Budgeting Made Simple

by Gerri Willis

It seems to me nothing is harder than following a monthly budget. Costs vary month to month and sticking to a rigid plan for spending and saving can be impossible. Apologies to you Quicken and Mint budgeting pros! I admire you, but can’t muster the discipline to do what you do!

And, I’m not alone.  Long-time personal finance guru and Edelman Financial Services Vice Chairman David Bach, author of “The Millionaire Next Door,” says budgets don’t work. “People rarely really build them, and it’s even harder to stick to them.” 

Fortunately, there is a way to get the benefits of the budget without spending your weekends slaving over an Excel spreadsheet. The real advantage of a budget is that it gives you parameters on what to spend on individual categories. Think of it as a pie. According to Bach, you’re best off spending just 35 percent of your monthly income on housing costs. That means mortgage or rent, repairs, taxes, utilities and insurance. Truth is, housing costs have been increasing handily. To find out whether it is cheaper to rent or buy, go to Trulia.com.

Another tough category is debt. Bach recommends that just 15 percent of income should be snagged by student loan payments, credit cards and personal loan payments. Transportation, car payments, insurance and gas, should comprise just 15 percent of your budget while other living expenses like eating out and vacationing should be 25 percent.

The big nut to crack is savings. Bach says saving 10 percent of your income is a good rule of thumb, but you may want to spend more if you are behind on retirement goals.

The bottom line is this: By understanding the proportion of your income that should go to each category of spending, you put yourself in a better position to budget without a real budget.  Hitting your goals can be as simple as paying yourself first. By automating your savings dollars and locking in low housing costs, you’ll go a long way towards making your budget (or unbudget) work!

Your Year-End Portfolio To-Do List

by Gerri Willis

The holidays are a good time to take a long, hard look at your retirement portfolio and make sure you are on track for a successful retirement. “The key question to ask yourself is, ‘In relation to my personal financial goals, is my portfolio helping me achieve them?’ Most investors say they want the most money they can (get). But, ultimately, what matters is if your money helps you get what you want and lets you sleep at night,” says Derrick Kinney, president, Derrick Kinney and Associates. 

  • Step No. 1, says Chris Cordaro, a certified financial planner, is to rebalance your portfolio to make sure that the run in stocks hasn’t inadvertently left you with a higher stock allocation than you planned. He advises rebalancing anytime your balances are 20 percent from your target allocation. He says emerging markets offer the most opportunity as the most undervalued asset class currently.
  •  As you evaluate actively managed mutual funds, watch for managers that “window dress” their portfolios, or change holdings to improve the appearance of the portfolio by selling losers and buying winners. Problem is, says Cordaro, window dressing hurts returns and tax efficiency.
  • Now is also a great time to make sure you’ve contributed the max to your 401(K). Limits for 2014 are $17,500 and $18,000 for 2015. If you are 50 or over, you can add catch up contributions of $5,500. If you are aged 70 and ½ or older, you are required to take minimum distributions from your IRA. Financial advisors say one of the most common mistakes retirees make is forgetting to take distributions or taking too little. If you just hit this milestone, you can delay taking the payment until April 1 of the following year. The end of the year is also a good time to review the beneficiary designations of your retirement plans and make sure everything is as you want it.

 Taking some time and reviewing your retirement accounts isn’t just good planning, it’s also peace of mind. 

Getting The Most From Your Charitable Giving

by Gerri Willis

If you’re like me, most of your charitable contributions are made online moments before the ball drops on New Year’s Eve. And, to be sure, giving before year-end pays benefits come April 15 because donations to qualified organizations are deductible from your taxable income.

Having said that, making contributions that qualify may be more difficult than it appears at first. For example, you can’t deduct contributions to individuals or non-qualified organizations, like country clubs or chambers of commerce. Likewise, appraisal fees are not deductible.

However, there are plenty of donations you can deduct to reduce your tax bill next year, says Clare Levison, a CPA and the author of, “Frugal Isn’t Cheap: Spend Less, Save More and Live Better.” Even plain old cash can be tricky unless you keep a copy of your bank record or get a receipt from the charity. You’re best off contributing money by cash, check, electronic funds transfer, debit card, credit card or even payroll deduction.

