Hi. Thanks for visiting us at the Westport Plaza Halloween Parade. Please click on the link below to find the picture of your child. Sorry we didn’t get to take pictures of everybody this year, we’ve never had so many kids show up before. Next year, we’ll figure things out so that we can keep the line moving and get you some pictures of your kids. Have a great Halloween!
Thank you so much for letting us celebrate this event with your family. We probably had as much fun as the kids did.
And in case you haven’t already clicked ahead to find your pictures, here’s our brazenly commercial plug: We hope that you’ll consider Roberg Tax Solutions in the future if you need tax assistance. If you’re a do it yourself type, do check back at this site for tips and tricks for preparing your own return. Why not take a look at these popular posts:
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I titled this blog post and later realized that people would think it’s about Albert Pujols’ income prospects after hitting three home runs in game 3 of the World Series down in Texas (Okay, don’t you think the three home runs will help his negotiating now that he’ll be a free agent?). But seriously, it’s about you.
Saving for the future is a little like baseball – you’ve got to work at it every day. Like baseball, in a regular game, the idea is to try to get someone on base, try to get a run in. If you get in a run during an inning you’re doing well. If you can save a little bit from every paycheck, you’re on the right track as well.
Sometimes in baseball, we get those great moments, like Albert Pujols hitting three home runs. That was truly amazing. But it also wasn’t just luck. Albert is out there every day. He works at it, he makes himself better. He learns from his mistakes and from his successes.
Sometimes in life we have great financial moments as well. Maybe you got a bonus at work, a tax refund you weren’t expecting, maybe even a winning lottery ticket—these are your financial home runs where it’s your chance to put your team ahead. You need to make sure you use your financial windfalls to your advantage. Unlike Albert Pujols, who can’t bank those extra runs to use for the next game, you can bank your windfall money.
When it comes to your life, you’re in it for the long haul. You need to start saving today to make tomorrow worthwhile.
The goal is to save 10% of your income. If you make $200 a week, then you bank $20. If you make $2,000 you save $200. For a lot of people, that’s impossible—at least it is to start. If you can’t do 10%, then I say you need to match your social security withholding. It’s not that much. If you look at your payroll stub, it should be listed right there. If you make $200, then your social security withholding is $8.40. That you can do. Work your way up to 10%.
If you can’t handle a bank account, you can save it in a jar or under the mattress for all I care. Once you’ve got enough to get free banking, then you can open an account and maybe earn a little interest. You always hear the people need to have money to make money—you’re slowly turning yourself into one of those people who have money. Just like baseball—one run at a time.
You may have heard about some of the things that you can deduct if you’re looking for a job: copying and mailing your resume, trips to another city for a job interview, fees you may pay to a headhunter, etc. Basically, any costs that you incur in trying to obtain a new job are considered tax deductible—but before you get too excited about that, let me explain the restrictions. When all is said and done, the likeliness that you’ll get a deduction for your job search is pretty slim.
First, you can only deduct your job search is you are looking for a job in the same career field—and boom, college students looking for their first job after graduation are automatically excluded because you have to already be in a career. For example; let’s say you’re a cop and you get laid off, but you also have a degree in accounting. You can write off your expenses if you’re looking for police work, but not if you’re looking for an accounting job.
Okay, so Dirty Harry would not be looking for an accounting job.
Sorry, I got a little off track. Anyway, the next issue you have to deal with in claiming these deductions is the 2% limitation rule. That means that any expenses that you deduct will have to be more than 2% of your income. So if you only spend $50 on copying and mailing your resume, then your income will have to be less than $2,500 for you to be able to take a deduction. Let’s face it, if your income is under $2,500 for the year—you don’t need a deduction!
But suppose you had some serious job search expenses—you took a few flights that were not reimbursed by the company, add a few hotel stays, paid a fee to an employment agency, etc. Maybe you spent $4,000 on job hunt expenses. Now if you had income of $40,000 before you were laid off, then your 2% threshold would be $800—that would give you a $3,200 deduction on your schedule A. So this is starting to look pretty good right? But what if you don’t have any other deductions to claim on your schedule A? You don’t own a home so there’s not real estate tax or mortgage interest to deduct. Maybe your other deductions only total $2,000. That means you’d still be better off claiming your standard deduction so there’s still no tax benefit for your job search expenses.
But that doesn’t mean you shouldn’t keep track of those expenses. Save your receipts and keep track of that mileage. Despite my gloomy forecast about being able to claim those expenses they just might come in really handy. For example: let’s say you’re in marketing. You join several networking groups, use your cell phone as a business line, meet with several different people over lunch to discuss opportunities, and you print up some personal business cards. Then company X needs a marketing guy to do a project for them—not a permanent hire but just a subcontracting job. They call you. At tax time, you don’t get a W2, you get a 1099MISC because you were contract labor. Suddenly, all those receipts become very handy because you can use many of them as self employed business expenses. Now, instead of being worthless, they are incredibly valuable deductions because 1099 income is taxed at the self-employment rate plus your regular tax rate.
