Thursday, November 24, 2016

3 Ways to Protect Your Business's Finances Against Cash Flow Downturns

If your company's cash flow is volatile, know how you can prepare yourself in the event of a downturn.

In the years since I co-founded my business loan and payment processing company, we've seen many new businesses struggle because of cash flow volatility. Many of my clients are considered "high risk" by traditional banks because they own a cash-intensive business, so bank financing is not always an option for them. Instead, my clients must look inwards to find new ways to self-finance their businesses during a cash flow downturn.

Take "Carol" for instance: She opened a clothing store two years ago, which has an established a clientele and a good reputation in the local community. But the previous summer had been slow. Cash flow lagged behind expenses. She struggled to make payroll and needed an injection of capital to get her through the down patch. However, when she went to her bank, she was shocked to find that, as the owner of a retail business, she was considered a "high risk."

If your business has volatile cash flow like Carol's, here's how you can manage your finances to protect it against down periods.

Make the downtime productive.

If you experience a business slowdown, look at it as an opportunity for business planning. In Carol's case, she could use the extra time to work on her business rather than in it, and that meant planning. She created a realistic budget for the coming year that reflected the seasonal nature of her business.

Similarly, you can create a budget for your business that builds in savings during your peak sales season so that you have a buffer in the leaner months. By sticking to your budget, you should be able to avoid future cash flow problems.

In general, coming up with a marketing plan to attract new customers can help you get out of your downturn faster. If your revenue is tight, focus first on marketing activities that don't require big investments, like social media campaigns and participating in local markets -- anything that keeps your business's downtime productive on a budget.

Focus on variable costs.

When Carol looked at her budget, she saw that she was really feeling pain around her fixed costs -- things like rent, payroll and equipment costs. To alleviate your own cash flow pressure, convert as many of your fixed costs to variable costs, if possible.

There may be nothing you can do about your building lease, for example, but you could hire temporary seasonal help during your busy periods and run with a smaller staff in the slow months. You could also lease equipment rather than buy it outright, which would give you more financial flexibility.

Ask for better terms.

Carol had never thought to dicker very much around the terms her suppliers demanded. However, they can be more flexible than you might imagine. Good vendors are partners in your business: When you succeed, so do they, and vice versa. It's in their best interest to sometimes allow better discounts or longer payment schedules if it means the difference between success and failure.

By negotiating longer payment terms with some of your vendors, you'll be able to lower your costs during the slow times. If your business faces cash-flow issues and traditional funding is not an option, look inward for solutions. Use your down time to create a budget that will minimize the effect of future downturns.

Focus on variable (versus fixed) costs so you can adjust to seasonal revenue variations, and renegotiate with suppliers so they become true partners, working together to smooth out cash flow volatility.

Managing your finances using these strategies will help you avoid -- or at least shorten -- your down seasons.


Theresa Todman, Managing Partner/CEO of B&M Financial Management Services, LLC . Theresa specializes in bookkeeping, accounting, QuickBooks solutions, small business tax issues and consulting.
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Wednesday, November 23, 2016

4 Dumb Mistakes That Lead Millennials to Screw Up Their Own Finances

Millennials are pretty smart, but not necessarily when it comes to their personal finances. Although some young people have made smart choices with their money and are well-informed about their finances, others seem reluctant to learn anything about their own financial outlook, perhaps in the hope that what they don't know won't hurt them.

Those are the findings from a recent survey of 500 18-to-29-year-olds, conducted by NextAdvisor, which provides independent research into a variety of internet services.

Here are the Millennial financial goofs that turned up in the survey:

1. Not knowing their credit scores.

Your credit score can dictate whether you're able to buy a house or car, or open a new credit card account. But that's not all. A low credit score can also lead to being turned down for a job and not being able to rent a home. And yet, 39 percent of the young people surveyed said they did not know what their credit scores were. When asked how often they checked their scores, 34 percent had never checked them at all, and another 14 percent had checked them at some point in the past, but not recently.

Getting your credit report once a year from each of three credit reporting agencies is free at, and you should definitely do it. But a credit report does not show your FICO credit scores (you have several but most lenders use scores from one of the three major credit reporting agencies: Equifax, TransUnion, and Experian). To get a look at your score, you can pay a fee to one of the reporting agencies or sign up for a free trial of a credit monitoring service. Or your credit card company or another lender might provide one of your scores free of charge. The three scores are usually relatively similar, so getting one will give you an idea what the others are.

2. Taking on too much debt.

In the survey, 54 percent of Millennials reported they had loans to pay. Of those, 53 percent had student loans--which isn't surprising, given the high cost of education these days. At the same time, studies show that people with college degrees make more on average than people who don't have one, Bill Gates and Mark Zuckerberg notwithstanding. So taking out a student loan, especially if you know you will put it to good use, may not be a bad idea.

