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Four Ways to Double the Power of Your Tax Refund

The IRS expects that more than 70% of taxpayers will receive a refund in 2017.¹ What you do with a tax refund is up to you, but here are some ideas that may make your refund twice as valuable.

Double your savings

Perhaps you’d like to use your tax refund to start an education fund for your children or grandchildren, contribute to a retirement savings account for yourself, or save for a rainy day. A financial concept known as the Rule of 72 can give you a rough estimate of how long it might take to double what you initially save. Simply divide 72 by the annual rate you hope that your money will earn. For example, if you invest your tax refund and it earns a 6% average annual rate of return, your investment might double in approximately 12 years (72 divided by 6 equals 12).

This hypothetical example of mathematical compounding is used for illustrative purposes only and does not represent the performance of any specific investment. Fees, expenses, and taxes are not considered and would reduce the performance shown if they were included.

Split your refund in two

If stashing your refund away in a savings account or using it to pay bills sounds unappealing, go ahead and splurge on something for yourself. But remember, you don’t necessarily have to spend it all. Instead, you could put half of it toward something practical and spend the other half on something fun.

The IRS makes splitting your refund easy. When you file your income taxes and choose direct deposit for your refund, you can decide to have it deposited among two or even three accounts, in any proportion you want. Qualified accounts include savings and checking accounts, as well as IRAs (except SIMPLE IRAs), Coverdell Education Savings Accounts, health savings accounts, Archer MSAs, and TreasuryDirect® online accounts. To split your refund, you’ll need to fill out IRS Form 8888 when you file your federal return.

Double down on your debt

Using your refund to pay down credit card debt or a loan with a high interest rate could enable you to pay it off early and save on interest charges. The time and money you’ll save depend on your balance, the interest rate, and other factors such as your monthly payment. Here’s a hypothetical example. Let’s say you have a personal loan with an $8,000 balance, a 12% fixed interest rate, and a 24-month repayment term. Your fixed monthly payment is $380. If you were to put a $4,000 refund toward paying down your principal balance, you would be able to pay off your loan in 12 months and save $780 in interest charges over the remaining loan term. Check the terms of any loan you want to prepay, though, to make sure that no prepayment penalty applies.

Be twice as nice to others

Giving to charity has its own rewards, but Uncle Sam may also reward you for gifts you make now when you file your taxes next year. If you itemize, you may be able to deduct contributions made to a qualified charity. You can also help your favorite charity or nonprofit reap double rewards by finding out whether your gift qualifies for a match. With a matching gift program, individuals, corporations, foundations, and employers offer to match gifts the charitable organization receives, usually on a dollar-for-dollar basis. Terms and conditions apply, so contact the charitable organization or your employer’s human resources department to find out more about available matching gift programs.

 

¹IR-2017-01, irs.gov

 

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Five Things to Watch Out for When Buying Long-Term Care Insurance

You’ve researched long-term care insurance (LTCI) and are seriously thinking of buying a policy. Just make sure you’re doing it for the right reasons–don’t be swayed by unsubstantiated sales pitches. Here are some claims you’ll want to think twice about.

A long-term care policy is a great tax write-off

Though it’s true that premiums paid on a tax-qualified LTCI policy can reduce your tax burden, you must itemize deductions to be eligible. When you’re older, perhaps you’ll no longer itemize deductions. And even if you do, LTCI premiums fall under the write-off for medical and dental expenses, which is limited to expenses that exceed 10 percent of your adjusted gross income. So, for example, if your adjusted gross income is $60,000, you are able to deduct only that portion of your unreimbursed medical and dental expenses (including LTCI premiums) that exceeds $6,000.

And there’s another caveat. Even if your LTCI premiums exceed 10 percent of your adjusted gross income, you can’t include all of the premiums in your deduction for medical and dental expenses. Instead, your premiums are deductible according to a sliding scale that depends on your age. So what might look like a great tax write-off at first glance may not be so great after all.

Note: The threshold is 7.5 percent for those age 65 and older until 2017, at which time it increases to 10 percent.

You should buy a policy now so you can lock in the price forever

With most LTCI policies, your age at the time you purchase the policy is a factor in determining your premiums. However, this doesn’t mean that your premiums will stay the same as long as you own the policy. In fact, your premiums can increase if your insurance company establishes a rate increase for everyone in your class, and that increase is approved by the state insurance commissioner.

