Have you received your credit card bill for December yet? If so, you're not the only one. As this Federal Reserve Board chart shows, Americans accumulate about $30 billion in credit card debt in the last quarter every year - and then attempt to pay it off in the first quarter of the New Year.
The problem is they rarely succeed at paying off the entire balance. By the end of the first quarter every year, roughly $6 billion of revolving consumer credit is still unpaid. Even worse, it usually continues to grow the rest of the year too.
Do you have FSA funds left in your Flexible Spending Arrangement? If you overestimated your medical expenses for 2016, you might lose that money under the use-it-or-lose-it rule. That means you have to spend all your FSA money by Dec. 31 unless your plan allows you to carry over a small amount into the next year.
The maximum you could have put toward a flexible spending arrangement is $2,550 for 2016, the same amount as 2015. The FSA maximum amount for 2017 is expected to rise $50 to $2,600.
Have you started shopping yet? No, I'm not talking about shopping for the holidays; I'm talking about something more important — your health insurance.
It's that time of year when many employers have their open-enrollment period and the federal and state health insurance marketplaces are open for business. Open enrollment is your annual opportunity to review and make changes to your health insurance plan so you end up with the best plan for your needs. Continue reading...
Know your taxes! I am a big fan of the philosophy: No one cares more about your money than you do. Even if a professional prepares your taxes every year, learn to do it yourself. Aside from what you'll save in fees, here are two benefits of learning to prepare your taxes yourself:
- By doing your taxes on your own, you can learn quite a bit about your finances and get a lot of ideas on how to make your money work more for you.
- Sometimes a professional might not ask the right question because they don't know everything that went on in your life this year. If you learn to prepare your taxes yourself, you will become more aware if a professional is missing any deductions.
Educate yourself. This is an excellent place to start — IRS tax tips.
If a professional prepares your taxes…
Set up a meeting with your accountant/tax adviser.
With age comes wisdom, so they say -- but it also comes with more complicated lifestyles. By the time we reach our 40s, we expect to be savvy, certainly capable of making good financial decisions, and generally well on our way to reaching our goals. But from what I can see, it's often not the case.
We are still in our 30s, but our friends and cousins are stepping into their 40s. I notice the decisions they make and the new struggles that come their way, and it's making me think about the money mistakes I would like to avoid in my 40s.
Money Mistakes to Avoid in Your 40s
- Lifestyle spiraling out of control: Speaking of complicated lifestyles, most people reach their peak earning potential in their 40s or early 50s -- and those bigger paychecks make the possibility of lifestyle inflation more likely. Bigger cars, fancier vacations, after-school sports, music, dance classes and eating out more often. Life gets busier, and it's just easier to let these expenses grow until they're out of control.
- Supersizing your house (or doing fancy remodeling): By 40, you've probably been living in your house for a few years and the itch to move to a bigger place (using kids as a reason) or to upgrade to a fancy kitchen or Pinterest-worthy bathroom starts to kick in. You might figure that, because you're earning more now than when you first bought the house and because remodeling is suppose to increase the house value, why not remodel?
Presumably, it has been a little more than a month since you submitted your tax return for 2014. Did you end up owing the IRS or did you get a refund? There are plenty of personal finance articles that discuss the pros and cons for each of these situations. So we will skip those discussions and go right to the point: Are you happy with your result?
If not, you can easily fix it for next year by adjusting your withholding now. But it's a simple step many people forget to take.
Now or Next Year?
For example, if you got a refund this year but would rather have more money each month to help your cash flow, adjusting your withholding now could fix that. On the other hand, if you wait or forget, you lose the benefit of better cash flow for the rest of the year.
My husband and I are millennials who expect to be part of the sandwich generation soon. The term "sandwich generation" refers to those who support both an aging parent and a child. As I read the responses to the Ask the Readers article, Are you planning to care for an aging parent, it looks like we have plenty of company, and statistics from the Pew Research Center seem to substantiate that. (http://www.pewsocialtrends.org/2013/01/30/the-sandwich-generation/):
"Nearly half (47%) of adults in their 40s and 50s have a parent age 65 or older and are either raising a young child or financially supporting a grown child (age 18 or older). And about one-in-seven middle-aged adults (15%) is providing financial support to both an aging parent and a child."
Though we are in our 30s, our parents are aging and increasingly need our help. In the next few years, we anticipate at least one parent, if not all of them, will be living with us. And we have a toddler.
Your 30s are a big deal. You may be starting a family or planning to make major purchases, such as a home. It's also a time when many begin to ask this critical question: How much to save for retirement in my 30s?
