spending plan

Create a Spending Plan & Get a Handle on Your Finances

Create a Spending Plan

Does it seem as if your paycheck is here one minute and gone the next? If your money disappears before you know it, you might need a way to keep better track of your spending. A budget — or spending plan — can help you take control of your finances to make sure that you’re spending wisely.

FOLLOW THE TRAIL

The first step is to find out where your money is going. And the only way to do that is to keep track of everything you spend, including cash purchases. Ideally, you’ll be able to gather spending data for three months (although one month may be more realistic). There are software programs and mobile apps that can help simplify the process.

Add up how much you’re spending in specific categories during a one-month period, and use those figures to project your future expenses. To improve accuracy, add up any and all irregular expenses (insurance premiums, taxes, etc.), divide the total by 12, and include that amount as a monthly expense. Obviously, spending projections should not exceed your income.

PRIORITIZE YOUR EXPENSES

Household expenses generally fall into two main categories. Non-negotiable expenses are the expenses you must pay, such as your mortgage or rent, utilities, phone service, and insurance. Groceries and any personal or student loans also fall into this category.

Negotiable or discretionary expenses are for things you want but don’t necessarily need, such as premium cable service, dinners out, and pricey vacations. If your cash flow is negative, reducing discretionary expenses will help you get from red to black.

MAKE SAVINGS AN ITEM

Your budget should include “savings” as an expense category. Direct the money into an emergency fund, a retirement savings account, a college savings account (if applicable), etc. Your budget should also reflect your priorities. You don’t necessarily have to give up expensive splurges, as long as you can fit them into your spending plan.

It will probably take some tweaking to finalize a workable spending plan, but it is well worth the time and effort.

business-borrowing-loan

Business Borrowing

Like most business owners, you probably have high hopes for your company’s future. You want to expand, to add employees, and, perhaps, to open up other locations. You know that to turn these hopes into reality, you’ll need financing. But you also know that obtaining a small business loan is never a slam dunk.

How you approach the process of securing business financing can determine whether you get the money you need. Here are some ideas that may help make a difference.

FIND THE IDEAL MATCH
Not all banks lend to small businesses. And not all of those that do lend to small businesses lend to all small businesses. The ideal match for you is a banker who’s familiar with your industry and can discuss potential risks and make informed decisions.

LAY THE GROUNDWORK CAREFULLY
If you walk in off the street and ask for a loan, you may not be successful. If possible, build a relationship with a potential lender. If your plans call for borrowing a substantial amount in a few years, you can establish your creditworthiness ahead of time by setting up a line of credit or taking out a small loan.

SUBMIT YOUR BUSINESS PLAN
Regardless of whether you have a relationship with a prospective lender, you’ll need to submit a business plan along with your loan application. Be prepared to answer questions about the assumptions you’ve used to create your plan. You might want to take things one step further by projecting how your plan might play out in three different scenarios: best case, most likely, and worst case.

Another proactive planning move is to line up some secondary repayment sources (business or personal collateral, for example) ahead of time. It shows the lender that you acknowledge the risk your loan represents and that you already have a backup plan.

PROVIDE FINANCIAL INFORMATION
Potential lenders will want to verify your background and confirm that you have the necessary experience. They will also require extensive financial information, including both your personal and business credit histories. Be prepared to provide personal and business financial statements as well as cash flow projections for a year (or more, depending on what the lender requires).

spending plan

Smart Business Strategies for a Seasonal Business

Spring may still be weeks away, but if your business is seasonal — and your season is summer — it’s time to start getting things organized. The more you can do before opening day, the easier it will be to stay cool when business and the weather heat up.

GET YOUR FINANCES IN ORDER
Operating a seasonal business means having to squeeze a year’s worth of business into a few months and then make your earnings last the entire year. You have to resist the temptation to overspend when cash is plentiful. So, before you start scrubbing walls or unpacking boxes, make sure your business finances are in order.