When making spending decisions about your job hunt, make the assumption that you’ll get no tax benefit from what you’re doing. Make your decisions based upon, “Is this a smart move for me to make or not?” If you manage to get a deduction for it, great—but if you don’t, you won’t feel cheated because you’ll know that you spent the money for the right reason.
After you lose your job, you’re going to want to sign up for your unemployment compensation right away. The first thing you’re going to do is check out your state’s website about unemployment compensation. Make sure that you go to a state government website—it will have a .gov in the address. You’ve got to be careful not to try to apply through one of the .com websites. Those aren’t government sponsored sites—they’re just compiling email lists and you’ll be deluged with spam that you agreed to receive by using that site. (Yep, you lost your job, you’re broke, and now they want to sell you more stuff.) In Missouri you’ll go to: www.moclaim.mo.gov.
Your unemployment compensation is taxable—it’s all taxable. A lot of people don’t realize that and don’t have withholding taken out and then they really get dinged at tax time. Let’s say that your spouse is still working and your combined income for the year puts you in the 25% tax bracket. If you’ve received $10,000 in unemployment benefits, then the tax on that would be $,2500. If you’re not withholding for that, it can be an ugly surprise in April.
On the other end of the income spectrum, let’s say that your unemployment is the only income you’re receiving—the standard deduction and exemption for a single person is $9,350. You’re probably better off not withholding and using the full amount of your unemployment check to put food on the table.
For persons with children—unemployment compensation will not qualify you for an Earned Income Credit. You must have wages or self employment income in order to qualify for the Earned Income Credit, unemployment doesn’t count.
Different states have different rules regarding their unemployment benefits. I recommend signing up for benefits as soon as possible to avoid missing any deadlines and possibly losing out on potential benefits. In most cases, you’re going to need the following information before you sign up:
- Your name , including any prior names if you’ve changed it
- Social security number
- Telephone number
- Name of county where you live
- Employment history: Employers names, mailing addresses (including zip code), last day of employment and why you’re not working any more (quit, fired, laid off, leave of absence, etc.)
- Bank routing and account number if you want direct deposit of your benefits
- Information about any holiday pay, sick pay, or severance pay that you received or are still entitled to
- Pension information, if you began receiving one
- If you’ve served in the military within the past 18 months you’ll need DD form 214– record of service and discharge
- If you’re a Federal employee you’ll need your SF8
- You’ll need your SF 50– where your duty station was– if you have one of those
A word about collecting benefits: Unemployment compensation is part of an insurance program. Your employer pays into the system for you to cover situations like this. Unemployment insurance is paid by your employer based upon a percentage of your income. Your employer pays state and federal unemployment insurance. You wouldn’t think twice about using your health insurance if you were sick, it should be the same way with your unemployment insurance. It’s there for you to use when you need it. Don’t let your pride get in the way of receiving something that is rightfully yours.
While losing your income is probably the worst thing about losing a job, the second worst thing for most people is losing you health care benefits. If you’re young and reasonably healthy, this might not seem like such a big problem, but for older workers or persons with pre-existing health conditions it can be a nightmare.
COBRA is named for the Consolidated Omnibus Budget Reconciliation Act, the health benefit provision act enacted in 1986. This allows you some time to stay on your employer’s health insurance program for awhile after leaving your job. Generally, you can be covered under COBRA for 18 months. Here’s a link to the Department of Revenue page about COBRA coverage: http://www.dol.gov/ebsa/faqs/faq-consumer-cobra.html.
Under COBRA, you will pay 102% of the real cost of your health insurance. (There’s an extra 2% administrative charge added.) That can be a real shocker if your employer was paying a portion of your insurance while you were working. If you have no income, you might not be able to afford your COBRA payments.
You’re going to have to make a decision, but here’s the important thing you need to know—you’ve got 60 days to make it. This buys you some important thinking time. Don’t sign up for the COBRA immediately unless of course you know you’ve got pre-existing conditions and you won’t be able to get insurance elsewhere. You can hold off signing up for COBRA while you shop around for other insurance (or get another job!). If something happens to you and you need that insurance, you can backdate your enrollment and be covered for the emergency. This is also helpful if you just can’t afford health insurance at all.
Remember, purchasing private health insurance takes time so you want to start right away. If you can’t get coverage elsewhere, you don’t want to miss the 60 day deadline to sign up for the COBRA. Don’t forget to look into state programs as well. Here in St. Louis we’ve got Missouri HealthNet for Kids which provides health insurance to children on a sliding scale basis. Here’s a link to their website: http://www.dss.mo.gov/mhk/ Check out all your options. For many people, COBRA is not the lowest cost option.
