Monthly Archives: February 2013

Getting Rid of Debt

Debt – an obligation owed by one party (the debtor) to a second party (the creditor).  Yeah, that’s the technical definition.  However, the definition that most are familiar with is that little monkey in your wallet that keeps throwing all your cash into thin air.  But just how can you get that monkey to stop?  This post will offer you the basic outline of how to make it all happen.

Our very own Jared Rogers is no stranger to debt and the effects it can have on your life.  While never a big spender, he did manage to rack up some debt when he was beginning his professional career.  You know the new car necessary for work. Then there were the student loans taken out for business school.  Then there was the condo and the merging of finances when he got married.  However, after a few years of dedicated work, he and his wife eliminated most of their debt (with the exception of the mortgage) by following a simple formula.  How much debt?  Somewhere in the neighborhood of $65,000.

Jared just recently signed up to be a debt coach to a family over at The Debt Movement.  Here are the simple steps that he suggests to those looking to get rid of that debt monkey for once and for all:

Track Your Spending.  If you don’t know where you’ve been, how will you know where you are going?  The first step in any debt elimination process is to know where all the money is being spent.  This can be done with something as simple as a spending journal that you carry in your pocket or as elaborate as using financial software.  However you do it, it is imperative that you actually identify where your hard earned dollars are seeping out of your bank account.  Many individuals think they know what they spend their money on, yet are often shocked when they find out how much when analyzed by category.

Determine Your Profit.  Now that you know what you’re spending money on, you need to determine if it is more or less than the income you take in.  If your spending is like the government, you will see a nice big fat deficit that you will have to balance.  Unfortunately, unlike Uncle Sam, you can’t just sell your debt to China and keep on operating like business as usual!  So the next step is to look at your spending and identify the discretionary categories (e.g. entertainment, clothing, etc.) that appear to be out of whack or excessive.

Balance The Budget.  Once you know where the problem areas are, you must next get them in line.  Everyone’s living expenses will vary depending on where you live and the associated cost of living.  For example, a resident of New York City might spend 50% of their monthly budget on housing costs while someone in Mexico Missouri might only spend 25%.  However, there are certain “standards” that you can start with to put you on the right path.  The next step would be to try and align as many categories as you can with the ideal budget.

Pay Yourself First.  One thing that gets us all in trouble is the unexpected emergency.  But just like they say, expect the unexpected.  With that being said, you should always pay yourself first.  It doesn’t matter if it’s 5% or 10% of what you make, but you should put that away (preferably in a separate account) for a rainy day.  But why first?  Well, it will ensure you don’t have to tap high interest credit cards or take out a pay-day loan when the car’s engine implodes and you need to get to work.  Additionally, it will ensure you do it.  When the money for the month is spent, but there are still bills, someone doesn’t get paid right?  Stop making that someone you and pay yourself before the phone, electric and cable companies all take their cut.  Ideally, if you get your check direct deposited into your bank account, why not have them split it between your checking and savings?  You can’t spend what you don’t miss and if your savings is out of sight, it will be out of mind.

Apply The Debt Accelerator.  The reality for most of us is that we make more than enough money to handle our debt obligations.  The world of credit is based on ratios and lenders do a pretty good job of making sure you can pay them.  The corrupter/interrupter is often the mismanagement of one’s discretionary spending.  However, if you put yourself on a budget, you can easily start to generate a monthly profit (i.e. income greater than expenses) that you can then apply to your debt (a.k.a  the debt accelerator).  From here you simply tally all your debts and calculate how long it would take to pay off the smallest debt using the normal payment plus the debt accelerator.  Then you simply get to work paying extra on that debt until it is gone.  Once vanquished, you take that old payment and apply it to the next debt that can be paid off the quickest.  This is what is known as debt snowballing and is a tried and true technique to eliminate your debt.

That’s it; there really is nothing more to it when it comes to getting rid of debt. Sure, you can make the process complicated, but it’s really just as simple as outlined above.  The hard part is staying committed to the plan and not giving up when you hit a setback.  If you do, simply brush yourself off and get back on the road to financial freedom.  The sooner you do, the quicker you can leave the debt monkey on the side of the road to hitchhike with someone else!

Are My Social Security Benefits Taxable?

