now for having the right amount in your retirement account no matter your age, there are several simple ways to get a good idea.
Consider the benchmarks
Many investment firms and financial institutions have done research to determine how much to have saved at a particular age, depending on spending and income.
JPMorgan Asset Management Team reports that someone age 40 with an annual household income of $100,000 should have 2.6 times that amount put away for retirement, and by age 60, that multiple should be 7.3.
If you’re not there, understand that there are multiple ways to get there, not just in a 401(k). Roth IRAs, traditional IRAs, and even Whole Life Insurance policies can all pay out the types of cash you’ll likely need after retirement. Can my team help you with that? Not specifically, but we can help you to craft a strategy that puts more money in your pocket to be able to invest – and we also know the right people to help you invest it.
Give us a call and let’s keep you on track!
By the way, we love, love, LOVE spreadsheets! However, if you want to get fancy… try a tool like YNAB (You Need A Budget – check it out here - http://bit.ly/YNAB4YOU – we will both get a free month when you try it!).
Is It Time to Create a New Company?
Most entrepreneurs I’ve worked with have the challenge of always wanting to build the next thing and sometimes neglecting the current business. But are there hints for when it’s time to build a new idea into a new venture?
Here are some ways to think about when it’s time to launch a new dream, even if the old one is doing pretty good (or the old one is someone else’s dream)…
1. You've realized your dream is worth more than your 401k.
There are numerous reasons people choose to go down the corporate road: They enjoy working toward a common goal, love their position, have an amazing salary, perks galore and benefits. People like knowing where their next paycheck is coming from, making security a huge attraction to this lifestyle.
But, if you’re like me, there is something else driving you, you have an inner need to help, to grow, to move. For those of us who are less risk averse and willing to take a chance on your dream, it may be time to think about the world of entrepreneurship.
2. You can't stop thinking about your potential startup.
If you can't stop thinking about your dream entrepreneurial endeavor enough to focus on the daily demands of your current one, you may be ready to move on. You aren't doing anyone a favor staying put, as an employer doesn't usually want less than 100 percent of your energy.
3. Your support system is in place.
You're ready for entrepreneurship if you have a strong support system. Let's not romanticize starting a business. It is one of the most stressful things that a person can do. Make sure your friends and family know you’re jumping into something that will take up the vast majority of your time. Also, have a set of mentors and advisers on your side, so you can reach out to them when times get rough. Entrepreneurship is a lonely road and you will need those people that know what you are going through because they have been there, also.
4. You see the problems that no one else can spot.
You pay attention to details and are able to see opportunities when others don't. If you’re constantly coming up with innovative ways to change your employer's business but no one is listening, it may be time to take what you learned and see if you can do it better.
Keep in mind that your idea may already be out there, so do adequate research. Also, talk to others to see if they are feeling your same pain points, and make sure there is a need for your startup concept. If so, take steps to turn your idea into a reality.
5. You're willing to live below your means for a while.
One bonus about working at an established business is you have a paycheck. That may not be the case when you venture out on your own. Entrepreneurship is about playing the long game. This means if your business hits a wall, then you’re going to have to be willing to take the biggest financial hit. This can be scary, so plan for it in advance. After years of ups and downs, I adopted the “Profit First” method of cash accounting to help the cash flow of my business ensure that I can take a paycheck and support my family through the good and not so good days.
No matter what your current situation is – corporate or simply successful small business owner – there comes a time for many of us when we have to think about moving forward into uncharted territory. Not to worry, if you’re thinking about building out a new idea, my team and I can help you figure it all out based on your current economic strategy and your future one!