For tax purposes, your COBRA or private health insurance is considered to be a deductible medical expense. That said, you’ll have to spend over 7.5% of your income on healthcare in order for it to be deductible. For most people, it won’t give them much of a tax benefit if any.
One more health care issue: If you had an FSA (flexible spending account) at your old job, make sure that you submit all of your health reimbursement forms before the account expires. No sense in leaving money behind.
There are so many issues with losing a job that you hate to think about taxes, but it’s important to think things through. In the last post, I talked about severance pay. In this post I want to talk about your 401(k) and what to do with that money.
First and foremost—it’s important to get your money out of that company’s 401(k) program as quickly as possible. For most people I’m not recommending just taking the money out, I’m recommending what you call a direct trustee to trustee transfer into an IRA. You want to remember that term “trustee to trustee transfer” because that phrase will save you money.
Why take the money out of the 401(k)? Why not just leave it there and roll it into my new company’s 401(k) when I land another job? I get that question a lot. First, you have a lot more control over your money if it’s in an IRA than in a 401(k) so that’s very important. Second, many 401(k) plans are tied into the stock of their company—if your company is laying people off, then that’s a signal that the company’s stock probably isn’t doing so well either. Do you really want to leave your money in a sinking ship? Third, and probably most importantly, if you wind up needing to access that money before you land a new job the IRA is the better place to be as far as taxes are concerned.
What exactly is a trustee to trustee transfer and why should I do one? A trustee to trustee transfer is when you have the money in your 401(k) plan transferred directly to your IRA account without you ever touching the money. Your financial adviser will have you sign the proper forms to make this happen. If you’ve got one of those self-directed plans like in an E-Trade account you’ll be able to find the right forms on their website
But how does this save me money? Because, by doing a trustee to trustee transfer, there are no tax issues. Let me use an example: Let’s say you have $10,000 in your company’s 401(k). You’re in the 25% tax bracket, if you just take the money out, you’ll pay $2,500 in taxes plus another $1,000 in penalties for a total of $3,500 in extra income tax. That’s not good. A direct trustee to trustee transfer is just a tax free way to move your retirement money from one account to another.
Let’s say instead that you want to rollover the money into an IRA but you don’t want to do a direct trustee to trustee transfer. You have your company cut you a check for the full amount of your 401(k) and you’ll handle depositing the money yourself later (You have 60 days to do the rollover). What happens is they cut you a check for $8,000 and give $2,000 to the IRS for taxes. You deposit the full $8,000 into your IRA so you won’t be taxed on that, but you will be taxed on the $2,000 that went to the IRS. That means you’re going to be billed $700 for the $2000 that you gave to the IRS. ($500 for the 25% tax plus another $200 for the 10% penalty.) That’s got to be the craziest thing in the word! You just paid tax on your tax! Oh sure, they’ll refund you the $1300 but that $700 is gone! Zippo! And for what? Don’t fall into this trap.
But I lost my job! What if I need access to my retirement funds? Good point, that happens to a lot of folks. But unless your 401(k) amount is pretty small, I’d still recommend doing the trustee to trustee transfer first, and then only taking out money from your IRA only when it’s absolutely necessary.
Here’s a different example: Jill has an annual salary of $40,000. She gets laid off in December and cashes in her 401(k) which has $100,000 in it. Normally, her annual Federal taxes are just under $3,600, but with the 401(k) added her income taxes are over $40,000 (with the 10% penalty included.) Her taxes for the year would actually be more than what her regular annual income would be. She’s gone from the 15% tax bracket to the 28% tax bracket, and with the 10% penalty for people who are under 59 and ½ years old that’s a 38% tax rate.
But Jill could have done a direct trustee to trustee transfer and saved herself a bundle. Let’s say she does the transfer, but later she needs to access some of that money to make ends meet. We know that she’s been managing on $40,000 a year. Let’s assume that she gets $10,000 in unemployment benefits for the year so she only needs to access $30,000 out of her IRA to stay level. Her taxable income will still be the same so she’ll owe just under $3,600 in regular tax, plus she’ll owe another $3,000 in penalties for the IRA money giving her a total tax bill of $6,600. It’s certainly not a perfect situation; that 10% penalty is painful, but it’s definitely better than paying a 38% tax rate. In this situation, Jill still has food on the table, a roof over her head, and some money still left in her retirement plan.
If you’ve been laid off and have 401(k) benefits left in the company, talk to your tax person and your financial adviser to figure out a plan that’s best for you and your family. You don’t have to go it alone.
First and foremost, I’m sorry for your loss. Losing a job is pretty hard to take and you’re allowed to have a mourning period, but you only get about a day because you’ve got work to do. This post is about taxes and timing —you really don’t want to get burned on your taxes in addition to losing your job.
