Q. I want to start the budget process but it’s overwhelming.  Where do I start?

A. Good for you for seeing the importance of budgeting.  Don’t be overwhelmed by what everyone says you should include in your budget.  The best place to start is to look at your income.  Since I come from a payroll background, I’ll try to take you to a more exact starting point than most planners do.

Let’s just assume you make $2,000 per paycheck and that you are paid twice per month.  Twice per month is the same as semi-monthly.  You are single and your W-4 says to claim 2 allowances.  You claim 2 allowances in California also.  Your budget does not start with $4,000.  Most planners will have you take a percentage of your income as taxes.  Since that percentage changes as you move up and down the income scale, I prefer to use a more exact method.  Head on over to PaycheckCity.com and select the “Salary Paycheck Calculator” under the Basic heading.  After selecting your state and entering all the information, you get a per check take home pay of $1,529.93.  This is your starting number.  Because you are paid twice per month, you double this amount to $3059.86.  That is the amount you have to spend each month.  This must be divided between fixed costs like mortgage/rent, car payments, insurances, food, gas, utilities and entertainment as well as general personal needs.  I’ll discuss splitting this up in the next post next week.

This amount could change based on any pre-tax items you may have taken from your check.  Health insurance and 401(k) plans generally fall into this category.  It is very important to know exactly how much you take home before starting this process.  Also, if you are getting  huge refund at tax filing time, perhaps you should adjust up your allowance numbers.  This increases you take home pay and adds to your budget.  Check with your CPA or tax planner for details.

            Insurance agents offer a very personal and important service.  They serve as advisors and consultants.  Their job is to recommend products and services that help you protect your possessions and secure your financial security.

            Good agents never use a cookie-cutter approach; they look individually at their clients.  They listen first, and then offer solutions.  They never try to sell a product or service; they instead only recommend those that will truly help you and your individual situation.

It’s important to select an agent who has the skills, knowledge, dedication and reputation to provide the service you deserve.

Develop A Relationship

            The best agents focus on building relationships with their customers.  Only through the development of a relationship can an agent become sensitive to changing life needs and anticipate the kinds of insurance and financial products and services you may need at different stages of your life.

            As a result, you want to choose someone you can depend on, and someone you feel will have a continued interest in you and your affairs.

Qualities Of A Good Agent

            Agents should be focused on you and work hard on your behalf.  Consider the following qualities when choosing an agent:

• References – Ask for references from other people in your age and income bracket, as well as from family, friends, and social or business acquaintances.
•  Credentials – Find out if the agent has any professional education and training credentials, and advanced insurance designations such as Chartered Life Underwriter (CLU), Chartered Property/Casualty Underwriter (CPCU), or Chartered Financial Consultant (ChFC).  Also, is the agent a member of any professional organizations, such as the National Association of Insurance and Financial Advisors?
•  Knowledge and Honesty – Insurance can be confusing.  Your agent should be able to provide you with up-to-date information on new product developments and should use terms you understand when explaining insurance policies and financial products.  Most importantly, an agent should tell you when a policy or service isn’t a good fit for you. 
•  Trustworthiness – Above all, your insurance agent should be someone you trust, either through recommendations from people you respect, or from your own knowledge of the person.  You should be able to communicate with the agent and get the answers to your questions in language you can understand. 
•  Integrity – Agents should listen to you and be up front about everything they say and do.  Quality insurance agents don’t focus on selling, instead, they concentrate on providing for your needs and helping others. 
•  Stability and Dedication – Through the years, your needs will change.  Your agent should provide annual reviews to help you determine whether the policies and services you have in place are still meeting your insurance and financial needs and goals. 

Look Beyond The Agent

            You must also look at the companies the agent represents.  Are the companies financially sound?  What are their financial ratings from major ratings organizations, such as A.M. Best and TheStreet.com?  Do they offer a broad range of high quality insurance and financial products and services?

            Price should not be the lone reason for choosing an agent or company; consider the products available and the service of both the agent and the company.  Your personal knowledge of both the company’s and the agent’s reputation for good service is a significant consideration.

            Do your homework when choosing an agent.  Finding someone with whom you are comfortable is the first step in creating a relationship that will help you through your lifetime.

