New College Graduates & Financial Planning

May is the month of college graduations.  Graduates, their family and friends celebrate, reflecting on how far the student has come and the promise of his future.  The graduate is transitioning from academic life to the “real” world.  Finances are a significant part of that world.  Habits established the first few years of working life set the precedent for financial stability in the future.  What should the graduate do?

Plan/Budget

The first step to financial success is a budget.  Estimate all your expenses (rent, utilities, student loan payments, other debt payments, food, car or commuting costs, savings, any other recurring payments.   List all sources of income.  For salary, use take-home amount.  Otherwise, you must include salary deductions for taxes as expenses.  Subtract total expenses from total income.  Hopefully, you’re not in the red – more expenses than income.  If so, look for expenses that can be cut.  Track your expenditures, compare to your plan, at least monthly.  The process is iterative, adjusting as things change.

Manage Debt

Managing debt and becoming a good credit risk is essential to accomplishing long term goals of acquiring those big ticket items (a car, a house) and eventually supporting your family.  College graduates often finish school with student loan debt and credit card debt.

Credit card debt is expensive. Finance charges on outstanding balances can be very high.  Any debt incurred during student days should be paid down as quickly as possible.  Pay more than the minimum on the credit cards with the highest rates.  Pay on time to avoid late fees. Late payments adversely impact credit rating.  If a credit card charges an annual fee consider closing it.  But don’t divest yourself of all cards.  Your credit score will be higher when the total amount owed is low compared to the total credit available.  Keep the credit, just don’t use it.  Only use the credit when you know you have the funds to pay for the purchase in full when the bill comes in.

Student loans.  Know the terms of your student loans.  If you have multiple loans, look to consolidate them.  This will help you manage the loan and often makes the monthly payment lower.  Investigate an income based payment plan. With this plan, loan payments start out lower and increase as your income increases.

Save

The habit of saving should begin with the first paycheck.  Called “paying yourself first”, some amount of money should be saved before you access the remainder for regular expenses.  Automatic transfer to an account can often be set up with your employer. Ideally, you should save 10 to15 percent of your income.  But if you can’t manage that, start with $25 to $50 a pay period.  The key is to start. 

Emergency fund.  The first savings goal is to build up a 3 to 6 month emergency fund.  This is to cover rent, utilities, and basic living expenses if you should lose your job.  Keep it in a liquid account (bank savings), don’t touch it.  It’s for an emergency, not for the trip your colleagues are planning to Vegas.

Retirement.   It’s hard to think of retiring when just starting a career but the best way to secure a comfortable retirement is to start early.  It is especially important to new employees since employers have cut back on employer funded pension plans.  If your employer offers a 401k retirement savings plan, participate as soon as you qualify.  Your contribution lowers your taxable income.  The employer often matches a percentage of your contribution.  Make sure you contribute enough to take advantage of the full matching.  Where else can you earn 100% on your money?

If your employer doesn’t offer a 401k or participation requires you wait a year to qualify, consider a Roth or traditional IRA.  The traditional IRA may lower your taxable income now, contributions and gains are not taxed until withdrawals which can’t start until you reach age 59 ½.  If you access the money before then, you will pay a 10% penalty.  A Roth IRA is funded with after tax dollars.  The gains are not taxable.   Withdrawals are to start at 59 ½ years of age.  However, if you hold the Roth for five years and then need the money, you can take out your contribution with no penalty.

401k and IRA funds may be invested in various financial instruments: certificate of deposits, stock funds, bond funds, etc.  Each of these instruments has a level of risk, from none (CD’s) to high (aggressive growth stock funds) with a related potential for growth.  It is important to learn about the options available.  Don’t avoid saving because you are a novice.  Start accumulating the funds, investing in what you understand. 

Curb the Splurge

A steady paycheck may seem like a financial windfall to a recent college student.  Exercise restraint.  Is the new car really necessary at this stage?  We all have heard about how a new car depreciates when driven off the lot.  A first apartment may be more affordable with roommates.  Do you really need those premium channels?  The choices made now establish spending habits for the future. 