As a relatively new type of insurance, LTCI may be particularly susceptible to rate increases, because insurance companies lack a sufficient amount of underwriting data to predict the number and size of claims they can expect in the future. And unfortunately for you, if your insurance company does raise your premium, it may not be so simple to take your business elsewhere. Any premium on a new LTCI policy will still be based on your age, which will be higher, and your health, which may be worse. So no matter when you buy your policy, make sure you can afford the premiums both now and in the future.

It doesn’t matter how the policy defines “facility”

Currently, there are no national standards on what constitutes a long-term care facility. This means that an “assisted-living facility” or “adult day-care facility” may mean one thing in a particular policy or state and another thing in a different policy or state. This can pose a problem if you buy the policy in one state and then retire to another state–there may be no facilities in your new state that match the definitions in your policy. To protect yourself, make sure you understand exactly what types of facilities the LTCI policy covers before you buy it.

It’s not necessary to check the financial rating of the insurance company

A large number of unexpected long-term care claims could potentially devastate an insurance company that isn’t financially strong. So before you buy an LTCI policy, it’s always a good idea to check the company’s financial rating by using a rating service like Standard & Poor’s, Moody’s, A. M. Best, or Fitch. You can also check with your state’s insurance department for more specific financial information on particular companies.

You should get rid of the policy you have now and buy a new one

Although in some cases a new LTCI policy might have an attractive added benefit that your old policy doesn’t, red flags should go up if an insurance agent encourages you to ditch your old policy for a new one without providing a clear explanation of the added benefits. For one thing, your premiums are based on your age and your health at the time you purchase the policy, so all other things being equal, your new policy will be more expensive. For another, you run the risk that a pre-existing condition won’t be covered under the new policy.

If you’re unhappy with your current policy, an alternative may be to upgrade it rather than replace it (though the agent earns a larger commission if you replace it). Unfortunately, there are unethical agents who make misleading comparisons of LTCI policies in an attempt to get you to switch policies for no reason other than their commission. If you’re considering switching policies, make sure you understand exactly what the new policy offers, whether this additional coverage is important to you, and what you’re giving up.

 

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Money Confidence Podcast Episode 6: Laid Off, Unemployed And Over 50

Personal Money Trainer, author and speaker, Crystal Oculee, empowers women to get money confident with tips, advice, stories and special guest interviews. From the basics of budgeting to getting to the bottom of retirement vehicles – you’ll get insightful information you can turn into major savings and smart investments!

LISTEN  ON ITUNES: https://itunes.apple.com/us/podcast/ep6-laid-off-unemployed-and-over-50-years-old/id1208123298?i=1000382674804&mt=2

IN THIS EPISODE, YOU’LL LEARN:

  • The blunt facts on layoffs after 50
  • Why it takes longer to find a job after 50
  • Tips on how to avoid prolonged unemployment
  • How to financially prepare for potential layoff/job loss
  • Step by step guide for rebuilding/reinventing after layoff

Don’t Stop Here – Check Out These FREE Tools!  

LINKS AND RESOURCES MENTIONED IN THIS EPISODE:

Surviving Financially When You’re Unemployed http://www.pljincome.com/surviving-financially-youre-unemployed/

Layoffs After 50: You Have Options http://www.pljincome.com/options-if-you-are-laid-off-and-over-50/

Job Change Checklist http://www.pljincome.com/job-change-checklist/

Setting Up a Support Network When You’re Unemployed http://www.pljincome.com/setting-up-a-support-network-when-you-are-unemployed/

Dealing with Periods of Crisis http://www.pljincome.com/dealing-with-periods-of-crisis/

Get to Know Crystal – and Email Her With Questions! (She might answer it on the podcast.)

AskCrystal@PLJincome.com

http://www.pljincome.com/crystal-oculee/

 

If you like our Money Confidence Podcast, be sure to leave a review on iTunes!

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Tax Tips for the Self-Employed

Being self-employed has many advantages — the opportunity to be your own boss and come and go as you please, for example. However, it also comes with unique challenges, especially when it comes to how to handle taxes.

Whether you’re running your own business or thinking about starting one, you’ll want to be aware of the specific tax rules and opportunities that apply to you.

