End-of-Year Tax Planning Checklist

I know what you’re thinking: “But I JUST filed my taxes a couple months ago!”

It’s been a bizarre year, to say the least. And with the federal government having moved this year’s tax return filing deadline from April 15 to July 15, it’s true that you may just have filed your taxes a couple months ago. Nonetheless, time — and the IRS — wait for no one. We are rapidly heading to the end of 2020 (thank goodness), and the end of the year means performing a few actions and making important financial decisions.

First, although many people may be wondering if the election will affect our tax situation, it’s unlikely that any changes will have an effect on 2020. So you should proceed with your tax planning using current tax laws.

To help you keep your priorities in order and your deadlines straight, we’ve put together this list of end-of-year tax planning tips for individuals and businesses.

Plan Your Gifts

We’re not talking about Christmas shopping here — this refers to financial gifts you may give to loved ones. Currently, the tax law allows for an annual exemption of $15,000 gift per person. A financial gift can be a straight gift of cash, or it can mean college expenses being paid directly to the institution, a deposit into a 529 college savings plan, or even forgiveness on an outstanding loan. Gifts must be given in plenty of time before January, meaning that checks must clear the bank by December 31, 2020 in order to qualify for this exemption. I have indeed heard of court cases in which recipients didn’t cash their checks until January, thereby making the gift questionable — don’t let this happen to you.

The IRS also allows for gift splitting, meaning that a married couple can qualify for the annual gift exemption even if they together give up to $30,000 to the same individual. However, if you wish to do this, you MUST file a Form 709 — U.S. Gift Tax Return — next year.

Consider Charitable Giving

Recent changes to the tax law raised the standard deduction to $12,400 per individual or $24,800 for a couple. For some, this is good news, but if you’re used to itemizing deductions for charitable donations and other expenses, this may not be favorable — you would have to give more than the standard deduction to see any benefit in your tax return. This disincentivizes giving, which has had negative impacts for a lot of organizations.

There are ways to make your donations count, however. First, you can contribute to a Donor-advised Fund (DaF). This arrangement allows you to prepay for donations for several coming years, then advise the account manager when and how much to distribute to the organizations of your choice. Prepaying allows you to surpass the standard deduction, so you can write off the donation but still provide steady levels of donations for the next few years. For example, if you wish to donate $10,000 to a charity, this doesn’t exceed the standard deduction. But if you paid for two years at a time — $20,000 — into a DaF, you could request to distribute $10,000 this year and $10,000 next year, and you can write off the entire $20,000 for the 2020 tax year.

Prepay to Itemize Deductions

Along these same lines, know that the increase in the standard deduction was designed to replace itemized deductions for donations, mortgage interest, accounting fees, DMV fees, real estate tax, and more. In some ways, this streamlines the tax preparation process. However, it limits the benefits of paying certain fees. Sometimes there is a way around this, however: prepayment.

If you prepay enough to exceed the standard deduction, you can benefit from a deduction for the 2020 tax year. For example, say you are part of a married couple who files jointly, and you’ve paid $15,000 in mortgage interest this year and donated $8,000 to charitable organizations. This totals $23,000, which still falls below the standard deduction of $24,800. If you prepaid some charitable giving, real estate taxes, or another expense for 2021 before this year is over, you could feasibly exceed the standard deduction and qualify for reduced taxable income. This provides immediate savings for you and reduces your payment burden for next year — a year when the tax laws could potentially change. Our standard advice for taxpayers is to accelerate income and delay expenses, so this approach checks both boxes.

Convert to a Roth IRA

We recommend that individuals convert their traditional retirement accounts, which defer taxes until withdrawal (at a potentially higher rate than today’s), to Roth IRAs, which contain funds that have already been taxed. This means that when you withdraw funds, you pay no additional taxes — and neither would any heirs on this account. Additionally, traditional IRAs involve required minimum distributions (RMDs). This is the first year in recent memory in which no RMD was required, and the age to begin RMDs moved from 70.5 to 72. The RMD is expected to be back in 2021. However, Roth plans have no such requirement.

But this is general advice and may not suit everyone right now. Contact us, and we can sit down with you to look at your tax rate, income situation, etc. to determine whether this is a good option for you.

Remember that if you plan to make IRA contributions (Traditional or Roth) for 2020, you may do so until April 15, 2021. If you decide to make such a contribution after your tax return has been filed, your CPA can submit an amended return.

Address Retirement Contributions

Speaking of your retirement, now is the time to review your employee contribution to a 401(k) or Simplified Employee Pension (SEP) accounts. If you’re in a position to increase your contribution before the year’s end, it could lower your taxable income, thereby lowering your tax burden. The maximum contribution for 2020 is $19,500 per person up to age 50, and for those older than 50, the maximum is $26,000. Check your paystub; if you’re not close to that and can afford to contribute more, do so.