A few days ago a client came into our office to have their taxes done.  Despite being married, this person was adamant that they wanted to file under the “single” filing status.  When we got to the bottom of it, the reason was due to their perception that their spouse’s social security benefits could impact his tax situation or she could lose them.  Despite all of the information we provided this individual, we ended up not doing the return because they didn’t want to use the correct status.

Which brings us to our question; when are Social Security (regular, disability, or survivor) benefits subject to taxation?  The answer is it depends.  Particularly, it depends on the amount of your Adjusted Gross Income (AGI), the total amount of your Social Security benefits and where your income comes from.

  • For someone filing using the status of Single, Head of Household, Widow or Married Filing Separately (and you lived apart), your benefits will generally not be taxable unless the total of your modified AGI, plus one-half of your Social Security benefits exceeds $25,000.
  • If you are married and file a joint return, your modified AGI plus one-half of your Social Security benefits would generally need to exceed $32,000 before taxes kick in.
  • If you are married filing a separate return, and you lived with your spouse, your threshold is actually zero, and your Social Security benefits generally may be taxable from dollar one.

The following examples will help illustrate some of the various scenarios that taxpayers may find themselves in.  Additionally, they will walk through the calculation to determine how much tax they may have to pay.

Example One: Eric and Kathy are filing a joint return for 2012 and both received social security benefits during the year. Eric received net benefits of $7,500 and Kathy $3,500. Eric also received a taxable pension of $22,000 and interest income of $500. Since half of Eric and Kathy’s benefits ($5,500) plus their modified AGI of $22,500 doesn’t exceed $32,000, none of their benefits are taxable.  Even though their benefits aren’t taxable, Eric and Kathy must file a return for 2012 because their taxable gross income ($22,500) exceeds the minimum filing requirement amount for their filing status.

Example Two: Jared and Aaronita are filing a joint return and have regular income of $15,000. They also have tax-exempt interest income of $12,000. Jared received Social Security benefits of $15,000 and Aaronita $5,000. Since half of their Social Security benefits ($10,000) plus their modified AGI ($27,000) exceeds the $32,000 threshold, they will have to pay taxes on their Social Security benefits.

Jared and Aaronita’s provisional income totals $37,000; their modified AGI of $27,000 plus one half of their Social Security benefits ($10,000).  From this amount, they would subtract their threshold limit of $32,000. This gives them a result of $5,000.  The law says that you must include the lesser of 50% of your benefits ($10,000) or 50% of the above result ($2,500) as additional income subject to tax.  Based on the above, Jared and Aaronita would include $2,500 of their Social Security benefits as additional income subject to tax. If they are in the 15% marginal tax bracket, they’ll pay about $375 (15% of $2,500) in taxes on their total benefits of $20,000.

Example Three: Ricky and Bobby are married and live together, but file separate returns for 2012.  Ricky earned $8,000 from his job and received $4,000 of Social Security benefits in 2012. Because Ricky is married filing separately and lived with his spouse during 2012, he must include 85% of his social security benefits in his taxable income. Thus, Ricky would enter $4,000 on his Form 1040, line 20a, and $3,400 on Form 1040, line 20b.

As you can see from the above, sometimes none of your benefits are taxable but that can increase to 50% all the way up to 85% in some circumstances.  Thus, the one thing to keep in mind is that as your income increases, so will the portion of your Social Security benefits that is subject to taxation.

It is also important to note that these rules also apply to Social Security disability and survivor benefits.  Many people assume that disability and/or survivor benefits are not subject to the rules regarding taxability of Social Security benefits. Unfortunately, this is not the case.  Thus, if you are receiving Social Security disability or survivor benefits, you’ll need to make sure whether any of your benefits will be subject to tax.

This IRS website has a pretty cool tool to help you determine if your Social Security or Railroad Retirement Tier I Benefits Taxable.  Additionally, IRS Publication 915 will give you much more detail regarding the taxation of your Social Security benefits and provides a number of worksheets you can use to do your own computations.

Dealing With A Bad Day As A CEO

Sometimes heading up a business can be rough stuff.   Things will not always go as planned, customers may be demanding and vendors may be unreasonable or uncooperative.   While you are the head of the company, you are a human being after it is all said and done.  Given the preceding statement, us humans have emotions and sometimes that will lead you to have a bad day.