No questions about this one, but the weather guys are starting to talk about tropical storms forming.  When I think of hurricanes or tropical storms, I think of lots of destruction and lots of tax documentation flying away from those who need it.  While other bloggers and reporters may talk about preparing food, shelter and data backups, this blog is designed for the average person to read.  No one talks about your tax documentation.  What happens if you are audited by the IRS or a state jurisdiction?  What is the first thing they look for?  Documentation!  How do you support your deductions if the paperwork has all flown away?  My recomendation is always to digitize all your important documents.  Use a service like Mozy to perform a backup of your documents that is both encrypted and offsite.

Secondly, store the original paper documents in a secure place like a bank safe deposit box.  When paper is flying, your W-2s, 10992, 1098s and all sorts of items containing your social security number suddenly are not in your control.  This leaves you and perhaps your family open to some serious identity theft risks.  Secure those documents!!

In an event like this, it is also important to keep important insurance information in a location that can easily be accessed.  If everything is on computer and you have no electricity or phone capability, you are stuck.  Find somewhere safe where all of this can be kept and retrieved in the unfortunate event that a disaster strikes your household.

A business owner or manager has much more to keep track off than just these two things.  You have employees, equipment, and building management to be concerned with.  Make sure you have an effective plan in place to get your business up and running as quickly as possible.  Some good articles on this topic can be found here, here, and here.

Tags: audits, disaster recovery, documentation, paperless, tax records, taxes

Q. I’m trying to follow some of the things you wrote about last year with the budgeting. But the gas prices keep going up and it blows all my savings amount.  Why is this happening?  I though we were still in a recession.

A. This is one of the great mysteries of life.  In the purest sense oil, and other commodities, would move up and down based on actual demand for the limited supply.  This is basic economics.  Unfortunately, it appears that there are several kinks in the system up and down the process that cause skyrocketing prices.  We know that gas is nothing but a refined oil product.  The higher the cost of each part of the system, the higher the ultimate cost to the consumer.  Oil prices have been climbing of late to nearly double the level they were just a few months ago.  This increases the raw cost of gas.  Most of the blame appears to be pointed at OPEC reducing their production and sticking to the stated quota. Second, refineries are not working at full capacity and are trying to maximize their profits by reducing production of gasoline when demand for fuel is down.  Thirdly, there is the delivery mechanism.  The cost to transport fuel continues to increase simply because it takes energy to move it whether by pipeline or truck.  Lastly, since the United States is not the sole consumer of oil products, we are at the mercy of other developing countries trying to get access to a limited supply of oil.

Unfortunately, there are two other pieces to this that are out of our control:  The investor and government spending.  As more and more funds and investors pile back into the market trying make a buck in commodities, it causes demand for ownership of those products to increase which increases the price.  Even though it appears that U.S. consumers are still driving less and conserving through downsizing their cars, it does little to stop the increase in prices.  If investors sense an increase in demand from a global perspective, even if it’s a rumor, the price will increase.  The other piece is the U.S. Government’s debt level.  The ability of our government to repay it’s debt is directly tied to the dollar’s value which is the currency that denominates oil prices.  As our government takes on incredible levels of debt, we see the markets questioning this and pondering inflation thus causing a weakening of the dollar.

In my opinion, each of these steps hurts the ultimate consumer.  Companies, individuals and countries at all levels of this process are so consumed with making a profit that they forget who pays the ultimate bill: the international consumer.  Some would say higher prices are a good motivation to increase conservation.  I say that only pads the pockets of the countries and companies who control the limited supply of these commodities.  I challenge everyone in the process to not only think of profit, but to think of smart alternatives that can be developed to give c0nsumers a choice of energy.

Tags: economics, gas price, investors, oil price

Q.  I am hoping to start doing a little development work on the side soon.  I am curious if I should just do it personally for now or if I should go ahead and set up a company.  I don’t anticipate much business or income at least not in this tax year.

A. Congratulations on your endeavor.  The question here is whether or not this will be a hobby.  It is irrelevant whether or not you “”set up a company”. If your activities are designed to make a profit,  you have essentially set one up already.  Regardless which type of activity this becomes, you must report any income produced by your activities.

