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5 overlooked tax deductions for families

February 19, 2015

By Dan Rafter | Money Rates Columnist

No one looks forward to April 15. For busy families, preparing a tax return can prove stressful -- not to mention costly. But part of the problem is that too many families fail to take all the deductions to which they are entitled.

"What I take for granted, many filers don't have any clue about," says Peter Baum, partner with the Harrison, New York, office of accounting firm O'Connor Davies, LLP. "A finance person might understand all the deductions available. The average person, no."

The deductions noted below may save your family some dollars this tax season. Remember though, you only want to itemize your deductions if your deductions total more than the IRS' standard deduction. For married taxpayers filing jointly, the standard deduction for the 2014 tax year is $12,400.

1. Medical expenses

Eric Green, a tax attorney in the New Haven, Connecticut, office of law firm Green & Sklarz, says that families might be able to reduce their tax burden by claiming medical expenses. But there are some caveats.

Medical expenses are tax deductible only if they total more than 10 percent of a family's adjusted gross income for the year. This means that for most families, medical costs would have to be fairly significant to generate enough expense to qualify for a deduction. But if someone in the family lost a job, dramatically reducing the family's income, it is possible that medical expenses could reach that 10 percent threshold.

If they do, it's important for families to claim these expenses. They can shave a significant amount of money off the taxes they owe.

Timing is key though, Green says. This is advice that families should heed this year in preparation for next tax season. If you have a medical bill for a late-in-the-year procedure, you might want to pay it before Jan. 1, even if the bill isn't due that soon. That way, you can claim it on your taxes the following April 15.

"Timing plays a role in so many tax decisions," Green says. "It's about accelerating your expenses in a given year and deferring your income for that same year. That's one way to maximize your deductions. You can do this with your medical expenses."

2. Job-search costs

Were you or your spouse looking for a job this year? The expenses involved in hunting for that job can be deducted as miscellaneous expenses if you itemize your deductions, says Michael Atias, tax director at Irvine, California-based financial education company Online Trading Academy.

Again though, there are some rules. First, your total miscellaneous expenses, including the expenses you incurred looking for a job, must be more than 2 percent of your adjusted gross income for you to deduct them.

If your miscellaneous expenses hit this threshold, you can deduct transportation expenses that you paid while searching for a job, including 56 cents a mile for driving your own car plus any parking fees or tolls that you paid, Atias says. You can also deduct food and lodging expenses if you have to spend an overnight stay while searching for your next job. Cab fares, employment agency fees and the costs of printing resumes are all deductible too.

You don't even have to have been successful in your attempts to find work.

"Qualifying expenses can be written off even if you didn't land a new job," Atias says.

3. State sales taxes

Some states don't have income taxes. But this doesn't mean that the residents there are out of luck when it comes to deductions. If you live in a state with no income tax, you can instead write off all the state sales tax that you paid during the year, says Baum.

This can pay off if you've made a big purchase during the year. If you bought a boat or car, those deducted sales tax dollars can have a big impact on your tax bill.

If you live in a state with low income taxes, you might still consider deducting your sales taxes instead of your income taxes to help boost those itemized deductions. Remember, you can only deduct state income taxes or sales taxes, not both.

4. Profitable hobbies

Cal Brown, adviser with Savant Capital Wealth Management in McLean, Virginia, says that if you already spend money on a hobby, you might be able to reduce your taxes by turning that hobby into a business. For instance, Brown plays guitar. During some years, he gave private lessons out of his home. He was then able to deduct the money he spent on guitar supplies on his taxes.

"I was spending money on strings, picks and other supplies anyway, so I turned my hobby into a business and deducted some of those expenses," Brown says.

A key guideline here is that you can only deduct purchases that are actually used for a business. Eventually, you also need to show a profit from your hobby-turned-business. If you don't show a profit in at least three of the prior five years, the IRS will classify your business as a hobby, and you won't be able to deduct any expenses associated with it.

5. Care for relatives

Do you provide a home or financial support for relatives who aren't your children? You might be able to claim a dependent exemption of $3,950 this year for any extra relative -- of the non-child variety, of course -- whom you support.

Again, you must meet certain requirements to earn an extra dependent exemption. First, the person you support must be a relative or a full-time member of your household and must be a citizen or resident of the United States or a resident of Canada or Mexico.