Cash-based businesses should also plan to make all their pension contributions by the end of the year in order for them to count toward this year’s deductions.

Harvest Your Losses

If you have significant stock gains from this year, this adds to your taxable income. Talk to your financial advisor about the option for loss harvesting. In this approach, you would sell any securities that are not performing well and would result in financial losses; the losses would qualify for tax deduction. This may offset any gains you’ve realized this year, thereby potentially lowering your tax burden.

Review Your Finances Now

The end of the year is the perfect time to make an appointment with a CPA to review your financial picture. If you schedule an appointment with us, we can happily meet with you via videoconference to make recommendations for improving your tax situation, increasing your financial gains, and achieving long-term goals.

As always, remember that we’re here for any of your tax and small business needs. Happy planning!

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!

Estate Planning 101

It’s not morbid or just for the rich — and the time to get started is now.

For many people, the words “estate plan” conjure up movie scenes of eager families awaiting readings of the wills of their wealthy relatives. It’s presumed to be the domain of the ultra-wealthy, and to discuss estate planning with one’s family is often dismissed as morbid, something unpleasant, and certainly not for the young.

None of this is true. In fact, having a frank conversation about estate planning is a gift, a kindness. And it’s a conversation that every family ought to have, whatever their financial situation or age might be.

Wills vs. Trusts

Many decades’ worth of films would have us believe that what we all need is a will. And this makes sense. After all, wills are contestable and often in dispute, so they make for great storytelling.

But in estate planning 101, your first step is to establish a living trust — so called because it is created while you’re alive and can be amended during your lifetime as your circumstances change.

A will is a statement of how you want your affairs handled and your assets distributed upon your death. But a will also becomes part of public record, so anything left through a will must go through probate court. In essence, a will leaves your decisions in the hands of a judge. A probate attorney will be needed by those left behind to help oversee the process, and all of this can wind up costing 2-4% of the estate in attorney and court fees.

A trust, on the other hand, offers more control over your assets than a will does — like its name implies, you can trust that your wishes will be heeded. This comes at a price, however: While you can usually make a will very cheaply, a trust must be done by an attorney, is far more thorough, and must be managed continuously. But the benefit is that it avoids probate entirely, helping to ensure that those assets are distributed immediately, without the need for further legal intervention. So while the initial expense of a trust is greater, the value it provides is priceless.

For families with minor children, this is particularly important because it ensures that whomever you wish to become the guardian of your children upon your death can do so right away, and the assets you leave behind for them are safely and rapidly disbursed to them.

If you do nothing else in the way of estate planning, at least set up a living trust.

Check Beneficiaries

Any time we start a new job, set up a new insurance policy, or establish a retirement account, we’re asked to provide names and information about our beneficiaries, the people we wish to receive our money in the event of our death. Then time passes — sometimes many years — and we forget what we wrote in that paperwork or whom we may have named as beneficiaries. For those who are divorced, remarried, have more children, or are predeceased by beneficiaries, this can become problematic.

Make it a habit to review these documents at least once a year to ensure that your beneficiary information is up to date. I’ve heard of many cases in which divorced couples didn’t update their life insurance information, and ex-spouses inherited entire policies, to the detriment of the new family. That’s a terrible mistake to make, and an easy one to correct.

Life Insurance

While we’re on the subject of life insurance, I highly recommend a term life policy, which, like its name suggests, involves paying a monthly premium for a specific term, or period of time. In the event of your death, your stated beneficiaries receive the coverage amount to subsidize the lost income you otherwise would have brought home. You can arrange for different levels of coverage. They’re also fairly inexpensive to purchase — for young people it can be as low as $25-$30 a month (or more once you reach age 40), depending on age and whether you are a smoker. The younger and healthier you are when you sign up, the cheaper it will be.

Think of a life insurance policy benefit as 20 years’ worth of income replacement. Multiple your annual salary by 20, and that’s about how much you’d need in coverage. For example, if you earn $50,000 per year, you would seek a policy with a death benefit of $1 million.

Of course, you might not be able to afford that. Many of us can’t. Don’t let that stop you from purchasing a policy — just buy something, as much coverage as you can afford. Anything will be helpful to the family members left behind. Usually, once people purchase an initial policy, they’re able to increase the coverage amount over several years as their circumstances change.

Communicate Your Plan and Information

Unfortunately, many people with detailed plans and many assets neglect a critical piece of the puzzle: communicating their financial information to those they will leave behind.

