7 Money Moves to Make at Year’s End

I don’t know about you, but I’m ready to see 2020 in the rearview mirror. But before you turn that calendar page and close the book on this dreadful year, take a bit of time to set yourself up for financial success in 2021. Spend these last two months reviewing what went well for you financially and what can be done better in the coming year.

Here’s my seven-item, year-end essential financial checklist:

  1. Spend an hour or two doing a review of the last year.

First, sit down with a paper and pen (or computer, if you prefer), as well as whatever financial records you have from the last 10 to 12 months. This may be your budget, an app such as Mint, or your bank’s website. You want to look at your income, your spending, your debts, and your goals. Did you meet your goals or fall short of them? Did you make progress toward paying off debt? Did your income decrease or increase? Did you notice any changes in your spending? Be honest with yourself and get a realistic picture—approach this without judgment or self-criticism, but instead with a positive attitude. This isn’t about beating yourself up—that’s not productive. Instead, it’s about making a few adjustments that can make a big difference.

  1. Set your financial goal(s) for the next year.

It’s tempting to get carried away with goal setting, but be realistic about what you can feasibly improve. Strive to set one or two goals and establish a plan to reach them. As the saying goes, a goal without a plan is just a wish. Putting systems in place will help ensure you can reach your goal rather than just wishing for it to come true.

Perhaps you want to save up for that long-awaited post-COVID trip? Pay off your car or buy a new one? Create an emergency fund? Increase your retirement savings? Or start a college savings plan for your kids? Maybe you want to pay off that credit card or student loan, or pay for home improvement? Perhaps it’s possible for you to set aside $20 a week or $100 a month—or more! Maybe by eliminating one or two expenses—a subscription or a weekly Starbucks run—you can channel that money toward your goal.

  1. Talk to a CPA about your tax standing.

Before 2020 is over, you might want to make some adjustments to your tax withholding. If your income changed significantly this year (and for many it did), whether it went up or down, you might be concerned about owing too much taxes. Schedule an appointment with a CPA for a year-end review. We can work with clients to make a few tweaks that could benefit your tax position for the coming year.

  1. Consider Health Savings Accounts (HSAs).

If you have a high-deductible health insurance plan and are not enrolled in Medicare, you may qualify for an HSA, which is a savings plan specifically designed to help people prepare for medical expenses. You may contribute up to a maximum amount per year ($3,550 for self-coverage and $7,100 for family coverage). This is an investment I recommend, if you qualify. Doing so not only lowers your taxable income for that tax year, but if the money is used on medical expenses, you will never owe any taxes on it. Plus, if you don’t use the money during that year, it can roll over to the next year. Health care costs are on everyone’s minds during the pandemic, so this could help to ease your mind, particularly if you foresee you will incur medical costs in the near future.

As a side note, I often am asked about whether Flexible Savings Accounts (FSAs) are similarly a good idea: I don’t really like them. An FSA, which is usually offered by an employer, requires you to predict at the beginning of the year how much money you will need to spend on health care in the next 12 months. If you put this money aside and don’t end up using it all, you lose access to the money. Though it’s better than no medical savings at all, in my opinion, the rules on FSAs are too inflexible to make this plan advantageous.

  1. Review your Social Security and disability benefits.

Each year, every American receives a statement from the Social Security Administration that details how much retirement savings have been put aside for you by the government. Those of us who are still far from retirement usually throw the statement in the trash with hardly a glance. But it’s a good idea to review it. If there’s income on there that isn’t yours or other erroneous information, it could be an indication of fraud.

If you’re receiving federal disability benefits, check to make sure you’re still eligible. People who don’t work for five out of the last 10 years lose these benefits. Getting back into the system takes about $5,000 of annual income, so it’s easy to maintain your benefits, but it can be very painful to lose them.

