Personal Financial Management Archives - Flex Tax and Consulting Group (FTCG)

How to Analyze Your Current Finances

Flex Tax and Consulting Group — Wed, 02 Jun 2021 19:59:22 +0000

This article was authored working with wikiHow, the world’s largest “how to” site, and also featured here on the wikiHow website.

Before you can improve your financial health, you need to analyze your current finances. Keep track of your expenses for a month and look at where you are spending the most. Use extra money to pay down debts, build an emergency fund, and save for your retirement. Although saving might seem difficult, it’s actually quite easy once you find out where your money is going.

Part 1: Tracking Your Spending

Record your spending. Record all purchases that you make in a month.[1] Write down the amount spent, the day, and the time. Some of the more popular methods include:

· Create a spreadsheet. Remember to enter every purchase or expense. You should probably hold onto receipts so that you don’t forget how much you spent during the day.[2]

· Keep a notebook. This is a lower-tech option, but it is convenient. Carry your notebook around with you and record purchases as soon as you make them.[3]

· Use checks. This is an old-fashioned option, but you can easily track your expenses when your monthly bank statement arrives.

· Use an app. Many apps are on the market that help track your spending on your smartphone. The most popular include Mint.com and Wesabe.com.[4] [5]

Add up your fixed expenses. Your fixed expenses don’t change month to month. Common fixed expenses include the following:[6]

· Rent or mortgage

· Insurance

· Car payment

· Utilities

· Debt repayment

Look closer at your discretionary spending. Your discretionary spending is any spending that isn’t fixed. Instead, it goes up and down each month. Pay attention to what you are spending money on.[7] Break out the amounts spent on the following:[8]

· Groceries

· Eating out

· Gas

· Clothes

· Hobbies/entertainment

Pay attention to when you spend the most.[9] Look at the days and times when you make most of your discretionary purchases. Do you buy impulsively immediately after work? Do you spend too much money on the weekends?

· You might need to change your routine, depending on when you spend. For example, instead of pulling into the mall on your way home from work, you can change your route so that you don’t pass the mall.

· If you’re a weekend spender, you can try to fill your time with other hobbies, such as exercise or visiting friends.

Compare your spending to the 50-20-30 rule. According to this rule, your monthly expenses should shake out this way: 50% should go to essentials, such as food, rent, and transportation. 20% should go to saving and debt reduction, and 30% should go for discretionary spending.[10]

· The 50-20-30 rule probably won’t work for many people. For example, your fixed expenses like rent might eat up more than 50% of your budget. If you have debts, then you might need to spend more than 20% to pay them down. Nevertheless, the 50-20-30 rule can help you identify where you are falling short. It also gives you something to work towards. If necessary, reduce your debt load by refinancing or paying down debts.

Part 2: Looking Closer at Your Debts

Draw up a list of your debts. Go through your paperwork and find information on your debts, then draw up a list including the following:[11]

· Name of the account

· Total current balance

· Monthly payment

· Interest rate

Pull a copy of your credit report. You might not remember all of your debts, so you should go through your credit report to make sure you haven’t forgotten anything. In the U.S., you are entitled to one free credit report annually from each of the three national credit reporting agencies. Don’t order the report from each agency. Instead, order them all by calling 1-877-322-8228.[12]

· You can also visit annualcreditreport.com. Provide your name, date of birth, address, and Social Security Number.

Check if you can reduce your debt load. Depending on your situation, you might be able to lower the overall amount you pay on your debts. Although this might not lower your monthly payments, you will ultimately save money in the long-term. Consider your options:

· You might be able to refinance a 30-year mortgage into a 15-year mortgage. This will probably increase your monthly payments, but you can save big on interest.

· Call up your credit card companies and ask for a better interest rate.[13] This will lower your monthly payment and your overall debt.

· Consolidate debt. For example, you can transfer credit card debts to a balance transfer credit card, or you can take out a lower-interest personal loan to pay off debts.

Find ways to reduce your monthly debt payment. In a cash crunch, you’ll need to reduce how much you pay each month, even if you end up paying more over the long-term. You can lower your monthly debt payments in the following ways:

· You might be able to stretch out the length of the loan. For example, you might refinance a car loan and stretch out the repayment period to six years.