Take a bit of time right now and create a list of all your financial accounts, including institution names, account numbers, approximate balances, passwords, and access links if appropriate. Then share it with a trustee, or a trusted friend or family member. If you aren’t comfortable having it in your home or someone else’s, put it in a safety deposit box. In the event of your death, this person can act on your behalf to work with institutions and ensure that your wishes, as expressed through the trust, may be executed and money accessed without delay.

Review Your Finances

In the past, estate planning was heavily concerned with estate taxes, which historically might have eaten up a significant share of a person’s estate. These days, the estate tax exemption is quite high ($11M+ per person) — but that’s not to say the exemption won’t change. As the pandemic upends nearly every aspect of our economy, it’s possible that lawmakers will eye estate taxes as a possible source of revenue. My best advice is simply to keep an eye on the tax rate and work with a CPA to address any changes that might put you in a more advantageous tax situation — particularly if your estate is currently between $5 million and $11 million.

Regardless of what your financial picture looks like, estate planning should begin with a review of your finances with a CPA, who can identify issues to consider in terms of your assets and make recommendations about professionals to assist in your planning. Though we aren’t qualified to prepare estate documents here at Ludmila CPA, a one-hour meeting with an accountant can be life changing and a great step toward the estate-planning process.

Contact us today to see how we can help you get started. Stay well and continue enjoying your summer!estate planning

Retirement Planning Made Simple

It’s not as hard as you think to start saving for retirement.

For many of my clients, when I bring up the subject of retirement planning, they start squirming in their chairs. Their discomfort is obvious — they feel guilty or ashamed about not having saved much (if anything), and they may even joke, “Oh, I’ll never be able to retire. I’ll just work until I die!”

Most people, it seems, believe they’ll need millions upon millions of dollars to properly retire. Recently I heard $5 million was the approximate amount. And some are so overwhelmed by this presumed sum that they throw up their hands and say, “Why bother? I’ll never have enough.” Retirement, for them, is as elusive and dreamlike as unicorns or the Loch Ness monster.

But you may not need as much as you think. Sure, we’d all like to have $5 million in the bank to retire with — that sure would make life comfortable. But chances are, to maintain your current lifestyle, you should follow this good rule of thumb: Figure that you’ll need 70 percent of your pre-retirement salary to live comfortably in retirement. So if you earn $100,000 a year now, you should plan to have 70% of that, or $70,000 per year saved, for each year of your retirement. There are several caveats to that rule, which I’ll go into in a minute, but here’s the basic formula for calculating your retirement savings goal:

(Current gross salary x 70%) x (the number of retirement years) = Retirement savings goal

So if your pre-retirement gross salary is $100,000, and you plan to retire at age 65, you can generally expect that retirement to last for 20-30 years. So here’s what that formula would look like for you:

$70,000 x 30 (years) = $2.1 million

That total would need to be adjusted for inflation as well as the growth of your savings. The 2019 rate of inflation was 2.3%, but it literally changes every day — especially in these turbulent times we’re living in. For simplicity, using 2% as annual inflation rate should work for this analysis. For annualized average returns on investments, one can safely use 6% based on historical market performance.

Right about now, you’re probably looking at your own total and worried that you’ll never have millions of dollars of cash in the bank. Don’t panic. The majority of us won’t have it.

But remember: This doesn’t mean you need to have $2.1 million (or whatever your final total is) in the bank as cash upon retirement. This is a cumulative total of assets. Remember that Social Security, pensions, real estate, businesses, and anything in your investment portfolio is included in that total.

I don’t know about you, but having a specific figure as a goal makes it seem more doable. Rather than socking money away blindly toward a vague, undefined goal, you can be more strategic about how much you can put away each year, or even each month or week.

Typically, you want a mix of the following retirement income:

  • Taxable income: This “bucket” contains money put in AFTER taxes, but any growth is entirely taxable. These accounts are also extremely liquid and easily accessed. Your emergency fund should be in this bucket. It includes interest income earned from such sources as mutual funds or Certificates of Deposit, stock dividends, or capital gains, as well as income earned from rental properties.
  • Tax-deferred income: This include withdrawals from any retirement plans to which you contributed pre-tax dollars, such as a traditional IRA, 401(k), most pensions, annuities, etc.
  • Tax-free income: This bucket contains money for which you have already been taxed. It would include Roth IRAs or whole life insurance policies.

Obviously, the less tax we pay, the more cash we have available for ourselves, so you want to emphasize as much tax-free income as possible, but you should also have slow-growth, liquid accounts such as money markets or savings accounts, readily accessible for short-term expenses. Your next-best option would be to seek investments that generate qualified dividends and capital gains, because of their comparatively low tax rates. Know that your taxes may account for up to 37 percent of your income (or more if you live in the state which also levies income tax). It’s likely that tax rates will be significantly higher during your retirement than they are now, partially due to the expenditures currently being used to deal with the coronavirus crisis.

