It’s Time for a Mid-Year Financial Check-Up

It’s that time again…time for a mid-year financial check-up! We are almost at the halfway mark of 2022, which makes this a perfect time to assess your financial progress and take action over the next six months. 

Last year, I wrote a blog post about mid-year financial check-ups for the OneOp Personal Finance team. In it, I urged a review of tax deductions/credits, tax withholding, budgeting/cash flow, flexible spending accounts, financial goal progress, and investment portfolio status.

This post describes eight more areas of personal finance for a mid-year review:

¨    Expense Projection Analysis- Now is the time to “do the math” for expenses anticipated in late summer or fall. For example, an iPad or laptop computer, major appliance, car, or college tuition. “Math” can include calculating how much money needs to be saved to make the purchase by a certain date or calculating the monthly payment for a loan to buy the item using an online loan calculator. For the latter, create different scenarios by changing the loan amount, loan term, and interest rate. Compare the results. Create a savings or loan payoff plan based on the results of the math.

 

¨    Credit Report and Score Check- Mid-year is a great time to check your credit history if you have not already done so this year. Visit www.annualcreditreport.com and request a free credit report from Equifax, Experian, and/or TransUnion. Americans are entitled to a free credit report every 12 months from each of these “big three” credit reporting agencies. Rather than request all three credit reports at once, many credit experts recommend requesting one report every four months so a recent report can be pulled more frequently.

 

¨    Investment Portfolio Rebalancing Review- To put it mildly, the stock market has been very volatile during the first half of 2022. This has undoubtedly changed the asset class weightings of numerous portfolios; i.e., the percentage weighing of stocks, bonds, cash-equivalents, real estate, etc. The objective of portfolio rebalancing is to get back to an investor’s target asset class weights (e.g., 50% stock, 30% bonds, and 20% cash assets). Rebalancing can be done by selling securities in an “over-weighted” class and/or depositing new money (savings) in an under-weighted class.

 

¨    Debt Repayment Progress- The best way to perform this check-up to compare the total balance on all of your consumer debts (e.g., car loan, student loans, credit cards) on 1/1/22 and today. Hopefully, the balances have gone down through the past six months of making monthly payments. To accelerate debt repayment during the remainder of 2022, consider doing a free PowerPay analysis that will create a personalized debt repayment calendar. When each debt is repaid, its former monthly payment is added to the monthly payment that is due to a remaining creditor.

 

¨    Savings Increase- Some people get mid-year raises or earn promotions on July 1 (e.g., college faculty promoted to a higher rank). This is a great time to increase emergency savings or automatic deposits into an employer retirement savings plan (e.g., 401(k) or 403(b) plan). Even 1% more of pay in increased savings can result in thousands of dollars more in later life, especially if that savings is matched by an employer. The best times to increase savings, so it doesn’t affect your cash flow, are when there is increased income or a household expense (e.g., child care, loan) ends.

 

¨    Insurance Check-Up- While stocks have trended downward so far in 2022, insurance premiums (homeowners, auto, health, etc.) have generally trended up. Among the culprits: climate change, higher costs for labor and supplies to repair houses and cars, and higher out-of-pocket costs for employer-provided health insurance. Now is a good time to explore money-saving strategies to reduce insurance costs. Start with a review of property insurance coverage with an insurance agent. Next, review employer health insurance options to be ready for open enrollment season in the fall.

 

¨    Automated Payments Review- Payments for utilities (e.g., cable, internet), streaming services, and other bills that many people pay through automatic payments have been rising. Therefore, now is a good time to review them and check to see if there are cheaper plans or substitute services. Start by asking your current service provider if payments can be reduced. You may find that less expensive payment plans are available or you are offered a “deal” to stay with a company and not leave. Consider dropping payments for products or services that are not used regularly.

 

¨    Financial “To Do” List Items- Many people have  a financial “to do list…things that they want to do when they “get around to it.” Mid-year is the time to get started on these items so they get done by year-end. Examples include preparing (or updating) a will, preparing net worth and cash flow statements, creating a digital asset inventory, calculating the savings needed for financial goals, comparing credit card offers, and making charitable contributions.

 

In summary, take time now to give yourself a mid-year financial check-up and act upon your financial "to do" list while there’s still time in 2022.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

 

Consumer Fraud: Statistics, Trends, and Tips

 I recently attended a webinar about fraud sponsored by Consumer Action. The title was Fraud and Scams in the COVID-19 Economy. The webinar presented statistics about the incidence of fraud and types of consumer fraud complaints, as well as “red flags” of fraud and tips for working with fraud victims.

Below are eleven of my key take-aways from the webinar:

 

¨    Fraud Reports- About 5.7 million fraud reports were logged by state and federal (e.g., CFPB, IRS, Federal Trade Commission) government agencies in 2021. The top two fraud categories were identity theft and imposter scams.

