Many of us are living close to our financial limit these days. We pay our bills on time, but there's not a lot left over. But that's a dangerous situation. If things go wrong, your financial situation can change very quickly from adequate to critical. Without a cash reserve, you could find yourself in serious trouble.
Imagine this situation. You're driving home from work when a motorist runs a red light and smashes into your car. You're rushed to the hospital with a broken leg that must remain in traction for several weeks. You quickly use up any sick leave from your job and your paycheck dries up. Luckily you have basic health and car insurance, but the deductibles and co-pays quickly add up to thousands of dollars. Meanwhile the mortgage and credit card payments are coming due, and you find yourself slipping into arrears.
It sounds grim, but it can easily happen. Natural disasters or a downsizing by your employer can have similar results. And when things go wrong, often several things go wrong at the same time. That's why it's a good idea to build a cash reserve of at least three months' living expenses.
Invest your reserve in a safe, liquid account. Consider investments such as a bank CD, a money market fund, or a very short-term bond fund. Make sure you have easy access to the funds without losing too much interest. And once you've built your fund, avoid temptations to raid it for nonessentials.
It may not be easy to build a reserve, especially if you're barely paying your bills now. But you'll never get there unless you try. Consider setting aside your tax refund or your next bonus, or set yourself a monthly saving goal. Perhaps you give up one espresso a day, eat at home instead of a restaurant one evening a week, or make your own lunch instead of eating out for a month. However you do it, and however long it takes, you might one day be very grateful that you made the effort.
It's the time of year when you may be scheduling employee reviews. Usually the annual employee performance review is dreaded by both supervisor and employee. The employee knows he'll have to hear about those mistakes from months ago, and the supervisor will finally have to discuss those issues he's been avoiding all year. Too often, the result is discomfort and embarrassment all around. Usually both parties fudge a little and are glad that it's over for another year. Too bad, because another chance for open communication and feedback has been lost.
To improve the process, consider holding performance appraisals more frequently, perhaps even quarterly. This can help make the appraisal less of a "special event" and more of a routine exchange of information. It also means your feedback is more directly related to your employee's recent performance, rather than coming months later.
Of course, even quarterly appraisals don't substitute for immediate feedback. If an employee does something wrong, or something good, tell him or her immediately. Point out the problem, make sure the employee acknowledges it, and make clear what you expect in the future. And if it's something good, the employee will appreciate receiving a pat on the back. With immediate feedback, there should never be any surprises at review time.
At the end of every appraisal, summarize the discussion and put the highlights in writing. Make sure your employee gets a copy. Before the next appraisal, ask your employee to review the copy and prepare his thoughts on his most recent performance. Ask him to present his opinions to start the discussion. If there are areas needing improvement, agree on an action plan and put that in writing too. And that might be a two-way street. It could involve your providing training or taking actions to support the employee, so make sure you're living up to the agreement.
Don't limit the appraisal to a score-card on the employee's achievements. If appropriate, use it to discuss career planning, cross-training, or job enrichment. Solicit ideas from the employee. It can all help turn a judgmental meeting into a constructive exchange of ideas.
As the population in the U.S. continues to age, more and more people will find themselves caring for their parents. Here are some of the tax breaks that caregivers should consider.
* If you provide more than half of your parent's support, you may be able to claim your parent as a dependent on your tax return. To be eligible, your parent can't earn more than $3,900 in 2013, excluding their nontaxable social security and disability income.
* What if you and your siblings all pitch in to support a parent? Anyone who contributes at least 10% of the total support can be the one to claim the $3,900 exemption if all of you sign a multiple support agreement.
* Even if a parent's income exceeds $3,900 this year, you can still deduct the medical expenses paid on the parent's behalf, as long as you provide more than half of his or her support.
* If you hire someone to take care of your parent while you work, you might qualify for the dependent care tax credit. Your parent must be physically or mentally incapable of caring for himself.
* Unmarried individuals who support a parent can file their tax returns as "head of household." To qualify, your parent doesn't need to live with you. Instead, as long as you pay more than half of the cost of maintaining your parent's main home, including a rest home or nursing facility, you qualify for this preferential tax treatment.
For more information about the tax issues affecting caregivers and their parents, please email us at firstname.lastname@example.org.
Are you familiar with PEP and Pease? Though they sound like a pop duo, the terms refer to tax rules known as phase-outs that can impact how much federal income tax you owe.
Phase-outs are reductions in the amount of deductions, credits, and other breaks you can claim on your tax return. Though generally based on adjusted gross income, phase-outs vary in rate, amount, and how they're calculated.
Here's an overview of PEP and Pease, two tax breaks that are once again subject to phase-out this year.
* Personal exemption phase-out (PEP). If you're married filing jointly for 2013 and your income exceeds $300,000, the PEP will reduce the amount you claim for yourself, your spouse, and your dependents.
The personal exemption for 2013 is $3,900. But when PEP applies and your income increases, your deduction is reduced accordingly.
