Timothy W. Tuttle &
Edition 4 Please
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Major Events This Month:
income tax returns for 2021 are due
- First quarter
2022 estimated tax payments are due
Welcome to tax month! Perhaps welcome is not quite the
right word, but to help lighten the mood, included in this month's newsletter
is a fun state tax quiz plus answers to the most common questions taxpayers ask
during the month.
Also read about ideas to manage your emergency fund while
in our new inflationary environment and a dozen money topics every young person
should understand prior to leaving the nest.
Enjoy! Please feel free to forward the information to
someone who may be interested in a topic and call with any questions you may
Fun State Tax Quiz. Go Figure...
A quiz to celebrate April tax month!
With this year's April tax deadline right around the
corner, here's a fun quiz that explores how states tax their citizens. So you think it's rough in your state? Try answering the
Q. Match the state with the unique tax
position they either have now or have had in the past:
1. Taxes a pumpkin if purchased to carve, but won't
tax a pumpkin if purchased to eat
2. Taxes fresh fruit purchased from a vending machine, but not fruit bought at
3. Allows a $50 deduction for a dead deer donation to the poor
4. Permits an anonymous tax on illegal substances sold
5. Will tax disposable diapers, but not cloth diapers
6. Will tax hiking boots, but not cowboy boots
B. South Carolina
E. Iowa/Pennsylvania/New Jersey
A. 1-E, 2-F, 3-B, 4-C, 5-A,
Q. Can you name nine states that don't impose
an individual income tax?
A. Alaska, Florida, Texas,
Tennessee, New Hampshire, Wyoming, South Dakota, Washington, and Nevada. But
even here there are exceptions, as New Hampshire and Tennessee tax dividend and
Q. Can you name the seven states with the
highest marginal state individual income tax rates in 2022?
A. Here they are ranked from
highest to lowest: #1 California (13.3%); #2 Hawaii (11%); #3 New Jersey
(10.75%); #4 Oregon (9.9%); #5 Minnesota (9.85%); #6 New York (8.82%); #7
Vermont (8.75%). And as a bit of irony, the state of Minnesota now reports a
revenue SURPLUS of over $9 billion!
Q. Want the best of both worlds? If you live
in this state near the border of this neighboring state, you can manage no
individual income tax and no sales taxes. Can you name the two states?
A. South Dakota and North Dakota
B. New Hampshire and Vermont
C. Washington and Oregon
D. Nevada and Arizona
E. Tennessee and Kentucky
A. C - Live in Washington
state and buy your goods in Oregon. Washington has no state income tax and
Oregon has no sales tax. Even better, Alaska has neither an income tax or general sales tax.
Q. Which state has a hidden alcohol tax?
B. New York
C. New Jersey
A. A - Pennsylvania. In the
1800s, a flood killed nearly 2,000 citizens in Johnstown, PA. In the 1930s,
another flood caused extensive damage in the same area. To help rebuild the
areas affected by the flood, Pennsylvania imposed a 10% tax on alcohol. By the
1940s, the alcohol tax had helped the Johnstown area to fully recover. The tax
was supposed to be temporary. Temporary? Maybe not, as the tax is still around today
at 18%. By the way, it's called a hidden tax because it doesn't show up on
receipts like sales tax does.
Q. Which state provides a tax break for
B. New Mexico
A. B - New Mexico. It pays to
be a centenarian in New Mexico! Since 2002, anyone who reaches 100 years of age
is exempt from personal income tax in New Mexico if that person is not claimed
as a dependent by another taxpayer.
The moral of the story? Logic does not drive tax
Your Emergency Fund from Inflation
Most financial experts suggest keeping three to six months worth of household expenses in savings to help in
case of emergency. But with record inflation, that task just got a lot harder
to accomplish as virtually every safe place to put your emergency funds will
not provide interest rates that keep pace with inflation. But that does not
mean you cannot increase the rate of return on these funds.
Here are some ideas to reduce the impact of inflation on
your emergency funds.
monitor your savings account rate. Earlier this year the
Federal Reserve increased interest rates for the first time since 2018. In
addition, the head of the Federal Reserve is suggesting there may be
several of these rate increases in the next twelve months. This should
increase the interest you can earn on the cash in your emergency account. What
you need to know: Not all savings accounts are created equal.
