Budget 101

A version of this article was first published on Military Spouse Advocacy Network. I am honored to be working with them. 

Google the word “budget” and you will get page after page results. Every finance blogger/author/guru has an opinion on the best way.  I say the best way to budget is the one you will stick with doing.

In its plain vanilla form, a budget is a spending plan for your money. It is how, when, and where you tell your money what to do.  In the beginning a budget can be painful.  It hurts sometimes to see those numbers flow in and out. But you cannot begin to master what you do not measure.  

We all have needs and wants.  This is the essence of a budget.  We also have fixed expenses and variable expenses.  There are ways to address each one and get as much out of our dollars as we can.  

I like a budget that starts with take home pay.  The reason I prefer this is because many people don’t really know or understand what their before tax pay is, and it can be tedious to remember to deduct all the portions of tax that are deducted before your pay hits your bank account. Now, if you find yourself at tax time with a bill, then that is another issue that should be addressed. Two quick ways to settle that is to either by have more withholdings or make estimated payments. The IRS and Bankrate both have withholdings calculators on their websites if you find yourself in that situation.

Basic Budgets

This includes your income, regular bills, regular variable bills like groceries, and anticipated items such as savings, additional debt payments, and planned expenses.  They can be fancy excel spreadsheets or a handwritten list or something in between.  

Examples of needs are housing, transportation, insurance, groceries.  That is not to say that these amounts must be extravagant, but they are typically the basic requirements for everyday life – a place to stay, a way to get to work, and food.

Standard wants include entertainment, cable, personal indulgences like manicures or massages, and Starbucks.  An argument can be made that any one of these wants is actually a need.  Depending on your lifestyle, health, job situation, and personal priorities I would be inclined to agree with you.  The real challenge is personal finance is personal and not one size fits all.

The  key to making budgets work is communication between spouses, and age appropriate conversations with children.  In our budget, in my house we have decided that it is important for each spouse to have their own bit of money to do with what they please. It could be $10 or $100, or some other number that is agreed upon, but each adult should have the ability to have some bit of cash to spend and for which they do not need to answer to anyone else.

Do you have a budget?  Do the adults in your home have allowances or agreed free spending money?  How do you balance needs and wants?

 

 

Of Donations and Documentation

Dresses and suits and sweaters and jeans, oh my! Donations to charitable organizations abound. One of the more generous line item deductions on a personal income tax return, the Schedule A itemized deductions allow taxpayers to make charitable contributions of up to 50% of their adjusted gross income (30% for capital gain property) for most taxpayers.

When was the last time you gave stuff away to charity? Do you make a particular effort to get your extra items out the door before December 31st so you could take advantage of deductions on your tax return?

Very generous individuals will see a limitation, but with some special opportunities for carry-forward of limited amounts. Wealthier taxpayers will see an overall limitation of itemized deductions. Of course, there are specifics that always apply, so be sure to consult a tax professional.

Imagine your mom passed away and your dad, grief-stricken, asked you take everything out of the family house. You donate truckloads of items, everything from bedroom sets, televisions, to sofas and rugs.

How would you document those donations?  Are they your donations, or do they belong to your father, or your mother’s estate?  How much effort do you make in keeping track of what you actually give away, its condition, how much was paid it for originally, and how much it is worth when you donate it?  How about if you made a really large donation of a lot small items, too, things that did belong to you and your immediate family personally – clothes, household goods.  What if, according to you, it all adds up to almost $28,000?  Does a spreadsheet with item descriptions and assigned values attached to the blank receipts the agencies hand out seem like sufficient paperwork?

Contrary to popular belief, there are rules about substantiation and documentation for charitable contributions, as well as what organizations qualify as charitable organizations. There are also very clear rules on record-keeping for charitable contributions that many people either overlook or ignore. You must have records of every single contribution of cash or goods, and the rules become even stricter as your contribution amounts increase. If you’ve received anything of value in exchange for your contribution, only the amount in excess of the value of what you received is deductible. For instance, you purchased two tickets to a spaghetti dinner at the local firehouse for $50, and the value of your dinners is $10, then $40 is the amount you are able to deduct.

Before you claim charitable deductions on your tax return, be sure to have the right paperwork.

FOR CASH Less that $250: Bank record that shows the name of the qualified organization, the date of the contribution, and the amount of the contribution. These include a canceled check, a bank or credit union statement or credit card statement. ORA receipt (or letter) from the qualified organization showing the qualified organization, the date of the contribution, and the amount of the contribution OR Payroll deduction records such as a pay stub, form W-2 or other document furnished by your employer that shows the date and amount of the contribution AND a pledge card or other document prepared by or for the qualified organization that shows the name of the organization.