Go over last year’s budget carefully to see what changes may be necessary. Run some financial projections. Then check your progress frequently during the season to make sure you’re on track.

REVISIT AND RETHINK YOUR MARKETING PLANS
Give some thought as to how you plan to market your business. If you’re adding new product lines or services for the coming season, there may be new markets you can tap. Think about tweaking your website to give it a fresher look. If your client base is mobile friendly but your website isn’t, it may be time to upgrade.

START HIRING EARLY
If you’re hoping to rehire some of last season’s newer workers, the sooner you get in touch with them, the better. Once you know how many vacancies you have to fill, you can even start advertising and interviewing.

FOCUS ON THE DETAILS
This is a great time to take care of any needed repairs and to put on that fresh coat of paint. You also have time to search for deals and compare prices, which could result in substantial savings. Shop for items you regularly keep in stock and any equipment you need to buy or replace.

Before you know it, summer will be here.

The Home-Sale Gain Tax Exclusion

A Big TAX BREAK
Who doesn’t love a tax break? The reality is that for many taxpayers, there aren’t too many tax breaks they can take. However, if you’re thinking the time is right to put your house on the market and it has appreciated in value, you may be eligible for one of the most valuable tax breaks of all — the home-sale gain tax exclusion.

THE NUTS AND BOLTS
Here’s how it works: If you make a profit when you sell your principal residence, all or part of your gain may be tax free. Eligible individual filers may exclude up to $250,000 of gain from their income; married couples filing jointly may exclude up to $500,000 of gain.

USE AND OWNERSHIP TESTS
In general, this tax break is available only once every two years. To qualify, you generally must have owned and used the home as your principal residence for at least two years (a total of 24 full months or 730 days) during the five-year period ending on the date of the sale. The ownership and use periods don’t necessarily have to coincide.

Only one spouse must pass the ownership test, although neither spouse may have excluded gain from a previous home sale during the two-year period ending on the sale date. As for the use test, both spouses must pass it.

REDUCED EXCLUSION MAY BE AVAILABLE
If you have to sell your home because of a change in employment, you move for health reasons, or there are other qualifying “unforeseen circumstances,” you might qualify for a reduced exclusion. The amount of the reduced exclusion is based on the portion of the two-year use and ownership periods you satisfy.

 

The general information provided in this publication is not intended to be nor should it be treated as tax, legal, investment, accounting, or other professional advice. Before making any decision or taking any action, you should consult a qualified professional advisor who has been provided with all pertinent facts relevant to your particular situation.   Content courtesy of Client Line Newsletter

Will You Fall into the Alternative Minimum Tax (AMT) TRAP?

Originally introduced in the 1980s, the alternative minimum tax (AMT) system is designed to prevent higher income taxpayers from avoiding federal income taxes through the use of alternative minimum taxvarious exclusions, deductions, and credits. However, taxpayers who have a large number of personal exemptions, take large itemized deductions for state and local taxes, or have a spike in capital gains, among other things, may find themselves subject to the AMT.

Determining whether you will be subject to the AMT requires a thorough review of your tax situation, but here are the general rules.

HOW IT WORKS

Generally, the AMT calculation starts with your regular taxable income and requires you to make revisions for certain “tax preferences” and “adjustments” to arrive at alternative minimum taxable income (AMTI). Some of the more common adjustment and preference items relate to interest on certain tax-exempt bonds, personal and dependency exemptions, the exercise of incentive stock options, and itemized deductions for certain types of home equity loan interest, state and local income taxes, and medical expenses.

EXEMPTION AMOUNTS

Once AMTI has been calculated, an AMT exemption amount is subtracted from it to determine the final taxable figure. For 2016, the AMT exemption amounts are $83,800 (married filing jointly), $53,900 (single), and $41,900 (married filing separately). A 26% tax rate is applied to the first $186,300 of the resulting income, while a 28% tax rate is applied to any amounts above $186,300. For married persons who file separately, the rate changes at $93,150 in 2016.

