January 2016 Archives

Making tax season a little less taxing

Published on January 26, 2016January 26, 2016 in Personal Finance, Tax Planning by RyanLaw

by Ryan H. Law

Politicians love to talk about how long the tax code is and compare it to how long the Bible is. I found quotes of politicians who said it ranged anywhere from 2,500 pages to 1.3 million pages.

It’s actually 13,458 pages (and growing every year), and if you want to order a copy of it you can purchase all twenty volumes of the code and regulations for just $10 for your Kindle device!(1) What a bargain!

In what has to be one of the greatest marketing strategies of all time, the U.S. Government Publishing Office, where you can order a printed copy of the tax code, encourages you to “Cozy up with a book from our latest Catalog,” or in the case of the tax code, cozy up with 20 books. Happy reading!

Here’s answers to common questions to help make tax season, well, a little less taxing.

Q. How early can I file my taxes?

A. Wait to file your taxes until you have ALL your tax forms. This includes W-2s, 1099s, Interest statements, etc. Employers and companies have until February 2 to send you everything, so you should have everything shortly after that. Make a list of what you should receive and wait to start until you have it. The most common forms are:

Form W-2: You should receive one from each of your employers

Form 1098: If you paid interest on a home or student loan or paid college tuition you will receive a 1098

Form 1099-DIV: If you received dividends, distributions or capital gains on any investments, watch for one of these to grace your mailbox

Form 1099-INT: Any interest paid to you, such as interest on a CD or bank account, will be reported on this form. If you get a pink one of these, you actually win $1,000(2)

1099-MISC: If you did work as an independent contractor you’ll get one of these.

If you donated to a charity they will either provide you a receipt when you donated, or an end of year statement

There’s other forms as well, but those are some of the most common ones.

Here’s a great printable checklist from TurboTax:

http://images.turbotax.intuit.com/iqcms/marketing/lib/TurboTax_TaxPrepChecklist.pdf

Q. Should I file my own taxes or have someone do it for me?

A. There’s a few different ways you can file your taxes:

On paper
I don’t recommend this – calculations can be complicated.

Software such as TaxAct, TurboTax or H&R Block at home
Most of the top-rated software packages are simple and intuitive to use, and they are made for consumers (not accountants). You’ll enter your tax forms in and the software will do the calculations, search for possible errors, and file your taxes electronically. I personally use TaxAct.

Discount tax preparation services, such as H&R Block or Jackson-Hewitt
These companies have their place, but can be expensive for what they provide. Their tax preparers are trained, but use similar software that you can use on your own. If you want the peace of mind from having someone do your taxes, this can be a good option.

Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE)
VITA and TCE volunteers are IRS-certified and will file your taxes for free. You read that correct. It’s free, and there’s no catch. VITA is available for anyone that makes under $54,000, and TCE is available for those over age 60. You can find them here: https://www.irs.gov/Individuals/Free-Tax-Return-Preparation-for-You-by-Volunteers. Both VITA and TCE tend to fill up quickly, and many are first-come, first-served.

Accountant or CPA
Unless you run a business you probably don’t need an accountant or CPA to prepare your return. I have several small businesses, and we still file our own, but if your business starts to grow you should work with your accountant or CPA throughout the year.

Q. What is the due date to file my tax return?

A. It’s normally April 15, but this year it is Monday, April 18. Why? Basically it’s because Washington DC has a holiday (Emancipation Day) on Saturday, April 16, and by law when that holiday falls on Saturday or Sunday it is observed the Friday before. A federal holiday on Friday, April 15 means that tax day gets moved to the following Monday.

To close up this week’s article, I strongly encourage you to check out one of the VITA sites if you make less than $54,000 a year. Most people who uses a discount tax preparer could have their taxes filed for free instead.

One last note – don’t ever get a Tax Refund Anticipation Loan. Companies will offer to give you your tax refund right then, for a fee that ranges between $30 and $150. Don’t fall for it – if you file electronically you’ll have your refund in 1-2 weeks.

(1) http://www.amazon.com/Complete-Internal-Revenue-Federal-Regulations-ebook/dp/B006KS43L8/ref=sr_1_2?ie=UTF8&qid=1453835893&sr=8-2&keywords=irs+code+26

(2) Just kidding.

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What’s up with the economy?

Published on January 19, 2016January 19, 2016 in Investing, National Economic issues, Personal Finance by RyanLaw

Are you tired of watching your savings earn .02% per year and seeing your investments lose money each year? You’re not alone.

You probably feel a lot like this guy – you just want someone to “FIX IT!”

Let’s establish a few things up front:

The economy moves in cycles:

We go through times of high unemployment, low savings rates, negative stock market growth, etc. and we go through times of low unemployment, great stock market growth, etc.