  1. Review your designated beneficiaries.

I’ve mentioned this before, and I’ve seen it happen: A married couple splits up, one of them dies before making changes to the beneficiaries on a life insurance policy, and the ex receives the entire sum. If you’ve had any major life changes—a new child, a new spouse, a divorce—it’s time to take a look at your beneficiaries on all accounts and make sure all the information is correct.

  1. Review your credit report.

Every American is entitled to a free credit report from each of the big three credit-reporting agencies (Equifax, Experian, and TransUnion) each year. Getting hold of all three of them can, admittedly, be trickier than it should be, but even getting two of them should give you a good picture of your credit rating. Review it to be sure that nothing looks amiss. Be sure that any late payments are correct or amended and nothing is a surprise. Anything that doesn’t look right is likely to be a simple reporting error, but it could also be an indication of fraud, so go over it carefully and take steps to make necessary corrections. The result could be an improved credit score, so it’s worth your time.

If you’re ready to make improvements to your financial picture but don’t know where to start, give us a call! We’re happy to make a one-hour appointment with you to go over your current financial picture and make a few recommendations that can get you started.

This November, we are grateful for you! Happy holidays!

Stock Up on School Supplies… and Savings

I love this back-to-school time of year when the air feels a touch cooler and the nostalgic scents of sharpened pencils and brand-new books are in the air. Now that the kiddos are headed back to school—whether in a classroom or through a computer screen—it makes sense to start thinking ahead to college.

As I mentioned in a recent post, putting a little money aside now can make a big difference in growing your savings. If you have children, it’s a good idea to put some of that money toward their education. The cost of higher education has never been higher than it is today, and this year, Forbes reported that student loan debt in this country hit a whopping $1.56 trillion, an all-time high. The average student loan debt for the class of 2018 is $29,200.

As a Personal Financial Specialist, education savings planning is one area in which I assist clients. And the best and most important advice I can offer is to start as early as possible.

529 Plans: Facts and Misconceptions

About one-third of parents (29%) use 529 college savings plans to save for their kids’ college, according to Forbes. They get their name from Section 529 of the IRS tax code, which authorizes tax-free status for qualified tuition programs. These plans are what we call “tax-advantage” plans. So yes, there is a tax benefit involved, but a common misperception is that the advantage happens immediately. It doesn’t.

A 529 is similar to a Roth IRA in that you deposit funds that have been taxed—your net income—so that when you withdraw the money later, you owe no taxes on it. Any appreciation of that investment is also tax free. But while the Roth is a retirement account, the 529 plan is to be used only for educational purposes at accredited institutions. This can include tuition, fees, room and board, books and supplies, and even student loan repayment (some other fees, such as transportation and cell phone expenses, don’t qualify).

What if your child decides not to go to college? Unfortunately, that complicates matters. The unused money can be withdrawn with a 10% penalty (account appreciation only—the money you put in will be returned for free), and it will be subject to income tax. However, you can roll it over to another account with a different beneficiary—perhaps a younger sibling or parent who wants to attend college.

Changes implemented in 2018 mean that 529 money can now be used for K-12 education as well, such as at private schools. But just because you can doesn’t mean you should—I don’t recommend this. In my experience, the benefit of a 529 plan comes from watching an investment grow with interest. Allowing the fund to mature is the best way to maximize its benefits, so withdrawing it while your child is still young cuts short that maturation period, and it reduces the amount available for higher education, where expenses are vastly more substantial.

I’ve also seen from experience the benefits of having a 529 plan on a child’s interest in college. There’s something about knowing the money is there and that, because of it, college is a possibility—it encourages a student to consider it and eventually enroll. For this reason, I recommend starting one. It’s a great gift idea for grandparents or other relatives or friends. Families should talk about it, regularly add to it, and share the benefits with their children so they can develop an appreciation for this helpful savings plan.

Prepaid Tuition Plans

While a 529 plan is portable and can be used at any accredited college or university, a prepaid tuition plan is a state-specific tool designed to increase a state’s college-going rate, with the enticement of paying now to save money later.