Taking responsibility for personal finances and building financial security is an integral part of the graduate’s transition to the “real” world.  Some of these topics may be new. Read, investigate, question. The learning mustn’t stop. 

IRS Circular 230 Disclosure

Pursuant to U.S. Treasury Department Regulations, we are now required to advise you that any federal tax advice contained in this communication, including attachments and enclosures, is not intended by the Sender or Sandra G Johnson, CPA, P.C. to constitute a covered opinion pursuant to regulation section 10.35 or to be used for the purpose of (i) avoiding tax-related penalties under Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.

 

IRS and Foreign Accounts.

A US citizen or resident alien must report all income, that earned in the US and that earned in other countries, when filing his tax return.  Additionally, the taxpayer must answer a series of questions on the Schedule B about foreign accounts he holds or for which he has signature authority.  Failure to report foreign income or to disclose foreign accounts subjects the taxpayer to civil penalties and possible criminal prosecution.

Most taxpayers have no interest in foreign financial accounts which include bank accounts, brokerage accounts, mutual funds or trusts.  However, any taxpayer that has such an account has to be aware of IRS reporting requirements enacted under the Bank Secrecy Act.  The FBAR, Report of Foreign Bank and Financial Accounts, is used by the US government to identify people who may use foreign accounts to avoid US tax laws.  Investigators also use the FBAR to assist in tracking funds used for illegal purposes or to identify unreported foreign income.

Who must file an FBAR?  Any US citizen, US resident, US business, or US trust or estate with an interest in or signature authority over at least one financial account located outside the United States when the total value of all foreign financial accounts exceeds $10,000 at any time during the calendar year.   The FBAR must be filed even if the accounts generated no income for the tax year.

The FBAR is not filed with the tax return.  The tax return includes Schedule B with the questions about foreign accounts appropriately answered and Form 8938, Statement of Specified Foreign Financial Assets, if the value of the financial accounts was over $50,000 at yearend or over $75,000 at any time during the year.  The FBAR is completed and filed separately.  The FBAR is due by June 30.  No extensions are granted.

The consequences of not disclosing foreign financial accounts are significant.  If non-disclosure was inadvertent, non-willful in IRS terms, the penalty is up to $10,000.  If the non-reporting is considered willful, the penalty is the greater of $100,000 or 50 percent of the total of the account balances.  The level of the penalties is indicative of the seriousness of this issue to the IRS. 

If you are a taxpayer with an interest in foreign accounts it is probably best to have your tax professional review your holdings, identify your reporting requirements, and complete and file the forms.  Make sure this is done correctly and avoid future problems. 

IRS Circular 230 Disclosure

Pursuant to U.S. Treasury Department Regulations, we are now required to advise you that any federal tax advice contained in this communication, including attachments and enclosures, is not intended by the Sender or Sandra G Johnson, CPA, P.C. to constitute a covered opinion pursuant to regulation section 10.35 or to be used for the purpose of (i) avoiding tax-related penalties under Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.

 

The IRS and Identity Theft

Have you filed your tax return expecting a refund only to be notified by the IRS that a return was already filed in your name?  Over the past few years the number of returns filed fraudulently has skyrocketed.  Untangling the mess and getting the refund to the legitimate taxpayer can take six months or longer.

The IRS has upped its efforts to work on identity theft issues dedicating a significant number of employees to identify fraudulent tax returns and prevent the issuance of refunds. In January, federal authorities targeted 389 people in 32 states and Puerto Rico, arresting and charging suspected identity thieves.

In addition to increased staff and training, the IRS is using new fraud filtering software.  The agency also works closely with banks to ensure that refunds do not get to thieves.  Personal identification numbers are issued to victims to help in subsequent filings.  The IRS is striving to make the resolution process quicker for the identity theft victims.

What can you do to protect yourself?

•File your tax return early.