· If you have student loans, you can ask for deferment or forbearance. These options temporarily suspend your payments, though interest will continue to accrue with forbearance.[14] When you get back on your feet, you can begin making payments.

· Debt consolidation can also reduce your monthly payments, depending on the interest rate and repayment period.

Pay off your debts. You need to pay back your debts, preferably sooner rather than later. Some of the more popular approaches to debt reduction include the following:[15]

· Debt avalanche. You pay the minimum on all debts except the one with the highest interest rate, to which you dedicate all extra money. Once that debt is paid off, you commit all resources to the debt with the next highest interest rate.

· Debt snowball. With this method, you pay the minimum on all debts except the smallest one. You devote all available money to this debt until it is paid off, then you focus on the remaining debt that is the smallest. This method can give you momentum as you see your smallest debts disappear.

· Debt snowflake. You look for ways to save money every day and make multiple payments each month to your debts. You can combine the debt snowflake method with either the avalanche or snowball method.[16]

Part 3: Reducing Your Expenses

Set a savings goal. Ideally, you should save 15-25% of your monthly paycheck.[17] This means that if you bring home $2,000 a month, you should save between $300 and $500. That might not be a realistic goal right now, depending on your expenses.

· If you can’t save 15%, then work on ways to reduce your discretionary spending. Every little bit helps, and there are many ways to save every day.

Reduce your spending on food. Stop eating out and instead cook at home.[18] Buy a cheap cook book and have fun making new recipes. Remember to buy groceries in bulk for extra savings.

· Clipping coupons will help reduce the amount you spend each week.[19] Find coupons in your local newspaper or in the circular at the grocery store.

· Use popular apps such as Checkout 51, Grocery IQ, and Coupons.com.[20]

Find cheap entertainment substitutes. Everyone needs to unwind a little bit. However, you can usually find a cheaper substitute for your favorite activity:

· Instead of paying for a gym membership, exercise outdoors. Join a jogging or walking group, or do pushups or sit-ups in the park.[21]

· Get your library card and check out books and DVDs instead of paying for them.

· Instead of joining friends for happy hour, host a potluck at your house. Ask all guests to bring a dish or a bottle of wine.

Cut your electricity use. Install LED lightbulbs, which are four times as energy efficient as regular lightbulbs, and remember to unplug electrical devices when you aren’t using them.[22]

· You might also weatherize and insulate your home for increased savings. Obtain a home energy audit and apply for any local government programs. An energy audit can reduce your energy expenses by 5-30%.[23]

Reduce your fixed expenses. These can be the hardest to reduce because they often require that you make big lifestyle changes. However, consider whether you can make any of the following changes, especially if you are living beyond your means:

· Move in with friends or family. If you can’t afford your rent or home, then you might need to crash at someone’s place, at least temporarily. This can save a lot of money.

· Take public transportation. Sell your car and pocket the money. You’ll also save on insurance and gas.[24]

· Get cheaper insurance. You can lower your auto or homeowners insurance by shopping around using an online aggregator. When you find a cheaper option, call up your current insurer and ask them to match it. If they won’t, you can switch.[25]

Freeze your credit cards. Reduce the temptation to spend by freezing your cards in ice and carrying only cash on you.[26] If you’re afraid of carrying cash, get a secured credit card or reloadable debit card.

Part 4: Saving for the Future

Build a cash cushion. If your car broke down or you lost your job, could you continue to pay the bills? Build a cash cushion by saving six months’ worth of expenses.[27] Start small, by putting aside whatever extra money you can spare.

· Don’t let debt repayment get in the way. Most financial experts recommend that you build up at least a small emergency fund at first—say, three months. Then you can tackle your credit card debt.[28]

· Ideally, you can do both at the same time—contribute some money to your emergency fund and some extra to paying debts down quickly.

Contact Human Resources about retirement plans. You might be surprised that your employer offers a retirement plan. Call up HR and ask. Also check whether or not they will match any of your contributions.