Another 13 percent of respondents had mortgages. Although buying a house is a long-term commitment for someone under 30 to make, it can be an excellent investment if you do your homework, can afford the mortgage (plus other expenses, such as maintenance), and get a good deal.

But 25 percent had car loans, which are often a large monthly expense for a new or expensive car when a less expensive used model would do just as well. And 9 percent had personal loans, which might or might not be a good idea.

3. Failure to budget.

When it comes to setting a budget, Millennials haven't quite got the hang of things, with 19 percent saying they don't budget at all and another 26 percent saying they budget for such items as rent and utilities but then spend freely once those items are accounted for. That's better than no budget at all, but it would be smarter to get a handle on all your expenses, make sure you're not overspending, and start the habit of setting up automatic deductions for savings. Doing that while you're young will put you way ahead of the game.

4. Not setting financial goals.

When asked if they had the goal to build up their credit and improve their financial health, 37 percent said no, although 20 percent also said they would like to have such a goal.

For those that did, that's a good start. There are multiple online services to help you monitor your credit and set good financial goals. Improving your credit and financial outlook is important at every age. Knowing you need to do that is an important first step.

Image Credit: Getty Images

Theresa Todman, Managing Partner/CEO of B&M Financial Management Services, LLC . Theresa specializes in bookkeeping, accounting, QuickBooks solutions, small business tax issues and consulting.
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Tuesday, November 22, 2016

10 Effective Ways to Manage Your Business Finances Effectively

Starting a business is an exhilarating experience, especially when you are burning with creative ideas focused on your field of interest. However, there are aspects of business management that are rather complex and never fun. Business finances are one of these areas.

The great news is that with all the amazing solutions available today, you don’t have to be a financial professional to manage your business funds and keep books effectively. The following 10 tactics will take out most of the stress from dealing with your company’s money flow.

#1. Invest in Quality Bookkeeping Software

This is the first thing you should do when starting a business. Bookkeeping is vital not only for paying taxes but also for understanding your company’s financial position and developing budgets.

Bigger businesses usually have accountants who utilize professional software. However, today anyone can master the basics of bookkeeping and ensure their records are in order. You just need to purchase a high-quality bookkeeping program. These solutions are easy to use as they automate the majority of the operations, so you only need to have a basic understanding of accounting.

#2. Accept and Use Various Types of Payments

The market today is extremely competitive, so you have to offer your customers the highest level of service. Convenient payment options are a major part of this, and with the abundance of transaction methods available today, you should strive to offer as many as you can.

You definitely need to accept cash, checks, credit and debit cards, as well as several online payment options (e-wallets, online transfers, etc.). Being flexible will not only help you win more customers but also allow you to make your own payments more easily. Planning your company’s money transfers wisely will enable you to reduce the size of transaction fees.

#3. Create Your Own Financial Dashboards Fast

A financial dashboards is a truly fantastic tool that allows you to visualize a variety of financial processes and make managing your funds, and business as a whole, much easier. Today you can use a specialized solution to create custom financial dashboards that will meet the specific needs of your company.

Make your own diagrams of the work capital flow, cash conversions, and other important financial operations. The simplicity of dashboards allows you to track your business’s progress with ease.

#4. Use Mobile Payment Systems

Mobile payment solutions, like GoPayment from QuickBooks, are perfect for small businesses. This software allows you to accept and make payments via a mobile device. In essence, you can use it to manage the majority of your financial transactions from your smartphone, so you have 24/7 control of them.

Choose a versatile solution that will integrate into your bookkeeping software effectively. It also needs to allow for customization so that you can make personalized receipts.

#5. Keep Tabs on Your Money Movements

It’s vitally important to trace all the movements of your capital regularly. Evaluating the numbers will show you how your business is faring and determine which areas perform most efficiently. You also need to study this data to develop a reasonable budget and track your progress to see if you fit within its limits. Various types of bookkeeping software, as well as effectively designed financial dashboards will make following your progress easy.

#6. Have a Financial Pro Draw Up Your Payment and Deposit Terms

No matter how small your business is, you need to have your payment terms outlined in a concise and efficient manner. It can be a very difficult thing to do for a non-professional because you need to take into account both the legal and financial side of monetary transactions.

Therefore, it would be best to employ the help of a qualified professional who can help you understand what kind of payment and deposit terms will work best for your business. An expert will also draw up all related paperwork to prevent any legal issues.