Understand the self-employment tax

When you worked for an employer, payroll taxes to fund Social Security and Medicare were split between you and your employer. Now you must pay a self-employment tax equal to the combined amount that an employee and employer would pay. You must pay this tax if you had net earnings of $400 or more from self-employment.

The self-employment tax rate on net earnings (up to $127,200 in 2017) is 15.3%, with 12.4% going toward Social Security and 2.9% allotted to Medicare. Any amount over the earnings threshold is generally subject only to the Medicare payroll tax.

However, self-employment and wage income above $200,000 is generally subject to a 0.9% additional Medicare tax. (For married individuals filing jointly, the 0.9% additional tax applies to combined self-employment and wage income over $250,000. For married individuals filing separately, the threshold is $125,000.)

If you file Form 1040, Schedule C, as a sole proprietor, independent contractor, or statutory employee, the net income listed on your Schedule C (or Schedule C-EZ) is self-employment income and must be included on Schedule SE, which is filed with your Form 1040.

Schedule SE is used both to calculate self-employment tax and to report the amount of tax owed. You can deduct one-half of the self-employment tax paid (but not any portion of the Medicare surtax) when you compute the self-employment tax on Schedule SE.

Make estimated tax payments on time

When you’re self-employed, you’ll need to make quarterly estimated tax payments (using IRS Form 1040-ES) to cover your federal tax liability. You may have to make state estimated tax payments as well.

Estimated tax payments are generally due each year on the 15th of April, June, September, and January. If you fail to make estimated tax payments on time, you may be subject to penalties, interest, and a large tax bill at the end of the tax year. For more information, see IRS Publication 505, Tax Withholding and Estimated Tax.

Invest in a retirement plan

If you are self-employed, it is up to you and you alone to save sufficient funds for retirement. Investing in a retirement plan can help you save for retirement and also provide numerous tax benefits.

A number of retirement plans are suited for self-employed individuals:

  • SEP IRA plan
  • SIMPLE IRA plan
  • SIMPLE 401(k) plan
  • “Individual” 401(k) plan

The type of retirement plan you choose will depend on your business and specific circumstances. Explore your options and be sure to consider the complexity of each plan.

In addition, if you have employees, you may have to provide retirement benefits for them as well. For more information, consult a tax professional or see IRS Publication 560, Retirement Plans for Small Businesses.

Take advantage of business deductions

If you have your own business, you can deduct some of the costs of starting the business, as well as the current operating costs of running that business. To be deductible, business expenses must be both ordinary (common and accepted in your field of business) and necessary (appropriate and helpful for your business).

Since business deductions will lower your taxable income, you should take advantage of any deductions to which you are entitled. You may be able to deduct a variety of business expenses, such as start-up costs, home office expenses, and office equipment.

Deduct health-care expenses

If you qualify, you may be able to benefit from the self-employed health insurance deduction, which would enable you to deduct up to 100% of the cost of health insurance that you provide for yourself, your spouse, your dependents, and employees.

In addition, if you are enrolled in a high-deductible health plan, you may be able to establish and contribute to a health savings account (HSA), which is a tax-advantaged account into which you can set aside funds to pay qualified medical expenses.

Contributions made to an HSA account are generally tax deductible. (Depending upon the state, HSA contributions may or may not be subject to state taxes.)

Do you need help putting your business fit your overall retirement income plan?

We can help. Set up a call by clicking here or calling (310) 824-1000.

 

 

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Dealing with Periods of Crisis

What is it?

By definition, a crisis is a turning point, a time when you have to make crucial decisions (often suddenly) that will affect your future. Although smart planning is the key to effectively dealing with periods of crisis, you may find yourself suddenly dealing with an unexpected event that you didn’t prepare for, and you wonder what to do next. Whether you’re planning ahead or dealing with a crisis now, take control. There’s no escaping the fact that a crisis is a life-changing event, but how you handle a crisis will, in part, determine whether your life changes for the better or for the worse.

Planning for a future crisis

Identify and manage risk

What future crises are you likely to face? While you hope that the answer to this question is none, that’s an overly optimistic thought. It’s almost inevitable that you will face one crisis or more during your lifetime. While you can’t have a plan to deal with all possible risks, you can plan for events that seem likely and for some events that may seem unlikely. You should, for instance, plan for events such as death, illness, and job loss. You may not, however, have to plan for crisis risks that are unlikely to affect you, such as divorce (if you are single or happily married), or natural disaster (if you live in a non-disaster prone area). Knowing that you have some plan will help you deal with a crisis if you ever do confront one.

