It's the norm these days to expect your personal financial advisor to be a CPA. But, why is that?
Let me preface this with the fact that I enrolled in an online basic accounting class and am half way through, earning an A right now (!). From what I've learned, so far, the stuff you learn to become a CPA doesn't have a lot to do with managing personal finances....Maybe that comes later, but what I've been learning is how to be accountable to investors and the government if I ever have a business and want investors or lots of deductions. Will that change in more advanced classes?
You need to know A LOT about accounting to pass the CPA, but not to manage your personal finances (unless you make so much money you run multiple businesses within your net income, and thus need to account for it). Personal finances seem so daunting and highly complicated, especially when you get closer to tax season, but really you don't have to be a CPA or an accountant to figure it out.
The only thing I would seek advice for would be for investment or retirement accounts. If you don't know what you're doing and you have a significant amount of money to invest or manage, it would be good to have someone look it over. Having said that, professional investors don't actually know more than you do. They cannot predict if the stock market will plummet tomorrow. If that's the fear holding you back, an investor may make you feel more confident, but in reality cannot predict the future. Secondly, I know a couple professional investment bankers and I don't think they are CPAs.
So that leads me back to the original question. Do you need a CPA to help you manage your finances? Or maybe just some help getting organized?
Thursday, March 29, 2012
Tuesday, March 6, 2012
Double your Tax Refund by Preparing
I mentioned earlier that I would write a post focusing on tax tips for self employed people. Actually, some of these tips could apply to everyone.
Awesome ROI
So let's get you prepared to get that big refund!
Really the main take-away from the study is to come to your tax appointment having done you due diligence. Knowing what to track and what to prepare will ensure that big check.
First thing you can do is track your mileage. Even though the miles you use to commute are not deducted, the miles you use to go from one work to the next do! Depending on how your business is set up that could be a lot of miles and having an accurate count will benefit you. I know I would have a hard time estimating how many miles to deduct for a whole year on the spot...
Keep track of ALL business expenses. Even though you won't be able to deduct everything, it will be better to have all the info available than (again) try to remember how much you spent on replacing that office chair last year....Imagine you forgot about buying it, and you don't deduct it! How horrible!
Tricky deductions
Most deductions are pretty straight forward. Cleaning supplies, mileage, machinery, etc. As the IRS says, business expenses need "to be deductible, a business expense must be both ordinary and necessary (D. Stoica's Blog). Some are a little less straightforward. For example, deductions for use of your home as an office are only applicable if you have a dedicated space in your home that is labeled the office, and that is NOT used for personal use. If you meet these conditions, go fot it! Travel and meals are also great to deduct...if they meet the requirements. Travel expenses such as hotel, flight, car, and even dry cleaning is 100% tax deductible, but meals are only 50% tax deductible - while traveling. Meal expenses while at home have a different set of rules. You can only deduct meals (while not traveling) when:
a. "Entertainment took place in a clear business setting, or
b. Main purpose of entertainment was the active conduct of business, and you did engage in business with the person during the entertainment period, and you had more than a general expectation of getting income or some other specific business benefit." (IRS)
For a list of common deductions check this blog by Bankrate.com.
Thursday, February 16, 2012
Should I Itemize Deductions this Year?
Ever wonder what the actual effect of a charitable deduction really has on your taxes? Does it really make a difference? When and how?
You might wonder what that has to do with itemized deductions. Well everything actually. While charities like to advertise the tax deduction benefit to incentivize you, this benefit only applies in certain cases. It only decreases your tax liability when you're itemizing your taxes.
Charitable deductions are one of many items you can deduct if you choose to itemize. However, for most people the standard deduction will end up being higher. Before you make any decisions it’s good to know what the actual standard deduction is.
2011 Standard Deduction:
· Married, Filing Jointly: $11,600
· Head of Household: $8,500
· Single: $5,800
· Married, Filing Separately: $5,800
· Blind or over 65 and married: $12,750
· Blind or over 65 and single: $7,250
As you can see these deductions are pretty high and unless you've been tracking your expenses all year or had a major expense, you will be better off taking the standard. So now lets look at the two major reasons you should consider itemizing:
1. High Medical Costs
Medical expenses are tricky. The problem here is that not all expenses count and you can’t deduct dollar for dollar. Medical expenses you can deduct include: insurance premiums, prescription drugs, and treatments that are not covered under insurance. Secondly, you can only deduct expenses that exceed 7.5% of your AGI. That means, for example, if your AGI is $40,000, your “7.5% limit” is $3000. Once you add your expenses, you need to subtract $3000 and that’s how much you can actually deduct. Check the IRS website for a more detailed explanation of both requirements.