You can also give household goods like clothing. Just be sure the clothes are in decent condition. Cars, boats and airplanes can be deducted for the smaller of the gross proceeds from their sale by the organization or their fair market value when they are contributed. Follow the letter of the law, though, because the IRS sees auto contributions as a red flag.

Stocks, bonds, jewelry and coin or stamp collections can also be contributed. Typically for tax purposes, you deduct the fair market value of the property. Giving stock or real estate can be tricky. Consult a tax pro to make sure you get it right.

About 70 percent of Americans will contribute this year, and most of them will be doing it this month. Stretch your charitable dollars by giving to philanthropies that have good management. Check out www.charitynavigator.org to find the best run charitable organizations. 

Medicare Open Enrollment: What You Need To Know

by Gerri Willis

Medicare Open Enrollment is on and there are big changes underway recipients need to know. Bottom line: Many seniors will see higher costs and fewer options. For example, according to the Kaiser Family Foundation, there are fewer Medicare Advantage plans for 2015. In fact, 320,000 enrollees are enrolled in plans that are exiting the market.

What’s more, enrollees in six of the 10 most popular plans this year will experience double-digit premium increases if they stay in the same plan for 2015.

The good news is this: The Part D “donut hole,” that is the coverage gap for prescription drug plans continues to shrink. Those who enter the coverage gap in 2015 will get a 55 percent discount on brand-name drugs and a 35 percent federal subsidy for generic drugs.

If you are considering keeping the same plan you have right now, be sure to check whether there are any changes in your plan. You may find a drug you need isn’t covered or not to the level you expect. Don't miss our User's Guide to Choosing the Best Health Insurance 5pmET on FOX Business.

Health Insurance: Workplace Enrollment

by Gerri Willis

It’s that time of year again. Companies are opening enrollment in health insurance plans, and if you haven’t gotten a peak at the 2015 changes, be advised, you may get sticker shock when you do. Deductibles will rise 7 percent this year as companies forecast higher healthcare costs.

Premiums and copays are likely to rise as well. If you work for a small company, watch out because your prices may rise even more than that 7 percent average.

The changes are more of the same. According to Kaiser, worker contributions to health care coverage have nearly doubled since 2003, from $2,412 to $4,565. Deductibles have jumped from $584 a decade ago to $1,217 today.

As you begin to compare plans, don’t assume your plan from last year is the same this time around. Plans are converging and looking more and more like each other. While HMOs, or health maintenance organizations, originated the co-pay, now PPOs or Preferred Provider Organizations are charging them as well.  Given that, you’ll want to think about what services you’ve used in the past and are likely to use again as you shop.

And, remember that premiums aren’t the sum total of everything that you will pay. Check out deductibles, co-pays, and whether you have to pay co-insurance even after paying your deductible.  If you are not a big user of health care, you might want to think about a high-deductible plan which will give you lower premiums. If you choose this route, consider setting aside money in a health savings account to cover your costs.

Don’t miss our User’s Guide to Choosing the Best Health Insurance tonight 5pmET on FOX Business

Ready or Not, Here Comes Round No. 2 of Obamacare

by Gerri Willis

Ready or not, here comes Round No. 2 of Obamacare. And, as much as I’d like to start this blog with an analysis of costs, details such as premiums for Obamacare 2015 policies won’t be made public until open enrollment starts Nov. 15, conveniently after the election. So forget getting your arms around price tags. At least for now.

To be sure, though, some details are already out. First off, there is a new website where you’ll go to enroll for the first time. Given the original healthcare.gov website’s glitch-plagued rollout a year ago, this could be a good thing. But, again, we don’t know because this website is still being tested. (Want to know how the testing is going? Again, forget it. That information isn’t being shared.) To their credit, the website designers have managed to shorten the number of screens in the online application from 76 on the original site to just 16 on the new site.