FOR CASH greater than $250: A written acknowledgement that must include amount of cash you contributed, whether the qualified organization give you any good or services as a result of your contribution, a description & good faith estimate of the value of any goods or services received and a statement that the only benefit you received was an intangible religious benefit, if that was case. You must get the acknowledgment on or before the earlier of the date you file your return for the year you make the contribution or the due date, including extension for filing the return.

Noncash donations, often made to places like Goodwill and the Salvation Army, have additional recordkeeping requirements. When figuring your donation amount, the claimed contributions must be combined for all similar items of property donated to any charitable organization during the year. As the amount of your goods donation increases, so does your recordkeeping requirement.

FOR ALL NONCASH: Taxpayers should have reliable written records for each item of contributed property. They must include: name and address of the organization, the date and location of contribution, description of the property in reasonable detail, whether the qualified organization give you any good or services as a result of your contribution, a description & good faith estimate of the value of any goods or services received and a statement that the only benefit you received was an intangible religious benefit, if that was case.  You must get the acknowledgment on or before the earlier of the date you file your return for the year you make the contribution or the due date, including extension for filing the return.  You are not required to have a receipt where it is impractical to get one (for example, if you leave property at a charity’s unattended drop site).

 FOR NONCASH less than $250: A receipt that includes the name of the charitable organization, the date and location of the contribution and a reasonably detailed description of the property. A letter from the organization with the same information may also serve as a receipt.

FOR NONCASH greater than $250 but less than $500: An acknowledgement with the same information as for cash greater than $250, but it must also include a description of any property you contributed.

FOR NONCASH greater than $500 but less than $5,000: An acknowledgement the same as above, but with additional specific records that include:

  • How you acquired the property (purchase, inheritance, give, exchange, etc.
  • Approximate date you acquired the property
  • The cost or other basis, and any adjustments to the basis of property held less than 12 months
  • If available the cost or other basis of property help more than 12 months – If you have reasonable cause for being unable to provide information about the date you got the property or the cost basis of the property, attach a statement to your return.

FOR NONCASH greater than $5,000: All the same information as above, in addition to a written appraisal of the donated property from a qualified appraiser. Over $5,000 in noncash contributions (other than publicly traded securities) must also have the organization sign Part IV of Section B of the 8283.

As you’ve probably guessed, the taxpayer in the situation above was denied the charitable deductions because he lacked substantiation. The Tax Court didn’t address the issue of whether or not the donations from his mother’s property should have been allowed on his return, because the issue before the court was only if the deductions should be allowed based on the substantiation, recordkeeping and documentation.

 

This article was first published on LinkedIn via LinkedIn Pulse on November 2, 2015.

For Love or Money – Is Your Side Hustle a Business or a Hobby?

Large losses on a taxpayer’s Schedule C, Profit or Loss from Business (Sole Proprietorship) tend be a red flag waving in the face of the IRS. And when this happens for too many years, those tax returns can be especially inviting to closer examination.

Consider the following cases:

  • An artist operates for many years, reporting losses in all but two years of the last few decades.
  • A sports memorabilia agent operates for many years, with relatively small profit on a few years and significant loss in the three years under review.

On the face they appear to be considering the same issue and, you would think, reach the same conclusion – each one is a sole proprietor who completed a Schedule C on their individual returns and reported big losses, some that carried forward for years — looks like these are probably expensive hobbies.

The list below is of factors that are under consideration when determining whether a taxpayer has a profit motive – and that’s where things between these two cases are vastly different.

The list, not exclusively, is the following:

  1. The manner in which the taxpayer carries on the activity
  2. The expertise of the taxpayer or his advisors
  3. The time and effort expended by the taxpayer in carrying on the activity
  4. The expectation that assets used in the activity may appreciate in value
  5. The success of the taxpayer in carrying on other similar or dissimilar activities
  6. The taxpayers history of income or losses with the respect to the activity
  7. The amount of occasional profits, if any, which are earned by the taxpayer
  8. The financial status of the taxpayer
  9. Elements of personal pleasure or recreation

No single factor is conclusive, and the court can afford greater weight to one over another given the facts and circumstances of each case. These two Tax Court decisions regarding sole proprietorships have given insight into what the court looks at, and how carefully they consider, all information and circumstances when profit motive of a sole proprietor is in question.

So, carefully consider now – is your side hustle for love or money? How will you prove it if the need arises?