These relatives must not have filed a joint income tax return with anyone else and must receive more than half of their financial support from you. The relative must also have earned less than $3,950 in 2014.

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5 groups who need professional tax help

February 9, 2015

| Money Rates Columnist

Given how simple it is to file a basic return with tax preparation software, paying someone to prepare your taxes may seem as timely today as a flip phone or dial-up modem.

Not so fast, say some finance experts. While tax software works well in some situations, it can never fully replace a human touch -- particularly if your situation is a little different from the average taxpayer's.

Here are five types of taxpayer that financial advisers say should skip the software this year and find a tax professional instead.

1. The fresh starters

Doug E. Lockwood, CFP, branch president and wealth partner at Hefty Wealth Partners in Auburn, Indiana, says that whenever he runs across someone who has had a change in their circumstances, he recommends they ask themselves, "Is this a life-changing event?" If they answer is yes, then it's time to pay a visit to a tax professional.

While a whole host of situations can be considered life-changing, Lockwood provides a rundown of what he considers major events.

  • Marriage
  • Divorce
  • Disability
  • Retirement
  • Relocation
  • Self-employment
  • Children leaving for college

While these events don't necessarily make filing taxes more difficult, they represent a time ripe for mistakes. People may not realize their new situation makes them eligible for certain tax benefits or, alternately, they may try claiming credits or deductions for which they no longer qualify.

2. The tax-curious

Cory Schmelzer, CFP, owner of San Diego Wealth Management, agrees that life-changing events are a top reason to see an enrolled agent or other qualified tax professional. He says seeing a pro is about more than merely avoiding mistakes. It's also about strategizing and minimizing future tax obligations.

What's more, you don't have to wait until a life change to see a tax pro. Schmelzer recommends professional tax preparation for anyone who wants to explore their tax options and look at alternative scenarios.

"Doing your tax preparation needs to be something where you design and plan for the future," he says.

Although some taxpayers may be able to do their own tax planning, the complex nature of the tax code makes it difficult, and not particularly enjoyable, for most people. However, a good tax preparer should be adept at running several scenarios and recommending how best to minimize tax liability in both the short and long run.

3. The trustees

According to Lockwood, another group that should definitely get professional help is anyone filing a return for an estate or trust.

The law requires a separate tax return from these entities, as their money may be taxable. You could do that by trying to file a Form 1041 on your own, but many taxpayers find the form baffling. Save the headache and let a pro do the heavy lifting instead.

4. The diversified investors

This fourth group may be the one most likely to seek out professional help, and for good reason. Tax rules for investments and assets can be difficult to understand and often come with income phase-outs or other catches.

For example, Schmelzer says that real estate investors may be able to deduct passive losses from rental properties. However, the law is very specific about who is eligible for this deduction, and it isn't always clear to taxpayers. Rather than guess, those with rental properties may want to check in with a tax preparer.

Lockwood says individuals with stock options or those who may be subject to the alternative minimum tax should also get help.

"In complicated tax situations, a tax professional earns their weight in gold," he says.

5. The technologically or mathematically challenged

Finally, if you find your iPhone confusing and have the office tech support number on speed dial, you may want to opt out of doing your own taxes. The same goes for those who struggle to understand their W-2s and other tax documentation. While software can make filing easy, it's not going to catch your mistakes, particularly if you are inputting the wrong information.

"TurboTax is a program," says Lockwood. "You put bad data in, you get bad data out."

If you don't fit neatly into any of the above groups, Schmelzer recommends considering the cost of professional tax preparation against its value when deciding how to file your taxes this year.

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6 key facts on Social Security

February 2, 2015

By Dan Rafter | Money Rates Columnist

Here's a key number: 567. That's the number of possible ways to claim Social Security benefits, says Joshua Melberg, president of J.D. Melberg Financial in Tucson, Arizona.

That 567 figure applies to couples -- singles have it a bit simpler -- but it's still little wonder that so many people fail to maximize the money they receive from the Social Security Administration.