2. Mortgage Interest
The home mortgage interest deduction is a lot simpler to figure out. Basically, if you pay interest on “loans to buy a home, home equity lines of credit, or construction loans,” you are legally liable, and it’s only on your main home and a second home you can deduct the interest paid (Taxes, William Perez).
Very rarely will it be worth it to itemize if you do not have one of these two expenses, but here is a good list of deductions you can include.
TIP: if you realize you have enough deductions and you wan't to itemize, start gathering your documents and remember to keep track of your expenses for next year!
You might wonder what that has to do with itemized deductions. Well everything actually. While charities like to advertise the tax deduction benefit to incentivize you, this benefit only applies in certain cases. It only decreases your tax liability when you're itemizing your taxes.
Charitable deductions are one of many items you can deduct if you choose to itemize. However, for most people the standard deduction will end up being higher. Before you make any decisions it’s good to know what the actual standard deduction is.
2011 Standard Deduction:
· Married, Filing Jointly: $11,600
· Head of Household: $8,500
· Single: $5,800
· Married, Filing Separately: $5,800
· Blind or over 65 and married: $12,750
· Blind or over 65 and single: $7,250
As you can see these deductions are pretty high and unless you've been tracking your expenses all year or had a major expense, you will be better off taking the standard. So now lets look at the two major reasons you should consider itemizing:
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| globalpoliticalawakening.org |
Medical expenses are tricky. The problem here is that not all expenses count and you can’t deduct dollar for dollar. Medical expenses you can deduct include: insurance premiums, prescription drugs, and treatments that are not covered under insurance. Secondly, you can only deduct expenses that exceed 7.5% of your AGI. That means, for example, if your AGI is $40,000, your “7.5% limit” is $3000. Once you add your expenses, you need to subtract $3000 and that’s how much you can actually deduct. Check the IRS website for a more detailed explanation of both requirements.
2. Mortgage Interest
The home mortgage interest deduction is a lot simpler to figure out. Basically, if you pay interest on “loans to buy a home, home equity lines of credit, or construction loans,” you are legally liable, and it’s only on your main home and a second home you can deduct the interest paid (Taxes, William Perez).
Very rarely will it be worth it to itemize if you do not have one of these two expenses, but here is a good list of deductions you can include.
TIP: if you realize you have enough deductions and you wan't to itemize, start gathering your documents and remember to keep track of your expenses for next year!
Wednesday, February 8, 2012
Want to eliminate the stress of filing taxes?
Now that I'm in my second year of VITA (Volunteer Income Tax Assistance a program of the IRS) I feel like I've observed and learned enough to decipher what a person can do to make the tax return process a whole lot easier.
BE ORGANIZED
The best thing you can do to make filing your taxes a more painless experience is to come organized. This is especially important if you are a small business owner or filing itemized deductions. If you have a small business, keep track of your receipts, track your mileage, and add up your income before you get to the site. The same goes for people filing a schedule A - itemized deduction. It’s ok if you don’t know exactly what you can deduct and what you cannot, but if you’re planning on using it, keep all the receipts and organize them. A tax preparer’s worst nightmare is a client walking in with a shoebox of papers and receipts, expecting the preparer to go through each and every item with the client.
If you want to be completely prepared (which will be beneficial to you, because the return will have a higher chance of being correct – there’s actually a study on that), I will write a second post on how to determine whether or not to file itemized deductions and a third post on tips for small business owners.
BRING LAST YEAR’S RETURN
If you want to hurry the process along, bringing your previous year’s taxes is the best way. Even if you’ve had many changes in the past year, having last year’s return will give the preparer an idea of what will need changing. It can trigger more questions to make sure you’re filling correctly and can answer questions about this year’s taxes (such as: was your EITC disallowed last year? did you itemize last year? did you claim dependents last year?) These questions may sound simple or obvious to you now, but often time people start second guessing themselves or maybe someone else answered them the year before. Oh and another reason you should bring last year’s return: sometimes the way you write your name or the way it is written on the Social Security card does not coincide with your taxes. Thus, brining last year’s taxes could prevent a reject and get you your refund faster!