* Itemized deduction phase-out. You probably already know that some itemized deductions are limited. For instance, to claim a deduction for medical expenses, your out-of-pocket costs for this year have to exceed 10% of adjusted gross income (AGI). This threshold remains at 7.5% of AGI if you are 65 or older. Miscellaneous itemized deductions, such as unreimbursed employee business expenses, are limited to amounts over 2% of AGI.
* There's also an additional phase-out called the Pease provision that limits the amount of total itemized deductions - after the above reductions. For 2013, Pease kicks in when your income exceeds $300,000 ($150,000 if you're married filing separately).
Other phase-outs limit the amount and deductibility of IRA contributions; the education, adoption, and childcare credits; and the alternative minimum tax exemption. Please email us at email@example.com for a review of how phase-outs affect you and what you might be able to do to avoid them.
And if you want to find out more about more ways we can help you with your needs, please visit our individual services page.
Some tax-cutting strategies make good financial sense. Other tax strategies are simply bad ideas, often because tax considerations are allowed to override basic economics.
Here's one example of the tax tail wagging the economic dog. Let's say that you run an unincorporated consulting business. You want some additional tax write-offs, so you decide to buy $10,000 of office furniture that you don't really need. If you're in the 28% tax bracket and you deduct the entire cost, this purchase will trim
There are other situations in which people often focus on tax considerations and ignore the bigger financial picture. For example: your tax bill by $2,800 (28% of $10,000). But even after the tax break, you'll still be out of pocket $7,200 ($10,000 minus $2,800) - and stuck with furniture that you don't really need.
* Someone increases the size of a home mortgage, solely to get a larger tax deduction for mortgage interest.
* A homeowner hesitates to pay off a mortgage, just to keep the interest deduction.
* Someone turns down extra income, because it might "push them into a higher tax bracket."
* An investor holds an appreciated asset indefinitely, solely to avoid paying the capital gains tax.
Tax-cutting strategies are usually part of a bigger financial picture. If you are planning any tax-related moves, we can help make sure that everything stays in focus. For assistance, email us at firstname.lastname@example.org.
Even if you're not an investment expert, you're probably familiar with the term "diversification." It means not putting all your eggs in one basket. Diversification calls for choosing the right mix of investments to keep a balance between risk and return.
Choose the right investment mix
While there is no single asset mix appropriate for all investors, most people should have some combination of stocks, bonds, and cash in their portfolio. The right investment mix for you depends on your age, income, family responsibilities, and your tolerance for risk.
Take a look at your mutual funds
Many mutual fund investors believe that they are well-diversified, even though they aren't. For example, it's possible that different mutual funds own many of the same stocks or similar stocks in the same industries. Whether you're thinking about buying a fund for the first time or you already own several of them, it pays to do a little digging. All mutual funds are required to publish a list of their complete holdings at least twice a year. Get the most recent listing for your funds and compare them for overlapping investments.
Consider the big picture
When you review your portfolio for diversity, consider the investments both inside and outside your retirement accounts. They are parts of the same picture. Doubling up on the same investment in both types of accounts may decrease your diversification and increase your risk.
Keep an eye on your 401(k)
As a general rule, you should avoid being too heavily invested in any one company's stock, including that of the company for which you work. If your employer matches your 401(k) contribution with company stock, consider other investments for your own 401(k) contributions and for the money you invest outside your 401(k) plan. When you're allowed to do so, consider selling enough company stock to rebalance your 401(k).
Don't risk your financial future by putting too many eggs in one basket. If we can help evaluate your situation, email us at email@example.com.
Employees often have too much of their employer's company stock in their 401(k) or other retirement plan. Employees feel they know their company best, overlooking the risks of having too much of an investment in any one company, including their own.
What are some of the risks of loading up on your employer's stock?
* Tremendous bet in a "safe haven." Overweighting investment holdings in any company minimizes diversification, exposing your portfolio to increased risk. The belief that employer shares are less risky is an illusion.
* Double whammy potential. No company is protected from economic downturns. If your employer's performance weakens, you may lose your job, as well as growth in your retirement portfolio from the company's market value.
* Lock-up periods. Some companies prohibit employees from converting the employer retirement match contributions in company stock into other investments until after a number of years. In this case, use your own contributions to diversify your holdings.
* Tendency to forget. As you move closer to retirement, you may forget the riskiness of your employer's stock to your portfolio. At the same time, contributions of company stock may be growing, based on higher benefit matches - just when portfolio reallocation is becoming more important.
Your goal should be to create a well-balanced portfolio that suits your age (investment horizon) and your risk tolerance. Email us at firstname.lastname@example.org for assistance in reviewing your retirement situation.
Want to lower your 2013 tax bill? The time for action is running out, so consider these tax-savers now.
* You can choose to deduct sales taxes instead of local and state income taxes. If you're planning big ticket purchases (like a car or a boat), buy before year-end to beef up your deductible amount of sales tax.
* If you're a teacher, don't overlook the deduction for up to $250 for classroom supplies you purchase in 2013.
* Consider prepaying college tuition you'll owe for the first semester of 2014. This year you can deduct up to $4,000 for higher education expenses. Income limits apply.
