How much do you need to retire?

Most Americans simply don’t save enough for retirement.

Nearly half (45 percent) of working-age households don’t have any retirement assets, according to the National Institute on Retirement Security. Of those working-age households close to retirement (age 55 and older) nearly two-thirds have less than one year’s worth of their annual salary in retirement savings.

The goal

So how much do you actually need to retire comfortably? There are many variables to consider, including retirement age, available pensions, and investment return assumptions. Mutual fund broker, Fidelity, estimates you need enough savings to replace roughly 85 percent of your pre-retirement income. Many experts estimate you will have to save between 8 and 12 times your pre-retirement annual income to reach this goal.

But the amount you need depends on when you plan to retire. For example, Fidelity estimates a person planning on retiring at age 65 will need to save 12 times their pre-retirement income. By delaying retirement by just five years, to age 70, your savings estimate lowers to 8 times your annual income.

This may be why an increasing number of Americans plan on delaying retirement or working during retirement. A majority (51 percent) of workers surveyed in 2016 by the Transamerica Center for Retirement Studies said they plan on working during retirement.

Some ideas to consider now

These are sobering realities, but there are actions you can take to be in a better position during your golden years.

  1. Contribute as much as possible every year to your employer provided retirement plans. With a 401(k) pretax retirement plan, for instance, up to $18,000 can be contributed each year, or $24,000 if you are age 50 or older.
  2. Contribute as much as possible to a Traditional or Roth IRA every year, up to the $5,500 maximum, or $6,500 if you are age 50 or older.
  3. If available, contribute as much as possible to a health savings account (HSA), which can be used to offset medical expenses, up to $3,400 a year, or $4,400 if you are age 55 or older.

If you’d like to review your tax-advantaged retirement strategy, call to schedule an appointment.

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Cosigning a loan can hurt financially and emotionally

Cosigning a loan for a friend or family member may seem like a good way to help your loved one establish credit or get back on track financially. But be sure to use your head as well as your heart to make the decision. Why? When you agree to cosign a loan, you become equally responsible for the debt. That means you will have to make payments and satisfy the loan if your friend or family member doesn’t or can’t. A recent survey by an online credit card marketplace shows that 38 percent of cosigners had to repay some or all of a cosigned loan. Another financial impact: cosigning the loan negatively affected the credit score of 28 percent of cosigners because the other person didn’t make payments or made them late. Cosigning has an emotional side, too. According to the survey, 26 percent of cosigners said the experience damaged the relationship with the person they were trying to help.

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College or retirement – Which should you fund first?

Saving for your children’s education or your own retirement – how do you decide which is more important? A typical retirement will generally last longer and cost more than your child’s education. If you cannot adequately fund both, maximize your retirement savings first. There are far more options for your child to finance his or her college education than there are for you to fund your retirement.

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Check your credit score

If you haven’t checked your credit report lately, this may be the time. Wrong or old information on your report can affect your credit score – and not in a good way.

Your credit score helps lenders determine your credit-worthiness and can impact the interest rate you pay on loans, or even whether you can obtain a loan at all. The score reflects the information on your credit record.

Under a recent agreement, credit-reporting agencies are required to make changes to policies for handling errors, disputes, and unpaid medical bills. The changes will take effect over the next three years.

You’re entitled to receive a free credit report every twelve months from the major reporting agencies. Request a copy now so you can begin the process of clearing up discrepancies and perhaps improving your credit score.

How credit scores work

If you’re applying for a car loan, a home mortgage, or a credit card to finance your next vacation, banks and other institutions will likely base their lending decision, at least in part, on your credit score. The higher the score (other things being equal), the more money lenders will offer and the lower the interest rate they’ll charge.

Credit scores are a relatively new invention. As credit cards became popular in the 1960s, card issuers needed a way to determine whether an applicant was likely to pay his or her bill on time. Although lenders used various means to assess that risk, their methods tended to be inconsistent and sometimes inaccurate. Around the same time, Congress started cracking down on discriminatory lending practices by passing several pieces of legislation that reined in lenders and collection agents.

Fair Isaac and Company developed a risk-scoring model in the 1980s. This model was widely adopted by credit issuers and banks throughout the United States and the FICO score was born. That score, which ranges from 300 to 800, is based on five factors that are considered good predictors of risk.

* Payment history (35%). This factor is given the greatest weight. Lenders want to know how many bills you’ve paid late and how many were sent to collection. The more recent the problems, the greater the negative impact on your score.

* Outstanding debt (30%). Rule of thumb: Keep your credit card balances at 25% or less of their limits.

* Length of time you’ve had credit (15%). In general, a longer credit history will generate a higher overall score.

* New credit (10%). Opening several new accounts tends to impact your score negatively in the short term.

* Types of credit (10%). Having experience with several types of credit – revolving credit, installment loans, mortgages – can push your score upward.

The FICO score isn’t the only score used by lenders, nor is it the only factor they consider. In fact, some lenders may use a different scoring model altogether. Nevertheless, by keeping a watchful eye on the above five factors, you can certainly increase your odds of obtaining credit at reasonable interest rates. What’s the best way to monitor your credit? Examine your credit report regularly and quickly resolve any inaccuracies.

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Tax-Deductible Expenses: Are You Recording All of Them?

2017 income tax preparation seems a long way off. Make it easier by tracking all the deductions you can take.

You’ve heard it said before: Tax planning should be a year-round process. It’s so true. Your life will be a lot easier early next year when all your tax forms start rolling in.