The first issue I want to discuss is severance pay. If you’re getting any severance pay at all, be glad, so many people aren’t. To a lesser extent, in this category I’m including vacation pay and sick leave that’s owed to you as well. Here’s the important part: if you get laid off in the fourth quarter of the year, try to negotiate to have your severance pay paid to you next year.
Here’s why: let’s say you make an annual salary of $40,000 a year. Your company decides to let go of you right before Christmas (it seems to be a popular lay-off time.) On the plus side, they are giving you one year’s salary as a severance package which is pretty sweet. Here’s the problem—if you’re single and making $40,000 a year, your income tax is going to be under $3600. If your company pays you that severance package before January first, your tax bill won’t be $7200 (which would be double) it will be closer to $13800—over $10,000 more! In this scenario, moving your severance package would save you over $6,000—money that could be used for putting food on the table and paying the rent! Of course, if you’re laid off early in the year, take the money right away—you won’t have that tax problem.
Here’s another reason for moving your severance pay ahead—and this includes your owed vacation pay and sick days as well. That money is still considered to be “earned income” and you want earned income on your tax return. Given today’s economy, it’s possible for you to be out of work for an entire year. Unemployment doesn’t give you access to the Earned Income Credit, but wages do and severance pay is wages. You might not be familiar with the Earned Income Credit if you’re used to having a good job with a good income, but when times are tough it can be a blessing so you really want some wages on your next year’s return.
Will my employer agree to pay me later? I don’t know. The one thing I do know is that if you don’t ask, you don’t get. Here’s his side of it—he’s cutting costs by laying-off staff. If he pays you your severance now, that will reduce his taxable income for the year, so that’s his motivation for paying now—less taxes. But if cash is a little short, by paying you in January, it buys him a little breathing room. If he pays your severance in January, then it also postpones when he pays the IRS your payroll taxes as well. If cash flow is a problem for him, he might jump at the opportunity to delay your payment.
One important issue: if you think the company is going belly up—take the money and run! Pay the tax, deal with it. Realistically, belly up companies aren’t doing severance packages, they’re just paying whatever’s required by law. Get your money, cash the check and be done. Having less money to live on is better than having no money to live on.
Whoa, that Roth IRA conversion you did last year seemed like such a great idea at the time didn’t it? I know I thought it was pretty wonderful. But things change and with the stock market tanking, your portfolio is probably not worth what it was back when you did the conversion. For some people, now might be a good time to – here’s the important IRS word: Recharacterize your IRA.
Basically, to recharacterize your IRA, you’re taking all the money that you “converted” and put it back into your Traditional IRA. You will need to talk with your financial adviser and fill out the proper forms to do this. You also have a deadline: you must complete the transaction by October 17th, so you don’t have a lot of time to work with here.
Once you recharacterize your Roth IRA, it will be like it never happened, so you’ll have to amend your tax return to eliminate the Roth conversion that you reported last April and claim a refund. But that might be the smartest tax move you ever made. Let’s take a look at an example:
Porky Pig is in the 25% tax bracket and he made a $10,000 Roth IRA conversion for tax year 2010. The cost of the conversion to Porky was $2500. But now, because of the stock market, Porky’s Roth IRA is only worth $8500. It’s like he paid $325 too much in tax. Is that enough for Porky to make a change? For me it is, but for some people it might not be.
Let’s take a look at Porky’s friend Bugs Bunny. Bugs did a larger conversion; he rolled over $50,000 into a ROTH IRA. Bugs has a tax rate of 33% so he paid $16,500 for his Roth IRA conversion. Bugs also had a bigger portfolio drop than Porky, his Roth IRA went down by 20% to $40,000. Bugs paid $3,300 too much in taxes for his Roth conversion. I would think that $3,300 has got to be too much tax by anyone’s standards.
So what should you do if you made a conversion and your portfolio tanked? First, you’ll want to make an analysis similar to Bugs and Porky’s. What’s the true cost to you in terms of taxes? Don’t forget how much it will cost to amend returns and pay your broker fees. If it makes sense to recharacterize, then by all means, do so.
Don’t get me wrong, I’m still a big fan of Roth IRAs and I still think that the Roth IRA conversion is a great tool, especially for people whose incomes are too high to make regular Roth contributions. It’s just that if recharacterizing your Roth can save you a large amount of tax money, you really should consider doing it.
Can you do a Roth conversion again later? Yes, but you’ll have to wait for at least 30 days before you do it. You’d be reporting the conversion on your 2011 return (unless you wait until 2012.) You would not get the advantage of being able to split the tax payment between two years.
I hope this sheds a little light on the situation. Remember, the deadline to recharacterize your Roth IRA to a Traditional IRA is October 17. Don’t wait until the last minute, remember that your financial adviser will need time to process the paperwork.