Thursday, February 29, 2024

The End of Your Life: Will it Be Good or Bad?

 

A frequently used quote is that “nothing is certain in life except death and taxes.” One of the topics that I wrote about in my book, Flipping a Switch: Your Guide to Happiness and Financial Security in Later Life, is having a “good ending” to your life. 


But what exactly does that mean?



For many people, a “good ending” means dying in peace, preferably at home with loved ones nearby. In addition, most people want a “Niagara Falls” death versus a long period of decline. In other words, to live well for as long as possible and then “go over the edge” and die quickly.


Other hallmarks of a “good ending” to life include the following:


    Organized Financial Records- Prepare a “financial center” (e.g., desk drawers) for documents like insurance policies; recent income tax returns; bank, investment, and credit card statements; and copies of a will, living will, etc. Make sure trusted parties have access, if needed.


 

   Personalized Financial Statements- Provide trusted parties with a current net worth (assets minus debts) and cash flow (income minus expenses) statement, contact information for financial advisors (e.g., lawyer, insurance agent, etc.), and login information for digital assets.



   Advance Directives- Contact an attorney to prepare a living will and health care power of attorney. Doing this will avoid “hospital hallway huddles” by stressed out relatives and ensure that your personal wishes regarding end-of-life care are respected.


 

   Buried Hatchets- Reach out to estranged family and friends with words like “thank you,” “I love you,” “please forgive me,” and “I forgive you” before it is too late. Apologize to those you love if you hurt them and tell friends and family how much they mean to you.

 

   Post-Death Instructions- Leave instructions for a memorial service agenda and charitable tribute contributions and select and prepay funeral and burial services. Another way people can take charge of their personal “ending” is by writing their own obituary.

 

Recently, I witnessed and personally experienced four features of a bad (financial) ending:

 

   Financial Infidelity- Don’t lie or withhold financial information. Doing this erodes trust and makes it very difficult for family, heirs, and fiduciaries (e.g., executor) to move forward.

 

   No Financial Statements- Don’t force your loved ones to be “forensic accountants” and have to reconstruct your finances from statements and a checkbook register. It is not easy to do!

 

   No Funeral Plans- Don’t force a family member to have to unexpectedly put a 4- or 5-figure cremation or funeral bill on a credit card because no plan or set-aside funding was available.

 

   No Digital Assets Inventory- Leave a list of logins for digital devices and online accounts. Don’t force your survivors to try to track this data down or permanently have to live without it.


Bottom line: 

    Make the time, while you are able, to take actions that increase the liklihood of having a good ending to your life. It is a gift to yourself and your family.

Thursday, February 22, 2024

Preparing for Your Tax Preparer

With income tax season well underway, many people are getting ready to see a tax preparer to get their 2023 income tax return prepared and filed before April 15, 2024. Some may have a long-standing tax pro while others are selecting a tax preparer for the first time. About half of U.S. taxpayers use a paid preparer according to the Department of the Treasury.



Below are tips for working with a tax preparer:



Check Credentials- Choose a tax preparer with tax-relevant credentials such as certified public accountant (CPA) and enrolled agent (EA), especially if your tax return is complex (e.g., capital gains, rent, and royalties). Credentials are an indication of a tax preparer’s expertise and adherence to professional standards and ethics. Also check reviews and references from previous clients.


Understand Fees Upfront- Clarify the fee structure before engaging a tax preparer. To avoid unexpected costs, find out if the fee is a flat dollar amount (e.g., $500) or based on the complexity of your tax situation (i.e., hourly fee x number of hours spent).


Organize Your Tax Records- Group like items (e.g., W-2 forms, 1099-INT for interest on savings, 1099-DIV for investment distributions, 1099-NEC for nonemployee (freelance) income, estimated quarterly tax payments) together and subtotal them. Make it as easy as possible for your tax preparer to find information, especially if the tax preparer is billing on a hourly basis. Not only can document organization save money, but it can also reduce the chance of errors.


Be Transparent About Income- Disclose all sources of income, including side jobs, tips, bartering activities, and gambling winnings. Open communication with a tax preparer ensures accurate reporting and compliance with tax regulations.


Provide Correct Information- Make sure that your tax preparer has your current address and bank account data (routing number and account number). The latter will avoid issues with direct deposit of a tax refund.