 

¨    Fraud Categories- Widely-reported fraud categories include online shopping. prizes/sweepstakes/lotteries, internet services, telephone and mobile services, investment-related, health care, travel/vacation/timeshare plans, foreign money offers and fake check scams, and business impersonator scams (especially Amazon and Apple).

 

¨    Generational Impacts- Younger adults reported losing money to fraud more often than older adults but….when people age 70+ had a loss, the median loss was much higher.

 

¨    Fraudulent Payment Methods- The top payment methods reported by Consumer Sentinel Network are credit cards, payment apps/services, debit cards, gift cards/reloadable cards, wire transfers, and cryptocurrency. Reports and losses related to cryptocurrency investment scams increased sharply from October 2020 through March 2021.

¨    Gift Card Losses- The top gift card brands ranked by reported dollar losses to fraud in the first nine months of 2021were Target, Google Play, Apple, eBay, and Walmart.

 

¨    Victim Contact Methods- Crime victims are contacted in a variety of ways. In descending order, the top victim contact methods were phone calls, texts, e-mail, a website or apps, social media, “other,” mail, and online ads or pop-up messages. Reports about fraud originating on social media soared over the past five years.

 

¨    Fraud Reporting- The go-to resource for fraud victims to report crimes is the Federal Trade Commission (FTC) website www.ReportFraud.ftc.gov. Here, victims can report a scam, a company, or an unwanted call. The website also provides information on “next steps”; i.e., what victims can do to protect themselves. The FTC shares consumer reports with their law enforcement partners to help with investigations.

 

¨    Victim Complaints- Webinar speakers advised victims to “complain to everyone.” This includes the FTC, the victim’s state attorney general, the Consumer Financial Protection Bureau (CFPB), your bank, and (if applicable), a payment processor (PayPal, Venmo) or gift card company. Also, file a police report with local law enforcement.

 

¨    Consumer Rights- Compared to debt cards and gift cards, credit cards provide the strongest scam protections due to “chargeback” rights that can be raised against the credit card company. To invoke this right, consumers must raise an objection within 60 days of receiving a statement for goods or services that were not delivered. They must also state that they are withholding payment and not paying the amount in question.

 

¨    Diversity of Fraud Victims- Fraud victims are very diverse and it is a myth to assume that they are all stupid, gullible, greedy, lonely, or elderly. The one thing that victims have in common, however, is social influence. Fraudsters are very adept at creating situations that induce compliance. In many cases, they will profile potential victims to find an “Achilles’ heel” and tailor their pitch accordingly. Anyone can be taken in by a scam.

 

¨    Fraud and Stress-  Fraud victims are more likely to experience a negative life event (e.g., a change in living arrangements, death of a spouse, divorce, unemployment, a serious injury) because that is when people are most vulnerable. Life stressors use up cognitive capacity and coping strength.

 

For more information about avoiding consumer fraud, review the Consumer Action website about scams.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

Retirement and Taxes: "To" and "Through" Planning

If you picture retirement planning and taxes as a Venn Diagram, there is lots of overlap between these two areas of personal finance. This is true both during one’s working years (when taxpayers are saving for retirement) and later, when people are older and withdrawing taxable income from tax-deferred accounts.

This post describes highlights from a recent webinar about retirement planning and taxes in both "to retirement" years (working and saving) and "through retirement" years (later life asset withdrawals). 

At any stage of retirement planning, taxpayers' taxable income determines their tax rate. It is calculated by subtracting adjustments and deductions (standard deduction or itemized deductions) from adjusted gross income and applying tax credits, if any. There are seven tax rates in effect through 2025: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. 

 

“To Retirement” Planning

 

¨    Tax-Advantaged Investing- Tax- deferred income is where taxpayers defer paying taxes until a future time. Examples include a 401(k) or 403(b) plan and traditional IRA. Tax-exempt income is income that is free from federal income tax. Examples include earnings on municipal bonds and Roth IRAs.

 

¨    Retirement Account Considerations- Four key questions to ask before deciding where to save for retirement are: 1. Does your employer offer matching retirement contributions?, 2. What tax bracket are you in now? 3. What tax bracket do you expect to be when you retire, and 4. How many years do you have before retirement?

 

¨    Workplace Retirement Plans- The four types of tax-deferred, salary-reduction, defined contribution plans available through employers are 401(k) (for-profit corporation employees), 403(b (school and non-profit employees), 457 (state/local government employees), and Thrift Savings Plan (federal government employees and service members).

 

¨    Contribution Limits- The maximum contribution for Roth and traditional individual retirement accounts (IRAs) in 2022 is $6,000 (under age 50) and $7,000 (age 50+). Contributions can be made until the tax filing deadline in April 2023. The 2022 limits for the plans noted above are $20,500 (under age 50) and $27,000 (age 50+).