* Max out your retirement plan contributions. You can set aside $5,500 in an IRA ($6,500 if you're 50 or older), $12,000 in a SIMPLE ($14,500 if you're 50 or older), or $17,500 in a 401(k) plan ($23,000 if you're 50 or older).
* Establish a pension plan for your small business. You may qualify for a tax credit of up to $500 in each of the plan's first three years.
* Need equipment for your business? Buy and place it in service by year-end to qualify for up to $500,000 of first-year expensing or 50% bonus depreciation.
* Review your investments and make your year-end sell decisions, whether to rebalance your portfolio at the lowest tax cost or to offset gains and losses.
* If you're charity-minded, consider giving appreciated stock that you've owned for over a year. You can generally deduct the fair market value and pay no capital gains tax on the appreciation.
* Another charitable possibility for those over 70½: Make a direct donation of up to $100,000 from your IRA to a charity. The donation counts as part of your required minimum distribution but isn't included in your taxable income.
* Install energy-saving improvements (such as insulation, doors, and windows) in your home, and you might qualify for a tax credit of up to $500.
These possibilities for cutting your taxes are just the starting point. Emails us for a review of your 2013 tax situation and tax-saving suggestions that will work best in your individual circumstances.
And if you own a business, learn how you can cut more taxes with our free guide!
In today’s economic environment, you may decide you have to work beyond the "normal" retirement age. Here's how extending your work life can affect your taxes and retirement benefits.
"Normal" retirement age is not a fixed number. For social security purposes, the "full" retirement age threshold ranges from 65 to 67, depending on your birth date. However, you can elect to start receiving lower payments as early as age 62, or you can maximize your benefits by forgoing them until you're 70. Once you reach age 70, there's no incentive to postpone your benefits further since you'll already have reached your maximum.
* Earnings limit
If you're working, you probably should forgo the early payment option. Benefits received before full retirement age will be reduced by $1 for every $2 earned over an annual limit (currently $15,120). However, you will receive a compensating increase when you do reach full retirement age, and your payments will not be reduced thereafter no matter how much you earn.
* Taxable benefits
Whether or not you draw benefits, you'll continue to pay social security and Medicare taxes on any income you earn from wages or self-employment. Up to 85% of your benefits may become subject to income tax, depending on the amount of your other income.
Medicare eligibility begins the year you reach age 65. The program encompasses four types of coverage: Medicare A (hospital insurance), Medicare B (general medical insurance), Medicare C (Medicare Advantage), and Medicare D (prescription drug coverage).
It's wise to sign up for Medicare A as soon as you're eligible. There's generally no cost, and the program provides supplemental coverage even if you're already insured at work. Medicare B and D are neither free nor mandatory, but the monthly premiums are reasonable, and either may be used as a stand-alone program or in conjunction with a private plan. If you have "creditable coverage" at work (i.e., coverage that's at least as good as Medicare), you can postpone signing up for Medicare B and/or D until you're no longer employed.
Your employer's plan also may offer Medicare C, which provides for private programs administered under contract with the government. These plans typically merge Medicare A and B benefits with other coverage.
Working beyond retirement age can require several complex decisions. Send us an email at email@example.com for help with planning the outcome that's best for you.
Walk through most commercial warehouses and you'll find products that have been collecting dust for months, even years. Tires that no one wants to buy, raw materials that are no longer used, tubes of caulking that are good for nothing but the dumpster - all may be considered obsolete inventory.
What makes inventory obsolete?
For one thing, alternative products may arrive in the marketplace at lower costs to the consumer. You might sell refrigerators that, several years ago, were a great value because they offered a "frost-free" feature. Now, however, similar models with digital enhancements are available - at the same or lower prices. This change in product features will often adversely affect the value of your existing inventory.
Many firms have learned that technological advances are a double-edged sword. (Ask any computer retailer.) Perhaps your company makes custom-designed widgets. If demand for such products dries up, you may need to retool and modify your existing product line. Your need for certain expensive raw materials - stuff that's sitting on your warehouse shelves - may dwindle.
Carrying obsolete products in your warehouse or retail store tends to increase operating costs without generating profit. Besides the cost of storing and insuring such items, you may be forced to incur labor expense to move the products to new locations and account for them. In addition, your financial reports may overstate business assets, especially if inventory is a major item on your balance sheet. Even your tax bill may be affected. Failing to recognize the expense of obsolete inventory may overstate net income.
How can you reduce the cost of excess inventory?
Define "obsolescence" for your major product lines; then be proactive. For example, if an item hasn't sold in a certain number of months or is being phased out by suppliers, start moving that item by offering sales discounts.
Be willing to write off products or raw materials that are unlikely to generate profit. Don't wait until escalating storage costs or an auditor's findings shine a spotlight on obsolete inventory.
Establish a regular schedule for reviewing inventory. Many firms count their goods at the end of the year. That's great. But knowing where you stand with inventory should be a year-round process.
For help with this or other business problems, email us at firstname.lastname@example.org.