Forms like 1099s and W-2s do a lot of the tracking for you. You only need to transfer data over to your IRS tax forms and schedules. But what about the daily stuff, the expenses you incur as a part of your workday that no one else is documenting? There are a lot of tax-deductible costs that can really add up when it’s time to file.

The IRS has two criteria for evaluating the validity of business expenses. First, is it ordinary? Is it something that other companies in your trade or profession would commonly buy? Second, is it necessary? Is it “…helpful and appropriate?”

Warning: Some expenses that you think might be deductible are not. Obviously, you can’t claim the costs of personal items. The IRS specifies two other types of expenses that can’t be deducted: Capital Expenses and those used the calculate the Cost of Goods Sold. Questions? Ask us.

 TaxPlan 0817(1)

Pulling together all that numbers required for the IRS Schedule C can be challenging. Let us know if you have questions.

Here are some examples of expenses that you might not consider, but which should be recorded as they occur so you don’t forget about them come tax time.

Advertising and promotion

Some of these expenses are obvious. For example, you might report printing costs for brochures, ad space bought, and postage for mailers and other business correspondence. But there’s much more that fits into this category. Think about everything you do that helps promote your business, like expenses related to:

  • Business cards
  • Team sponsorships
  • Your website (including startup and maintenance fees)
  • Graphic design
  • Workshops/webinars

Insurance

Do you have any kind of business insurance, like liability or malpractice? Your premiums are deductible.

Car and truck expenses

Understandably, you can only deduct expenses for miles driven for business purposes. If you have a vehicle—either owned or leased—that you also use for personal driving part of the time, you’ll need to track those two separately.

There are two options for calculating business mileage: Actual Expenses and Standard TaxPlan 0817(2)Mileage. To calculate the latter, you’d multiple the number of business miles driven by 53.5 cents for tax year 2017, then add tolls and parking fees. The Actual Expense method is more complicated; it involves many costs, and recognizes depreciation of the vehicle. Check with us if you’re planning to claim expenses for a car or truck, as there are additional rules governing this deduction.

Postage and office supplies

Yes, they’re deductible if you need them for your business.

Meals and entertainment

Familiarize yourself with the rules for this one. They’re complicated, and the IRS looks closely at such deductions.

Business use of your home

Ditto. There are all kinds of regulations, restrictions, and exceptions here, even if you use the simplified method that the IRS introduced a few years ago. Further, the home office deduction can be an audit red flag.

The rules are very specific and very rigid. For example, even if you use your home’s land line for business, you can’t deduct it. Add another line for business, and you can.

Professional and legal fees

If you pay an individual or firm for services provided to help you operate your business, those fees are often deductible. This includes lawyers, accountants, and tax preparers, of course, but as always, there are exceptions. You can’t usually, for example, deduct attorneys’ fees if you were getting legal help to buy business assets.

Dealing with Details

As you can see, there are many allowable business expenses that require meticulous recordkeeping. You can, of course, do this on paper or in a spreadsheet. There are cloud-based applications specifically designed for this purpose. If you’re interested in checking these out, let us know. We’re always available to help you plan for future tax filings.

 

 

 

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Get to know these tax-saving terms

As you begin to think about scheduling your midyear tax planning appointment, refresh your memory on the meanings of terms that can save you money. Here are three.

  • Exclusions are items that would generally be included on your return, but are specifically excluded by a tax law provision. For example, gifts and inheritances you receive are excluded from your income – you simply don’t report them on your federal tax return.
  • By definition, a deduction means an amount is subtracted from your income. Tax deductions fit into four general categories.

Above the line deductions, such as alimony paid, can be claimed even if you don’t itemize.

Itemized deductions are a specific group of expenses, including amounts you pay for certain taxes, medical costs, charitable donations, mortgage interest, and disaster losses.

The standard deduction is a simplified substitute for itemized deductions. It’s a flat amount you can use to reduce your gross income instead of itemizing each allowable expense.

Business deductions are the ordinary and necessary expenses required for carrying on your trade or business.

  • Income tax credits are subtracted from the tax you owe. Note the difference from the definition of deductions, which reduce your income and indirectly reduce your final tax bill.

Tax credits can be refundable, meaning you’ll get money back if the credit exceeds the amount of tax you owe. Nonrefundable credits can only reduce your tax to zero.

These terms can be confusing. Call if you have questions about these tax-savers and how including them in your midyear planning can benefit you.

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A tax credit is available for adoption

If you are preparing to adopt a child, you know your life will change for the better. And, you may have also experienced the financial commitment adoption requires. However, take note, because as an adoptive parent, you may qualify for a special break on your income tax return.

As you know, tax credits save you money by reducing the amount you owe dollar-for-dollar. In the case of the adoption credit, you may be able to save up to $13,570 per child on your 2017 federal income tax return for expenses you pay during the process of adopting a child.

Be aware the credit is subject to a phase-out – that is, the amount you can claim is reduced once your 2017 modified adjusted gross income (MAGI) reaches $203,540. No credit is available when your MAGI is $243,540 or more.

In general, the credit is based on total out-of-pocket expenses including adoption fees, amounts you paid your attorney, court costs, and your meals and lodging while away from home. However, when you adopt a special needs child and qualify for the credit, you can claim the full $13,570, regardless of how much you spent during the adoption process. In addition, you may also be able to exclude from income certain adoption benefits provided by your employer.

The credit is typically available for both foreign and U.S. adoptions. For domestic adoptions, you can claim it even if your attempt to adopt was unsuccessful.

Other tax breaks are available for new parents. Please call us if you would like details.

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