These are just the basics when it comes to retirement planning, but everyone’s situation is unique. My point here is that the time to plan for retirement is now, whether you’re young and plan to work for several more decades, squarely in the middle of your career, or rapidly approaching retirement. It’s never too late, but every day you wait to plan is a day you miss an opportunity to put a little more aside.

Arriving at your “magic number” is complicated, and we can help. Sitting down with a CPA can help with forecasting, goal setting and retirement planning, and as a Professional Financial Specialist (PFS), I can assist with this and much more. Contact us today to see how we can help you stop squirming in your chair whenever you hear the word “retirement”!retirement planning

How to Make Savings a Habit

Tips for saving more money and watching it grow.

Lately, it seems we’re constantly bombarded with terrible news stemming from the coronavirus. So it was a pleasant surprise to read recently about one silver lining to come from the outbreak: the historic rise in personal income and savings.

That’s right. Americans saved a record-breaking 33% of their income in April 2020, creating an increase of 10.5% in personal income.

In the face of tremendous financial uncertainty caused by the virus, with economic stimulus payments in hand, stores closed, and travel and leisure activities almost totally off the table, Americans have been stockpiling cash at unprecedented levels. That’s great news and is sure to help many of us weather the economic storm many experts say is sure to come our way.

But putting money aside in savings hasn’t typically been a habit many of us have cultivated. The vast majority of Americans have no savings — or at least haven’t saved regularly. Now seems like the perfect time to turn our current savings trend into a long-lasting habit that helps us meet future financial challenges, meet savings goals, and develop peace of mind.

How to Save

When I was just starting out in my career, my money was tight. I remember thinking, “There’s no way I can afford to put money aside in savings — I need every dollar I get!” But for most of us, this simply isn’t true. A good household budget will reveal where your money is going each month, and often you’ll find that you’re spending more than necessary on non-essential expenses. Even putting aside $50 a paycheck can add up to more than $1,200 a year. You can decide the maximum amount you can set aside each pay period or month and work with your employer and bank to have those funds automatically deposited or transferred into your savings account regularly. When you don’t actually see that money showing up in your checking account, it will be out of sight and out of mind, which allows it to grow untouched.

Create Your Emergency Fund

The upside of squirreling money away these days is that we’re creating an emergency fund for ourselves in the case of job losses, unforeseen medical issues, or repairs on cars to get to essential jobs. Even when the economy begins to normalize and virus shutdowns are in the rearview mirror, keeping an emergency fund intact is critical. Financial guru Dave Ramsey recommends that everyone have an emergency fund of at least $1,000, and this is advice we subscribe to here at Ludmila CPA. If you don’t currently have this much set aside, you should make this a top priority.

Put anything extra after you’ve done your monthly budget into a separate savings account that you can access for true emergencies. This is not for buying clothes, taking trips, or paying bills, which are expenses you should be anticipating and budgeting for. Rather, this emergency fund is for the expenses we don’t see coming — like a new tire or car repair, a busted air conditioner, or a burst pipe in your plumbing — and it should sit outside the accounts you use to pay bills. It should be fairly liquid, so not an investment, but not so easy to use that you’re tempted to. Once you have an emergency fund in place, you’ll enjoy peace of mind from knowing that a true emergency won’t wipe you out financially.

Then you can move to the next step: creating a safety net.

Save 3 to 6 Months’ Worth of Expenses

It’s always a good idea to plan for the worst — a job loss, a catastrophic illness, etc. — by accumulating enough money to live on if you lose your income. With the cloud of virus-related economic uncertainty expected to linger for months or even years, it’s especially wise to start growing your financial safety net of three to six months’ worth of household expenses. You’ll find that having this amount set aside provides tremendous reassurance that you could survive a loss of income. And if you have lost your job, this fund buys you time to find the best job for you, rather than feeling rushed into taking the first one you can find out of desperation.

Once you have this in place, put as much savings as you can into your retirement account(s).