When the Fed increases the interest rate, your saving account rate should
also go higher...immediately. But this is not always the case. If your
bank is slow to raise your savings rate, be willing to monitor and shift
funds to a bank that does. Just make sure the funds are still FDIC insured
and are kept at a reputable bank.
a look at Series I Savings Bonds. Series I Savings bonds
are issued and backed by the U.S. government and feature two interest rate
components: a fixed rate and an inflation rate. The fixed rate is set when
the bond is issued and never changes during the life of the bond. The
inflation rate resets semi-annually based on the Consumer Price Index. What
you need to know: You must hold an I bond for at least 12
months before redeeming it. And although you can redeem it after one year,
you’ll have to pay a penalty worth the interest of the previous three
months if you redeem the bond within five years. And remember, you must be
prepared to pay the penalty if you need the funds for an emergency.
use of Roth IRA funds in an emergency. Roth IRAs are
funded with after-tax dollars. Because of this, early removal of the
initial contribution is tax and penalty free. If you dip into the
earnings, however, you will not only be subject to income tax, but also
may be subject to a 10% early withdrawal penalty. What you need to
know: Use of a Roth IRA is often a creative way to fund your
emergency account while achieving higher returns with conservative
investment choices, but it is not for the faint of heart. If you get this
one wrong, it could cost you in taxes, penalties and
lost fund value in a bear market. Prior to removing funds from any IRA, it
makes sense to conduct a tax planning session.
Please call if you have questions about how to reduce the
impact of inflation on your emergency fund.
April Tax Questions Answered!
The individual tax deadline of April 18th (yes, this year
it's April 18th!) is fast approaching. Here are answers to five common
questions that taxpayers typically ask in April.
happens if I don’t file on time?
There’s no penalty for filing a tax return after the deadline if you are
set to receive a refund. However, penalties and interest are due if taxes
are not paid on time or a tax extension is not
requested AND you owe tax. To avoid this problem, file your taxes as soon
as you can because the penalties can pile up pretty quickly. The
failure-to-file penalty is 5 percent of the unpaid tax added for each
month (or part of a month) that a tax return is late.
I file for an extension?
If you are not on track to complete your tax return by April 18th, you can
file an extension to give you until Oct. 17, 2022
to file your tax return. Be aware that this is only an extension of time
to file — not an extension of time to pay taxes you owe. You still need to
pay all taxes by April 18th to avoid penalties and interest. So even if
you plan to file an extension, a preliminary review of your tax documents
is necessary to determine whether or not you need to make a payment when
the extension is filed.
are my tax payment options?
You have many options to pay your income tax. You can mail a check, pay
directly from a bank account with IRS Direct Pay, pay with a debit or
credit card (for a fee), or apply online for an IRS payment plan. No
matter how you pay your tax bill, finalize your tax payment arrangements
by the end of the day on April 18th.
will I get my refund?
According to the IRS, 90 percent of refunds for returns that are e-filed
are processed in less than 21 days. You could end up waiting several
months, however, if you paper file your return.
The IRS is still processing a backlog of several million paper-filed tax
returns from last year. You can use the Where’s My Refund? feature on
the IRS website to see the status of your refund. The refund information
is usually available 24 hours after receiving confirmation that your
e-filed tax return was accepted by the IRS.
hear the IRS is still backlogged with last year's tax returns. Is this
Yes. Late changing tax legislation created tons of extra work for the IRS,
all while the pandemic played havoc on staffing. During a testimony made
to Congress, the Director of the IRS claims the backlog will be cleared up
by the end of the year...assuming no major demands for are made on their
Your High School Student Become Money Smart
A dozen great topics!
Often lost in the race to get kids through high school and
on to life in the real world are basic financial skills. Here are a dozen
financial concepts to consider explaining to your kids before graduating high
bank accounts work. While there are numerous online
applications, consider using a good ol’ check
register when teaching the basics of how to track and reconcile bank
credit cards work. Emphasize to your child that
credit card spending actually creates a loan. Go through a monthly
statement together and show how interest is calculated and stress the need
to never carry a balance from month to month by showing how long it takes
to pay off the debt with minimum payments.
basics. When your child receives their first
paycheck, walk through their paystub to explain Social Security and
Medicare taxes, federal income tax withholdings, and state tax
withholdings. If they receive a Form 1099 instead of a paycheck, consider
opening a savings account and explain that they will need to set aside a
certain percentage of their money to pay the IRS.
power of a retirement account. Explain the advantages
of long-term savings tools like an IRA. The wise saver can turn into a
self-made millionaire by starting their retirement savings at a young age.
credit scores work. Consider explaining how credit
scores work and the importance of keeping their score at the highest level
possible. If your child is like many young adults who currently doesn’t
have a credit score, consider downloading your own credit report and walk
through it with them.
within your means. Saving first before spending is a
simple concept that is becoming a lost art. Help your child understand
this by setting their sights on something they want, and then help them
save money to buy it.
art of saving. Part of spending within your means
implies that your child has healthy savings habits. Walk your child
through the techniques that work for you. Perhaps it is setting up a
separate savings account or automatic transfers from a paycheck.
strength of investing. The most valuable investment a
young person can make is in themselves. Whether it’s a college degree or a
trade school diploma, your child can build tremendous value with skills
that will provide a positive financial return each year.
of stocks and mutual funds. With an understanding
of investments, consider teaching your child some of the basic investments
available to them. Stocks and mutual funds are the most common, but also
consider explaining bonds, CD’s, annuities and
Help your child create a basic budget, then help them track their savings
and spending against this budget.
flow. The hard way to learn the lesson of cash flow is
when bill collectors are calling and there simply isn’t money to pay them.