Example(s): Jane and Hal built a beach house in Malibu. Their home was swept away in a mudslide, and they spent months replacing their personal possessions, as well as getting duplicates of their birth certificates, insurance policies, and other personal and financial records. Five years later after they had rebuilt their house, a fire swept through town, and their house was destroyed. Fortunately, this time they were ready. They had kept their important records and financial information in a safety deposit box, and had sent boxes of photos to Jane’s mother for safekeeping.

Plan for contingencies

Any plan you make for dealing with a future crisis should be flexible. Part of the stress you feel when confronting a crisis is because crises are unexpected and unpredictable. You won’t know ahead of time how you’ll react and exactly what you’ll have to confront. One good approach is to plan for a worst-case scenario. For instance, if you plan for a period of unemployment that lasts for two months, what will you do if it stretches for six months? If you plan around a six-month period of unemployment, however, you’ll know what to do if it only lasts for two months.

Organize your records

A key component of planning for a crisis is organizing your records and personal papers. This is particularly true if you become sick, incapacitated or die and your loved ones have to assume responsibility for your finances. You will also be able to readily access vital information instead of wasting time and energy trying to find it. At the very least, you’ll want to set up a filing system and give a list of your important documents and advisors to a trusted friend for safekeeping.

Plan your finances

Unless you have significant liquid assets, planning for a crisis means, in large part, planning your finances. Many financial professionals advise their clients to keep an emergency fund equal to at least three months worth of expenses, just in case your income flow stops or your expenses increase. This emergency fund can make a big difference because many things can change in three months. If you don’t have the emergency fund, however, you may have to make hasty decisions regarding your future, such as taking a new job you don’t really want, selling prized personal possessions, or dipping into your college or retirement fund. You should also work up a bare-bones budget that reflects only your basic living expenses. Cut out all luxuries, and determine the least amount of income you need to survive.

Quantify your plan

When you plan for a future crisis, don’t be too general. Instead, be as specific as possible and write down your options. This way, you’ll be less tempted to avoid decisions by thinking you’ll deal with that when the time comes, and you’ll have something concrete to refer to if you must deal with a crisis situation. You’ll feel calmer, too, when you’re facing the crisis. People who live in areas prone to natural disasters often keep emergency kits in their cars or homes in case they need to evacuate in a hurry–a good example of this principle.

Dealing with an immediate crisis

Act, don’t react

Often when facing an immediate crisis, you want to do something, just about anything to solve the crisis, or you want to run away. While both responses are natural, neither is helpful. While you definitely need to do something in a crisis situation besides hide your head in the sand, you shouldn’t do just anything. In fact, it may even be preferable to take no action for a few days to let your emotions cool a bit. Then, act, but don’t react. To the extent possible, collect information and advice and formulate a plan. You may have only hours or days to do this, but some plan is better than none. If you feel that you can’t keep your emotions separate from your actions, ask a friend, relative, or professional to help you sort through your options.

Make a list of things that you need to do

When you have to plan in a hurry, the easiest way is to make a simple list of things you have to do. List as many items as possible. Then, as you do them, you can check them off. This is important because when you’re under stress, you may forget to do important tasks. In addition, a list will help you remember to focus on action, not reaction.

Find help

No one should have to weather a crisis alone. Even if you’re alone in the world or if you don’t want to burden your loved ones with details, there are community resources and individuals (paid and unpaid) who can give you general and specific advice.

Dealing with illness or disability

Harness your emotions

If you find out that you, or someone close to you is sick, hurt, or dying, you’ll probably feel numb, scared, angry, sad, anxious, or even panicked. It’s likely that your initial feelings will change, but you may never accept your situation. You don’t necessarily have to accept illness and its consequences to deal with it, however, and you can control how you react to it. In fact, some people need to feel in control of everything when they become sick because they are unable to control their disease. Remember that this need for control is common, and it can be positive if you use your energy to make unemotional decisions that will affect you and your loved ones.

