Saving | Live a Life By Design

Time is Running Out

Posted on December 6, 2019December 6, 2019 by Jimmy J. Williams, CPA/PFS, CFP®

As a calendar-year, cash-basis taxpayer, you will have fewer opportunities to reduce your 2019 income tax burden once the calendar rolls over to 2020. By taking a few simple steps today, you will see a better result when you file your income tax return in April, 2020.

If you participate in a Flexible Spending Health Plan, referred to as a “cafeteria plan”, through your employer, it is critical that you utilize (spend) your elected deferral amount for 2019. The IRS has liberalized the rules regarding the ability to claim qualified medical expenses and you may carry over a small portion of your elected deferral amount to a following year. Discuss your options with your company’s Human Resource Officer for your particular plan.

Consider paying your total advalorem tax assessment in full prior to December 31, 2019. The Tax Cuts and Jobs Act of 2017 increased the amount of standard deductions to such levels that most individuals will not incur sufficient qualified itemized deductions to file a Schedule A – Itemized Deductions Form – with their returns. Analyze your current level of qualified deductions to determine if you exceed your standard deduction of $12,200 for individuals or $24,400 for married filing joint taxpayers. A lowered state tax may be an added incentive to itemize deductions on your federal return.

What if you could take a deduction on your tax return for something that doesn’t require your current cash? You may receive an increased benefit by donating appreciated stocks to qualified charities. The process requires that a donor (you) physically donate the certificate of the shares to the charity instead of selling the stock and donating the proceeds. You will receive a tax deduction based on the fair market value of the stock on the date of the donation (transfer). Since the charity is generally exempt from federal and state income taxes, the charity will sell the stock and receive the much needed cash it desires to run its programs. For example, you may have basis in the stock of $1,000 and the fair market value has risen to $10,000. Your charitable deduction is $10,000 (your deduction is limited to 30% of your adjusted gross income). You do not realize the $9,000 capital gain that would be taxed if you sold the stock. It is a win-win situation!

Lastly, review any employee benefit elections for 2020 that are required this month. Most employer-provided retirement plans utilize an enrollment period in November or December of the current year to elect the amount of contributions for the next year. One of the most effective and efficient tax deductions is the contribution to your retirement. Maximizing this election will save federal and state income taxes as well as receives growth via the employer matching contribution. We advise clients to defer at least the matching percentage provided by the employer so that you literally “double” your money notwithstanding market conditions.

Be proactive in your finances and retain more discretionary income for your family. If you want additional information on the above tax strategies and other financial planning methods to help your family reach its goals, go to the Compass Capital Management Website. You will find a wealth of information to help you navigate life!

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It’s All Taxable, Unless…

Posted on October 21, 2019November 8, 2019 by Jimmy J. Williams, CPA/PFS, CFP®

All of your income is taxable! This is the premise of the United States Government. However, provisions are addressed through tax legislation that allows certain types of income to be partially taxable or fully exempt from taxation. How do you know which income is tax-free? Is it unpatriotic to pay the least amount of income taxes you lawfully owe?

Well, lets get one thought out of your mind. Judge Learned Hand, U.S. Court of Appeals in the early 20^th century, is credited with stating “nobody owes any public duty to pay more [taxes] than the law demands.” What is fair in our system? The U.S. tax system is based on the honor of its citizens and their willingness to remit taxes timely for the efficient function of the government.

The Internal Revenue Code of 1986, as amended, provides us guidance in the treatment of assets and monies received during the course of the year. For those of us employed, the compensation received from our employers is taxable. However, what about the gift received from Aunt Sally? Is there a limit to what she can give you? Good news! As a beneficiary, or donee, of a gift, of any size, you owe no federal or state income taxes. That means, you could receive a gift of $10,000,000 and owe no income tax. Wow! If that is true, why do we pay tax on other income that is not “earned” during employment?

Section 61 of the Internal Revenue Code states, “… gross income means all income from whatever source derived…” For an item of income to be exempt from taxation, the item must meet specific criteria within the Internal Revenue Code. How does anyone make sense of all of this legal speak? It is critical to understand your tax situation since this expenditure is one of the largest allocations of most individual’s annual budget.

Does this mean your Social Security Benefits are taxable? The answer is maybe. If your income from sources, other than the Social Security Administration, exceeds $25,000 as a single filer or $32,000 as a joint filer, you may have to pay tax on a portion of your benefits. To illustrate the changes in tax laws, the process used by Congress to create revenue for the federal government, in tax years prior to 1987, individuals were not taxed on their Social Security Benefits. Tax laws change, literally, daily.