Taxpayers with AMTI over a certain threshold do not qualify for the AMT exemption. For example, individuals in 2016 will have their exemption reduced by 25% of the amount by which their AMTI exceeds $119,700, which means that their exemption equals zero at AMTI of $335,300 or more.

PLANNING

Taxpayers who expect a potential AMT problem may be able to use certain strategies to reduce their taxes. For example, if a tax projection indicates that you may be subject to AMT this year but not next year, it may be helpful to delay prepaying certain expenses, such as state and local income taxes.

Key Financial Ratios That Measure Your BUSINESS’S FINANCIAL HEALTH

key financial ratiosIt’s human nature to measure and compare. Whether it’s counting steps in the fitness world or tracking single-season passing yards in the sports world, measuring our progress against ourselves and others helps us keep track of how we’re doing.

As an owner of a small business, you can do something similar with financial ratios. Financial ratios help you measure how well your business is performing, and just as importantly, can let others, such as lenders and outside investors, evaluate your business’s financial health.

Looking at trends in your ratios over time and comparing them to industry averages can be instructive. There are different categories of financial ratios, all derived using data from a company’s financial statements.

PROFITABILITY RATIOS

These ratios measure whether your business is earning an adequate return on sales, total assets, and invested capital. For example, profit margin (the ratio of net income to sales) measures your company’s return on the sales dollar and is a key profitability ratio.

ASSET UTILIZATION RATIOS

Also known as “turnover ratios,” asset utilization ratios measure how efficiently your business is using its assets. For example, the receivables turnover ratio indicates how fast you collect cash from credit customers. The higher the ratio, the faster your collections. Similarly, the inventory turnover ratio measures how fast a company sells its inventory.

LIQUIDITY RATIOS

Liquidity ratios illustrate whether your business has sufficient assets to pay outstanding short-term obligations as they come due. The current ratio (current assets to current liabilities) is a commonly used liquidity ratio.

DEBT UTILIZATION RATIOS

A key ratio in this category, debt to total assets helps you to determine whether the debt your business carries is manageable. Since an inability to pay off debts may result in a business’s failure, this particular ratio is a critical indicator of the long-term financial sustainability of a business.

New Overtime Rules

A recently issued final rule from the U.S. Department of Labor increases the salary threshold under which most salaried workers are eligible for overtime pay when they work more than 40 hours a week. The rule will take effect on December 1, 2016.

The rule essentially doubles the threshold, raising it from $23,660 annually ($455 per week) to $47,476 ($913 per week). The rule also updates the total annual compensation level above which most white-collar workers will be ineligible for overtime by raising the salary level of a highly compensated employee (HCE) to $134,004 from the current $100,000.

The White House announced that the new rule is expected to extend overtime protections to an additional 4.2 million employees and boost employee wages by $12 billion over the next 10 years.

The new rule will:

  • Automatically update the salary threshold every three years, beginning January 1, 2020. Each update will raise the standard threshold to the 40th percentile of full-time salaried workers in the lowest wage Census region, estimated to be $51,168 in 2020. The HCE threshold will increase to the 90th percentile of full-time salaried workers nationally, estimated to be $147,524 in 2020.
  • Allow employers to count nondiscretionary bonuses, incentive pay, or commissions toward as much as 10% of the salary threshold for non-HCE workers provided these payments are made on at least a quarterly basis.
  • Keep in place the “duties test” that determines whether white-collar salaried workers earning more than the salary threshold are ineligible for overtime pay

EMPLOYER COMPLIANCE

Employers still have flexibility in choosing how they comply with the new rule. Permissible methods of compliance include raising salaries of primarily executive, administrative, or professional workers to at least the new threshold, paying overtime for hours worked in excess of 40 hours per week, or reducing overtime hours.

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Article originally Published in Client Line

MANAGING TAXES on Your Retirement Savings

Managing Taxes on Your Retirement Savings

The money you save and invest in your traditional individual retirement account (IRA) or 401(k) plan can compound tax deferred for as long as you keep the money in your retirement account. Unfortunately, however, you’ll have to pay income taxes on withdrawals. How can you manage the taxes on your retirement savings? These strategies could help.