The short answer is most experts say you should be socking away 15% of your gross income by your 30s -- that's your income before taxes and other deductions. But before you max out your company 401(k) or fund an IRA, it's also critical that you set aside cash for emergencies, at the very least $1,000 but preferably three months of living expenses. Going without this cushion could force you to turn toward debt during a financial setback. Becoming a steady and determined saver will also put you ahead of the pack when it comes to home-buying and college saving.
Etsy, TaskRabbit, Uber, AirBnB, and numerous other technologies make earning a little extra income (or even a full-time income) easier than ever. Almost anyone can be a micropreneur these days, even if they started out just pursuing a hobby. The sharing economy or peer-to-peer economy is growing at a record pace by leveraging disruptive technologies. But a lot of people don't seem to understand how the sharing economy can impact their taxes, and the IRS has never issued any official publication regarding how to deal with the income and expenses from these new ventures. I can't cover every single aspect of tax law and how it applies to the sharing economy in this article, but here are some tips to get you started in the right direction.
- Any income is income. It's kind of sad to realize that this point needs to be made; but it is clear from my last tax article that not everyone thinks that all income should be declared. So let's get this one out of the way to begin with -- ALL income, in whatever form you get it, has to be reported on your taxes. If not, it is tax fraud. That's about as straightforward as I can be about the income part of this equation.
- Estimated tax payments. No one is collecting taxes regularly on the income you make, so it is your responsibility to estimate your tax liability and pay it quarterly. At the end of the tax year, if you owe taxes and you didn't pay quarterly estimated tax, you might owe both penalties and interest payments along with your tax liability to the IRS. It is a good idea to keep those funds separate in your online savings account so they are available when you need them every quarter.
- You are your own employer. You can set your own hours, great! It also means that you have to pay the self-employment taxes, including the employer's part.
- Understand your tax forms. Depending on the technology you are using, you might be getting a 1099-K (AirBnB) or a 1099-Misc. (Uber) -- but you might not get any tax form at all. Whatever form you get (or don't), the income still has to be reported.
The 1099-K became more commonplace as PayPal started issuing one to all the self-employed folks who used Paypal as a payment medium. AirBnB will send you a 1099-K if you rent out your room more than 14 days in a year. The 1099K is a form merchants use to report payments received via debit cards, credit cards and other third-party payment systems like PayPal.
The 1099 Misc. is used to report income earned by freelancers. Uber treats its drivers as independent contractors, so they issue a 1099 Misc. form. You will most likely be using Schedule C (unless you have incorporated a business and are not channeling your income via personal tax return) to report income you earned and expenses you incurred from your micropreneurial ventures. The Schedule SE is used to calculate your self-employment taxes.
- Keep all the records. You owe taxes on every dollar of income; and, likewise, you can also deduct every dollar of eligible business expenses. Here are some sample deductions that are available for different types of services (note that some of these expenses have to be depreciated over time and it also has implications when you sell your asset -- house or car):
Rideshare service expenses
- Mileage (standard rate or actual cost)
- Parking fees, tolls
- Car-loan interest (or lease payments)
- Cell phone services
- Any advertising costs
- Car-cleaning costs
- Car insurance (the business-related portion)
- Maintenance costs
- Registration and taxes
- In-car entertainment
Home-sharing service expenses
- Rent or mortgage
- Professional cleaning services or cleaning supplies (if you clean the home, you cannot deduct the monetary value for your time; you can only deduct the money you spent on the cleaning supplies)
- Utilities (electricity, cable, internet, sewer, etc.)
- Food provided for your guests
- Insurance (the business-related portion)
- Repair costs, grounds-keeping expenses, replacement items (for example: worn-out bulbs in the rental room)
- All the host-related service fees like AirBnB's guest services fees (6 to 18 percent) and host-service fees (3 percent). Uber's commissions are fully deductible.
When I was in my 20s, I was single, without kids, renting, had graduated from college, working at my first job and no interest whatsoever in taxes. My feeling was, Why should I waste time thinking about taxes? As a single, renter with no kids, I would get absolutely no deductions or credits -- and in addition to that, I had nothing to itemize. That meant I should have just filled a 1040EZ and been done with it, right? Right?
Most of us who are starting our financial journey think this. It is not always true. The assumption that paying attention to taxes at this stage provides little benefit, can result in us losing out on a lot!
That is why I decided to write this post, focusing on people in their 20s -- to get their attention, and to tell them there are reasons to take a second look at their taxes (though taxpayers of any age can equally take advantage of these deductions/credits).