Where to Keep Your Savings

Depending on your purpose and goals, you have several types of savings accounts to choose from:

  • Basic Savings Account: This is an easy option — ideal for having direct deposits automatically placed into it and liquid enough to access in case of emergency. However, interest rates on savings accounts are so low — lower than inflation — that it’s not a great way to grow your money.
  • Money Market: A money market offers more interest — though only slightly more — enabling your money to grow a bit faster. And it’s just a touch less convenient to access, which can be a good thing, as it won’t tempt you to dip into it for non-emergencies.
  • Certificates of Deposit: A CD is a good, conservative savings option that forces you to hold off on using your savings. With this time deposit, you wait for the CD to mature and accrue interest, based on a specified fixed interest rate. These offer slightly higher interest rates than savings accounts, but rates are so low right now that it might be best to select a CD with a shorter term that will mature more quickly. When interest rates are higher, go for a longer period to see that savings maximized.
  • Investments: To grow money, experts recommend a portfolio of diverse assets — real estate, businesses, mutual funds, and other financial instruments offered by brokerage firms. Many tax-favorable accounts deserve attention, namely the traditional and Roth IRA, which you should contribute to regularly. Consult a professional to discuss which one is best for your situation.
  • Health Savings Accounts: An HSA is for families or singles who have high-deductible health plans to accrue savings for medical expenses. The nice thing about this plan is that it enables you to pay for medical expenses with pre-tax money.
  • Education Savings Plans: Plans such as the 529 are designed to help families afford the rising costs of college. Speak to a financial professional to set this up or determine how best to save for your child’s college education.

I’m heartened to see so many people putting aside savings during this difficult time, but for it to make a real difference, now’s the time to start making this a habit, for your long-term financial health. We’d love to help guide you toward the right savings solution — contact us today.

And enjoy your summer!

Tips for Trimming Your Budget

Part 2 of 2-part Budgeting Tips Series

What should you cut? What shouldn’t you touch?

Earlier this month, I shared my advice about budgeting tips — why it’s important, why it’s less scary and limiting than you think, and how to get started. As we face the uncertain times ahead that COVID-19 has only begun to show us, it’s more important than ever to get a clear sense of our finances and prepare for the worst.

Once you’ve got the facts in front of you with your newly created budget, and you know exactly how much money is coming in and going out the door, now it’s time to make some decisions. If you’re fortunate enough to be making more than you’re spending, you should be looking for ways to save the excess. But if you’re like most of us and living beyond your means, don’t beat yourself up. You aren’t alone. You’re already in more control and headed toward better financial health.

Here are my budgeting tips for cutting expenses and bringing spending down to a manageable level.

Start Trimming the Fat

Where can you make spending cuts? Chances are, a few cuts here and there will make a big difference, and they won’t be as painful as you’d think.

Perhaps you can carry our current norm of dining at home a bit more into the future, allowing you to curb some of that restaurant spending. And now that you’re drinking most of your coffee at home, maybe you realize that your afternoon latte can be an occasional treat, not a frequent habit. What about the baby magazine you’re still receiving, now that your “baby” is 11, or the magazine you’re getting that you’ve never read? Maybe now that you’ve had to miss your bimonthly manicure, you realize you could probably do your own nails from now on and save that $100+ a month. Or maybe your Disney+ subscription isn’t worth the one show you’re watching on it. The point is to identify expenses that aren’t necessary. Many of these things cost very little each month, but when added together, they come to hundreds, even thousands of dollars that could be put to better use. These are small budgeting tips that can make a big difference.

Set Priorities

Of course many expenses are not optional. Food, shelter, utilities, a vehicle, and gas … these things are vital to our survival. Pay those things first. You must have food to eat, a roof over your head, electricity, water, and a ride to work.

That said, however, it’s also important to point out that those expenses can be lowered. Eating at home is less expensive than eating out, for sure, but some stores may also be less expensive than others. Take note of how much food in your home is wasted; perhaps you can buy less at the store to ensure more is eaten. Not that you should restrict yourself to a diet of rice and beans, but look for ways to trim spending on your food items — buying generic brands, for example, or only paying with cash to prevent you from impulse buying.

The bottom line here is that if you’re struggling to afford even these most basic of needs, and cutting your other spending still doesn’t help, it’s time to take further steps to negotiate some lower living expenses. Your main goal, especially if your income for the near future is uncertain, is to conserve cash until you know you’re in a safer position.

Start Negotiating

Once you’ve cancelled unnecessary expenses, it’s time to play hardball and start negotiating lower payments on the necessary ones. Consider the following:

  • If you rent, talk to your landlord about options. In the midst of the COVID crisis, many landlords are accepting partial rent payments, waiving late fees, or even waiving rents altogether. Perhaps yours can work with you. You should know, however, that a federal freeze was placed on evictions due to the pandemic, so rest assured you won’t be thrown out in the cold as this crisis rages on.
  • If you have a mortgage, there may be resources available to help you. The Federal Housing Finance Agency has rounded up a page full of COVID-19 information and resources regarding mortgage assistance. Talk to your lender about your options.
  • The stimulus package enacted by Congress provided student loan holders a six-month break from payments. If you currently owe student loans, this is a great opportunity to save that money and put it toward other debts. No interest will accrue during those six months. After that six months is up, it may be possible to qualify for a hardship forbearance, which allows you to pause payments during times of financial hardship (although interest may accrue). Talk to your lender about your options.
  • Now may be the time to look for a better interest rate on your credit card. Call your creditor to ask for a lower rate, and if you can’t get one, maybe it’s time to shop around for a lower-rate card, then transfer your balance to the new card to lower your overall balance. Then look at paying down that debt, even if it means paying only the minimum each month and not adding to the existing balance.