GET A BABYSITTER FOR THE KIDS
Seriously, get one…or at least bring something VERY entertaining for your kids (age 0-6). Having children at the tax site brings a high level of stress to EVERYONE. I realize sometimes it’s unavoidable, but if there were any way you can leave them at home, everyone would appreciate it. When neither the client nor the tax preparer can hear each other over a screaming child, or they are distracted because the child is making photocopies of their hand, it will take a lot longer and become tiring very quickly.
LAST THING
If you make around $50,000 or less, go to a VITA site! It's completely free and a volunteer, trained by the IRS, will be taking you through the return. If you live in the Bay Area, check out earnitkeepitsaveit.org for a site near you. No one will be charging you extra fees for a refund or an extra form that needs to be filled out. All sites file electronically so you will be able to get your refund fast, and most sites are nonprofit i.e. really friendly people who are most likely going to offer you other free services while you’re there!
BE ORGANIZED
The best thing you can do to make filing your taxes a more painless experience is to come organized. This is especially important if you are a small business owner or filing itemized deductions. If you have a small business, keep track of your receipts, track your mileage, and add up your income before you get to the site. The same goes for people filing a schedule A - itemized deduction. It’s ok if you don’t know exactly what you can deduct and what you cannot, but if you’re planning on using it, keep all the receipts and organize them. A tax preparer’s worst nightmare is a client walking in with a shoebox of papers and receipts, expecting the preparer to go through each and every item with the client.
If you want to be completely prepared (which will be beneficial to you, because the return will have a higher chance of being correct – there’s actually a study on that), I will write a second post on how to determine whether or not to file itemized deductions and a third post on tips for small business owners.
BRING LAST YEAR’S RETURN
If you want to hurry the process along, bringing your previous year’s taxes is the best way. Even if you’ve had many changes in the past year, having last year’s return will give the preparer an idea of what will need changing. It can trigger more questions to make sure you’re filling correctly and can answer questions about this year’s taxes (such as: was your EITC disallowed last year? did you itemize last year? did you claim dependents last year?) These questions may sound simple or obvious to you now, but often time people start second guessing themselves or maybe someone else answered them the year before. Oh and another reason you should bring last year’s return: sometimes the way you write your name or the way it is written on the Social Security card does not coincide with your taxes. Thus, brining last year’s taxes could prevent a reject and get you your refund faster!
GET A BABYSITTER FOR THE KIDS
Seriously, get one…or at least bring something VERY entertaining for your kids (age 0-6). Having children at the tax site brings a high level of stress to EVERYONE. I realize sometimes it’s unavoidable, but if there were any way you can leave them at home, everyone would appreciate it. When neither the client nor the tax preparer can hear each other over a screaming child, or they are distracted because the child is making photocopies of their hand, it will take a lot longer and become tiring very quickly.
LAST THING
If you make around $50,000 or less, go to a VITA site! It's completely free and a volunteer, trained by the IRS, will be taking you through the return. If you live in the Bay Area, check out earnitkeepitsaveit.org for a site near you. No one will be charging you extra fees for a refund or an extra form that needs to be filled out. All sites file electronically so you will be able to get your refund fast, and most sites are nonprofit i.e. really friendly people who are most likely going to offer you other free services while you’re there!
Thursday, January 19, 2012
Having faith in the stock market
Here's one of many reasons I have been slacking on my Roth IRA savings: I lost my faith in the stock market. I had spent all the time exactly a year ago researching different stocks and mutual funds to invest in and actually started finding some stuff perfect for me and my investment risk level. But I lost momentum, you can probably guess why!
So anyways, I have been feeling guilty about not saving regularly in my Roth IRA for a while now, but I invest because I felt conflicted. All the news this past year about the unstable stock market was NOT encouraging. But then something, well someone changed my mind. I learned from a CPA that when it comes to your retirement account, you're looking for long term growth not the day to day fluctuations. So you invest regularly in order to average out the fluctuations. Instead of investing $1000 once a year when you think the timing is perfect, you invest $100 a month and if some are during bad times, others will be at good times so things eventually even out. So to cut things short, I decided to start an automatic payment plan to my Roth IRA. Finally, I am surmounting the courage to invest regularly!