Find support

When you’re sick or hurt or caring for someone else who is, it’s vital to have a support network. Hopefully, you have close friends and relatives that will help you. But many people don’t come forward to help and even well-intentioned friends and relatives may not give you as much help as you need. Fortunately, there are many community resources available to help you.

Find a way to pay your bills

Paying your bills when you’re sick can be hard because you can’t work at all or perhaps can work only part-time. If you own your own disability insurance policy, check your coverage and contact your insurance company for claims information. Your employer may have group disability insurance that you aren’t aware of that will help you. If you were hurt or became sick from job-related causes, you may be able to collect benefits from workers’ compensation. If your disability is expected to last a year or more (or even result in your death), you may be eligible for Social Security disability benefits. But if you have no hope of receiving disability insurance benefits, you’ll have to cut your expenses and rely on your savings or spousal income. If you have limited income, you may be able to qualify for Supplemental Security Income (SSI) benefits or other government programs.

Determine how the illness will affect your job

If you work and become sick or get hurt, or if you have to care for someone else who is ill, you’re probably worried about how you’re going to keep your job. First, talk to your employer about what benefits you are entitled to in the event you are disabled. Your employer may be used to dealing with situations like yours and may have programs in place that you don’t know about. Next, be aware that if you work for a company that employs 50 or more people, you may be entitled to take up to 12 weeks unpaid leave under the Family and Medical Leave Act of 1993 if you need time off to recuperate or to care for someone else.

Example(s): When her mother was seriously injured in a car crash, Marcy wanted to fly to Dallas to take care of her. Because of the Family and Medical Leave Act of 1993, Marcy was able to take eight weeks of unpaid leave from her job, and she was restored to her former position at the same level of pay and benefits when she returned to work.

Plan for the future

Planning for the future is vital. When you’re sick, you suddenly realize the limits of your own mortality and your priorities may become clearer. It’s a good idea at this point to set new priorities and goals for the future. If you’re terminally ill, this step is critical. You may also need to quickly revise your financial and estate plans. Even if you expect to recover from your illness, you’ll benefit from reviewing your insurance coverage and your financial plans and by applying lessons learned from your illness to planning for the future.

Dealing with unemployment

Deal with your emotions

When you lose your job (unless you’ve quit), you’re usually angry and discouraged. It’s natural if your self-esteem is ebbing, and you may be tempted to run away from your problem instead of facing it. You may be tempted to make a drastic career change, start your own business, or continue your education. Although doing one of these things may be right for you, be careful. You may be reacting emotionally rather than logically. Following your dream can be wonderful, but it can also be a way to escape from the crisis that confronts you. Check out your options carefully, and don’t forget that finding a new job is one of them.
When Lou was 53, he was laid off from the automobile manufacturing plant where he had worked for 18 years. A month later while still depressed, Lou decided to take his life savings and invest in his dream. Six months later he opened Lou’s Lakeside Restaurant. Unfortunately, Lou’s restaurant failed because he hadn’t taken the time he needed to plan his business or to learn about running a restaurant. He lost all his money.

Find support

If you’re married, you may be tempted to rely upon your spouse for support, and he or she is probably happy to give it to you. Remember, though, the most loving spouse in the world can’t solve all your problems and is probably more anxious over your job loss than you realize. Share your burden with your friends, a support group, a career counselor, or a financial professional.

Find a way to pay your bills

If you’ve lost your job through a layoff or because you were fired, immediately contact your state’s unemployment office. You may be able to apply by phone or by mail, and you may receive benefits quickly once your application is verified. You’ll also need to find ways to cut expenses or increase your income. If you know that you are losing your job a few weeks or months before it happens, you’ll have time to restructure your debt, take a part-time job to fund your future unemployment, or borrow against your savings, home, or investments. If your job loss is sudden, however, you may need to rely upon your savings and find ways to reduce your payments on bills.

Find a new job

One of the first things on your mind when you lose your job is finding another one. You may be surprised at how difficult this is, particularly if you’ve worked at the same job for a long time. If you’ve dealt with unemployment before, you probably know the drill: update your resume, check the want ads, begin to network, etc. Even if you’re an experienced job seeker, there are resources that can help you.

Dealing with the death of a family member

When your spouse or a family member has died, you may need to plan the funeral, organize your finances, and claim life insurance benefits. You may need to serve as executor of your loved one’s estate, and you may need to be familiar with estate settlement procedures.