#7. Remember to Track Vehicle Mileage

Many business owners tend to forget this as mileage isn’t directly related to funds. However, to benefit from the tax deduction for the business vehicle gas you’ll need to provide IRS with a mileage logs during audits. Please note that in some cases this isn’t a mandatory requirement, so consult your tax expert on what kind of records you need to have.

You can track mileage by recording the odometer readings every day and compiling them into a log or by using a specialized app, like MileIQ.

#8. Plan Your Taxes

Proper tax planning can make all the difference for your business as not doing your taxes right can cause very serious problems. What you need is to consult an expert on taxes BEFORE you start your business and have them help you develop the most efficient scheme.

A professional will be able to advise you on the best tax reduction strategies available for your enterprise, which may help you free up a lot of funds you can use for growing your business. Note that taxes are time-sensitive, so not applying for deductions at the right moment can lose you many opportunities.

#9. Separate Your Business Accounts from Personal Accounts

It’s imperative to do this as quickly as possible. This will allow you to use the benefits of being incorporated, especially the measure of legal protection that comes with this title.

Using your personal account for business when you claim to be a formed and operating corporation means you are commingling expenses (business and personal), which can cause trouble during audits. This can lead to your losing the chance to deduct some of your business expenses from taxes.

Even if you aren’t incorporated, separating accounts would be beneficial and will allow for easier and more effective financial management overall.

#10. Manage Your Business Finances Through Advanced Solutions

Managing your business’ finances may seem like a daunting task. However, with the advanced solutions available today, you don’t even have to hire a professional accountant for your startup. Instead, you should focus on learning the basics and purchase effective and easy-to-manage software solutions that will make bookkeeping easy. You also should go for versatility with payment options to allow your prospective customers choose the method of transaction that meets their needs best.


Theresa Todman, Managing Partner/CEO of B&M Financial Management Services, LLC . Theresa specializes in bookkeeping, accounting, QuickBooks solutions, small business tax issues and consulting.
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Monday, November 21, 2016

Plan Ahead to Avoid Tax Time Surprises

Self-employment can be so liberating. Being an entrepreneur and launching your own business provides tremendous freedom that you just can’t get working for someone else.

At least until tax time arrives.

Entrepreneurs must take a totally different approach to taxes than the average worker. For example, when you work for someone else, your employer takes care of withholding taxes from your checks. But when you’re self-employed, that tax requirement falls squarely on your shoulders.

For the uninitiated entrepreneur, not understanding these tax requirements could mean an unpleasant surprise at tax time. Follow these tips to help you plan ahead and avoid any last-minute tax time surprises.

1. Know your self-employment tax obligations.

As mentioned above, you have to pay self-employment tax if you work for yourself. That doesn’t apply just to individuals working alone or sole proprietors: Members of LLCs and business partnerships are also subject to a percentage-based self-employment tax. Part of this tax goes to Social Security and part to Medicare. This is in addition to individual income tax.

2. Calculate your tax obligation.

If your business earns a net annual income of more than $400, you’ll owe self-employment taxes. If this is the first year that you’re in business for yourself, you’ll need to estimate how much money you expect to earn by December 31st. Otherwise, you can use IRS Schedule SE, a worksheet to help you figure out your tax obligation based on your prior year’s tax return.

3. Don’t wait to pay

Because entrepreneurs don’t pay taxes regularly from a paycheck, the IRS fully expects quarterly estimated payments.

The IRS has established fixed due dates for every quarter. If you don’t pay, or you underpay, the IRS will charge a penalty, even if you’re eligible for a refund at the end of the tax year.

In addition, know the absolute deadline dates to file your business tax returns.

4. Keep up on your numbers.

All too often, entrepreneurs wait until the end of the tax year to start gathering receipts and calculating expenses. But this just invites mistakes, which often lead to nasty surprises and even audits.

It’s smarter, and safer, to use an accounting service like and automated payroll services like Wagepoint than it is to do everything by hand, with physical receipts and Excel spreadsheets. This eliminates the rush and makes it easier to complete quarterly payments and filings at the end of the tax season.

5. Properly designate employees.

Entrepreneurs often hire contract employees such as freelancers, in addition to in-house employees. Freelancers are responsible for their own taxes.

If you make the mistake of mixing up employee designations and the IRS determines that a worker is an employee rather than a contractor, you could be hit with costly penalties and a huge tax bill from unpaid Social Security and Medicare taxes.

6. Keep separate accounts.

It’s hard to know if your business is going to succeed when you first launch, but that’s no reason to merge your business and personal checking accounts. From the moment you plan to start a business, you need to get a business checking account to obtain appropriate business savings.