At its most basic, the concept is simple: You pay today’s tuition rates now, and when your child reaches college-going age, he or she can attend college at no cost, regardless of how much tuition may have grown. That’s no small savings: In the last 10 years, the cost of college has increased by 25%. By locking in today’s rates, you save in the long run.

Currently, 18 states offer some form of prepaid tuition plan, though individual states differ. Typically you can pay either all at once, for two or four years, or through a payment plan. You lock in your tuition rate at the time of purchase, and no matter what tuition costs when your child finally attends college, it doesn’t matter. College is still entirely paid for.

What if your child wants to attend an out-of-state school? That’s okay, but the benefits are mitigated. You’ll get only the value of the investment put toward the tuition, and no more. In other words, if you paid $25,000 and your child decides to attend an Ivy League institution out of state, that $25,000 is his, but that may only cover his first year (if that). Nonetheless, having college already paid for is a huge enticement for a student to attend college, so it’s likely to be a powerful and well-used investment.

If back-to-school time has you thinking about education savings, schedule an appointment with us today. We can advise you what to do when you use multiple sources to pay for college: 529 plans, grants, and student loans—which can get tricky on tax returns—as well as help you assess whether such plan is advantageous to you.

In the meantime, I wish you a happy fall and a healthy, enjoyable back-to-school season!

Filing Taxes Late? Start Here.

Filing Taxes Late? Start Here.

It’s a bit like that nightmare where you show up for class on the day of the final, and you realize you never came to class before now and you don’t know any of the stuff on the test.

You’ve missed the April 15 deadline to file your tax return. You feel like a deadbeat. You’re scared about the consequences and you feel like the only person in America who didn’t make the deadline.

Well, I’m here to tell you, you’re not. We see a lot of this at our office. People skulk in, their tails between their legs, embarrassed that they didn’t make the deadline and imagining outrageous consequences.

These aren’t criminals. They aren’t dishonest people. Many times, they’re simply afraid they can’t afford what they owe, so they wait until they can pull the money together.

Or they’re perfectionists who fall behind trying to get everything just right and miss the deadline. They’re late one year, then that snowballs into the next year, and then the next, and before they know it, they’re five years behind and too afraid to file because they think there’s no way to catch up. They’re terrified about drawing attention to themselves.

In fact, Forbes says that about 7 million Americans fail to file their income tax returns each year. You aren’t alone, and the good news is that it’s not as difficult as you might think to get back on track. But the worst thing you can do is nothing.

  1. Schedule a meeting. Send us an email or give us a call. No matter how bad you think it is or how embarrassed you feel, you should know that we’ve seen it all before and we’re not going to intimidate you or make you feel bad. Taking that first step to schedule an appointment will go a long way toward helping you to breathe easier. When you call us, we’ll let you know what to bring with you to get the process started. Don’t worry if you’re missing documents. After all, that might be the reason you were late. We have ways to find some of that information you may be missing.
  1. Expect to sign a power of attorney. Usually, this is the first step in the process. Signing over power of attorney to us enables us to do all the talking for you. That way we can get hold of information, update all the information the IRS needs, and speak with the necessary parties, all so you don’t have to. Plus, as experts, we know the right things to say and the right questions to ask.
  1. Plan to make a plan. At our meeting, we’ll formulate a plan to track down information, submit letters, file forms, and make payments. Don’t worry that you’ll have to pay everything at our meeting—if you owe something (which we won’t know until we meet with you), we can come up with a reasonable payment plan that works for you. The IRS realizes that something is better than nothing, so as long as you’re committed to making regular payments, you’re usually in good shape.

Throughout my experience as a CPA, one of the most rewarding things about my job has been working with clients who were so behind on their taxes that they thought they were beyond hope. This is because, after working with them and coming up with a plan to correct the situation, I’ve witnessed them gaining peace of mind. The transformation was almost physical.

At Ludmila CPA, we know being behind on your taxes can be scary and even emotional. It affects your quality of life. But we do care, and we’re in your corner. Contact us today, and let’s figure it out together.