•Monitor your bank accounts regularly.

•Check your credit report at least once a year.

•Never give personal information over the phone or via e-mail unless you initiated the contact.  The IRS will never contact you by e-mail, or text, or social media. 

•Protect your Social Security number. Do not carry your card with you.  Only give the number when absolutely required.  Question why it is needed.

•Update anti-virus software, firewall, security patches and passwords.

•Avoid using unsecured wireless networks. Using your smart phone or iPad in the local coffee house for financial transactions is dangerous. When using a public computer, perhaps at the library, make sure you logoff your account and close the browser.

•Shred financial documents.

Identity theft is a lucrative business.  Protect yourself.  Revisit our blog of October 7, 2010, “Protecting Yourself from Identity Theft”.  Visit the IRS website: Identity Protection Tips.

IRS Circular 230 Disclosure

Pursuant to U.S. Treasury Department Regulations, we are now required to advise you that any federal tax advice contained in this communication, including attachments and enclosures, is not intended by the Sender or Sandra G Johnson, CPA, P.C. to constitute a covered opinion pursuant to regulation section 10.35 or to be used for the purpose of (i) avoiding tax-related penalties under Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.

 

 

 

 

IRS Startup Delay

The IRS will begin processing individual tax returns for 2012 on January 30th. The delay in the IRS start is due to the “fiscal cliff” legislation signed into law on January 2nd, requiring changes to tax processing. Some parts of the law reinstated credits retroactively to the January 1, 2012.

The vast majority of taxpayers, more than 120 million, will be able to file on January 30th, whether they file electronically or via paper. The IRS will be ready to process returns affected by some of the new legislation, specifically those returns which are affected by the AMT patch or which claim sales tax deduction, educator deduction, or higher tuition and fees deductions.

However, if the tax return requires some special forms, the taxpayer will not be able to file until late February or early March. The IRS needs additional time to change and test their processes. Key among these forms is the Residential Energy Credit, Depreciation and Amortization, and the General Business Credit. A complete list of the forms impacted can be found at the IRS website. The IRS will announce specific dates for the forms availability.

Regardless of when you file, it is advantageous to file electronically and to have any refund direct deposited.


IRS Circular 230 Disclosure

Pursuant to U.S. Treasury Department Regulations, we are now required to advise you that any federal tax advice contained in this communication, including attachments and enclosures, is not intended by the Sender or Sandra G Johnson, CPA, P.C. to constitute a covered opinion pursuant to regulation section 10.35 or to be used for the purpose of (i) avoiding tax-related penalties under Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.

The “Fiscal Cliff” Solution & How It Impacts You

For the last six to eight weeks of 2012, the media bombarded us with news of the “Fiscal Cliff”, essentially the expiration of the Bush tax cuts passed in 2003. If the tax cuts were allowed to expire, higher tax rates for all would take effect and possibly derail the country’s economic recovery. If the Bush tax cuts were continued, President Obama would not meet his goal of raising revenue by raising taxes on the wealthiest. The compromise was the American Taxpayer Relief Act of 2012, passed by Congress on January 1st and signed by the President on January 2nd.

The act makes the changes permanent, no expiration date. It maintains lower tax rates for most while raising tax rates for high income individuals. The act did little to address spending and the debt.

The main features of the law follow.