When creating an initial budget, show your child the flow of funds each
of net worth. Assets (what you own) minus liabilities
(what you owe others) equals net worth. Every person has a net
worth...even a child. So help them understand
theirs and periodically calculate it.
Benefits of Being a Sole Proprietor
Many start-up businesses move from hobby status to a
business when they start to make a profit. The tax entity typically used is a
sole proprietorship. Taxes on this business activity type flow through your
personal tax return on a Schedule C. This business form has many benefits. Here
are some to consider:
can hire your kids and decrease your tax bill.
As a sole proprietor, you can hire your kids and avoid paying Social
Security and Medicare taxes for their work. While there are exceptions,
this can generally save your small business over 7.65% on their wages.
kids can benefit, too. Any income your kids earn that’s
less than $12,950 isn’t taxed at the federal level. So
this is a great way to build a tax-free savings account for your children.
Remember, though, that their work must reflect actual activity and
reasonable pay. So consider hiring your kids to
do copying, act as a receptionist, provide office clean up, advertising or
other reasonable activities for your business.
tax forms and filings. As a sole
proprietor, your business activity is reported on a Schedule C
within your personal Form 1040 tax return. Other business types like an S
corporation, C corporation or a partnership must file separate tax
returns, which makes tax compliance a lot more complicated.
control over revenue and expense. You often have more
control over the taxable income of your small business as a sole
proprietor. This can provide more flexibility in determining the timing of
some of your revenue and business expenses, which can be used as a great
tax planning tool.
your spouse. If handled correctly, a spouse hired as
an employee can work to your advantage as a sole proprietor. As long as
the spouse is truly an employee of the business, the sole proprietor can
benefit as a member of their employee’s (spouse’s) family benefits. This
can include potential medical expense reimbursements.
a retirement account. You can also reduce your business'
taxable income by placing some of the profits into a retirement account
like an IRA. As a sole proprietor, you can readily manage your marginal
tax rate by controlling the amount you wish to set aside in this pre-tax
not all roses. While there are many benefits of
running your business as a sole proprietor, don't forget the drawbacks.
One of the most significant drawbacks is the lack of personal legal
protection, which is a feature in other business forms like corporations
and Limited Liability Companies. Most sole proprietors address this with
proper business insurance, so do not overlook the need to find coverage
Please call if you have questions about your sole proprietor business.
Down Scholarship Barriers
There’s plenty of money available for you to pursue a
post-secondary education for either you or your child! Here are several barriers
that could be getting in the way of securing money to pay for school.
Scholarships are only for top scholars and
athletes. Many of the splashy news stories are certainly about
high-profile students who snag a fully-paid-for scholarship. There are an
unbelievable number of scholarships, however, that do not take grades or
athletic ability into consideration whatsoever.
Scholarships are only for students attending
college. Enrollment in vocational and trade schools has nearly doubled
since 2000, according to the National Center for Education Statistics. And the
good news for prospective students is that scholarships for vocational and
trade schools are just as plentiful as scholarships for four-year colleges and
You have to be a great writer.
Winning scholarships is more often about what you write than how you write. And
for some scholarships, following the application’s directions and answering the
questions that are asked is more important than how well you write.
You have to be a high school student.
Scholarships aren’t just for soon-to-be high school graduates. Many schools
have degree programs – and corresponding scholarships – aimed at older adults
who are looking to learn new skills or make a transition in their career.
Scholarships are also available for graduate students.
Finding scholarships takes too much time.
Yes, you’ll need to invest a certain amount of time to find and apply for scholarships, but finding financial aid may not require as
much of a time investment as you may think with tons of available online tools.
What to do
the directions! You’d be surprised how many applicants
don’t read or follow the rules of the scholarships. Take the time to read
through all instructions, and thoughtfully answer the questions that are
every year by January. For every year that you’re
attending a post-secondary school, consider setting aside some time in the
fall and early winter to complete scholarship applications for the
upcoming school year. Many applications need to be completed by January
for the following school year.
your school. Nearly every college in the U.S. offers
some form of merit-based financial aid. You’ll likely need to complete the
Free Application for Federal Student Aid (FAFSA), as many colleges have
all students apply for scholarships by completing the FAFSA. This includes
students who may qualify for only merit-based scholarships.
local businesses. Many local businesses, civic
groups, foundations, and religious or community organizations offer
scholarships. So ask around in your community
about available financial aid.
The early bird often gets the worm, but the bird that
does not go looking for one will never get one!
As always, should you have any questions or concerns regarding your tax
situation please feel free to call.
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information contained in this newsletter is of a general nature and should not
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Timothy W. Tuttle & Associates