 

“Through Retirement” Planning

 

¨    Taxable Income Sources- Common types of taxable income in later life include pensions, distributions from workplace retirement accounts, and Social Security. For Social Security, a portion (up to 85%) of benefits may be taxable depending upon “combined income” (adjusted gross income + nontaxable interest + ½ of Social Security benefits) for their tax filing status. Some older adults have a higher tax bracket than when they were working, which can trigger IRMAA Medicare premium surcharges and/or the net investment income tax.

 

¨    Pensions and Annuities- A portion of the money that people receive in pension payments is not taxable because it is considered their basis (i.e., a return of their own money). Older taxpayers who receive annuity payments pay income tax on the gain (earnings) on after-tax dollars used to fund their account.

 

¨    Required Minimum Distributions (RMDs)- RMDs must begin at age 72 for traditional IRAs, employer retirement accounts, and SEPs (for self-employed workers). These distributions are taxed at ordinary income tax rates. Thanks to RMDs, pensions, and other income sources, some older adults with multiple income streams are surprised to see themselves in a higher tax bracket in retirement than when they were working. One strategy to mitigate the tax impact of RMDS is to gradually transfer (and pay tax on) money from a traditional IRA to a Roth IRA before RMDs begin (i.e., a Roth IRA conversion).

Finally, a definition of terms. There is a big difference between “tax planning” and “tax preparation.” The former is focused on proactively using legal strategies to reduce income taxes to the lowest amount possible. The latter is focused on preparing a tax return and filing it with the IRS. 

For people who are unfamiliar with income tax rules and forms, money spent on either or both services could be money well spent and save money in the long run.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Ten Tips for Tax Withholding on Multiple Income Streams

It is not uncommon for American taxpayers of all ages to have multiple streams of income. Young adults working in the gig economy may have income from a variety of consulting contracts or from a full-time job and “side hustles.”

 

Many older adults also have multiple income sources including Social Security, a pension, full-or part-time work or self-employment, withdrawals from retirement savings (including taxable required minimum distributions or RMDs), and interest, dividends, and capital gains on investments. Roth IRA conversions also produce taxable income at any age.

 

A big concern of people with multiple income streams is adequate tax withholding. Nobody want to pay the IRS tax underpayment penalty, which is 0.5% of the amount owed for each month or partial month of unpaid taxes.

Below are ten tax withholding tips for taxpayers with multiple streams of income:

 

Inventory Your Total Income- Make a list of projected income sources for the current year, using previous income listed on your 2021 tax return as a guide. Adjust the previous income as life circumstances necessitate (e.g., the start of RMDs, receipt of an inheritance, or increased or decreased earnings).

 

Do a Mid-Year Income Tax Mock-Up- Once you have inventoried your income, take the time in June or July to do a 2022 pro forma tax return using best estimates for tax credits, unknown income (e.g., mutual fund dividend and capital gain distributions), and tax withholding. Use the IRS Tax Withholding Estimator to check if withholding is adequate.

 

Arrange Tax Withholding Services- Employers withhold income taxes based on information that workers submit on Form W-4. Self-employed workers generally submit quarterly estimated tax payments or over-withhold taxes at their “day job.” In other instances (e.g., RMDs, Roth conversions, pensions, unemployment benefits), taxpayers may have to proactively request tax withholding. For withholding on Social Security benefits, taxpayers must complete Form W-4V.

 

Make Estimated Tax Payments- Quarterly estimated payments are often used for withholding on investment dividends and capital gains, freelance income as an independent contractor, and other taxable income where withholding was not requested. To mail quarterly payment vouchers with a check to the IRS, taxpayers need to download Form 1040-ES.

 

Fine Tune Withholding by January 15- The fourth- and final- estimated tax payment for a tax year is due by January 15 of the following year. By early January, most data that affects taxes is a “done deal” including tax withholding, freelance income, and mutual fund distributions. Update your mid-year tax mock-up and adjust the Q4 estimated tax accordingly.

 

Consider Safe Harbor Rule #1- Especially if you expect your total income to increase this year from one or more sources, withhold/estimate at least 100% (i.e., the same amount) of tax owed the previous year (110% with adjusted gross income or AGI over $150,000) by the Q4 estimated payment. This way, the IRS will not assess an underpayment penalty.

 

Consider Safe Harbor Rule #2- If you expect your total income to decrease from a “high water mark” a year earlier, the safe harbor rule, above, would result in over-withholding. A second safe harbor is to pay at least 90% of tax liability for the current year. There is also a third safe harbor for taxpayers who owe less than $1,000 after subtracting withholding.

