March 28, 2014

What You Should Do If You Owed Taxes

Credit: Stuart Miles
Last week I posted some suggestions about what you should do with your tax refund. A majority of Americans do receive tax refunds, but what if you’re not expecting a refund? What if you actually owe more taxes to dear Uncle Sam or your state’s department of revenue? I want to help you, too!

The first thing you need to do is pay up. It stinks, but don’t add penalties and interest to your pain. Realize that if you promptly settle up by April 15th, you really haven’t done anything wrong. On a brighter note, at least you can have the satisfaction of knowing that you didn’t let those people in Washington, D.C., hold any more of your money than they should have. If you invested some of your money last year and now owe taxes, you may have even come out a tiny bit ahead than if you had gone ahead and withheld more taxes or made larger estimated payments!

The second thing you need to do is figure out what happened. Do you always owe more taxes? If so, you may want to consider changing your tax withholdings or making larger estimated payments. If this is the first year you owed more taxes, what changed? Did you make more money (larger income base, higher tax brackets)? Did your stocks do unusually well (more dividends, realized gains, or capital gain distributions)? Were you healthier? Did you refinance or pay off a mortgage (we refinanced in 2013 and definitely noticed a difference on our mortgage interest deduction!)? Did you give less to charity? Any of these changes can result in fewer itemized deductions. Did you somehow stumble into Alternative Minimum Tax? It’s also worth mentioning that if you owed Uncle Sam, you will probably need to pay either 90% of your expected tax for 2014 or 110% of the tax shown on your 2013 return (whichever is smaller) to avoid an estimated tax penalty next year. Consider meeting with your CPA to take a good hard look at what happened in 2013 and what is likely going to happen in 2014. You have time to adjust things for 2014 now, but you won’t in April 2015!

There are tons of things you could do to make sure you get a refund, including beginning to make estimated tax payments (or making larger estimated payments), increasing contributions to your Traditional 401(k) (so that you have less taxable income), or simply adjusting your automatic tax withholdings. Since people most commonly owe more taxes because they have gotten a raise or an itemized deduction decreased (like medical expenses or mortgage interest), it is important to periodically think about adjusting your withholdings proactively.

To adjust your withholdings, go to your employer’s accounting or human resources department and tell them you’d like to adjust your withholdings. They will likely give you Form W-4 and your state’s equivalent to the W-4. The form is pretty simple and people most frequently elect to have more taxes withheld from their checks if they’re married by putting a “0” on Line C (because they have a working spouse, they work two jobs, or earn a lot of income), or if they’re single, by requesting to have more withheld from each paycheck on Line 6. If you need more assistance, the IRS has put together this little withholding calculator app to try and assist taxpayers. As always, I’m happy to help anyone with questions, but this is another example of where tax preparation software may not be all you need to help with your taxes and tax planning!

I prefer to get a small refund, and I think most people feel the same way. It just feels better and makes things easier. If you find that you owe more than you paid in this year or got a refund that was so small you could barely purchase breakfast, as painful as it may be, I’d suggest you go ahead and start thinking about your taxes for 2014.