Here are a few suggestions:

  • Keep accurate and timely records
  • Devote time to the business side of your activity – inventory, recordkeeping, networking, and follow-up
  • Develop your experience and consult with experts in the field
  • Determine if your business is, or reasonably may be in the future, a means of support for yourself or family
  • Dedicate significant portions of your personal time to the pursuit of creating a profit in your business
  • Cultivate new skills and periodically evaluate and change, as necessary, your business practices to be more profitable
  • Enjoying your business is acceptable, but there should be definite elements of demand and market for the goods, products, or services

 

This article was first published on LinkedIn via LinkedIn Pulse on October 22, 2015.

What to Do if You Experience Tax-Related Identity Theft

As identity thieves become ever more advanced, taxpayers must take extra precautions to protect themselves from identity theft. Not only is the toll a costly financial exercise, the inconvenience, frustration, and emotional toll is one that is difficult to withstand.

Many of us have experienced having a credit or debit card number compromised, but tax-related identity theft occurs with someone uses your stolen Social Security number to file a tax return to claim a fraudulent refund. Over 19 million suspicious returns have been stopped by the IRS between 2011 and October 2014.

Those that have experienced tax-related identity theft usually do not find out about it until they attempt to file a tax return and the e-file is rejected as a duplicate return, or they receive an underpayment or underreporting notice from the IRS because someone has used their Social Security number for employment or other reporting, such as assistance benefits.

What should you do if your Social Security number has been compromised? The IRS recommends the following:

  • File a report with the local police.
  • File a complaint with the Federal Trade Commission at www.identitytheft.gov or the FTC Identity Theft Hotline at 1-877-438-4338 or TTY 1-866-653-4261.
  • Contact one of the three major credit bureaus to place a ‘fraud alert’ on your credit records:
    • Equifax, www.Equifax.com, 1-800-525-6285
    • Experian, www.Experian.com, 1-888-397-3742
    • TransUnion, www.TransUnion.com, 1-800-680-7289
  • Close any accounts opened without your permission or tampered with.

If your SSN is compromised and you know or suspect you are a victim of tax-related identity theft, take these additional steps:

  • Respond immediately to any IRS notice; call the number provided
  • Complete IRS Form 14039, Identity Theft Affidavit. Use a fillable form at IRS.gov, print, then mail or fax according to instructions.
  • Continue to pay your taxes and file your tax return, even if you must do so by paper.

If you previously contacted the IRS and did not have a resolution, contact the Identity Protection Specialized Unit at 1-800-908-4490. They have teams available to assist.  Additionally, the IRS is continuing a pilot program for those that live in Florida, Georgia, or the District of Columbia. Not only have 1.5 million six digit Identity Protection PINs already been issued, those that filed a tax return last year with an address in the areas mentioned above may choose to get an IP PIN. It is important to remember that you currently cannot opt out once you get an IP PIN. You must use an IP PIN to confirm your identity for returns you file from the point you receive the IP PIN and in all future returns. You should receive a new PIN each year, typically in December.

For more information, visit www.irs.gov and search identity theft.

 

This article was first published on LinkedIn via LinkedIn Pulse on July 29, 2015.

A Practical Point in the Face of Tragedy

May 11, 2015

I was shocked this morning to wake up to the news that a sorority sister’s husband had passed away suddenly.  He was the same age as my husband and I, a fraternity brother of my husband, in fact.

Getting older, the sudden loss of a peer due to health reasons rather than an accident, coupled with watching our parents age, brings uncomfortable thoughts and stark realities into clearer focus.

These tragic circumstances always bring practical questions to my mind.  In the case of my sorority sister, her husband was a self-employed attorney and she was his paralegal. I am left wondering if they have life insurance, what is the status of the cases they had pending, do they have savings that will get her through the next few weeks?  How will she continue to provide for her daughter now that not only is her husband gone, but also her job?

It is said that nothing is for certain but death and taxes.  And as cliché as that is, there is truth in the statement.  So many hurts will be resurrected next year as she goes through the process of filing their final tax return as a couple, if there is a need for an estate return, gathering information and working to determine what is actually needed to get this requirement of life – even in death – completed.

I have prepared tax returns for soldiers killed in action, for couples after a sudden death, and for those that know the inevitable is coming.  It is tragic, and an honor to serve those who are coping with this pain.  There are tools, resources, and professionals out there guide loved ones through this process, call upon them to make this as smooth as this process can be.

For friends and family assisting those they love through this tragic time, be a shoulder to cry on, a rock in the tide, and a source of information in the time of need.

Here is a starting point from the IRS, http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Deceased-Taxpayers-Probate-Filing-Estate-and-Individual-Returns-Paying-Taxes-Due

Nothing will make this process completely pain free, but we can strive to make it less stressful and painful.

This article was first published on May 11, 2015, via Linked In Pulse on my Linked In profile.