 

Don’t Forget Self-Employment Tax- Self-employed taxpayers (including freelancers), not only have to withhold enough tax on their taxable income, but they also need to add self-employment tax to their tax bill as an “other tax” using the 1040-SE tax form and Schedule 2. The higher the net income of a taxpayer’s business, the higher the tax bite, which needs to be anticipated with withholding somewhere or quarterly estimated tax payments.

 

Consider “Bunching” and Withhold Accordingly- With another half-year to go, there is still plenty of time to develop a proactive strategy to exceed the standard deduction. Typically, this is done by combining one or more of the following: large qualified, unreimbursed medical expenses, state and local taxes up to the $10,000 SALT cap, mortgage interest, and sizable charitable donations. If you plan to “bunch,” check your withholding with the IRS calculator noted above.

 

Expect the Unexpected-  If you have invested large sums of money (at any age) or have watched investments grow over time, taxable capital gains (e.g., from mutual funds) will grow as well. Be sure to include reasonable estimates of this source of taxable income in calculations for tax withholding.

 

For additional information, review the IRS publication Tax Withholding for Individuals.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

Purging and Organizing Photographs: Expert Tips

I recently attended a class on organizing and editing photographs, both the tangible kind that people put in albums “back in the day” and the more recent digital variety. This information is useful for people of any age but especially for older adults who are trying to downsize and simplify their possessions.

 

As I wrote in my book, Flipping a Switch, downsizing and organizing any possessions (including photos) requires time and reasonable expectations about how other people feel about your property. In addition, there may be strong emotions involved as people “relive” their lives as they sort through photos. It is like taking a walk down memory lane!

Below are nine tips that I gleaned from Brian Rowland, the class instructor:

 

¨    Start With Two Questions- The two questions are: 1. What do you have in the way of photos (e.g., shoeboxes, photo albums, envelopes, digital files stored in a cloud server)? and 2. What would you like to do with them (e.g. organize  in chronological order, give to family members, throw away low priority print photos)? Begin with the end in mind.

 

¨    Take Inventory- Start the process of organizing photos with a written list of what you have and where you have it. Many older adults have a mish-mash of pre-digital photography prints (can you say Polaroid instant cameras?) and digital photos taken since the first digital cameras became available to consumers in the late 1990s.

 

¨    Answer Three More Questions- Responses to these questions will guide the sorting and organizing process: 1. How do you want to view your photos in the future?, 2. How will others want to view your photos in the future?, and 3. Do you want your photos all in a single system that can be passed on?

 

¨    Decide on a Sorting System- Three common ways to sort print photos are 1. Strictly chronological by dates on photos and from memory (if possible), 2. Loosely chronological (by decades, seasons, significant events, vacations, etc.), and 3. By people or places. If a couple is involved, the third filing system might include each individual’s pre-marriage photos and family photos followed by joint photos of their wedding, children, and grandchildren. Scanned digital photos can also be organized according to one of the three methods noted above. Back up everything.

 

¨    Delete, Throw Away, Delete, Throw Away- The goal for most photo organizers is to keep only photos that are high quality which have special meaning. The rest can be deleted (digital photos) or thrown out (print photos). For example, fuzzy pictures of pretty flowers taken somewhere in the 1990s are probably not a high priority!

 

¨    Reconfigure Photos in Albums or Digitize Them- Some people decide to store their high quality print photos (i.e., their “keepers”) “as is.” In this case, they either buy a new album (or a binder with sleeves) to store their photos or rework existing albums with a slimmed-down photo collection. Other people digitize their photos using a scanner. In this case, check the scanner’s dpi (dots per inch) number. Photo experts recommend digitizing photos using 300 dpi scanning so that the photos look sharp on a phone, tablet, or computer screen. The most common photo format is JPG.

 

¨    Organize and Identify- For digital photos, create folders and sub-folders, just like document filing on a computer. For example, set up photo folders for each year (e.g. 2022), for social occasions, and/or important  events. Give each photo a specific file name that describes it and includes the date with a month and year (e.g., Jane’s Wedding-Ring Ceremony-05-22). Import photos from a cell phone/digital camera to a computer or cloud server at least monthly.

 

¨    Enhance Your Digital Photos- Once digital photos are taken, they can generally be enhanced. One simple way is to use the cropping tool on a digital camera or computer to eliminate extraneous content. Sometimes, cropping is all that is needed. There are also various photo editing tools to add different hues or convert color to black and white.

 

¨    Consider Commercial Tools- Here’s the personal finance section of this post. Organizing photos does not have to cost any money, but it can if you decide to pay for products or services. There are commercial “photo keeper” products to store print photos as well as digital film/slide scanners and special flash drives and scanners for photos.

 

For additional information, search the internet for “organizing photos.” There are also many books on this topic.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.