Most creditors realize that something is better than nothing. If you find you’re unable to make a full monthly payment, let them know ahead of time and try to work out a payment plan. This can keep bill collectors off your back and help you stay in good financial standing as you get through this rough patch.

Pay Yourself

It’s important that every budget includes payments to yourself in the form of savings. I’ll talk in more detail in my June blog about savings tips, but you should make it a priority to put some money away each month into savings, even if it’s only $50. Work to build up an emergency fund of at least $1,000 so that you can deal with unexpected costs like car or home repair without breaking your budget or dipping into credit cards.

Money isn’t just for paying bills. We work hard and should be able to enjoy it, so by all means, budget a certain amount of money each month for discretionary spending. Knowing you have the freedom to spend a certain amount each month on whatever you want is a wonderful feeling and makes other limits easier to accept.

And if you can afford to save a lot more money, do. In this time of great uncertainty, it can be reassuring to know you’re putting money aside for the future, and encouraging to save for that trip you will eventually be able to take.

In the end, you’ll be surprised by how empowering it can be to create a budget. When you know that every expense you will encounter is accounted for and that you can live within your means, you will feel the opposite of restricted: You’ll feel freedom, and you’ll be relieved to know you have some control in a world that often — especially right now — feels out of control.

All of us here at Ludmila CPA are happy to help you get started with your budget, whether it’s recommending tools, helping you make ends meet, or setting financial goals. Contact us today to see how we can help. Hang in there, utilize these budgeting tips — we’ll get through this together.

There’s Never Been a Better Time to Create a Budget

Creating a budget is more empowering — and less scary — than you think.

I’ve been advising individuals and small businesses on financial matters for over a decade, and in that time there’s one suggestion I always make that consistently makes my clients squirm: It’s when I suggest that they make a budget.

I get it. The idea of creating a budget is scary. It means taking a hard, even embarrassing, look at what you’re spending. It means coming to grips with what money you have — or don’t have — coming in, and how that compares to with the money that’s flowing out. As they say, ignorance is bliss. Plus, it seems to involve will power, which many of us lack.

And we tend to equate the word “budget” with “limitations” or “restrictions,” which have negative connotations.

I’d like to offer a new way to think of budgeting: as a freeing exercise, not a limiting one, and as a way to feel IN control, rather than out of control.

Now that we’ve sheltered in place for two months due to COVID-19, our feelings of fear about the unknown and powerlessness in the face of unprecedented restrictions are overwhelming. For many in our community, the financial uncertainties we face have yet to rear their ugly heads. So while we’re still safe in our homes, worrying about what comes next, there’s never been a better time than right now to get an accurate picture of our finances and take control of them. Making a budget doesn’t have to be hard, and I promise it’s more freeing and empowering than you think.

How to Get Started

First, find a system that works for you. There are a million tools out there to help you get started. Personally, I like applications that connect to your personal accounts, so they can automatically track your income and expenses. Xero Cashbook software is what we use here at Ludmila CPA; contact us and we’ll be happy to help you set it up. This is a subscription-based program that costs $7 per month, but we’ve found its exceptional functionality to be worth that small expense, particularly for small businesses.

If you prefer something simpler without the bells and whistles, a simple Excel spreadsheet works fine as well, as do several personal budgeting apps. Many existing budget templates can be found online, which you can customize according to the types of expenses you have.

Track Spending

Once you determine your preferred system, it’s time to get a picture of your current spending. Contrary to what many believe, budgeting doesn’t begin with immediately imposing restrictions. Rather, it starts by taking some vital statistics. Hopefully you have records of your expenditures — if you don’t balance a checkbook, perhaps your credit card statements are a good measure of spending. Or simply comb through your online bank account summaries. Go through your statements for various monthly obligations, such as utilities, phone and Internet bills, grocery receipts, etc. Tally your receipts from restaurants or Starbucks runs. Consider how much you’ve spent in the last six months (typical months, that is) on dry cleaning, gas, parking, child care, and more. And don’t forget all your subscriptions! Not only do those magazine and newspaper subscriptions sneak up on us, but so do our cloud storage, email, domain hosting, virus protection, Netflix, Amazon, and other monthly subscription draws as well.