Unfortunately, if you bought Obamacare coverage last year, you’re stuck with the old website which is famously unreliable. Some of our sources maintain the backend of the website still isn’t complete a year after launch. And, re-enrollers will face a time crunch. They’ll have just one month – until Dec. 15 – to get on the site and update their financial information – a move that is required to have coverage beginning Jan. 1, 2015. You’ll want to have handy a 14-character identifier number to keep any current insurance policy. If you don’t re-enroll, you may be reassigned to your old plan, but you’ll also get this year’s subsidy amount, which may be smaller than they would be entitled to for 2015.

On top of all of this, it’s possible that several hundred thousand people across the country may face cancelled health insurance policies because those policies are not in compliance with Obamacare. Initially these policies were granted a reprieve, but break time is over. Thirteen states and the District of Columbia plan to cancel policies that don’t offer the level of services required by the Affordable Care Act. Federal law requires a 60-day notice of plan changes, so if you’re getting bad news in the mail, it will probably come no later than Nov. 1 (right before midterm elections.) 

So, truth be told, Obamacare Year 2 remains a mystery, though Health and Human Services Secretary Sylvia Burwell has already said that it won’t be perfect. That’s reassuring.

Don’t miss our User’s Guide to Choosing the Best Health Insurance all next week 5pmET on FOX Business         

 

Taking Advantage of Tax Deductions

by Gerri Willis

If ever there was a year to look for deductions to your tax bill, this is it. The reason? Millions of Americans will be paying more because of higher tax levels imposed by Obamacare and the ironically named American Taxpayer Relief Act of 2012. But even if you aren't subject to the higher rates, it still pays to get all the breaks you can.

  • PRIVATE MORTGAGE INSURANCE. The home mortgage interest deduction is a perennial favorite of homeowners and while that deduction is now on a phase out schedule for high earners, others may benefit from the private mortgage interest deduction. PMI is an insurance policy that lenders require if you can't make a 20 percent downpayment on a home. And, 2013 is the last year you'll be able to claim the deduction unless Congress changes its mind.

You'll find the amount of PMI you paid on your bank's mortgage interest form 1098. The break is available to homeowners who took out their mortgage after Jan. 1, 2007.

And, like a lot of deductions, this one has income phase outs too. The sweet spot for this break is an adjusted gross income below $109,000.

  • CARING FOR A DEPENDENT PARENT. This is more complicated than it sounds, but if you can claim a parent as a dependent, you can save on taxes. Your parent must live with you and get more than half of his or her support from you. Keep in mind the parent's earnings must be less than the tax exemption level. The devil is in the details with this one, and you should consult a tax professional. But if you meet the requirements, you'll be able to claim an added personal exemption on your income tax return.

An added plus, any medical expenses you pay for that parent can contribute to the threshold for deducting medical costs. To meet that threshold, you have to spend 10 percent or more of your adjusted gross income on medical expenses. (That threshold increased from 7.5 percent last year.

  • COLLEGE LOAN INTEREST. Parents struggling with the high cost of education will find they can deduct up to $2,500 of annual interest on loans to pay for college. Income phase outs exist, naturally, so high earners might want to consider taking out a home-equity loan instead, which in most cases, will allow you to deduct interest.
  • HOME EQUITY LOAN INTEREST. You probably know that mortgage interest is deductible. Interest on mortgage debt up to $1 million is deductible, but phases out at higher income levels. Interest on home-equity loans totaling up to $100,000 also is deductible, no matter what you do with the money.
  • JOB SEARCH. If you were looking for a job last year as millions of Americans were, the costs of that job search is deductible. File them under miscellaneous expenses. You don't have to be successful to claim the deductions. If you do land a new gig, you can also claim relocation expenses for the new job. Consult a pro to determine exactly what you can deduct. 

There are more deductions -- many more -- but you should be aware that some of them are IRS audit bait. Here are a few of the deductions that might get you a second look, if not an audit:

  • Home office deductions. This one draws attention especially if you claim a salaried income.
  • Non-cash charitable donations, especially if you donate a car to a charity.
  • Earned income tax credit. This benefit for low-wage earners is often abused and the IRS will take a close look.