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| there's no way you get that kind of return anymore... |
Thursday, January 12, 2012
2 financial tips for when you're unemployed
So I've taken a little bit of a hiatus over the past two months, if you haven't noticed... It turns out being unemployed a. does not mean you're less busy and b. does not motivate financial housekeeping...and how am I supposed to talk about money and finance, when I am ignoring my own finances?
Loosing sight of your financial status
It's almost impossible to budget when you don't have any income, because keeping track of all your expenses is DEPRESSING! It's interesting because before I was employed, I didn't understand why people who are unemployed don't budget since it's so important to manage your money, especially when you don't have much. But now I get it! When you know you don't have any coming in (I didn't even get unemployment benefits) you know you're going to either be draining savings or amounting debt. So why count it?
Well I can tell you why. Ultimately you will be better off knowing what's going on. The more disciplined you are, the better off you will be once you do start taking care of the finances...and we all know that at one point you will need to manage it.
I must say I am happy I at least checked into my bank account to make sure I was above water and to keep an eye on the ever increasing credit card bill. Even though I stopped checking into my mint.com account and making sure I was staying within budget, I didn't constantly feel guilty since I had half an eye on it. Plus, now that I have a job I feel very ready to get back into it! I am excited to re-allocate my budget to fit my new income, and to start allocating money to my savings.
Small Steps
I did do something positive in terms of my finances over the holidays. Since I couldn't save or budget or plan for retirement (my favorite thing to do! check out last years blog posts), I planned to save in the future. I decided to start an automatic payment plan for my Roth IRA. But, here's the key: I scheduled the start date for one month in advance.
I didn't actually do anything to fix my finances at that moment, but I did something for my future and that felt just as good. Even if you're not sure about whether you will have the money next month I would recommend doing this, because you can always reschedule the start date. This will keep retirement planning on your mind at least once a month and will help you feel like you're doing something about your financial mess, even if it's not a lot.
Loosing sight of your financial status
It's almost impossible to budget when you don't have any income, because keeping track of all your expenses is DEPRESSING! It's interesting because before I was employed, I didn't understand why people who are unemployed don't budget since it's so important to manage your money, especially when you don't have much. But now I get it! When you know you don't have any coming in (I didn't even get unemployment benefits) you know you're going to either be draining savings or amounting debt. So why count it?
Well I can tell you why. Ultimately you will be better off knowing what's going on. The more disciplined you are, the better off you will be once you do start taking care of the finances...and we all know that at one point you will need to manage it.
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| similar to what my bank account looked like! |
Small Steps
I did do something positive in terms of my finances over the holidays. Since I couldn't save or budget or plan for retirement (my favorite thing to do! check out last years blog posts), I planned to save in the future. I decided to start an automatic payment plan for my Roth IRA. But, here's the key: I scheduled the start date for one month in advance.
I didn't actually do anything to fix my finances at that moment, but I did something for my future and that felt just as good. Even if you're not sure about whether you will have the money next month I would recommend doing this, because you can always reschedule the start date. This will keep retirement planning on your mind at least once a month and will help you feel like you're doing something about your financial mess, even if it's not a lot.
Wednesday, December 14, 2011
A Time for Gratitude and Reflection
During the holiday season, many of us feel the need to show appreciation through big presents and gestures, and spending money on gifts we can't afford is very common. It's imporant to remember that expressing appreciation for what we already have can be just as rewarding. Medical studies show that taking time out of your day to be grateful for your family, friends, and positive parts of life can make you happy, improve your sleep, and even cut your risk for heart disease. And some say it's just as important to appreciate the things that are challenging, stressful or simply unfair, because they are helping you grow, learn and become a stronger person.
Some things I am grateful for:
• My parents, who still support me financially and emotionally when I hit a rough spot
Some things I am grateful for:
• My parents, who still support me financially and emotionally when I hit a rough spot
• AmeriCorps, for giving me the opportunity to enter the non-profit world, fix my personal finances, and work with inspiring and intelligent professionals
• SparkPoint staff and coaches, for being supportive and encouraging as I embark on the next stage of my life
Will I be able to express my appreciation to these people with lavish gifts this year? Unfortunately, no. But I am going to be creative and grateful, and inspire the people around me to take time to find gratitude within their own lives as well. Can’t beat that, right? ;-)
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