But just what do you do when you’re having a not-so-stellar day?  Well, this is the hard part of running any and all businesses – dealing with the “inner game” that goes on in your head.  What exactly is the “inner game” you may ask?  Well, it consist of all the thought processes that regulate what we do with our time, how we respond to situations and the internal programming that guides how we think about our world and our place in it.  When you are having a bad day, this is how the inner game might play out:

Something goes wrong and threatens either the success of a particular task or worse your entire business.  You start to dwell on what is going wrong and as a result, you begin to miss opportunities to correct the situation.  As things compound on one another, your spirits begin to slide and you lose hope.  This feeling begins to permeate your attitude, which others will no doubt pick up on.  From there you may find yourself feeling as if “nothing is going right” and things are simply going from bad to worse.

The major take away from the above scenario is that the Law of Attraction works on all of us, whether we are consciously utilizing it or not. The Law of Attraction basically says that you attract into your life that which you think about most.  Thus, whatever you spend most of your time thinking about is most likely the thing you’re taking the most action on.

So then, how do you fix a bad day as a CEO?

Have a pity party for 2 mins and then move on!  Yes, you are a human.  But “crying over spilled milk” isn’t going to fix the situation.  At some point, you simply need to tell yourself that this is the situation you are dealing with and you need to work on fixing it.

Reaffirm what you do well.  Bad days will usually make you doubt yourself.  What did I do wrong?  Why didn’t we win that sale?  How much longer can we survive?  However, the key to reversing these feelings is to remind yourself that you are in fact good at something and this is just a setback.

Acknowledge what is out of your control.  We as humans like to control things – it’s in our nature. But the reality is that a good portion of our lives are not within our control.  To fix a bad day, let go of what you have no control over (like that truck that crashed into your storefront) and focus on what you can fix.

Focus on what you can do.  In every situation there are things that you can do to “right the ship” and get you back on track.  If that means going out and drumming up business, visiting clients, firing that headache employee or just taking a quick break to clear your mind, identify what you CAN control.

Act on what you can.  Nothing is going to fix itself and no one is going to help you.  Being a CEO is a lonely job.  At the end of the day, you are responsible for everything that happens in your company (good and bad).  But sitting around waiting for the situation to get better is not the answer.  So get up, dust yourself off and get to work.  Remember, whatever you spend most of your time thinking about is most likely the thing you’re taking the most action on.  So start thinking/acting on how to make tomorrow a good day!

Filing Options For Married Taxpayers

So it’s the start of the next year and here you are gathering your papers together to file your taxes.  Inevitably, sometime during the process you will encounter the question “what was your filing status?”

While this seems like a straightforward inquiry, it often poses a challenge for those who recently married, divorced or separated.  Can I file as single if I didn’t change my name with the Social Security Administration (SSA)?  Am I considered married if I’m separated but not divorced?  What do I choose if my spouse passed away last year?

As with anything involving taxes, the answer often changes depending on the circumstances.  In general, if you are married before December 31st of a given year, your two options are to go married filing joint (MFJ) and married filing separate (MFS).  But we’re pretty sure you might have the following questions:

Wait, I can’t file as single?  Nope, not under ANY circumstances.  You are now married and have to file as such.

But what if I didn’t change my name with the SSA?  Doesn’t matter.  You will show your maiden name on your return, but your filing status will NOT be single.

Okay, so what if I married someone from another country and we haven’t been married in the US yet?  This opens up another can of worms that we’ll write about in another post.  But the short answer is the same as point number one, you have to file MFJ or MFS.

What happens if my spouse leaves me?  This one can get tricky.

  • Typically you would file MFJ
  • If you and your spouse aren’t on speaking terms (or you don’t know where they are) you would file MFS unless…
  • You have a child AND your spouse didn’t live with you for the last 6 months of the year – you may qualify to file Head of Household (HOH)

Okay, what if we got married and divorced in the same year?  If on December 31st you were legally divorced OR legally separated, according to state law, under a decree of divorce or separate maintenance then you can file as single.

What happens if I was married, but my spouse passed away?  If you spouse died during the tax year you are filing (e.g. 2012 in 2013) you can file MFJ for that year.  For 2013 and 2014 you may be able to file Qualifying Widow(er) if certain conditions are met.

As you can see, picking the right status can be a challenge.  If you need further help, check out IRS Publication 17 or their tool What Is My Filing Status?  If you want to know if it’s better to file MFJ or MFS, check out this post we did last year.