These accounts should be used solely for business expenses, with no personal charges or withdrawals. If you commingle charges, then you could find yourself on the hook for business tax debts.

7. Know your deductions

This is another area where it pays to use an accounting service, so talk with certified tax accountants as necessary.

There are a lot of allowable deductions specifically for startups, and even more tax deductions for small businesses, if you know about them. A professional accountant can help you maximize your deductions. For example, you can deduct up to $5,000 for research and development as well as startup costs.

Just make sure you’re claiming all of your available deductions; many entrepreneurs don’t. For example, 7.6 million filers claimed a home office deduction in tax year 2011-- but that was just 32 percent of eligible filers.

“Many small businesses assume they can deduct all of their costs in starting a new busines, but they cannot until they have their first sale,” says Gail Rosen, CPA. “Then, costs are deductible based on the laws for that deduction.”

8. Save for liability.

Even if you think you’ve got your taxes covered, you need to set funds aside in the event that you have fines, penalties or a larger tax obligation than you calculated. The last thing you want is a tax debt that accrues additional fees and penalties due to being late while you scramble to put funds together.

9. Think about the future.

If you’re going to seek funding in the next year, talk to an accountant about your reporting method (cash or accrual). This will impact your P&L. When a lender is underwriting a loan, or you’re talking to a VC, less profit can have an effect on whether or not you’re approved.

10. Get the tools and people you need now.

Richard Milam, CEO of EnableSoft, advised looking at your current systems to see where you can optimize before the end of the year: “Get the tools you need and get ahead of the year end rush so you’re not playing defense at tax time," he said. "If something needs to be updated, take care of it, so when it’s time to close the books, the data is in place and it’s clean.”


Theresa Todman, Managing Partner/CEO of B&M Financial Management Services, LLC . Theresa specializes in bookkeeping, accounting, QuickBooks solutions, small business tax issues and consulting.
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Friday, November 18, 2016

How Much Do Large Corporations Pay In Income Tax? Probably Less Than You Think

The WalletHub study says Facebook had an overall tax rate of 40.5%. It actually paid 10.9% of its pretax income in income taxes.

WalletHub has just come out with its annual Corporate Tax Report.  Based on the detailed information assembled by WalletHub’s data analysts, John Kiernan tells us “The overall tax rate that S&P 100 companies pay, around 28 percent, is basically unchanged compared with 2014″ (Emphasis added).  There is also commentary by experts such as W. Eugene Seago, who thinks it is unpatriotic to do an inversion and Luke Watson who suggestion that maybe inversions are not such a hot idea. Then there is a chart that gives percentage tax rates.  There is one big problem.  The rates are not what the companies paid.

Facebook – Love Those Stock Options

To take an extreme example Facebook is indicated as having an overall tax rate of 40.5%.  I can actually tell you how they got that number.  According to its 2015 10-K (Page 57) Facebook had “Income before provision for income taxes” of $6.194 billion and a “Provision for income taxes” of $2.506 billion which, rounded, works out to 40.5%.  Facebook did not however pay $2.506 billion in income taxes.  You have to dig a little for that number.  It is on Page 61 as part of the “Supplemental cash flow data”.  It is $273 million.  That means that Facebook actually paid 10.9% of its pretax income in income taxes.

I know what you are thinking.  Must be deferred taxes.  They might not be paying this year, but it will catch up with them in the future. That’s not it.  Facebook actually has $151 million in deferred tax assets on net. Reconciling the amount paid to the amount of the provision is not a required disclosure, so I can’t tell you exactly what makes up the difference, but I can point you to a big piece of it.  On page 59 – Consolidated Statement of Stockholders’ Equity – you will find “Tax-benefit from share-based award activity” $1.853 billion.

The Tax-benefit from share-based award activity is not like deferred taxes from differences between book and tax depreciation.  It is a permanent difference between the book deduction for share-based compensation and the tax deduction.  The people at FASB don’t think the savings from that deduction should be included in computing net earnings.  So the savings is accounted for as a contribution to capital.

Another disclosure not currently required, although there is a proposal on it, is the breakdown of the amount paid, so we don’t know how much, if any, of the $273 million was paid in federal income taxes.  Given that Facebook on page 79 discloses that it has a $2.7 billion net operating loss carryover, it would not surprise me at all to find that Facebook has never actually paid any federal income tax, despite the substantial provisions that you see.

Berkshire Hathaway And The Charge That Donald Trump Loves

I should disclose here that a substantial portion of my unimpressive net worth is in Berkshire Hathaway stock.  WalletHub has BH with a rate of 30.1%. Going to the BH 2015 K-1 (page 68) we find “Earnings before income tax” of $34.946 billion and “Income tax expense” of $10.532 billion, which is 30.1%.  The amount paid which you will find on page 87 was $4.535, which is just 13.0% of pretax income.