"The basic concept seems simple: You'll suffer a financial hit if you claim your Social Security benefits before you reach full retirement age and you'll get a reward if you turn on your benefits after full retirement age," Melberg says. "But there are different situations for different people. Waiting until you turn 70 to claim your benefits will provide the biggest monthly payment. But that doesn't mean it's the right move for everyone. Unfortunately, most people are leaving money on the table."

Here are six facts you need to know before you begin claiming your Social Security benefits. Understanding them can help you maximize the amount of money you receive from Social Security during your retirement years.

1. The Social Security Administration isn't going to run out of money

Andrew Weissman, senior vice president at RDM Financial Group in Westport, Connecticut, says that many people rush to take their Social Security benefits as early as they can because they believe that the government will run out of the money that they need to fund the program. Their theory? They better take the money when they can.

The truth, though, is less dire. Weissman says that if Congress doesn't do anything to overhaul Social Security -- such as boosting the amount of money that workers pay into the system or raising the retirement age -- the Social Security Administration by 2033 will only be able to pay out 75 percent of the payments that recipients are scheduled to receive.

This means that even in an implausible worst-case scenario, the recipients will still receive 75 percent of their benefits each month.

"You shouldn't use fear that the government will run out of money as an excuse to take your payments as early as possible," Weissman says. "People in Congress like to stay in Congress. They don't want to get voted out of office. It is extremely likely that they will do something before 2033 to make sure that they can fund Social Security payments."

2. Thirty-five is a magic number

The amount of money you'll receive each month depends on when you begin claiming your benefits. If you claim before your full retirement age, you'll receive less each month. If you wait until 70, you'll receive the largest monthly payment possible. That's common knowledge. But many recipients don't understand the math behind their benefits.

At its most basic, your monthly benefit is determined by a 35-year average of your covered wages, with each year's wages adjusted according to inflation. If you worked more than 35 years, though, the Social Security Administration will use your 35 highest-earning years to calculate your monthly benefits. On the negative side, the administration will average in zeroes for every year less than 35 that you worked, something that will drag down the size of your monthly benefits. If you want the maximum monthly benefit, you'll need to work at least 35 years.

3. Your decisions can impact how much your spouse receives after you die

Robin Brewton, chief operations officer of Overland Park, Kansas-based Social Security Solutions, says that the rules for survivor benefits -- the benefits that widows or widowers receive after their spouses die -- are some of the most misunderstood because they are so complicated.

But here's a basic tip: If you want to make sure the surviving spouse receives the maximum amount of benefits each month, the spouse earning the most money -- and the highest amount of Social Security benefits -- should delay claiming benefits until reaching the age of 70.

That's because the surviving spouse always has a choice: Survivors can choose to receive either their own monthly benefits or the full amount of their departed spouse's, whichever is higher. The surviving spouse will receive the highest amount of money, then, if the highest-earner in the marriage waits as long as possible to claim benefits.

"I have seen so many widows who are in poverty late in life," Brewton says. "They thought they had enough, but then late in life their retirement savings start to run out. One way to not let this happen is to make sure that surviving spouses receive the highest monthly benefits possible."

4. Staying married for less than a decade can hurt you

You might want to get divorced. But if you've already been married eight or nine years, it may make financial sense to wait until 10 years to make end of your marriage final. That's because if you've been married at least 10 years, you can claim either your benefits or an amount equal to half of what your former spouse earned, whichever is higher.

But if you've only been married for nine years and 11 months? You don't get that option.

Of course, if you remarry, this option disappears. In fact, you won't be able to claim your new spouse's benefits, either, until you've been married for at least one year.

5. You won't lose your benefits if you keep working

Laurie Samay, client service associate with Scarsdale, New York-based Palisades Hudson Financial Group, says that many people think that they can't work and receive Social Security benefits at the same time. This isn't true, though the issue is a bit complicated.

If you are collecting benefits while under your full retirement age and still working, the government will withhold $1 in benefits for every $2 you earn past a certain yearly limit. For 2015, that annual limit was $15,720. If you begin collecting your benefits at full retirement age and continue to work, the government will withhold $1 of benefits for every $3 you earn past a higher threshold amount. In 2015, the withholding would start once you earn more than $41,880.

And, as Samay points out, you're not really losing those withheld benefits. Once you reach full retirement age, the government will increase your monthly benefits to make up for those that it withheld.