It’s all part of a cycle.

There are times, of course, when the recessions and troughs last longer than others, but overall that is how the economy works. No one knows how long or short any part of the cycle is going to be.

The “stock market” is made up of a lot of different components.
There are individual company stocks, company and government bonds and money market savings. It also includes things like commodities (gold and silver), oil and real estate. You can invest in all of these.

Most people invest in the stock market through their employer (401(k)) or through another retirement account such as an IRA. Typically this is in the form of mutual funds, which is a collection of corporate and government stocks and bonds. Throughout the article when I refer to investing in stocks I am talking about stock mutual funds. Most people shouldn’t be purchasing individual stocks.

Past performance in the stock market doesn’t predict what it will do in the future, but it can give you an idea of trends.

So how do you make or lose money in the stock market? When the market is down in a recession or trough stocks generally lose money. This can be caused by many things. Most recently the drop in the market has been caused by economic issues in China and the low price of oil, along with a continuing sluggish economy in the U.S.

In the first two weeks of 2016 the stock market has lost about 8% of its value. 8% in two weeks! Everyone’s invested assets are taking quite a hit right now.

Let’s take a look at some historical data.

The graph above shows the Dow yearly return frequency. You can see that there are years that the return on your investments would have returned more than 70%, and years it would have lost more than 20%. About 25% of the time the market has lost money.

This next graph shows the range of returns for a portfolio of 100% stocks, 100% bonds and 50% stocks and 50% bonds between 1950-2013.

In a single year the stock portfolio returned between -37% and +51%.

If you invested for 5-years that range narrows to -2% and +28%

If you go out to 20 years, the range narrows even more to +6% and +18%.

The average annualized returns for stocks during those 20-year periods is 11.1%.

You have to decide if you are willing to ride out the negative years in hopes of gaining in the good years, and how long your time horizon is.

Here are some things to keep in mind:

The further out your time horizon is the better chance you have of getting a positive return, with the stock market returning the most. If you don’t have at least 5 years, or even better 10 years, you shouldn’t be invested in stocks.

The shorter your time horizon is the more you should be invested in conservative assets such as bonds. That means that you can be invested in stocks the younger you are, and move your money to bonds the closer you get to retirement.

A good rule of thumb is that you should take 100 minus your age and that’s how much you should invest in stocks. If you are 40 years old you should invest about 60% in stocks (100 – 40 = 60%). If you are 55 years old you should invest about 45% of your money in stocks. Your risk tolerance level might be higher or lower than that, though. Here is a good free online tool that will help you determine your risk tolerance level: http://njaes.rutgers.edu:8080/money/riskquiz/. Because I have a higher risk tolerance I have more of my assets invested in stock mutual funds.

Remember that there are additional ways to invest your money. While most of our retirement money is in the stock market, we are saving up money to invest in some real estate as well. A diversified portfolio is best.

What you don’t want to do is invest in stocks, panic when it goes down and pull all your money out, then when the market goes back up move your money back in to stocks. That’s a losing game, and you will never get ahead that way. You are buying high and selling low, which is the opposite of what you should do. A lot of people do this, however, which is why there is a big difference between investment returns and investor returns. Investment returns assume you leave the money in the market, while investors move their money around when things get bad.This chart helps me to remember that I need to stay invested:

This chart assumes you invested $10,000 between Dec 31, 1993 and Dec 31, 2013. During that time the stock market had some great years and rough years.If you kept it fully invested you would have ended up with just over $58,000. If you missed the 10 best days (which often come right after the worst days) your return drops to $29,000. If you missed the 40 best days your return is actually negative – your $10,000 drops to $8,147.

People miss the best days all the time though because they switch from stocks to cash when the market goes down, miss the up-side, and invest when stocks are back at their most expensive.

I realize that all these charts and statistics don’t make you say, “Well, I’m sure glad my portfolio is losing money!” No one likes to see their portfolio drop for even a day, let alone for a few years in a row.

Every time it feels different, like we aren’t going to recover this time. I understand it. I get it. If you need help, find a financial planner who can help you set goals and stick to the strategy you outline together. Make sure it is someone you trust and has your best interests at heart. Someone who will teach you and encourage you and cheer you on.

As always, feel free to leave comments or ask questions below, on Facebook or in an e-mail.

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Why Giving Matters

Published on January 12, 2016January 13, 2016 in Budgeting, Giving by RyanLaw

by Ryan H. Law

Did you know there is one thing you can do that has been scientifically proven to:

lower your levels of stress
make you more productive and more successful, and
make you happier, healthier and more prosperous?