Start inputting the monthly totals into your spreadsheet or other budgeting tool until you have a fairly good picture of the last three to six months’ worth of spending. Remember to include line items for everything, from rent or mortgage, loan, insurance, car, credit card, and utility payments to your monthly clothing, dry cleaning, dining, movie, office supply, and travel expenses, and even savings transfers. Everything should get a line item so nothing is unaccounted for.

Determine Monthly Income

Your budgeting tool will, of course, ask for a total monthly income. If your income is consistent and predictable, this monthly total is easy to calculate. However, if you are self-employed or own a small business such as a restaurant, your monthly income can vary — particularly now as many brick-and-mortar businesses are shuttered. In that case, you could determine what a year’s income would be and divide by 12 to come up with a monthly average. As you proceed with doing a budget each month, you may find that you can predict what income will for sure be coming in over the next month and plan accordingly.

Compare Income to Spending

Here’s where the rubber meets the road: Are you spending more or less than you make?

For many people, this exercise is eye-opening. For some it reveals that they actually have more than they thought. For others, they find more money has been flowing out the door than in. But only when you see what the true picture looks like can you fine tune it.

Determine Spending Habits

With the data you’ve collected, look at trends in your spending habits. Are you subscribing to services you don’t use? Are you paying high interest on a credit card that could potentially be lowered? What about that unused gym membership? Is your twice-a-week latte habit eating into your budget? Are you spending a lot on dining out?

One of the few silver linings to come from the COVID-19 crisis is that much of our spending has been paused, so take advantage of this time at home to get a handle on where your spending has gotten out of control and create a plan to move forward, stronger.

Knowledge is power. Knowing whether or not you need to cut expenses — and by how much — gives you the power to make some choices and take control of your finances, and I promise you it will feel GREAT. Later this month, I’ll share tips with you for cutting expenses and negotiating lower payments.

In the meantime, contact us today to see how we can help. And stay safe!

What Does COVID-19 Mean for Your Taxes?

By now, I’m sure, you’ve heard that the federal government has postponed the deadline for filing your 2019 tax return and paying any tax owed, moving it from April 15 to July 15. This gave me and my team, as I’m sure it did you, a huge sense of relief as we all grapple with the more pressing crisis we all face: COVID-19 and the havoc it continues to wreak on our nation. Your top priority should be keeping yourself and your family safe and healthy.

Rest assured that you don’t have to do anything — no filing of any extension paperwork — in order to take advantage of this new deadline.

Note that this also new deadline also applies to the first installment of estimated tax payments for the first quarter of 2020 — that payment deadline has also been moved from April 15 to July 15.

However, you may be wondering about COVID-19’s impact on certain other deadlines and business or tax-related transactions, particularly at the state level. Here’s some important information for you to be aware of:

No change to Q2 federal estimated tax payment deadline: While the Q1 deadline has been pushed to July, what you may not realize is that at the time of this writing, the June 15 deadline for sending Q2 estimated tax payments has NOT yet changed. You should still plan to submit this estimated payment in June, with the Q1 payment due a month later.

Change to IRA and HSA contributions: There has been an adjustment to the April 15 deadline for making contributions to Traditional and Roth IRAs or Health Savings Accounts (HSAs) for 2019. If you plan to make contributions that count toward 2019, you must do this by July 15.

Depending on the state where you live and do business, you’ll need to take the following state-level information into account as well:

If you do business in Nevada… you file no state income tax, but take note that the Department of Taxation in the state is fully closed due to COVID-19. Taxpayers are advised to file and pay their taxes (this primarily applies to sales tax) through its online portal or by mail. Business license renewals have undergone no COVID-19-related changes; you should plan to renew through the Nevada Secretary of State’s online business portal, SilverFlume.

If you do business in California… you should know that the Franchise Tax Board (FTB) has postponed the filing and payment deadlines for all individuals and business entities to July 15. This applies to the following:

  • 2019 tax returns
  • 2019 tax return payments
  • 2020 Q1 and Q2 estimated payments (*Note: Remember, the federal Q2 deadline of June 15 is still in place as of today).
  • 2020 LLC taxes and fees ($800 LLC payments)

If you are an employer whose business has been affected by COVID-19, you may request an extension, in writing, of up to 60 days from the California Employment Development Department to file your state payroll reports and/or deposit payroll taxes without penalty or interest. This written request must be received within 60 days of the original delinquent date of payment or return.

Although the Ludmila CPA team are all working from home as we ride out the COVID-19 crisis safely, we want you to know that we are working. We’re available to assist you with filing returns, answering your questions, sharing financial advice, and providing peace of mind in this difficult time. Don’t hesitate to contact us with your questions or concerns.

A final word: If COVID-19 teaches us anything, it’s that nothing is more important than our health and well-being. Be present with your family, take care of yourself, and know that we’ll all get through this. Hang in there, and please let us know if we can help.