The solution to this income tax conundrum is to seek a tax adviser that not only understands the tax laws but specializes in planning. Our role as wealth advisors, for our clients, is to provide guidance on the critical areas of their finances that may impair the clients’ abilities to live a life by design. Don’t simply sign your returns each year and send them off hoping for the best. To gain more confidence in your tax responsibilities, seek out a CPA and Certified Financial Planner practitioner that understands the interaction between your planning for the future and the impact of taxation on your investments and income. You can truly take control of your taxes. In the words of Nike, JUST DO IT!

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Starting Late and Finishing Strong

Posted on July 15, 2019July 12, 2019 by Jimmy J. Williams, CPA/PFS, CFP®

Too many people give up on their dream retirement simply because they started too late (or so they think). One of the greatest opportunities to change your future to what you wish it to be is … to start today! Often, we experience a client that wishes to retire at age 65 and have saved little. Instead of simply acknowledging their lack of discipline, we provide solutions that will help them realize a better future but requires their participation on a plan that will be effective for them.

Let’s look at the most obvious savings point – employer retirement plans. If you work for an employer that provides a deferred savings plan such as a §401(k) Plan, you are in luck. Meet with your employer or human resource officer and determine when you can begin participating in the plan. If you are already enrolled in the plan but want to make changes to your savings rate (called your “deferral amount”) there are certain windows of time that must be observed.

If you are age 50 or older, you can take advantage of “catch-up” provisions within the law that can significantly reduce your current taxes and increase your savings exponentially. For 2019, the “catch-up” contribution amount is $6,000. Think about it. You can save an additional $500 per month on a tax-deferred basis. This will add up to a considerable increase in retirement savings over a ten-year period! If invested prudently, you will experience even greater potential growth until retirement.

The next step is to review your investments within the plan. Are you sufficiently allocated and diversified in your selection of investments? Don’t simply invest in the same manner as other employees. Invest in yourself by spending some quality time to understand the particular options and how you feel if the performance was not as projected. How would your retirement plans be affected if the performance was lacking?

By electing to save your maximum amount to your employer plan, you have essentially placed your goals on auto-pilot. You will automatically be saving money each pay period and it is a little more difficult to obtain the funds if an impulse to buy is experienced.

Now, the really good news. Your employer-provided plan matches a certain limit of your contributions each year. This is money you will receive in your account that helps you grow your retirement savings. Let’s assume that your employer matches up to 5% of your salary (assuming you defer or invest at least 5% of your salary to the plan) and your total compensation is $60,000 per year. This means your employer will contribute $3,000 (or $250 per month) to your retirement account each year. If you work at least ten years you will have gained another $30,000 plus potential growth for retirement support!

If you are self-employed, you have a number of options that will benefit you if you started late saving for retirement. We will discuss these options in the next article.

Now, take the initiative today to set your course for retirement to be your best years ever! If you have questions about your employer’s plan account, retirement strategies or the tax impact on your cash flow to and through retirement, contact a Certified Financial Planner^TM practitioner to construct a retirement plan that works for you. Until next time…

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The Power of Habits

Posted on May 6, 2019May 3, 2019 by Jimmy J. Williams, CPA/PFS, CFP®

Habits are much easier to form than to change. Good or bad, habits are formed by all of us, sometimes subconsciously. For example, which leg do you place in your trousers each morning while dressing for the day? Do you even think about the process of dressing or is it simply a routine that you follow because you have performed the same process for many years?

What do habits have to do with your finances? Everything! Many of the habits involving finances are passed down from generation to generation. Did you know that by simply saving $200 per month and investing it prudently for a period of 25 years, one could amass one million dollars? My personal habit of saving started when I was a young child. Granted, money was a little more difficult to accumulate in the 60’s and 70’s but I digress.

Analyze your living expenses and keep in mind the following phrase: “If your lifestyle exceeds your income, your outlook will be bleak.” One habit that should be learned by everyone is the habit of saving. For example, lets assume both spouses are working and the family has excessive (or discretionary) cash flow each month. Why not assign that excess to a savings plan for future needs? We inform many of our clients that their income needs in retirement will be approximately 80% – 90% of the pre-retirement income. Many are shocked with this statement! Think about what is happening during the retirement phase of life. Are you simply going to stop driving your car, eating regularly, utilizing electricity and other utilities in your home? Of course not.