· For example, some employers might match up to 4% of your base salary. This means you contribute 4% and they contribute 4%. If you only contribute 3%, then they will match that.

Research IRAs. If your employer doesn’t offer a retirement plan, don’t worry! You have plenty of options to choose from. The two most common are Individual Retirement Accounts (IRAs) and Roth IRAs. You can open an account with many online brokers. Choose which IRA works for you:

· IRA. With a traditional IRA, your contributions are tax-free. This is a good choice if you anticipate being in a lower income tax bracket when you retire.

· Roth IRA. The big advantage of a Roth IRA is that your withdrawals will be tax free. However, you pay taxes on your contributions. This is a good option if you anticipate being in a higher income tax bracket when you retire.[29]

Reference:

1. ↑Brian Stormont, CFP®. Certified Financial Planner. Expert Interview. 21 July 2020.

2. ↑Alex Kwan. Certified Public Accountant. Expert Interview. 23 April 2021.

3. ↑https://www.saveandinvest.org/military-everyday-finances/track-your-spending

4. ↑http://www.nytimes.com/2010/03/25/your-money/financial-planners/25CHECK.html

5. ↑Alex Kwan. Certified Public Accountant. Expert Interview. 23 April 2021.

6. ↑https://www.nerdwallet.com/blog/finance/what-are-fixed-expenses/

7. ↑Brian Stormont, CFP®. Certified Financial Planner. Expert Interview. 21 July 2020.

8. ↑http://www.getrichslowly.org/blog/2014/04/24/how-to-track-your-spending-and-why-you-should/

9. ↑Brian Stormont, CFP®. Certified Financial Planner. Expert Interview. 21 July 2020.

10. ↑https://www.forbes.com/sites/trulia/2016/07/11/new-to-budgeting-why-you-should-try-the-50-20-30-rule/#46feb3b632e9

11. ↑https://www.thesimpledollar.com/10-things-you-can-do-to-tackle-your-debt-right-now/

12. ↑https://www.ftc.gov/faq/consumer-protection/get-my-free-credit-report

13. ↑https://www.credit.com/debt/5-steps-to-reduce-your-debt-diy-debt-reduction/

14. ↑https://studentaid.ed.gov/sa/repay-loans/deferment-forbearance

15. ↑https://www.forbes.com/sites/robertberger/2017/07/20/debt-snowball-versus-debt-avalanche-what-the-academic-research-shows/#562363641454

16. ↑https://www.nerdwallet.com/blog/finance/debt-snowflake/

17. ↑https://www.backstage.com/advice-for-actors/backstage-experts/7-point-checklist-analyze-your-current-financial-situation-part-ii/

18. ↑Brian Stormont, CFP®. Certified Financial Planner. Expert Interview. 21 July 2020.

19. ↑https://money.usnews.com/money/personal-finance/articles/2014/03/07/9-steps-to-drastically-reduce-your-spending

20. ↑https://www.consumerreports.org/cro/2013/08/best-coupon-apps/index.htm

21. ↑http://www.experian.com/blogs/news/2012/12/19/fixed-expenses/

22. ↑https://www.thesimpledollar.com/trimming-the-fat-forty-ways-to-reduce-your-monthly-required-spending/

23. ↑https://energy.gov/public-services/homes/home-weatherization

24. ↑https://www.thesimpledollar.com/trimming-the-fat-forty-ways-to-reduce-your-monthly-required-spending/

25. ↑http://www.experian.com/blogs/news/2012/12/19/fixed-expenses/

26. ↑https://www.csmonitor.com/Business/The-Simple-Dollar/2011/0225/Freeze-your-credit-cards-in-ice-cubes

27. ↑http://www.nytimes.com/2010/03/25/your-money/financial-planners/25CHECK.html

28. ↑https://www.thesimpledollar.com/is-suze-right-do-emergency-funds-now-trump-debt-repayment/

29. ↑https://www.nerdwallet.com/blog/investing/roth-or-traditional-ira-account/

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Nonresident Aliens and The Section 121 Principal Resident Exclusion