"So it's nothing to worry about," Samay says. "If you want to keep working in retirement, you can. Those benefits are just being deferred. They're not being taken away."

6. Waiting really can pay off, unless ...

Many people automatically begin claiming their Social Security benefits at full retirement age because it's so easy. They also don't think that the difference between claiming at, say, age 66 and 70 amounts to much money.

This is where they are wrong. For every year you wait to claim Social Security benefits, your yearly benefit will jump by about 8 percent until you reach age 70. So by waiting from age 66 to age 70 to claim your benefits, you can increase your eventual monthly payments by roughly one-third.

The caveat? If you're in poor health and may not make it much past retirement age, claiming your benefits sooner rather than later may still be the best choice for maximizing your overall payout.

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7 habits of money-wise couples

January 12, 2015

| Money Rates Columnist

Given its magical atmosphere and twinkling lights, it's perhaps no surprise that December is a peak time for marriage proposals. Wedding site TheKnot.com reports that 16 percent of proposals occurred during the final 31 days of 2013, making it the most popular month for engagements.

However, after the holidays comes divorce season. According to the website FindLaw.com, divorces jump dramatically in January before peaking in March.

How do happy couples who pledge their devotion one December become weary partners who call it quits during some future spring? There are numerous answers to this question, but New York City-based divorce attorney Bruce Provda says that money often plays a major role in whether a marriage survives.

Provda says research indicates that couples fight twice as much about money as they do about sex, and that some surveys find that more than half of divorced couples say finances were a significant factor in their decision to split. "Money, whether we want to admit it, is a key to a stable relationship," he says.

To help keep their relationship healthy, newly engaged couples may want to take a cue from those who are already married and in-sync on their finances. Experts say these seven habits are typical of money-wise couples.

1. Entering into a marriage with eyes wide open

Healthy marriages start long before the bride and groom say "I do." Money-wise couples make a point to discuss finances and get on the same page prior to their wedding day.

"If one is in the habit of spending as much or more than they make, a real conversation has to be had explaining your concerns," says Provda. "Love alone will not solve the problem."

2. Scheduling regular financial meetings

Steven Elwell, a certified financial planner and vice president at Schroeder, Braxton & Vogt in Amherst, New York, says regular money meetings should be a priority for every couple.

"That can be in the form of a one-hour recap each month or a more in-depth view twice a year," he says. "At this meeting, they can discuss what's going on with their finances and what they want to accomplish."

Even if there is nothing new to discuss, Elwell says couples often benefit simply by ensuring they are both on the same page as far as finances are concerned.

3. Keeping emotions out of financial discussions

"Marriages involve complex emotions, and one of the strongest is being safe and secure," says Provda. He says that money is key to creating that security.

Unfortunately, since money plays such an important role in marriages, it also has the potential to become an emotional topic. Smart couples understand keeping their emotions in check when discussing financial matters minimizes the risk of walking away from a disagreement with hurt feelings.

Elwell suggests having frequent discussions to help keep emotions from boiling over. "Without communication, financial issues or differences can build to a breaking point, so the topic should be addressed early and often."

4. Making budgeting and record-keeping a joint effort

Both Elwell and Provda recommend couples keep good financial records.

"Get in the habit of keeping records of what you make, spend and need," says Provda.

For couples who aren't sure where to start, Elwell says websites like Mint.com offer a way to easily track spending and plan a budget. Couples may also want to read money-management books or take courses on personal finance together.

"Once people learn what is happening and how that is bad, they become more inclined to correct it," says Elwell.

5. Splurging from time to time

When making their budget, money-wise couples are smart enough to carve out a line-item for small splurges.

"Plan and keep to a budget, (but) put away something to splurge every so often," says Provda, "like a nice romantic evening so it's something you both can share in."

Couples with tight budgets might not be able to afford much, but making a point to go out and enjoy each other's company on a regular basis can strengthen marriage bonds.

6. Creating manageable goals and realistic expectations

Another smart money habit for couples is to break down large goals into smaller, more attainable ones.

"For instance, retiring at age 60 with $1 million dollars sounds really hard to a 35-year-old couple," says Elwell. "But saving $100 a month to a Roth IRA with the goal of having a $1,200 balance at the end of the year is much easier to swallow."