If you do not ever plan to make a profit in these endeavors, the activity is considered a hobby.  You can claim expenses for your hobbies up to the amount of income you produce.  More on this can be found on the IRS website here.  For instance, I am an avid banjo player.  I have no group to play with yet.  However, if I decided to start playing solo once or twice a week outside the local arena or ballpark for fun and found that occasionally people dropped money in my case, likely this is just a hobby.  I could claim the mileage that I drive to these venues and any cost of supplies needed while playing.  On the other hand, if I were the banjo player for a real group and traveled full-time with that group for pay, the endeavor is now a business.  (Assuming I am not an employee) I would be able to claim all my income and expenses, even if I have a net loss, with the goal of attempting to make a profit.

Aside from taxes, if your business will involve anything that would create potential lawsuits against you, then officially incorporating and insuring your business is important as well. You never know when a disgruntled customer will decide to make your life miserable.

Tags: hobby, incorporating, new business, profit

Q. First, please explain the notes on line G of the W4 that talks about what to put on the form for children using different income levels. Secondly, I claimed 8 allowances last year and there were no taxes taken out of my check.  This year when I complete the form it shows 9 or 10 (bought a house).  How does that work, if 8 had already put me at no taxes?

A. See form W-4 before reading this explanation.  Most of the credits enacted in the last few years are phased out for higher income earners.  Line G of the Form W-4 deals with child tax credits and these credits are no different. The credit begins to phase out when Adjusted Gross Income (AGI) reaches the following levels:

• Married Filing Joint: $110,000
• Single and Head of Household Filers: $75,000
• Married Filing Separately: $55,000

To accommodate the reduction in the credit, you need to reduce the number of allowances you claim towards that credit. This makes your withholding increase but is correct because you will receive less credit and owe more in tax.  Therefore your withholding needs to increase anyway.  Those under the income threshold will still be able to claim extra allowances since they receive the full credit.

Regarding your second question, the number of allowances you claim should not be based on the number it takes to get your withholding to zero for federal purposes.  In your case, you bought a house.  If the mortgage qualifies, that means you now get to claim property taxes and mortgage interest on the itemized deduction form of the 1040.  Normally, this reduces taxable income and thus you get to claim more allowances.   If you think about it, now you have extra deductions available to absorb any salary increases that may happen in the future.  Talk you to tax preparer or CPA if you have specific questions regarding your situation.

Tags: allowances, dependants, paycheck, w4, withholding

Q. I know you get a lot of questions about this, but I think I may have not been allowing myself the number of allowances that I am qualified to receive. I am 33, single, have 2 homes in a separate state, both are rented. Should I be able to claim an allowance of 3, for tax and interest and depreciation for those homes?

A. The question of the “right” number of allowances to claim is a tough one.  For most people, it simply involves completing the Form W-4 as correctly as possible using any the necessary worksheets on the back side of the form.  For others, because of some extra factors that are not handled in the W-4, finding that number is an interesting problem.  In your case, the two homes in other states that are rentals are most likely considered a passive investment meaning you probably cannot fully deduct any losses that occur.  The best way for you to determine how many allowances to claim is to sit down with your tax advisor or CPA and go through last year’s tax situation.

On a side note, make sure you have mentioned the 2 rental homes.  By maintaining homes in other states from your resident state, you likely will need to complete a tax form for those states even if you have no actual tax liability.  Often, sales tax is required on the rental price of your homes along with the normal property taxes.  Make sure you check with the taxing jurisdictions where your homes are located.  You don’t want to be caught by surprise with sales taxes.

Tags: allowances, rental homes, taxes, W-4, withholding

Q. Is it illegal to claim exempt status on my W-4 for a couple of paychecks?

A. To get the answer to your question, we need to examine the statements on the W-4 relating to the exempt status.  Exempt means you will have no federal withholding on your paycheck.  It does not affect Social Security and Medicare withholding.  To be exempt, the form requires that you verify the following two conditions:

• Last year I had a right to a refund of all federal income tax withheld bec ause I had no tax liability and
• This year I expect a refund of all federal income tax withheld because I expect to have no tax liability.