Flex Tax and Consulting Group — Thu, 09 Jul 2020 20:35:37 +0000

Internal Revenue Code § 121 provides taxpayers with an income tax exclusion from the gain of taxpayer selling a primary residence. The exclusion amount for a single up to $250,000 and married couples will raise to $500,000. To qualify for the exclusion, the taxpayer-owned and used the property as the taxpayer’s principal residence for periods aggregating two years or more during the 5-year period ending on the date of the property sale or exchange. Determining the primary residence is a matter of fact and circumstances. For example, when a taxpayer rotates between two different residences, only one will be regarded as the primary residence based on a variety of factors, including but not limited to the time spent in the residence, workplace, and residence of other family members, etc. The address listed on the tax return, the address listed on the driver’s license, the mailing address for bills and letters, the location of the bank, and the religious organization’s location.

Non-resident foreigners can also apply this exclusion. However, because non-resident aliens are not eligible to submit a joint return, each person designated as a non-resident alien needs to share its share of the national resident exclusion tax in a separate tax return. In practice, this means that if the sale proceeds exceed $250,000, each filer will need to 1) be eligible to apply for the exemption of the primary residence on their own, and 2) file Form 1040NR U.S. Nonresident Alien Income Tax Return and state the ownership share of the principal residence.

According to the ” Foreign Investment in Real Property Tax Act ” (“FIRPTA”), non-resident foreigners should also pay additional tax other. For primary residences where the realized amount of sale (usually the sale price) is less than $300,000, no withholding is required; for sales between $300,000 and $1,000,000, the withholding tax rate is 10%; if the sales exceed $1,000,000, The withholding rate is 15%. Non-resident foreign taxpayers may find themselves eligible to claim the exclusion of the primary residence stipulated in IRC § 121, so FIRPTA withholding taxes will exceed his/her highest tax liability in the transaction. In this case, the taxpayer can request the US Internal Revenue Service to provide proof of withholding tax to the buyer, indicating that the withholding tax rate they owe is low or not at all. Since the primary residence exclusion in IRC § 121 does not constitute a non-recognition provision within the meaning of FIRPTA (non-recognition provision makes FIRPTA not applicable at all), unless the purchaser obtains a withholding certificate, the buyer must withhold the appropriate tax rate.

Tax treatment for gain from sale of principal residence can be tricky. We are here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston), and e-mail us at info@flextcg.com.

The post Nonresident Aliens and The Section 121 Principal Resident Exclusion appeared first on Flex Tax and Consulting Group (FTCG).

TAX RELIEF FOR INDIVIDUALS: CONSIDER CHANGING 2019 OVERPAYMENT FROM A CARRYFORWARD TO A REFUND

Flex Tax and Consulting Group — Thu, 04 Jun 2020 04:48:30 +0000

Since the CARES Act passed, there has been a lot of talk about getting funding to businesses to help the economy. Businesses received some relief through Payroll Protection Program loans, Economic Injury Disaster Loans (EIDL),-Employee Retention Credits and an increase in the allowable business interest deduction limit, to name a few.

But what about the individuals? The most noted benefit that individual filers received was the Economic Impact Payment, which depended on adjusted gross income thresholds. Those who lost their jobs or had work hours reduced could apply for unemployment benefits or Pandemic Unemployment Assistance. With millions of people collecting unemployment and unsure what their cash flow might look like in the future, this may not be enough. The good news is there may be another way for individuals to get their hands on some much-needed cash.

Taxpayers who have already filed 2019 individual income tax returns reflecting an overpayment applied to 2020 may elect (retroactively) to receive this overpayment as a refund instead. Pursuant to a 1977 Revenue Ruling, this process is relatively simple. There is no need to file an amended return for 2019, but rather a “Superseded Return.” When filing the superseded return, simply indicate that the overpayment should be refunded instead of carried forward. The superseded return will replace the original 2019 return.