Setting realistic goals can avoid resentments that might occur when goals are missed and one half of a couple blames the other.

7. Getting help when it's needed

Finally, money-wise couples aren't afraid to ask for help when they need it. That may mean going to a finance professional for advice or, for deeper problems, heading to a counselor's office.

Sometimes money problems aren't money problems. Instead, they are trust problems or communication problems. Provda says couples shouldn't shy away from seeking help to address these underlying issues.

"Speaking to a therapist or a marriage guidance counselor is a must," he says. "You need to be able to open up and get an unbiased, emotionally cool person who will understand and help push you to a clear goal."

Ultimately, money-wise couples are proactive about their financial situation. They work together to address money problems head-on and create manageable goals for their future. By adopting these same habits, you too may avoid becoming a victim of the springtime divorce season.

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5 signs your teen is ready to handle credit

January 5, 2015

By Dan Rafter | Money Rates Columnist

When used properly, credit cards can teach teenagers how to manage money and help them establish a credit history. When used improperly, they can lead to huge amounts of debt and missed obligations -- two things that can wreck your teen's credit before it's really gotten started.

How can you know when your teen is ready for a first credit card? Financial experts say that there is no one age at which teens can handle that first piece of plastic. Some teens are ready to manage credit at 16 while others won't be ready at 19. It's up to parents to look for the signs that their teens are mature enough to handle the responsibility of a credit card.

"You don't just out of the blue get a credit card for your kid because he's doing well or done his chores," says Janet Lehman, a child behavior therapist and co-creator of the Total Transformation Program in Westbrook, Maine. "A kid should never be given a card carte blanche, because you will start something you'll regret. We need to teach kids how to use them and what they're all about, and how to manage money in a responsible way. It's all about teaching and coaching."

The good news? College students are getting better at managing credit cards. Thirty-two percent of students with credit cards in 2013 carried a zero balance, and 46 percent had a balance under $500, according to Sallie Mae. Additionally, just 2 percent carried more than $4,000 of credit-card debt.

Here are some signs that your teen will fall closer to the zero-balance group than the $4,000 one.

1. Your teen talks about money

Dr. Susan Kuczmarski, Chicago-based author of three books on parenting and family and a business teacher at the Kellogg School of Management at Northwestern University and Loyola University Chicago, says that before they get their first credit cards, teens should already be involved in the financial decisions their family makes.

For instance, a teen might give input into how much family members should spend on holiday presents or how much they should set aside for a summer vacation. This financial decision-making can help them make better choices with their first credit card, Kuczmarski says.

"Teens learn a great deal about decision-making by experiencing it firsthand," Kuczmarski says. "Follow this general rule: As teens get older, increase their involvement in decision-making.They are often capable of making informed decisions and have valuable information to offer."

2. Your teen is ready to accept limits

Lots of teens may ask for a credit card, but teens who are ready for them will sit with their parents to discuss limits on what they can use their cards for, says Elle Kaplan, chief executive officer and founder of LexION Capital Management in New York City. Teens who won't accept limits -- say, that their cards can only be used for buying school supplies or textbooks -- aren't ready for that first card.

"Set very clear expectations about what the credit card is to be used for," Kaplan says. "Emergencies only? School supplies? Gas?"

3. Your teen is already successfully managing a bank account

Teens need to learn about money -- and show that they can handle it -- before they get a credit card. Andrew Johnson, communications and public relations manager with the Troy, Michigan, office of GreenPath Debt Solutions, recommends that parents set up savings accounts for their teens.

If their teens regularly deposit money in these accounts and refrain from draining it, they might be ready for the responsibility of a credit card, Johnson says.

4. Your teen has a job

Lehman says that teens should be holding down a job and earning income before they get a credit card. Working can help teach them the value of money, and might make them think twice before running up too much debt.

To qualify for a credit card, teens will need an income anyway. According to the Credit CARD Act of 2009, credit card applicants under the age of 21 now need to show proof of income to qualify for an account in their names.

5. Your teen handles peer pressure well

Does your teen succumb to peer pressure on a regular basis? If so, then that teen might not be ready for a credit card, Johnson says. Those teens that can resist the whims of their peers? They might be mature enough.

"They need to be diligent and not cave in to peer pressure from friends to use the card on a whim," Johnson says.

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