MAINTAIN YOUR TAX DEFERRAL

Cashing out a 401(k) means you may end up owing a 10% early withdrawal penalty as well as income taxes, leaving you with significantly less money to spend or reinvest. Instead, keep the money in the plan or roll it into another employer’s tax-deferred retirement plan or an IRA.

FOCUS ON RMDS

Generally, you are obligated to start taking annual required minimum distributions (RMDs) from your tax-deferred accounts after you reach age 70½. If you fail to make a required withdrawal, you’ll face a penalty of 50% of the amount that should have been withdrawn.

Taking smaller distributions before you are required to spreads the tax bill over a greater number of years, which could keep you in a lower tax bracket. A tax projection can help you see if this strategy might be beneficial.

OPEN A ROTH IRA

With a Roth IRA, contributions are nondeductible but earnings are potentially tax free. Roth IRA owners can qualify for tax-free withdrawals of earnings once they reach age 59½ (or meet other conditions) and have had a Roth IRA for five years. By allocating a portion of your retirement savings to a Roth IRA, you are positioning yourself for tax-free investment growth and withdrawals.*

CONSIDER TAX RATES

If you hold equities in a retirement account, any gains will be taxed at your regular — likely higher — income tax rate upon withdrawal from your account. It’s generally preferable from a tax-reducing standpoint to focus on keeping more highly taxed income-producing securities, such as bonds, in retirement accounts.

* Eligibility for Roth IRA contributions depends on income. There are no income restrictions on converting a traditional IRA to a Roth IRA, but a conversion does result in taxable income.

Home Office Tax Tips

Home Office Tax Tips

Working from home can potentially deliver some attractive tax advantages. If you qualify for the home office deduction, you can deduct all direct expenses and part of your indirect expenses involved in working from home.  Here are some home office tax tips that may help you make the best choice for your situation.

Direct expenses are costs that apply only to your home office. The cost of painting your home office is an example of a direct expense. Indirect expenses are costs that benefit your entire home, such as rent, deductible mortgage interest, real estate taxes, and homeowners insurance. You can deduct only the business portion of your indirect expenses.

WHAT SPACE CAN QUALIFY?

Your home office could be a room in your home, a portion of a room in your home, or a separate building next to your home that you use to conduct business activities. To qualify for the deduction, that part of your home must be one of the following.

Your principal place of business. This requires you to show that you use part of your home exclusively and regularly as the principal place of business for your trade or business.

A place where you meet clients, customers, or patients. Your home office may qualify if you use it exclusively and regularly to meet with clients, customers, or patients in the normal course of your trade or business.

A separate, unattached structure used in connection with your trade or business. A shed or unattached garage might qualify for the home office deduction if it is a place that you use regularly and exclusively in connection with your trade or business.

A place where you store inventory or product samples. You must use the space on a regular basis (but not necessarily exclusively) for the storage of inventory or product samples used in your trade or business of selling products at retail or wholesale.

If you set aside a room in your home as your home office and you also use the room as a guest bedroom or den, then you won’t meet the “exclusive use” test.

SIMPLIFIED OPTION

If you prefer not to keep track of your expenses, there’s a simplified method that allows qualifying taxpayers to deduct $5 for each square foot of office space, up to a maximum of 300 square feet.

New marriage Tax Tips

New marriage equals new tax responsibilities.

wedding-tax-tipsThese new responsibilities include:

  • Reporting name changes to the Social Security Administration
  • changing tax withholdings by giving employers a new Form W-4 (Employee’s Withholding Allowance Certificate)
  • filing Form 8822 (Change of Address) with the IRS to report any address changes.
  • In addition, newly-married couples with a Health Insurance Marketplace plan who received an advance premium assistance credit will need report any changes in circumstances to the Marketplace.