When it comes to deductions, one of the things IRS auditors keep in mind is just how you stack up with other taxpayers. CCH Inc. recently calculated average deductions, and while you shouldn't use these as a hard and fast guide to your own tax return, it makes sense to have a general idea of what people in your income bracket pay. For example, folks with an income range of $50,000 to $100,000, claim medical expenses of $7,312 interest of $9,320 and charitable contributions of $2,815. These households pay federal taxes of $6,111.

So the point, here, isn't to discourage you from the taking all the breaks that are due to you. In fact, I say take absolutely everything you are eligible for. The IRS expects nothing less. 

 

Don’t miss The Willis Report starting 5pmET on FOX Business

Tax Returns: Do Them Yourself or Hire Help?

by Gerri Willis

Tonight on The Willis Report at 5pm ET we’ll be talking about the best tax software for filers. But that’s not the only way to get the work done. There are times it makes sense to actually hire a tax pro. Tax software is great and for millions of Americans, it’s a good solution, but there are times you need professional help.

It’s best to use a professional when you own your own business, you’ve gone through a major life change like marriage or divorce, you’ve bought or sold a home in the previous year, you own rental property or have a large investment portfolio. In other words, if your taxes are complicated for any reason, it pays to hire a professional. If you manage to pick an experienced accountant, you’ll find that he or she has probably prepared a return for someone in your exact situation. What’s more, if the IRS has issues with the filing, such as wanting more information, your professional will handle the exchange.

Picking a professional is a whole other kettle of fish. Certified public accountants are the gold standard having completed a four-part accounting exam. What’s more, they can represent you in front of the IRS (if it comes to that.) However, there are less expensive ways to get help. Enrolled agents who have passed a tax exam and/or actually worked at the IRS and are licensed to file taxes. You can find an enrolled agent at www.naea.org.   Some certified financial planners also offer tax services. At a minimum, you want your CFP to be talking to whoever prepares your taxes. There are also accredited tax accountants and tax planning services. (I did say it was a whole kettle of fish, right?) Getting a preparer who is recommended by someone you know and trust is a good idea, too. Keep in mind, though, if there is an accountant that everybody in the office uses because he gets incredible refunds, I’d stay away. When a pro gets in trouble, the feds typically audit everyone he did a return for.

Truth is, tax software isn’t nearly as scary as you might think. You don’t do math. The software makes calculations for you. And, the way the packages work is that they have you fill out the form by asking you questions and prompting you for a response. Better yet, if you make a mistake using a software program, like entering the wrong Social Security number, the IRS will ask you to fix the issue, instead of sending you a bill.

For some of us, it comes down to a comfort level – do you want to handle it on your own, or do you want a pro to do it for you. Just make sure that however you get it done that you file electronically. Filing online is the most secure way of filing your taxes, and guarantees the quickest processing.

What Changes to Expect on Your 2013 Tax Return

by Gerri Willis

The countdown is on with just five weeks to go to April 15! Tax season is upon us, and if you are wealthy or simply well-to-do, steel yourself, you are about to get soaked. Tax changes for the 2013 tax year are huge and the nation's top earners are likely to see their tax rates rise above a whopping 50 percent.

At risk for the biggest changes, are Americans earning over $200,000, says Melissa Labant, director of tax advocacy for the American Institute of Certified Public Accountants.  To be sure, though, earners above $400,000 for single filers and $450,000 for married filers filing jointly will get the biggest bite. And, it’s not just wages that will get more heavily taxed; investment income taxes are rising, and tax benefits that you might have taken for granted like personal exemptions and itemized deductions are under assault too. These changes come thanks to Obamacare and the American Taxpayer Relief Act of 2012.

“I think high earners may be surprised that multiple increases are hitting them,” says Rich Coppa, of Wealth Health LLC. “If they didn't pay attention to these changes from last year they are going to find a bigger bill to Uncle Sam.”