In the case of BH, much of the difference comes from faster depreciation for tax purposes ( In one of the debates Donald Trump mentioned how much he loves depreciation.  Warren Buffett has a more nuanced view of it) .  Berkshire’s net deferred tax liability grew by $1.263 billion.  And as long as the company continues to put more property in service, at least on a dollar basis, than it retires that deferred tax liability, currently $63.199 billion will likely continue to grow.

Do The Experts Know This?

Professor Seago and Professor Watson are accounting professors. Of course they know, as they told me that the income tax expense and the amount of tax paid are “two very different things”.  The focus of the rules for “Income tax expense” is to have net income clearly reflect the results of the company’s operations and also to prevent companies from using the income tax provision to game their earnings.

A probably unintended consequence of it is to detach “Income tax expense” from more than a passing relationship with the amount of income taxes actually paid.

Why Is This Important

I guess it is a prejudice of mine as a member of the reality based community.  The WalletHub numbers find their way into stories with titles like

“These are the giant US companies that paid the least in taxes last year” – Business Insider

“WalletHub: Three Oklahoma-based companies pay highest corporate taxes” – 8ABC Tulsa

“The Top Tax Rate is Killing American Business” – Live Trading News

These articles all refer to what the companies are paying, but they use the “Income tax expense” not the amount paid. And as most CPAs and WalletHub’s own experts and now you all know the “Income tax expense” and the amount paid are “very different things”.  If what companies are paying in corporate income tax is important, then we should probably make judgments about it based on what the companies are, in fact, paying.

My Pledge To You 

I have assigned myself the task of constructing a table that will compare the income tax provision of the top hundred companies with the amount actually “paid”.  You can read about the top seven here.  In only one case was the amount paid more than the “income tax expense” (Microsoft with an expense of 15% and 19.7% paid).  We’ll see if that trend stands up.  The wildest difference in that group was Amazon which had an income tax expense of 60.5% and paid 17.4%.

I’m shooting for Monday, but am not making a firm promise at this point. So stay tuned.


Theresa Todman, Managing Partner/CEO of B&M Financial Management Services, LLC . Theresa specializes in bookkeeping, accounting, QuickBooks solutions, small business tax issues and consulting.
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When Starting a Business, Beware All the Taxes and Regulations

Small business is the engine of our country’s economy, and both political parties want economic growth. Therefore, you would think that the government would make it easy to start a small business. You’d be wrong.

If you plan to start a small business, you will face a complex net of federal, state and local requirements. There are a morass of laws and regulations with which you are supposed to comply and your efforts will be taxed at multiple levels. Worse, depending on the geography in which you operate and the industry you are in, the rules vary.

We’re not attorneys and we don’t give legal or tax advice. Further, this column isn’t long enough to cover this topic thoroughly (books have been written on the subject). However, we can make you aware of a few of the challenges you will face.

1. Business structure

First, decide how to structure your business (e.g., partnership, LLC, S-corp, C-corp, etc.). We have addressed this issue in a previous article, but the short answer is that you will probably want to be an LLC or an S-corp. These structures will provide you with some protection from the liabilities of your company (such as lawsuits) and they have some tax advantages. We suggest that you consult an attorney for details.

2. Payroll and taxes

You will have to pay personal taxes (federal and state) on any salary you receive. This means that the company will have to file both federal and state withholding taxes. This can be complex because you have to take income tax, FICA and FUTA out of paychecks. Then the employer has to match the FICA withholding. In most states, you will have to pay state unemployment taxes.

If you use a payroll service, it will do this for you (for a fee, obviously). We use QuickBooks in our business, which does the calculations. However, we had to pay an outside firm to set this up and we call them periodically when we have questions. It can be frustrating. We have paid this outside service $200 to help us figure out how to correctly pay a $70 tax.

Don’t get us started on the new regulations surrounding the Affordable Care Act, which will add another level of complexity.

If you are an LLC, profits of the business (even if they are not paid out as dividends) will be split between the owners on a pro rata basis and each will have to pay their own portion of the taxes. However, if the business earns enough, you’ll have to file quarterly withholdings or risk a penalty at the end of the year.

3. Other taxes and fees

Depending on your state regulations, you may need to pay for workers’ compensation insurance. For instance, businesses with three or more full-time employees have to buy this insurance.

If you sell a product rather than a service, you’ll have to pay sales tax. It can sometimes be unclear where the line between a product and a service is drawn. For example, if you are paid by the hour to write code for someone, that’s probably a service. However, if you are paid for developing an app that you deliver to someone, that may be considered a product.