If you are not able to say yes to both statements, look carefully at the statements at the bottom of the form, “Under penalties of perjury, I declare that I have examined this certificate and to the best of my knowledge and belief, it is true, correct, and complete.”  If you are willing to accept the risk detailed in the “jurat” statement at the bottom of the form, then it is fine to do this.  But let’s think about this carefully.  Are you only going to meet the qualifications for exempt for two weeks?  If you have knowledge that you will not be eligible for it for the rest of the year, then you should not do it.

If you meet with your tax advisor or CPA, they will be able to help you claim the correct amount of allowances for your situation to keep a constant withholding number for the entire year.  If you are a commission-only employee and your commissions vary widely, then it is still best to complete your W-4 claiming the number of allowances to which you are actually entitled.  Using Publication 919 later in the year, you can get a good idea if your withholding will be too much or not which will give you an idea if you should adjust your W-4 for the remainder of the year.

Tags: allowances, exempt, perjury, w4, withholding

Happy National Small Business Week!  This happens to be the illustrious week designated for increased awareness of issues surrounding the small business community.  In honor of this week, I wanted to highlight three very big issues facing small employers.

1. Health Care Costs – The Obama administration is looking to find a way to cover everyone with health insurance.  While arguments could be made either way of the necessity of this proposal, it could take shape as mandatory coverage provided by employers.  It could also look like a removal of pre-tax health insurance benefits with everyone receiving a credit on their tax return for all or part of premiums paid throughout the year.  Because health insurance is one of the biggest expenses in business, owners and managers need to keep close tabs on this one.

2. Taxes – Self-employed business owners need to make sure they are reporting all income and expenses incurred in the operation of the business.  By under-reporting income or exagerating expenses, individuals are cheating the system and not paying their fair share.  A reputable accountant or tax preparer can help with keep things above board by asking the right questions.

3. Human Resources – Issues relating to employee retention, discipline, training and compensation all are equally important.  Being in the payroll industry, it is my opinion that most employers simply don’t take the payroll function seriously enough.  Employers are the first line of “defense” in ensuring that taxes are paid.  By withholding and remitting the proper amounts, employees can make the best tax planning decisions possible.  Employers should be keeping up with tax changes in the appropriate jurisdictions.  They should also be referring their employees to online tools for employees to be educated about their checks.  One good place is PaycheckCity.com which has free paycheck calculators.  I use these frequently in planning my check as well.

Tags: calculators, health care, pre-tax, small business, taxes, withholding

Q. I recently got married in April. My wife is starting her job next week. In the past I have claimed 4 witholdings and usually get around $1,500 -$2,000 back each year. Need  some help in determining if I need to adjust my withholdings… if so … how much. Also… how many withholding should my wife have taken out of her paycheck.

A. This is one of the most frequently asked questions.  Unfortunately, it is not possible to answer without knowing your entire situation.  I can tell you that you both need to complete a Form W-4.  This form tells your payroll department exactly how many allowances you are claiming for your situation.  By answering these questions as correctly as possible, you will get just a little bit too much withholding.  Getting a refund of $1,500 to $2,000 shows that in the past, you could have claimed additional allowances.  The objective is to get as close as possible to a zero refund, even paying a little bit.  That way, you are getting the full use of your money, instead of loaning it to the government interest-free.

The key in your situation is that married tax tables usually result in lower withholding.  Both of you likely need to move to the “Married” filing status.  However, it is important to remember that there is a total number of allowances to which your family is entitled.  These allowances must be split between the two of you.  For every $3,650 of non-taxable income, you are entitled to one allowance.  If you claim the standard deduction ($11,400 in 2009), meaning you don’t have enough mortgage interest, state tax or charitable deductions (for example) to itemize, your situation provides for a maximum of  3 allowances plus one for each of you.  That means a total of 5 to split on your W-4s.  I usually reccommend that the spouse with the higher paying job claims the allowances.  The lower paying job claims zero.

There are some handy free calculators available at PaycheckCity.com that can help you plan.  The Form W-4 Assistant helps you complete a Form W-4 and the Salary Paycheck Calculator helps you see what your paycheck(s) will look like when you change allowances. For specific help on your situation, contact a CPA or tax advisor in your area.  They will be able to take into consideration all of the aspects of your financial situation to help you plan on paying the lowest legal amount of taxes.

Tags: income tax, married, tax refund, w4, withholding allowances