Another habit we hope you will consider is the habit of exercise. By “investing” in your physical fitness, you will reap generous benefits later in life. Mobility and wellness are easily maintained in our 70’s and 80’s rather than being developed in the same time period. Start now to develop the habit of quitting, yes, quitting. Quit drinking sugar-loaded drinks and consume water instead. Limit your caffeine intake each day. Stop eating processed foods and refined sugar. If you find your willpower lacking, seek out an accountability partner. These simple steps will start you on a path of fitness that will create adventures unsurpassed in your retirement years.

By combining your new habits of saving for the future and maintaining your physical fitness, you have conquered a tremendous number of these hardships experienced by most retirees. Don’t fear being in the minority of retirees who maintain their mobility, mental health and financial security. We believe life is far more than money. Actually, to us, true wealth is all those things that money can’t buy and death can’t take away. If you seek to reach your potential in life, seek out a specialist that works with retirees and understands the challenges faced by this amazing group of citizens.

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How Do You Define Risk?

Posted on April 29, 2019April 26, 2019 by Jimmy J. Williams, CPA/PFS, CFP®

Danger! Danger! Red flashing lights! Sirens breaking through the still night awakening you from a deep sleep! These are simple, yet effective, methods of alerting you to risks that arise in life. Don’t you wish investment risk were that simple to alert you when you are about to face an inanimate action that has the power to destroy your life savings?

We accept certain risks in life everyday. Once you leave the safety of your bed, you may be subject to risk. Let’s focus on one type of risk – financial risk. You can control the level of risk in your financial life by taking prudent steps to minimize risk when possible. For example, if you are 80 years of age, it may be too risky to invest in a new tech startup with 50% of your retirement portfolio. If you were 24 years of age, this may be viewed more as an opportunity.

As specialists in retirement planning, we believe it is critical to properly measure and mitigate risk when possible. Many of our clients come to us with portfolios that are highly illiquid or invested in a manner that is not in their best interest. When we ask questions pertaining to their acceptable level of risk, the client will generally be moderate or conservative in their approach to investing their hard-earned money.

However, after a careful analytical analysis of their portfolio we inform them of their current investment risk level and their eyes pop open like they are watching a scene from a horror movie. To mitigate the risk, we believe several factors must be considered in their portfolio design:

Consider liquidity needs
Research suitable and appropriate types of investment positions
Determine the tax-effect of the proposed investments
Properly diversify the portfolio to control the level of risk acceptable by the client.

Simply investing the portfolio in its initial allocation does not resolve the client’s risk issues. Proper monitoring of the performance and appropriate rebalancing of the asset allocation to its original target are critical to maintaining the client’s risk level in the portfolio. The financial planning required for an advisor to fully understand the client’s long- and short-term needs and goals entails significant education, experience and knowledge of the economy.

Certified Financial Planner practitioners are professionals that maintain one of the highest credentials as a witness to their competency and ethics. Don’t risk your lifetime savings to risk. What you don’t know could truly ruin your future. Ask for a second opinion regarding your retirement portfolio. Better to find out early if there is a problem in your future.

Diversification and asset allocation strategies do not assure profit or protect against loss. Past performance is no guarantee or future results. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loass, including total loss of principal

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Five Last-Minute Tax Savings Ideas for 2018

Posted on March 23, 2019March 28, 2019 by Jimmy J. Williams, CPA/PFS, CFP®

If you are like many people, you are procrastinating the filing of your 2018 individual income tax returns. Don’t worry, you still have time to reduce your 2018 income tax burden. Below are five ideas to reduce your taxes for last year:

Contribute to an Individual Retirement Account (IRA). If you qualify, you may contribute $5,500 (or $6,500 if age 50 or older) to an IRA prior to April 15, 2019, and claim the deduction on your 2018 individual income tax return. This is a wonderful deduction in which you gain a benefit and continue to control your money.
Contribute to a Health Savings Account (HSA). Many families have increased the amount of their health insurance deductible to offset the increase in policy premiums in recent years. If your policy qualifies as a “High-Deductible Plan”, you may open and contribute up to $3,450 for a single person, or $6,900 for family coverage, to a Health Savings Account. Similar to an IRA, this is an effective method of lowering your tax burden while you continue to control your funds. Remember, these accounts can only be used to pay for qualified medical expenditures. Your contribution must be performed prior to April 15, 2019.
Establish and fund a Simplified Employee Pension (SEP) Plan. One of the most generous tax deductions, a SEP Plan is similar to a 401(k) plan in that it allows larger contributions annually than an IRA. This type of plan is available to individuals, corporations and partnerships with self-employment income. If you qualify, you may contribute a maximum of $55,000 to an SEP Plan prior to the filing of your income tax return and take the deduction in 2018. This is a unique opportunity for those individuals who can’t file their returns by April 15, 2019. You may contribute to this plan up to the extended due date for filing your return. Although a little more complicated than an IRA, the larger contribution limit allows significant tax savings and, more importantly, greater opportunity to grow your retirement savings.
Contribute to the Oklahoma 529 Colleges Savings Plan. If you wish to benefit your children, and yourself, consider contributing to their college needs before April 15, 2019. You may contribute up to $10,000 per year filing as an individual or $20,000 per filing as a married couple. Based on Oklahoma’s current tax rate, this contribution may save you $500 to $1,000 of Oklahoma income tax for 2018. Another positive attribute about these plans is the right to transfer the funds among family members and utilize the growth of the account without taxation as long as the funds are spent on qualified educational expenses.
Immediate Expensing of Qualified Business Assets. For many self-employed individuals, this section of the Internal Revenue Code is utilized to control their income tax liability in a significant way. For example, if you are self-employed and bought tangible personal property (an IRS term that simply means, “not land or buildings”), you may be availed a tremendous deduction against your income. The limit for this deduction for 2018 is $1,000,000. For most small businesses, this is an opportunity to invest in your business and take a tax deduction for doing so. Certain types of property must be purchased and limitations apply.

Don’t take chances with your income taxes. Consult a CPA or Certified Financial Planner practitioner to determine if you qualify for the above deductions. Remember, every dollar you save in taxes can be used by your family for something of your choice.

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Three Simple Steps to Secure Your Future

Posted on January 5, 2019February 11, 2019 by Jimmy J. Williams, CPA/PFS, CFP®

The word “retirement” sounds pretty scary to most people. The reason for this emotion is that they have failed to plan properly and lack confidence in the process. This article will provide you a simple, yet effective, roadmap to reach your retirement objectives.

First, stop thinking like everyone else when it comes to finances. Yes, it is fine to be different. You must understand that your circumstances in life are most likely different from many of your friends. Some employers support their employees in planning for their futures while others do not. Your new mindset should be that of “I will depend on no one but me for my future plans”.

Do you often wonder why the ultra wealthy have the financial security they do when they may have started life in a lesser social/fiscal position than you? Do they know a “secret” formula for success that has eluded you in life? The answer is a resounding NO. However, the ultra rich think far different than the typical person. For example, to accumulate wealth you must do this simple task:

Invest for retirement first and then spend the rest

If you have a goal of saving ten percent of your income, place this 10% in your retirement and then plan your spending with the remaining 90% of your paycheck. For many of us this will sound very opposite than what we have been doing for our adult lives. Remember, it is OK to be different because you have different dreams and aspirations than anyone else. Don’t listen to the negative comments of the mass population who struggle from paycheck to paycheck with no change. You can make this change rather quickly and simply.

Second, learn to live within your means. This step requires you to know where each of your dollars are spent. To accomplish this, write down every penny spent for a week. Upon the conclusion of the week, categorize the areas you have spent your money and you may be startled when you become aware of where your money went! For example, “Did I really spend $32 on specialty coffee this week?!?” “Do I need all of the subscriptions that I don’t read regularly?” “How did I accumulate a bad habit, like tobacco use, that costs me $40 per week or $160 per month??”

Once you analyze your spending, you will quickly see areas you may derive savings for a better purpose – your future. The most difficult part of this process is writing everything down. To accomplish this, purchase a small notebook and carry it with you at all times. Record every penny you spend for whatever reason. Be honest with yourself. The only person to be cheated by not being honest is your future you.

Remind yourself daily, if not several times per day, the “why” for taking these measures in your life. You deserve a comfortable retirement, in terms you define, and can reach your goals with small steps performed on a daily basis. The action step to take is:

Know where your money is being spent and correct course

Lastly, Step 3 is the most impactful, powerful and simple of the steps to reach your retirement goals – measure your progress and celebrate when reaching small goals. The purpose of this step is to remember that you are on a journey and the lifetime goal is too far away to see. The best method for reassuring yourself of the progress you are achieving is to look for the next step in conquering your next challenge, not the ultimate lifetime goal. The last action step is:

Celebrate small wins frequently!

To assist you in the process of defining your roadmap for the future, you may wish to seek out a financial adviser or CPA that specializes in retirement planning. The price paid by far too many people for failing to plan is very severe. Don’t pay that price, take these simple steps today to design the future you wish to live.