March 19, 2014

What You Should Do With Your Tax Refund

Credit: David Castillo Dominici
Hopefully, you’ve already started working on your taxes. If you’re a real overachiever, maybe you have already submitted your taxes. With a little luck (or conservative withholding), hopefully you’re expecting a refund. If you are, I’d like to make a few suggestions for what you should do with those funds.
  1. Go have some fun. Take 10%, take a couple hundred bucks, take whatever you feel is right and go buy that snowboard, get that new dress, or eat at that new, expensive Italian place everyone is raving about. I’m not your typical financial advisor, and I’m not Scrooge: go take some of your check from Uncle Sam or your home state and enjoy yourself!
  2. Pay off your credit cards. There are very few things you can do that help your financial health more than paying off that Visa debt you’ve been carrying around since college. Maybe you’ve been making steady progress in recent months and need a surge to finish the drill? Luckily, if you’re getting a refund, the Department of the Treasury could be about to provide that cash surge.
  3. Boost your cash / rainy day fund. If you’re working, I’d advise you to have three to six months’ worth of living expenses in cash. If you’re retired, I’d propose one to three years’ worth of living expenses, just to make sure you’re in good shape and can sleep comfortably. If you just checked your account balance and it isn’t at my suggested threshold, take advantage of this unbudgeted (and maybe even unexpected) cash inflow.
  4. Put a little towards your long-term debt. An extra mortgage payment every year can sometimes cut five or six years off a thirty-year mortgage! If you’ve got an outstanding car loan or student loan, go ahead and consider putting some of your refund there. Seeing people debt-free or working towards being debt-free makes me happy, and it usually makes them happy as well!
  5. Make an IRA contribution (or a bigger IRA contribution). If you’re 49 or younger and have earned at least $5,500, you can contribute $5,500. If you’re 50 or older and you have earned at least $6,500, you can contribute $6,500. Now it’s important to note that $5,500 (and $6,500) is the limit, not the requirement! Every dollar saved towards retirement gets you one step closer to that recliner, newspaper, and having your wife bring you your slippers – wait, strike that last part!
Getting a tax refund is a great feeling and as I mentioned in #1, you should do something fun with part of the money. Don’t just throw it all away on a March Madness bet, a golf weekend, or a shopping spree!
Many people, myself included, sometimes view a tax refund as money you were never expecting to have. On some levels, that may be true, but it can also be said that a tax refund is money you should have never agreed to loan the government in the first place! When you look at a tax refund that way, I’d suggest you look at options #2 though #5 and decide for yourself what you should do with your tax refund.

March 14, 2014

How to Fix Your Credit

Credit: khunaspix
I know a lot of good people with not-so-good credit. Most people who ask me how to improve their credit are not repeat offenders. They had an emergency, they decided to take a big trip, or they got a little carried away with their first credit cards. Still, some people have serious, recurring credit problems and are headed in the wrong direction. In this post, I'd like to share five tips on how you can right the ship and start improving your credit once and for all.
  1. We’ll call this “1(a),” as in order to have credit at all (good or bad), you need to have used credit. If you don’t have a credit card, get one. The sooner you start wisely using a credit card and paying it off every month, the longer your credit history will be. The longer your credit history is good, the higher your credit score, which will help you get the most favorable terms when it comes time to buy that house or car. If you’re solely focused on trying to improve your credit score, you might even consider using your oldest card (the one you’ve had the longest) over your newer ones.
  2. Pay off what you owe every month! If you have a mortgage payment or a car loan payment due, at least pay what is due. If you have a credit card bill, don’t just pay the minimum - pay it all off! If you can’t pay it all off, I understand, but you really need to spend less next month so you can pay it off then. Building up credit card debt doesn’t usually end well, trust me.
  3. Even if you can comfortably pay off your credit card every month, try to pay it off before it gets near its limit, even if that means making payments several times a month. Some people have low limits (and some people want low limits, which isn’t a bad thing), but believe it or not, letting your credit card bill rise to near its maximum allowable limit can have negative consequences for your credit score.
  4. Long-term debt can help. Associated with a long, good credit history is often the steady reduction of student loans, car loans, mortgages, and home equity lines of credit. Steady, recurring payments (with a little extra principal every now and then) are really one of the best things you can do to improve your credit score. Now I’m not suggesting you go take out a huge thirty-year note on a line of credit in the name of boosting your credit score, but I am saying that by steadily paying your long-term debts you are literally showing other lenders that you would likely be a good steward of any funds they lend you in the future.
  5. I’ve mentioned this in previous posts (The Best Home Loan You Could Possibly Hope For and TARGETed to cite a few), but you really should check your credit reports from time to time at You can check your credit once a year with all three credit bureaus for free if you like, but I also like the strategy of people who check their reports with a different bureau each year, and they just rotate to make the task seem less daunting (unless they find an error and then they check with all three bureaus). I would suggest that you check your credit reports at least every several years, but definitely before you buy a car or take on a mortgage. When you get your credit report, you’re looking for errors, to make sure all the types and forms of credit you are using are listed, and to make sure the limits on each type of credit are up-to-date. While we’re not usually talking massive improvements to your credit score, correcting the fact that you made your October 2013 payment on time and that your Visa actually has a $10,000 limit instead of your initial $5,000 limit can only help. If you find an error, here’s a helpful site listing tips and contact information for the three credit bureaus provided by the Consumer Financial Protection Bureau.
Your credit score can range from around 350 to 850, and anything above a 720 or so is usually considered pretty good. Now just like Rome, your credit score cannot be built (or improved) in a day, but unlike Rome, it can be destroyed pretty quickly. Credit reports usually go back about seven years, so unless you find and correct a serious error or two on your credit report, there really aren’t any “silver bullets” (contrary to what some billboards and late-night commercials will try to tell you). If you’ve done a good job handling your debts and you have a great credit score, keep up the good work. If you’ve had some struggles with credit cards and being able to make payments on all of your debts, I’d encourage you to implement these tips and simply do better going forward. As they say, time heals wounds...and credit scores!