Again, depending on your state’s regulations, you may need to register your business with the State Corporation Commission and be required to pay an annual license fee.

Your county or city probably has some tax requirements. For example, in Chesterfield County, where we live, we have to get a business license (you can’t open a bank account without one). Chesterfield requires that we pay an additional tax on our revenue. In addition, we have to file and pay taxes on the assets of the business.

Most labor laws apply to companies with even one employee. There are many of them and they can be complex.

Starting an entrepreneurial venture can be exciting, rewarding and profitable. Unfortunately, our government makes it complex. We suggest seeking out competent advisors.

Image Credit: shutterstock

Theresa Todman, Managing Partner/CEO of B&M Financial Management Services, LLC . Theresa specializes in bookkeeping, accounting, QuickBooks solutions, small business tax issues and consulting.
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Thursday, November 17, 2016

Smart Year-End Tax Moves to Limit Your 2016 Tax Bill

Take these steps by New Year’s Eve to keep more money in your pocket and put less in Uncle Sam’s next year.

This is the time of year when many of us take stock of our lives, and it’s not a bad idea to apply that same introspection to your investment portfolio. The stock market has been surprisingly resilient, but that doesn’t mean everything in your portfolio escaped unscathed. Some last-minute trades could lower your 2016 tax bill, and you may be able to reap some tax-free profits, too.

If you have stocks or mutual funds in a taxable account that have fallen from the price you paid, you can sell them and use the losses to offset profits you’ve locked in from selling other investments during the year. Losses will also come in handy if you have unexpected distributions from your mutual funds. Every December, funds pay out dividends and capital-gains distributions that have built up during the year. In taxable accounts, such payouts are taxable, even if you reinvest them in additional shares.

If losses exceed your gains (or you don’t have any gains to offset), you can use up to $3,000 of losses to offset ordinary income. Unused losses can be rolled over to future years.

Even if you don’t have losses to harvest, you may be able to cash in some of your top performers tax-free. Taxpayers in the 10% or 15% tax bracket qualify for a 0% long-term capital-gains rate. In 2016, married couples filing jointly with taxable income of up to $75,300 are eligible for the 0% capital-gains rate, and singles with taxable income of up to $37,650 can cash in winners tax-free. Recent retirees who have been living off their cash reserves are good candidates for this tax break, says Kevin Meehan, a certified financial planner in Itasca, Ill.

But don’t get carried away. The sweet 0% rate applies only to the extent that your gains don’t push your taxable income into the 25% bracket; profit that falls in that bracket is taxed at 15%. Let’s say you estimate your taxable income for the year on a joint return (before a sale) at $70,000. If you sell a stock for a $6,000 profit, the first $5,300 would enjoy the 0% rate, but the other $700 would be taxed at 15%.

Try to sell for enough profit to fully exploit the 0% rate. If you don’t want to part with the stock, you can immediately buy it back, and any future tax would be based on today’s higher purchase price. Keep in mind, too, that if your state has an income tax, you may owe state taxes on your capital gains, even if Uncle Sam turns a blind eye.

If you won’t fall into the 10% or 15% tax bracket, perhaps someone in your family will—an adult child, for example, or an elderly parent. In that case, appreciated stocks make great gifts. Your family member (or anyone else you want to help) can sell the securities and use the 0% rate as long as the profit falls in the 10% or 15% bracket. (You can also give appreciated stock to charity; see below.) In 2016, you can give cash, securities or other property valued at up to $14,000 to as many people as you want without filing a gift-tax return or dipping into the credit that will protect your estate from the federal estate tax.

Most taxpayers don’t have to worry about the federal estate tax. The 2016 estate-tax exemption, which is adjusted annually for inflation, is $5.45 million, or $10.9 million for married couples. But 11 states and Washington, D.C., have lower estate-tax thresholds than the federal government. New Jersey, for example, taxes estates valued at as little as $675,000.

Manage your IRA. If your income declined this year—because you retired, for example, or took an unpaid sabbatical—consider whether this is the time to convert some or all of the funds in your traditional IRA to a Roth before year-end. You must pay tax on the amount you convert (except for any after-tax contributions), but if you’re in a lower bracket now than you’re likely to be in later, it can really pay off. Once you convert, future earnings are tax-free, as long as you’re at least 59½ and have owned the Roth for at least five years when you withdraw the money. To get the maximum amount of tax-free growth, use money from outside your IRA to pay the tax bill, Meehan says.