Here’s what you can expect: You likely already know about the increase in the Medicare payroll tax. In 2012, the tax was 2.9 percent and employee’s share of the tax, 1.45 percent, was automatically deducted from your paycheck. Effective this calendar year, however, high-wage earners owed an additional 0.9 percent tax on earned income above $200,000 for single filers and $250,000 for those married and filing jointly. This year also starts a new income tax bracket for people earning $400,000 for single filers and $450,000 for joint filers – a top tax rate of 39.6 percent up from 35 percent last year. That’s the easy stuff to understand. Some of the other changes are more complicated.

Your personal exemption of $3,900 last year is phased out. The amount of the reduction is 2 percent for each $2,500 in excess of adjusted gross income amounts of $250,000 for single filers and $250,000 for those married, filing jointly. The result is a complete elimination of the exemption for single filers with an adjusted gross income above $372,501, and for couples filing jointly over $422,501. What’s more, itemized deductions, such as mortgage interest, state income and sales tax and home office deductions will be on phase-out schedules as well. (These are sometimes Pease deductions). This change will reduce the value of itemized deductions by 3 percent of adjusted gross income above $300,000 for couples and $250,000 for single filers to a maximum reduction of 80 percent of its value.

Even more pernicious are higher taxes on investment income. If your income is greater than $200,000 as a single filer or $250,000 married and filing jointly, a 3.8 percent Medicare surtax on investment income will be due. (The tax applies to the lesser of your net investment income for the year or the amount by which your modified adjusted gross income exceeds the income thresholds). Note that a taxpayer could be subject to both the additional 0.9 percent tax on earned income and the 3.8 percent tax.

In addition, Obamacare makes it more difficult to deduct unreimbursed medical expenses. Before the Affordable Care Act was passed, unreimbursed medical expenses could be deducted after they exceed 7.5 percent of adjusted gross income. The threshold is now 10 percent.

All this week, we will be discussing what you need to know about this year's tax bite and what you can do to reduce it.

 

Join us on The Willis Report at 5pm ET.

 

The High Cost of Having Kids

by Gerri Willis

It never ceases to amaze me what my friends spend to raise their children.  Between the child care, the private schools and clothing, it’s no wonder so many parents both work. The Department of Agriculture estimates the average cost of raising a child born in 2012 will be $241,080 or $301,970 if you adjust for expected inflation, And, this shockingly, does not even include the cost of a college education which currently is $22,826 for a public school or $44,750 for a private school – that’s before the 4 to 5 percent annual tuition inflation hikes kick in.

Of course, the real cost depends on where you live. In rural parts of the country, you might get away with spending just $143,600, but in the high-cost Northeast your costs might be $446,100, again according to the USDA. Trouble is some families spend even more, which raises the question: How can you cut your costs without sacrificing care for your child?

Let’s tackle child care – it’s one of the most expensive tabs parents face. According to the National Association of Child Care Resource and Referral Agencies, in 31 states and the District of Columbia, the average annual cost for infant care is MORE than a year’s tuition and fees at a four-year public college. In 2012, according to the same source, the average annual care cost for infants ranged from $4,863 in Mississippi to a high of $16,430 in Massachusetts. For a four year old, the average costs are similar ranging from $4,312 in Mississippi to $12,355 in New York.          

The best solution – getting a family member to care for your child, simply isn’t practical for many moms and dads. Given that, a good solution for some parents may be employer-provided child care which is typically run at a lower cost to employees. Peace of mind is higher when your child is down the hall or in the same building as mom or dad. If there is no onsite child care, your employer may provide you with referrals or even discounts to centers nearby. You may be able to pay for child care with pre-tax dollars through a flexible spending account, check your human resources office for details. Remember if you work in the public sector or for a company with more than 50 employees, you may be eligible for up to 12 weeks of leave to care for a sick child, under the Family and Medical Leave Act.

Another way to save is to share a nanny with other families and split up the costs of care. Other moms I know have set up a babysitting co-op, in which parents provide the care. You’ll need to work with families in which the parents have different schedules.

One word of caution for moms and dads: Don’t put your future at risk by putting every single penny into Junior’s education. Your son or daughter will be able to borrow for higher education, but you’ll have to foot your own tab for retirement.

 

Don’t miss The Willis Report starting 5pmET on FOX Business.

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