March 05, 2014

Required Minimum Distributions

Credit: Stuart Miles
In my line of work, I get to surprise people all of the time. Sometimes my advice or the conclusion of my financial analysis evokes an elated and relieved response. Sometimes it does not, but instead confirms a painful reality or brings about sadness and temporary distress (not to worry: I’m happy to develop a new plan or strategy for my clients who find themselves in temporary distress).

One of the most frequent surprises I get to deliver is the news that in the year you become 70 ½ years of age, if you have certain retirement investment accounts like a 401(k), Traditional IRA, or qualified (tax-deferred) annuity, you are required to start taking minimum distributions, whether you want to or not! Technically, you could choose not to take your minimum distributions and agree to pay one of the most onerous IRS penalties of 50% of the amount you should have withdrawn, but since I’ve never had any takers on that strategy, let’s push forward assuming you will take your required minimum distributions (RMDs).

The amount that has to be distributed is based on IRS life expectancy tables and the age of your spouse (or designated beneficiary). It’s a relatively simple multiplication problem consisting of your account’s previous year-end value and your applicable life expectancy factor, but there are so many tables and beneficiary circumstances to consider that I’d suggest you let your financial advisor or CPA do it for you. There are some brokerage firms and custodians that will actually calculate your RMD for you on your brokerage statements when they become required, but please note that brokerage firm calculations will only be relative to the accounts you have with them. If you have multiple accounts that require RMDs, you’ll need to be careful, and make sure you take enough in total and from each account to avoid the before-mentioned “bear” of a tax penalty.

This required distribution can be a good surprise. If you’re not already withdrawing from your retirement account, this distribution can feel like a little extra income that could be used for anything from family trips to home renovations. I should mention, though, that your distribution does not have to be spent! You have to withdraw it and you have to pay taxes on your withdrawal, but you’re welcome to top off your savings account or reinvest the proceeds in your after-tax brokerage account.

This required distribution can be a bad surprise if you didn’t know you had to do it (or forget to do it), but even if you’re on top of things, it still stinks because the tax man cometh. Uncle Sam wants to wish you a happy birthday from age 70 ½ on, and to commemorate the occasion, he’s going to want ordinary income taxes from your distribution amount to help fill his empty coffers.

If you’ve read this post, there is no reason to let RMDs surprise you. If you are 70 ½ or older, please double check with your financial advisor and CPA to make sure you are taking your RMDs. If you’re almost 70 ½, I’d urge you to meet with your financial advisor and make sure you have a game plan in place for your RMDs as there is often an opportunity for meaningful and significant tax and cash flow planning. If you’re nowhere near 70 ½, I bet you can think of someone you care about who is and would appreciate you looking out for them.