• The reduction of payroll taxes for social security was not extended. The deduction for social security in 2013 will be 6.2 percent rather than the 4.2 percent deducted in 2011 and 2012. This change impacted salaried employees lowering take home pay as of January 1st. For 2013, the tax is payable on income up to $113,700.
• For individuals making less than $400,000 per year ($450,000 for married filing jointly) the tax rates for income, dividends, and capital gains remained at the 2012 or Bush tax cut level.
• For those reporting income above these levels:
• The top marginal tax rate on income increased from 35% to 39.6%.
• The top marginal tax rate on capital gains increased from 15% to 20%.
• The dividend tax rate was set to the capital gains tax rate increasing from 15% to 20%.
• The phase-out of tax deductions and credits for individuals with income above $250,000 ($300,000 married filing jointly) was reinstated.
• The Alternative Minimum Tax (AMT) was permanently tied to inflation. The AMT was introduced to ensure that taxpayers with an adjusted gross income above a specified threshold paid some federal tax (a variety of deductions are disallowed). The threshold was not automatically adjusted. Over time more middle class taxpayers were required to pay the AMT. Congress had to pass legislation to adjust the threshold. The threshold is now tied to inflation.
• Estate taxes were raised to 40% of the value above $5 million, adjusted each year by inflation. Estate taxes were 35% of the value above $5,120,000.
• Many Bush era tax credits were extended through 2013 or made permanent. Some were reinstated for 2012. The credits affected include, but are not limited to, the child tax credit, the enhanced Earned Income Credit, tuition credit, child and dependent care credit, and home energy credit.
• Two provisions impact retirement savings.
• Tax free distributions from an IRA to a qualified charity by individuals above 70 ½ years of age have been extended for 2 years.
• Restrictions on 401K participants to transfer funds to an in-plan Roth have been lifted.
• Many temporary business tax provisions were extended. Of primary importance are Code Sec 179 small business expensing, bonus depreciation, the research tax credit, and the Work Opportunity Tax Credit.

Generally, the Tax Relief Act could be summarized by stating “if you have a lot of income, you’ll pay more. If you don’t, your taxes will be about the same”. However, since there are enough different items addressed, particularly on tax credits, you would be wise to consult with your tax preparer.

IRS Circular 230 Disclosure
Pursuant to U.S. Treasury Department Regulations, we are now required to advise you that any federal tax advice contained in this communication, including attachments and enclosures, is not intended by the Sender or Sandra G Johnson, CPA, P.C. to constitute a covered opinion pursuant to regulation section 10.35 or to be used for the purpose of (i) avoiding tax-related penalties under Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.

When is it Time to Find a New Accountant?

• My accountant doesn’t return my calls.
• My tax return is always on extension.
• I often receive penalties from the IRS.
• My accountant doesn’t answer my questions to my satisfaction.
• My accountant is too far away.
• My accountant is too busy to spend time with me.
• My accountant doesn’t explain my financial statements to me.
• I don’t know what my accountant does for his/her fee.
• I never sign any tax returns, my accountant takes care of that.
• I don’t know if my business is making a profit or not.
• I haven’t filed a tax return in ___ years.

IRS Circular 230 Disclosure


Pursuant to U.S. Treasury Department Regulations, we are now required to advise you that any federal tax advice contained in this communication, including attachments and enclosures, is not intended by the Sender or Sandra G Johnson, CPA, P.C. to constitute a covered opinion pursuant to regulation section 10.35 or to be used for the purpose of (i) avoiding tax-related penalties under Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.

Why Use a CPA?

Today, many people choose to prepare tax returns on their own or hire one of many unlicensed and/or unregistered tax preparers. Following is only a partial list of why you should hire a CPA to prepare your tax returns:

• CPAs must pass an intense uniform exam.
• CPAs must take continuing education (40 hours per year in New York State.)
• CPAs must have experience to become licensed.
• CPAs must have a college degree (150 credits as of 2009 in New York State.)
• CPAs must follow a strict code of ethics.
• CPAs must sign a tax return they are paid to prepare.
• CPAs can represent you in an audit.
• CPAs provide consistency and stability.
• CPA offices are open all year round.
• CPAs provide tax planning.
• CPAs have been rated the most trusted business professional in national studies.


IRS Circular 230 Disclosure

Pursuant to U.S. Treasury Department Regulations, we are now required to advise you that any federal tax advice contained in this communication, including attachments and enclosures, is not intended by the Sender or Sandra G Johnson, CPA, P.C. to constitute a covered opinion pursuant to regulation section 10.35 or to be used for the purpose of (i) avoiding tax-related penalties under Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.