There are a couple things to note. Most importantly, the superseded return needs to be filed before the original due date for your 2019 return. The original due date for filing 2019 individual income tax returns is July 15, 2020 (extended from April 15, 2020 under the CARES Act). Superseded returns must be paper filed and mailed to the appropriate IRS processing center. (The mailing address can be found within the Form 1040 filing instructions.) As with most returns that are paper filed, processing could be delayed; however, providing banking information on the return will speed up the payment by four to six weeks.

For questions about filing a superseded return or receiving a refund of your tax overpayment, contact your Flex Tax tax advisor.

The post TAX RELIEF FOR INDIVIDUALS: CONSIDER CHANGING 2019 OVERPAYMENT FROM A CARRYFORWARD TO A REFUND appeared first on Flex Tax and Consulting Group (FTCG).

Filing Taxes When Marrying a Non-U.S. Citizen

Flex Tax and Consulting Group — Sun, 26 Apr 2020 02:01:50 +0000

Marrying or Married to a Non-Resident Alien? Filing Status Information

The IRS defers stating or foreign law to determine whether you have a valid marriage. In most cases, a marriage in a foreign country is valid for U.S. tax purposes.

“Can I File Single if Married to Non-Resident Alien?”

Generally, no, you can’t file single if you’re married to a non-resident alien. Married individuals are not allowed to file under the single filing status, and when you are married to a non-resident alien (referred to as a nonresident spouse), you are also unable to file a joint return unless a separate election is made to do so.

Here are the options when you are married to a non-U.S. citizen. You should consider the options carefully, as each will have a different effect on your tax and reporting requirements.

1 – Filing Married Filing Separately

The default filing status for a U.S. citizen married to a nonresident alien spouse is Married Filing Separately (MFS). While the MFS filing status does not pose any additional hurdles for getting your return easily filed, it does come at a cost.

The biggest downsides to married filing separately for a resident or U.S. citizen spouse is the loss of some potential tax credits and deductions and overall higher tax rates. If you are married to a nonresident spouse and do not have any dependents to claim, this may be the only filing status available to you.

2 – Filing Head of Household

The more beneficial option is available if you do have a dependent is to file using the Head of Household filing status. To file as Head of Household, you must have a qualifying person for head of household purposes and meet the tests to use Head of Household status.

In order to use this filing status, you must:

Be considered unmarried, and
Maintain as your home a household for the qualifying person for more than half of the year, or
Maintain a home for your parent you can claim as a dependent. Your parent does not have to live with you.

You cannot claim your spouse who lives overseas as a dependent, but you can claim other people who are U.S. citizens, U.S. nationals, or U.S. residents or residents of Canada or Mexico. The qualifying person must meet all the rules or Head of the Household status is unavailable.

In many cases, this is the most beneficial status available when you are married to a nonresident spouse because it is accompanied by lower tax rates and additional deductions. Just remember, this status also requires your dependent to have a valid social security number or ITIN.

3 – Filing Married Filing Jointly

The final option is to make an election to treat your nonresident spouse as a U.S. resident for tax purposes. Making this election allows you and your spouse to file a Married Filing Jointly (MFJ) tax return. Filing MFJ will allow you both to take advantage of lower tax rates and deductions that are otherwise not available to MFS filers. However, it will also subject your spouse’s entire income to U.S. taxation and possibly subject your spouse to other information reporting requirements. FBAR and Form 8938 filing is required if you file MFJ.

Practically speaking, this status is most beneficial if your spouse does not earn any income or otherwise has any accounts or investments that may cause negative tax consequences from the U.S. side.

One additional hurdle for choosing this option will be the requirement for your spouse to obtain an Individual Taxpayer Identification Number (ITIN) if they’re not eligible for a Social Security number. So, both spouses need to have either an SSN or ITIN. (Applying for an ITIN requires you to gather additional documentation that must be sent to the IRS. It could also cause delays in the processing of your return.)

Marrying a Non-U.S. Citizen? Get Help

Hopefully, questions like “Can I claim my wife who lives overseas?” and other tricky tax questions about marrying a non-U.S. citizen are answered in this post. But, before you file your return, discuss the best filing status for your particular situation with a tax advisor. The experts at Flex Tax s can assist you with this decision. To set up a free consultation, please visit www.flextcg.com/remote.

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