Discuss Life Changes- Inform your tax preparer of any significant life events that can impact your tax situation. Examples include marriage/remarriage, divorce, widowhood, the birth or adoption of a child, unemployment, and retirement.


Respect Deadlines- Remember that paid tax preparers are juggling the tax returns of many clients. Be aware of deadlines set by the tax preparer as well as the IRS tax filing deadline. Provide your tax preparer with ample time to file your return. Also, the earlier you file, the more time you have to address any issues that may arise and the earlier you will receive a tax refund, if any.


Review Your Tax Return- Take the time to review your entire tax return before it is submitted (about 94% of tax returns were e-filed online in 2023). Ensure that all information is accurate and ask your tax preparer about any unclear sections.


Discuss Future Planning- Ask your tax preparert discuss future tax planning strategies and expected changes in income (e.g., reaching the required minimum distribution (RMD) age of 73) to optimize your tax situation for the upcoming year.


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.


Thursday, February 15, 2024

Do You Know Your Income Tax Rates?

 

With 2023 tax season well underway, now is a good time to examine income tax rates, which are a percentage of taxpayers’ income that is taxed. 


The U.S. income tax system is progressive, which means that taxes take a larger percentage of income from taxpayers with higher taxable incomes. Federal marginal income tax rates are established by Congress and change periodically.



There are actually five tax rates that taxpayers should be aware of: marginal tax rate, short-term capital gains tax rate, long-term capital gains tax rate, the tax rate on dividends (qualified and non-qualified), and effective tax rate. Below is a brief description of each tax rate category:

 

Marginal Tax Rate- The tax rate applied to the last dollar that an individual (or married couple filing jointly) earns. Under the most recently passed tax law, the Tax Cuts and Jobs Act of 2017, there are currently seven income range segments for four tax filing status categories (single, married filing jointly, married filing separately, and head of household) that are taxed at increasing rates as income rises. 


The current marginal tax rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. If someone is in the 22% tax bracket, portions of their income are taxed at 10%, 12%, and 22%.

 

The term “ordinary income” is frequently used to refer to income sources that are taxed at the marginal tax rates described above. Examples include salary, wage, commission, bonus, and tip income, rents and royalties, interest, and required minimum distribution (RMD) withdrawals from tax-deferred retirement savings accounts (e.g., 401(k)s, 403(b)s, and traditional IRAs).

 

Short-Term Capital Gains Tax Rate- A short-term capital gain (STCG) is the profit made on an investment that is held for a year or less. It is taxed at the ordinary income tax rates; i.e., the same marginal tax rate as the income sources noted above.

 

Long-Term Capital Gains Tax Rate- A long-term capital gain (LTCG) is the profit made on an investment that is held for a year and a day or longer. There are three LTCG tax brackets that are based on taxpayers’ taxable income and tax filing status. The LTCG tax rates under current tax law are 0%, 15%, and 20%.

 

Tax Rate on Dividends- The tax rate on dividends depends on three factors: taxable income, tax filing status, and whether a dividend is considered qualified or  nonqualified. Qualified dividends must meet certain IRS criteria and are taxed at 0%, 15%, and 20% (the same tax rate as long-term capital gains). 


Nonqualified dividends are taxed as ordinary income. The type and amount of each type of dividend is reported to taxpayers by investment custodians on a 1099-DIV form.

 

Effective Tax Rate- This tax rate takes into account the fact that higher ranges of income are taxed at progressively increasing rates. It is calculated by dividing the total amount owed on a tax return by total taxable income. 


For example, if a couple owes $25,000 on a $150,000 taxable joint income, their effective tax rate is $25,000 ÷ $150,000 = 16.7%, even though their 2023 and 2024 marginal tax bracket is 22%. An effective tax rate is always lower than a marginal tax rate.


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.

 


Thursday, February 8, 2024

The Cost of Convenience

A key factor that determines what people spend money on every day is convenience. Convenience generally saves time but can add to the cost of products and services because somebody did some work for you (e.g., marinating meat or fish or making kabobs). 


An estimated $751 billion is spent annually by Americans on convenience items according to a study by Finder, an online data aggregator.