Filing Taxes During the Coronavirus | COVID-19 Update

We understand these are turbulent times for many people and it can be really scary. If you haven’t heard yet, to ease the burden of these times, the tax deadline has been extended to July 15 rather than April 15. We are currently out of office and are working from home. Even though we may not be able to help you face-to-face, there are still actions you can take to stay on top of filing your taxes during the coronavirus.

Here are some things you can do for filing your taxes during the coronavirus.

1. Get a scanner and scan all your tax documents. First of all, you will do yourself a favor and have a digital copy of all the documents. As long as you keep a good backup copy of your hard drive, no need to keep paper.

2. You can send your scanned documents to us using the secure file transfer at: https://ludmilacpa.leapfile.net. We scan all the documents we receive. If you do it for us, you should see some tax prep cost savings.

3. We conduct meetings over the phone and over the Zoom video chat. Industry experts say that virtual meetings are what the majority meetings will be in the future. Learn the new technology to keep up with technology.

4. Be pro-active and scan all your 2020 tax information. It will be helpful to you when the next tax season rolls around.

5. If you are not into all this technology yet, just put all your tax info into an envelope and mail it to: 930 Tahoe Blvd # 802-393 Incline Village, NV 89451.

We cannot wait to go back to normal business when we can be in the same office sharing a cup of coffee together. Until then, we will make it work to the best of our ability. And hopefully, everybody will learn something important that can be utilized in the future (either new technology or the new understanding how important it is for us, human, to be together). If you need help with filing your taxes during the coronavirus, please give us a call!

Tips for a Trouble-Free Tax Time

tax timeTax time ain’t what it used to be — and that’s a good thing! It used to be that you had to lug a box of documents (arduously collected over many months) into your accountant’s office and plan to spend a few excruciating hours poring over your receipts. Not so anymore! In these days of electronic filing, you really don’t even need to be present. At our offices, we can prepare your return quickly without needing to sit through meeting after meeting. We’re able to be far more efficient with our time (and your money) than ever before, and you’re able to get out and enjoy this unseasonably beautiful weather without giving it another thought.

The key is providing your information digitally (and securely) to your CPA or come by our office and drop it off with us. The information you’ll need to provide includes the following (not all may apply to you):

  • Your prior year’s tax return, if you are a new customer
  • Form W-2, if you worked for a company and even if the company is yours
  • Bank-provided Forms 1099-DIVS and INT — your dividend and interest income
  • Your investment portfolio Consolidated Form 1099, which would include all the sales of marketable securities
  • Form(s) 1099-R, if you are retired
  • Social security statement (also for retirees)
  • All Forms K-1, if you have invested in any companies (some may not arrive until sometime in September)
  • Form 1041, if you have been the beneficiary of a trust (if the trust did not make any distributions during the prior year, the form usually shows only zeros and is often not provided)
  • Forms 1099-MISC, if you are self-employed (Note: The IRS is really watching for under-reported income. Sometimes, these forms are issued with errors. We usually make corrections when filing your tax return. Also, bring the summary of your income and expenses.)
  • Forms 1099-MISC, if you are a real estate investor and have collected rent (as well as the schedule of expenses to offset that income, at least partially)
  • Form 1098-T for parents with students, allowing you to take a deduction for some of the tuition paid during the prior year (some parents with higher income will not be able to take advantage of this otherwise-generous tax credit)
  • Form 1098, the mortgage expense statement for homeowners
  • Detailed list of child care expenses, including tax ID of the institutions your child attended
  • Health Savings accounts contribution and distribution statements (Forms 5498-SA and 1099-SA)
  • A list of questions (The general rule is that it’s better to bring more than omit some very important information)
  • Any other documents which arrived in the envelope marked “Important Tax Information Enclosed”

Additionally, to help us make the decision about whether you should itemize or take the standard deduction, bring your real estate property tax paid, DMV registration fees, summary of charitable contributions (cash and non-cash separately) and summary of medical expenses (if they were significant: think “at least over $7,500 for taxpayers with AGI of $100,000).

Once you’ve assembled all this information, my advice is this: Schedule your appointment with us for AFTER tax season. Although we’re always happy to meet with any clients who would like to sit with us during tax preparation, it’s not an effective use of your time or ours. Instead, send the information in or drop it off personally, then give us a chance to prepare your return and get a clear understanding of your financial picture. Then we can speak about the return in person or by phone to go through it and, most importantly, schedule a meeting to plan the next year. This is the most important part of tax work — planning the next 12 months. This helps ensure that you’re achieving the financial goals you’ve set for yourself and can minimize tax risks for the coming year.

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 time a lot less taxing.