Show your generosity. For the first time in years, retirees won’t have to wait for Congress to renew a valuable tax break for charitably inclined IRA owners. Last December, Congress made permanent a law that allows seniors age 70½ and older to donate up to $100,000 from their IRAs directly to charity. The contribution counts toward your required minimum distribution and isn’t included in your adjusted gross income. That could qualify you for tax breaks tied to your AGI and reduce or eliminate taxes on your Social Security benefits.

You don’t need to be wealthy to take advantage of this tax break, says Jackie Perlman, senior analyst for H&R Block’s Tax Institute. Although you can transfer up to $100,000 from your IRA, even small donations will lower your AGI. It’s a useful tax break for seniors who no longer have enough deductions to itemize, she says.

For taxpayers who do itemize, another tax-smart strategy is to give appreciated securities to charity. As long as you’ve owned the securities for more than a year, you can deduct their value on the day you make the donation. You won’t pay taxes on the gains, and the charity won’t, either.

If you’d like to make a large donation but aren’t sure which charities you want to help, consider opening a donor-advised fund. You can donate now, claim the deduction on your 2016 tax return and distribute the funds later. If you donate securities, the donor-advised fund will sell them and add the proceeds to your account. (Note: Donor-advised funds aren’t eligible for direct charitable contributions from IRAs.)

In recent years, some of the largest donor-advised funds have lowered their minimum investment requirements. You can open an account with Fidelity Charitable and Schwab Charitable with as little as $5,000; Vanguard Charitable requires $25,000.

Don’t miss these tax savers. In addition to the IRA charitable rollover provision, Congress made permanent several other tax breaks that could affect your year-end tax planning. One such provision is the American Opportunity tax credit, which is designed to offset the cost of tuition, fees and textbooks during each of a student’s first four years of undergraduate education. The credit is worth up to 100% of the first $2,000 spent on qualifying expenses and 25% on the next $2,000, for a total maximum of $2,500 for each qualifying student. Married couples filing jointly qualify for the full credit if their modified adjusted gross income is $160,000 or less; for single filers, the cutoff for a full credit is $80,000. Married couples with MAGI of up to $180,000 and singles with MAGI of up to $90,000 can claim a reduced amount.

A credit represents a dollar-for-dollar reduction in your tax bill, so this tax break could save you a bundle. If you haven’t spent enough this year to take full advantage of the tax credit, consider paying your child’s January tuition bill before December 31. You can claim the credit only for money you actually spent this year, not the amount that you were billed.

Congress also put a forever stamp on the deduction for state and local sales taxes. You can claim this deduction or write off your state and local income taxes, but you can’t do both. The sales tax deduction is a no-brainer for residents of the nine states with no income tax. Taxpayers who live in low-income-tax states, along with seniors who live in states with special breaks for retiree income, could also get a bigger tax break by deducting sales taxes.

If you live in a no- or low-tax state and plan to buy a car or boat in the near future, making the purchase by year-end will let you add the tax on the big-ticket purchase to your deduction.

Finally, Congress made permanent a provision that allows elementary and secondary school teachers to claim a $250 above-the-line deduction for out-of-pocket classroom expenses, such as books and supplies. While the tax break won’t expire, if you want to claim the full $250 deduction on your 2016 tax bill, you should stock up before year-end. From now on, the amount of the deduction will be indexed to inflation, and qualified expenses will include professional development classes.

Disappearing tax breaks. This year is your last chance to claim a tax credit for installing new energy-efficient windows or making similar energy-saving home improvements, unless Congress renews the provision. You can claim up to $500 in total tax credits for eligible improvements. The credit applies to 10% of the purchase cost (not installation) of certain insulation, windows, doors and skylights. The credit is subject to a lifetime cap, so if you’ve already claimed it for energy-efficient home improvements, you’re out of luck.

A tax break for homeowners who pay private mortgage insurance is also scheduled to expire. If you itemize, you can deduct premiums paid this year—as long as you obtained your mortgage in 2007 or later and the loan is for your primary residence or a second home that’s not a rental property. The deduction is restricted if your 2016 adjusted gross income exceeds $100,000 and disappears when AGI exceeds $109,000.

If you’re negotiating with your mortgage lender to sell your home for less than you owe on the mortgage, be sure to get the contract signed before December 31. Ordinarily, forgiven debt is taxable, but Congress extended through the end of this year a provision that excludes from taxes up to $2 million in forgiven mortgage debt on a principal residence. The exclusion will apply to mortgage debt forgiven in 2017 if the agreement to discharge the debt is signed in 2016.