 

Consider the following ten examples:



¨    Buying sliced fruit at a supermarket vs. whole fruit (e.g., melons and strawberries) and cutting it up yourself; ditto for packaged salads vs. cutting up lettuce, tomatoes, etc. yourself



¨    Using food shopping delivery services vs. shopping yourself at a supermarket



¨    Ordering home food delivery (e.g., DoorDash, Grubhub) from restaurants instead of eating out



¨    Taking a cab or ride share (e.g., Uber, Lyft) vs. using public transportation or even walking



¨    Eating out, take-out, or meal delivery services vs. cooking food at home and brown bagging



¨    Visiting a drive-through vendor for coffee and/or breakfast vs. preparing these items at home



¨    Shopping online, being tempted to overspend, and having to pay shipping and handling fees



¨    Buying home-delivered books online that could be checked out for free from a public library



¨    Using vending machines to buy snacks or beverages instead of bringing them from home



¨    Hiring a home cleaning service or lawn mowing service vs. performing these tasks yourself

 


Another example of high-cost convenience spending is using plastic (debit or credit cards) or mobile (digital) wallets (e.g., Google Pay, Venmo, Apple Pay) to make purchases. Studies have found that people spend more when no physical money is changing hands...about 30% more when they don't spend with cash.


According to a Pew Research study, in 2022, about 41% of Americans said none of their purchases in a typical week were made with cash, up from 29% in 2018. Digital wallets are even more convenient than credit cards because people don’t need to carry a credit card and can pay with their phone. The easier it is to spend money, the more money people typically spend.



Bottom Line: convenience spending methods are here to stay and people often use them to help manage their busy lives. Convenience is not necessarily a bad thing but people need to understand the price tag and evaluate how convenience deccisions affect their finances. 


When money is tight, it may be wise to ditch convenience in favor of inconvenient, but lower cost, spending options. Personal decision rules are also useful (e.g., a spending limit for spontaneous purchases). 


For additional information about the cost of convenience, view this OneOp webinar.


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.


Thursday, February 1, 2024

Middle-Income Earners Can Be Millionaires

Many people think you need to earn a high salary (e.g., $100,000+) to become a millionaire. In reality, many people of ordinary means (i.e., middle-income earners like teachers and police) become wealthy over time and achieve a net worth (assets minus debts) of $1million or more.


A key factor in their success is financial capability, which includes financial knowledge, decision-making skills, and habits. Below are nine things to know about "middle-income millionaires":


Planning is Key- Research has found that saving with a plan makes people two times more likely to reach their goals. Having a motivation to save also matters. One study found that emergency fund and retirement saving motives significantly increase the likelihood of saving regularly.


Slow Starts Are OK- A negative net worth (debts-like student loans-greater than assets) is not uncommon when young adults are in college. What matters is that proactive action is taken afterward to increase savings and reduce debt so that a positive net worth steadily grows.


Decisions Matter- Wealth and net worth are determined largely by decisions that people make about money (e.g., saving 10% of pay in a 401(k) plan). Two people with the same income, or two siblings raised by the same parents, can have very different financial paths and net worths.


Education Matters- One study found that 88% of millionaires graduated from college and 52% have a master’s, doctoral, or professional degree. One reason is that average salaries rise with higher levels of education. In addition, people tend to marry spouses with similar characteristics.


Automation is Key- One of the best “one and done” financial decisions that someone can make to build wealth over time is to set aside money automatically from each paycheck (or net income from self-employment) for retirement or other financial goals. Payroll deductions for defined contribution plans, like 401(k)s, make adhering to advice to “pay your first” automatic.


Wealth-Building Needs Protection- It is important not to overlook the role of insurance as a wealth-building tool. A growing nest egg can quickly be depleted if a family breadwinner dies or is disabled or a major illness or property damage or a large liability judgment occurs.


Backstops Can Mitigate Risk-Taking- Some investors feel that they can take on more investment risk when they have a guaranteed source of income (think tenured educators or retirees with a pension and/or annuities). Similarly, if one spouse in a couple has a stable income, the other spouse may decide to take a chance with entrepreneurship or by earning a degree.


Investment Expenses Are a Drag- Successful wealth accumulators avoid high expense ratios and front- and back-end loads (commissions) on mutual funds and costly annuities with high surrender and mortality & expense charges. Expenses are a drag on the performance of an investment. The second most important factor affecting investment portfolio returns, after asset allocation, is fees.


Knowledge is Power- Wealth-building is enhanced with financial knowledge (e.g., investment risks and characteristics) and skills (e.g., budgeting). A good rule to follow to build financial knowledge is to learn one new thing every day about personal finance (e.g., blogs, podcasts, newspapers, etc.).


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.



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