It’s a simple thing as well.

It’s giving.

Giving of your money, your time, or even giving blood.

Of course, most of us don’t give because of the benefits we gain, but because we genuinely want to help other people.

My post today mainly comes from Arthur C. Brooks’ work, who is one of the leading researchers on charitable giving in the United States.

Brooks came across a statement from John D. Rockefeller where Rockefeller stated that he was rich because he gave so much, and he believed if he stopped giving that God would take his money away from him.

Rockefeller was very wealthy.

His net worth was about $340 billion, and during his lifetime he gave away about $540 million.

He came across statements from a number of other wealthy people who basically said the same thing.

This bothered Brooks so he set out to prove that Rockefeller and others were wrong. Brooks says, “…what I found was that Rockefeller was right and I was wrong [1].” You can read the article referenced below to get into the details of the studies that he did, but what I want to look at here is the results of his studies.

Here are some things that Brooks discovered:

Prosperity – when people give they prosper
- This is true whether you are giving of your time, money or even giving blood.
- If you take two identical families except that one family gives $100 more to charity than the other family, the giving family will earn on average $375 more in income than the non-giving family, and that $375 is statistically attributable to the $100 gift.
- As people and our country gets richer, they give more away, but as we give more away it translates into better economic growth for the country and the individual – it’s a wonderful cycle – the more you give the wealthier you become, which allows you to give more, which leads to more prosperity and on and on.
Happiness & stress reduction
- People who give are happier than those who do not give
  - People who give money are 43% more likely than people who don’t give to say they are very happy people.
  - People who give blood are twice as likely to say they are very happy people than those who don’t give blood.
- When people give, it lowers their levels of stress which makes them more productive and more successful at work.
  - One study showed that those who gave cut their stress hormones in half.

Let me share a story with you that illustrates at least one aspect of this. When I was younger – probably about 10 years old, there was a big snowstorm that left a fair amount of snow in our neighborhood. There was an older widow who lived on the corner, and my older brother and I and a friend from across the street decided we would shovel her driveway, but we were going to do it quietly so she wouldn’t know who did it.

Well, you can imagine how quietly three boys that age can shovel a driveway, but we did try! Every time she would peek out her window we would throw our shovels down and dive behind a bank of snow, figuring we were so fast she wouldn’t be able to see us. I remember going home feeling tired from shoveling, but also feeling really happy. Happy that we had pulled off this great feat of both strength and stealth, but happier because we had done something for her that she wasn’t physically capable of doing for herself. To this day I still feel happy when I think about it. We were definitely the main beneficiaries of this.

We did find out later that we weren’t quite as stealthy as we thought when she brought us some cookies, so not only did we get the benefit of feeling happy, but some nice warm cookies as well. =)

I’m sure you have similar experiences – perhaps you have volunteered at a Food Bank, or a homeless shelter, or coached a little league team or done countless other acts of service as so many Americans do, and you felt the same way I did – giving of your time makes you happier.

I find the same is true of money. The very first thing on our budget line is the 10% we give to our church [2]. We never miss this money. Giving doesn’t make you poorer.

Brooks says, “What I charge you with today is what I charge myself with, which is to discover more creative solutions to working these concepts into our everyday lives.” Remember that you are the main beneficiary of your giving – it will lower your levels of stress, make you more productive and more successful, and make you happier, healthier and more prosperous. Just like Brooks I encourage you and me to examine our giving to see where we can do better.

[1] http://speeches.byu.edu/?act=viewitem&id=1826 Note: This speech was given at Brigham Young University in 2009. Brooks, a Roman Catholic, talks about Mormon giving in this article but also deals with giving in general. You can also read Brooks’ book: Who Really Cares (http://www.amazon.com/Who-Really-Cares-Compassionate-Conservatism-ebook/dp/B004VRP37S/ref=sr_1_1?ie=UTF8&qid=1396546413&sr=8-1&keywords=who+really+cares+brooks) which deals with the subject matter without getting into the specifics of Mormon giving. The article is a great synopsis of the book, though, regardless of your religious affiliation or non-affiliation.

[2] Brooks found that of those who practice a faith (attend church weekly), 91% give to charity each year, compared to 66% of those who don’t attend weekly. Practicing faith is the number one predictor of giving. Malachi, in the Bible, says essentially the same thing Brooks is saying: “Bring all the tithes into the storehouse, that there may be meat in mine house, and prove me now herewith, saith the Lord of hosts, if I will not open you the windows of heaven, and pour you out a blessing, that there shall not be room enough to receive it” (Malachi 3:8-10). Giving brings us a myriad of blessings, as Brooks has pointed out, but you certainly don’t have to be religious to give!

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