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Theresa Todman, Managing Partner/CEO of B&M Financial Management Services, LLC . Theresa specializes in bookkeeping, accounting, QuickBooks solutions, small business tax issues and consulting.
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Wednesday, September 28, 2016

6 Terrible Money Situations You Need to Stop Getting Into

When it comes to money, I know I can be my own best friend and my own worst enemy. Most of the time, I'm frugal, intentional, careful and deliberate with my money. But, every once in awhile, it's like I forget all of those principles. Maybe I want something badly, even though I can't afford it. Or I am tired and it's easier to spend than to think first.

See Also on Kiplinger: 10 Financial Decisions You Will Regret Forever

Now, I've never gone totally off the rails financially. But I can see where these acts of — let's call them what they really are — self-sabotage — undermine the principles I desire to live by.

As I've gotten older, I've gotten better at staying out of these situations, and I know you can do the same. Here are some of the places where I've gotten into trouble in the past.

1. Overspending

It's hard to live within your means. It just is. There's so much that you want, and that doesn't even take into account what you need. But overspending — spending more than you make — is a sure way to get into deep financial trouble.

Even if you don't get into debt, and some overspenders don't, you'll end up living paycheck to paycheck, juggling which bills need to be paid so that nothing gets turned off this month. That life isn't any fun at all, even though spending the money might be a blast. Besides, eventually some large expense will come up, and you'll end up in debt because you won't have the money saved to cover it.

2. Credit Card Debt

This usually comes as a result of overspending for a period of time. When you get used to spending, it starts to feel natural to just put something on your card. Do this enough times, and you'll find yourself with a bill you can't cover at the end of the month.

The problem with credit card debt is that it feels deceptive. Sure, there's interest to pay, but the minimum payment looks so small. It might take you a while, but paying it off feels entirely doable.

However, you'll end up paying forever and paying a lot in interest. And even those minimum payments can add up. Maybe you can handle one or two of them, but get three or four (or 10), and making the payments becomes a lot more financial stress than you need.

3. Not Saving for Retirement

It's easy to prioritize everything else over retirement. When you're young, retiring feels like such a long way off that it's easy to wait too long to get started. And when you're older, it's easy to spend or save for your kids rather than for yourself. Many parents panic about paying for college and end up putting their savings there rather than into their retirement accounts.

Most "real" jobs come with some sort of retirement account and, often, with a matching plan from the employer. Take full advantage of this as soon as you are eligible. If possible, have the money deducted from your paycheck automatically, so you don't even have a choice in where it goes each month.

4. Buying Too Many Toys

This probably comes with the territory of overspending, but it seems like a specific trap that you can fall into. Many people (myself included) tend to live pretty frugally most of the time, but are willing to spend quite a bit of money on a toy. This can be something like sports equipment, a designer purse, a new car, technology and other splurges.

I think that a lot of us live such stressful lives that we feel like we deserve something that will help us rest or, at least, make us feel better about ourselves. So we spend a lot on an item based on the idea that it will improve our lives. Even if it does actually help us de-stress, the financial impact can cause as much or more stress in the long run.

It's much better to save up for a toy, or rent one, or ask friends and family to contribute to a fund toward it for your birthday or another holiday. That way you will actually lower your overall stress levels, rather than adding to them.

5. Going Out Too Much

Sure, it's fun to get dinner and drinks with your friends. And it's probably a good idea to go to happy hour with the coworkers here and there, to forge connections and get to know people. But when you're doing it every night, those bills are going to add up.

You don't need to deprive yourself to make good decisions about when and where you spend when it comes to eating (and drinking) out. Lowering your spending can be as simple as ordering an appetizer and a beer instead of a meal and a cocktail. You can get creative, too. Some of my friends and I take turns hosting a meal along with one or two signature drinks and the overall cost is much lower than what we'd spend if we met at restaurants.

6. Spending to Save

Sure, there are times when it's worthwhile to spend a bit more on a quality product so that you don't have to buy another one anytime soon. But I've also seen this as an excuse to spend way too much. Not sure how this might apply to you?

What about when your car dies? You might legitimately need a new one. But it's a trap to believe the voices that say, "Buy a brand-new car. That way you will save, in the long run, on maintenance costs." Instead, you can buy a car off a two or three -year lease. You still get the benefits of low maintenance, but you save a lot off the initial price.

Or, maybe, you see a pair of nice new boots in the store. They're high quality, and you think to yourself, "Sure, that's a lot of money. But if I buy those, I won't have to buy boots for several years." That might be true, but before you purchase, think about how many pairs of boots you already have sitting in your closet.

Sometimes, buying quality is the way to go. But other times, it's an excuse we use to let ourselves spend more than we should.

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Theresa Todman, Managing Partner/CEO of B&M Financial Management Services, LLC . Theresa specializes in bookkeeping, accounting, QuickBooks solutions, small business tax issues and consulting.
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