Tips for Personal Tax Prep – Making Tax Season Less Taxing

Tips for Personal Tax Prep

We understand. The whole idea of hauling that box of papers out of the closet, sorting through them to decide what’s important and what’s not, pestering people to collect whatever documents are missing (and not being quite sure what those might be), then heading to the accountant’s office with frazzled nerves as you fear the worst outcome … tax season is rarely anyone’s favorite time of year. Trust us, we get it. We Make Tax Season Less Taxing

For some folks, going to the accountant is like going to the dentist: You dread it enough that you only go when you absolutely have to, and you spend the whole time there with a sinking feeling that you’re about to find out something bad.

The problem with that approach is that there might be something that’s a tiny issue now, something that’s easily fixable with a few adjustments, but it could wind up being a major issue next year. Avoiding your CPA doesn’t prevent the issue; it just makes it worse. (Also like the dentist.)

At our offices, we tend to only see some clients when there’s a huge problem. Maybe a few years ago they thought it would be easier, less scary, to have their friends do their taxes. Then they wind up sitting in our office, terrified because they owe a $4,000 penalty to the IRS for gross income omission.

Had they made the small investment in a CPA, they would have benefitted from a knowledgeable expert spotting such an oversight early on and correcting the mistake—or, at the very least, helping them to anticipate and mitigate the consequences. Paying us for an hour of our time buys you peace of mind. And trust us, there’s nothing more valuable than that.

We’re firm believers in surrounding yourself with professionals. You shouldn’t diagnose your own illnesses, you shouldn’t fix your own electrical system, and you shouldn’t manage your own stock portfolio—not without experts in your corner. And you shouldn’t file your tax return without insight from a trained professional, either.

We also won’t need you to bring in that dreaded box. When you call us and schedule an appointment, we’ll let you know what things we’ll actually need from you—and it won’t be as much as you’d think. At our meeting, we’ll go through your document package together, and we’ll let you know if anything’s incomplete, doesn’t look right, or is missing. Don’t worry about being perfect; no one expects that. We’re in this together, and we know that you’re not an expert. We’ll talk you through what’s next and make filing your tax return as un-scary a process as possible.

Then comes the most important part of the meeting: planning next year. The more thought you put into next year’s tax filing, the more rewards you’ll reap. Next year, we will remind you it’s tax preparation time to help you collect the documents you’ll need and to schedule a meeting. And then we’ll debrief—what went well, and what didn’t? What changed for you? What adjustments should we make in response? What are your financial goals, and how can we help you reach them?

Are you convinced? The April 15 tax deadline is fast approaching, so contact us today to schedule an appointment or to discuss any concerns you may have. We’re ready to help you make tax season a whole lot less taxing.

Are you a small business owner? Check out our tax prep tips for your small business!


9 Financial Resolutions for 2019

Nine financial resolutions to get your finances in shape for the new year.

If you’re like us, the last month has been a blur of excess—too much food, too much sugar, too much spending, and just plain too much stuff! But now that the new year has begun, it’s time to make those resolutions to eat better, get in shape, and get the house in order.

But are your finances in shape for 2019?

It’s never too late to get your financial house in order, but January is an ideal time to start with a fresh, clean slate. As you’re pulling those documents together in preparation for tax time, why not spend a little extra time cleaning out your financial clutter and laying the groundwork for a more stress-free year?

Here are 9 financial resolutions we suggest making right now for a healthier bottom line:

  1. Set financial goals. What more could you be doing to grow your money, increase profits, and spend or save more wisely? Write down your goals and determine steps you can take toward reaching them. Don’t let this step intimidate you—we’re not talking about major changes here. Start small. Maybe you’re looking to save more money for retirement, a major purchase, or a vacation? Try putting aside an extra $50 each week, or from each paycheck. Even just $5 more per week gives you $260 more at the end of the year.
  2. Create a budget. You know it’s a good idea, but it seems intimidating, not only because it’s extra work but because you’re worried you’ll discover you can’t afford things or will be limited. Here’s a secret the financial pros know: The opposite is true. When you make a good, detailed budget and adhere to it, you’ll be amazed by the feeling of freedom that comes as a result. When you’re designing a budget based on reality and that addresses every type of spending you do in a month (and even a bit for savings), you’ll realize that there aren’t any surprises. Your debts, your groceries, the gas for your car, the office supplies, the new shoes, even those dinners out … they’re all accounted for, and you’ll feel ready to tackle it all in the month to come. If you’re having trouble figuring out how to start, let us know—we’re happy to share tools and tips to get you off on the right foot.
  3. Invest in accounting software. Numerous tools exist to help individuals and small businesses keep track of their finances, from Xero to Quickbooks and more. When you put your financial details into a personal accounting system, you’ll get a clear picture over the coming year of where you’re spending—or spending too much. Perhaps you’ll also realize that you can afford to save or donate more than you thought you could. Your system can probably enable you to make a budget and help you stay on target each month. It may even help you to catch fraudulent activity more quickly since it allows you to look at all your accounts in one place and over time. The more you use it, the more data you’ll have in order to make wise economic decisions. Many systems even allow you to set up bill paying, which leads to our next resolution…
  4. Schedule automatic bill payments. In the end, we’re all human. We get busy, we take vacations, and statements occasionally get lost in the mail. But your most important bills—such as your mortgage, rent, and utilities—are due at the same time each month or each quarter. Why not take some work off your plate this year and schedule automatic bill payments through your bank, creditor websites, or personal accounting system? This will help ensure that you never make payments late or miss them altogether, which will ultimately help your credit score. Setting it up takes a bit of a time investment, but in the long run, it will save you time for other more important things.
  5. Keep credit in check. As of this month, the average American household has an average of $5,700 in credit card debt, according to a survey of consumer finances by the U.S. Federal Reserve. And this same research shows that the higher the credit card debt, the lower the net worth. If your holiday spending went on credit cards, resolve to get your debt under control and pay it off. Resolve to never charge what you can’t pay off in full the next month, or just stop using credit altogether. Set up automatic bill pay to ensure the full balance is automatically paid on time, every time. If your debt is too large to pay at once, start small. Pay your minimum payments each month, and put anything extra you can afford going toward paying off the smallest debt. Once that card is paid off, roll the payment into what you pay toward the next one.
  6. Plan to donate. As I discussed in my last post, the new tax laws will greatly affect how people donate to charitable organizations. When you’re creating your budget, figure out how much you can afford to donate each week, month, quarter, or year and set up automatic donation payments.
  7. Track mileage. Although the new tax code may make itemization unnecessary, it’s a good idea to start on the right track by keeping a close eye on expenses, just in case itemization becomes an option. One thing you can start doing is tracking your mileage. The IRS will allow business owners or independent contractors to either write off actual vehicle expenses or mileage, whichever is higher. A number of apps exist, such as MileIQ, Mileage Tracker, or MileLogger, to help you easily record mileage and calculate potential reimbursement. And be sure to keep a backup of this data elsewhere, just in case something happens to your phone or device.
  8. Plan IRA contributions ahead of time. This time of year, you may hear from your financial advisor that you can squeeze in last-minute contributions to IRA accounts without missing the April 15 contribution deadline. Then you’re scrambling to see what you might have lying around to put in. A better idea is to consult with your CPA to determine how much you can contribute in the coming year and set up automatic transfers each month. This is a much more pain-free method since we often don’t miss what we never felt we had to begin with. This is a particularly good method for self-employed individuals, whose income may fluctuate from month to month, making it hard to come up with unplanned IRA payments.
  9. Set up your CPA appointment! Accountants’ schedules are already filling up, and before you know it, April 15 will be here. Call to schedule your appointment today to get your tax filing done and out of the way, so you can enjoy any potential refunds even sooner.

From all of us at Ludmila CPA, have a healthy, happy new year!