Online Advisor
Timothy W. Tuttle &
Associates
Volume 18
Edition 6 Please
email comments to newsletter@tuttlefirm.com
June 2022
Major Events This Month:
Upcoming dates:
June 14
- Flag Day
June 19
- Father's Day
The last thing you may want to do during the summer is
start thinking about your 2022 tax return! The best way to lower your tax bill
for next year, however, is to start looking for tax cutting strategies as soon
as possible.
In this month’s newsletter, read about some tax planning
tips to help you lower your 2022 taxes. Also read about tax implications if you
have a side hustle, money management tips for couples, and how to make your
child’s summer break a tax break!
Please feel free to forward the information to someone
who may be interested in a topic and call with any questions you may have.
Start
Your Tax Planning NOW!
Keeping your taxes as low as possible requires paying
attention to your financial situation throughout the year. Here are some tips
for getting a head start on tax planning for your 2022 return:
- Check
your paycheck withholdings. Now is a good time to
check your tax withholdings to make sure you haven’t been paying too much
or too little. The IRS has an online tool that will help you calculate how
much your current withholdings match what your final tax bill will be.
Visit https://apps.irs.gov/app/tax-withholding-estimator.
Action step: To change how much is withheld from your
paycheck in taxes, fill out a new Form W-4 and give it to your employer.
- Defer
earnings. You could potentially cut your tax
liability by deferring your 2022 income to a future year via contributions
to a retirement account. For 2022, the 401(k) contribution limit is
$20,500 ($27,000 if 50 or older); $6,000 for both a traditional and Roth
IRA ($7,000 if 50 and older); or $14,000 for a SIMPLE IRA ($17,000 if 50
and older).
Action step: Consider an automatic transfer from either
your paycheck or checking account to your retirement account so you won’t
have to think about manually making a transfer each month.
- Plan
withdrawals from retirement accounts to be tax efficient.
Your retirement accounts could span multiple account types, such as
traditional retirement accounts, Roth accounts, and taxable accounts like
brokerage or savings accounts. Because of this you should plan for your
withdrawals to be as tax efficient as possible.
Action step: One way to structure withdrawals is to pull
from taxable accounts first, and leave Roth
account withdrawals for last. Another approach would be to structure
proportional withdrawals from all retirement accounts that would lead to a
more predictable tax bill each year.
- Net
capital gains with capital losses. If you have
appreciated investments you’re thinking about
selling, take a look through the rest of your portfolio to see if you have
other assets that you could sell for a loss and use to offset your gains.
Using the tax strategy of tax-loss harvesting, you may be able to take
advantage of stocks that have underperformed.
Action step: Make an appointment with your investment
advisor to look over your portfolio to see if there are any securities you
may want to sell by the end of 2022.
Tax planning can potentially result in a lower bill from
the IRS if you start taking action now. Please call if
you have questions about your tax situation for 2022.
Hustling
for Extra Income
Don't forget the taxman!
From supplementing their current income to replacing
income that was lost because of layoffs, the pandemic or other reasons, many
people have started side hustles over the past 2 years to help make ends meet.
If you currently have a side hustle, don't forget about
the tax implications from earning extra money. Here are several ideas to help
you stay on top of your side hustle's taxes:
- All
income must be reported. Income from side
hustles can come from a variety of sources. Regardless of where the money
comes from or how much it is, it is supposed to be reported on your tax
return. If you do work for a company, expect to receive a 1099-NEC or
1099-MISC if you are an independent contractor, or a W-2 if you're an
employee.
- Keep
good records and save receipts. Being organized and
having good records will do two things: ensure accurate tax reporting and
provide backup in the event of an audit. Log each receipt of income and
each expense. Save copies of receipts in an organized fashion for easy
access. There are multiple programs and apps to help with this, but a
simple spreadsheet may be all that you need.
- Make
estimated payments. If you are running a profitable
side business, you will owe additional taxes. In addition to income tax,
you might owe self-employment tax as well. Federal quarterly estimated tax
payments are required if you will owe more than $1,000 in taxes for 2022.
Even if you think you will owe less than that, it's a good idea to set a
percentage of your income aside for taxes to avoid a surprise when you
file your 2022 return.
- Don't
fall into the hobby trap. You won't be allowed
to deduct any expenses if the IRS determines that your side hustle is a
hobby instead of a business. To make sure your side hustle is deemed a
business by the IRS, you should show a profit during at least three of the
previous five years.
- Get
professional tax help. There are many other tax factors
that can arise from side income such as business entity selection, sales
taxes, state taxes, and more. Please call to set up a time to work through
your situation and determine the best course of action for your side
hustle.
Money
Management Tips for Couples
Couples consistently report finances as the leading cause
of stress in their relationship. Here are a few tips to avoid conflict with
your long-term partner or spouse.
- Be
transparent. Be honest with each other about your
financial status. As you enter a committed relationship, each partner
should learn about the status of the other person's debts, income and assets. Any surprises down the road may feel
like dishonesty and lead to conflict.
- Frequently
discuss future plans. The closer you are with your
partner, the more you'll want to know about the other person's future
plans. Kids, planned career changes, travel,
hobbies, retirement expectations — all of these will depend upon money and
shared resources. So discuss these plans and
create the financial roadmap to go with them. Remember that even people in
a long-term marriage may be caught unaware if they fail to keep up
communication and find out their spouse's priorities have changed over
time.
- Know
your comfort levels. As you discuss your future plans,
bring up hypotheticals: How much debt is too much? What level of spending
versus savings is acceptable? How much would you spend on a car, home or vacation? You may be surprised to learn that
your assumptions about these things fall outside your partner's comfort
zone.
- Divide
responsibilities, combine forces. Try to divide
financial tasks such as paying certain bills, updating a budget,
contributing to savings and making appointments
with tax and financial advisors. Then periodically trade responsibilities
over time. Even if one person tends to be better at numbers, it's best to
have both members participating. By having a hand in budgeting, planning and spending decisions, you will be constantly
reminded how what you are doing financially contributes to the strength of
your relationship.
- Learn
to love compromising. No two people have the same
priorities or personalities, so differences of opinion are going to
happen. One person is going to want to spend, while the other wants to
save. Vacation may be on your spouse's mind, while you want to put money
aside for a new car. By acknowledging that these differences of opinion
will happen, you'll be less frustrated when they do. Treat any problems as
opportunities to negotiate and compromise.
Make
Your Child's Summer Break a Tax Break
As a busy working parent, you may be on the lookout for
activities that are available for your kids this summer. There may be a
solution that’s also a tax break: Summer camp!
Using the Child and Dependent Care Credit, you can be
reimbursed for part of the cost of enrolling your child in a day camp this
summer.
Am I eligible?
- You, and your
spouse if you are married, must both be working.
- Your child must
be under age 13, your legal dependent, and live in your residence for more
than half the year.
Tip: If your spouse
doesn’t work but is either a full-time student, or is disabled and incapable of
self-care, you can still qualify for the credit.
How much can I save?
For 2022, you can claim a maximum credit of $1,050 on up
to $3,000 in expenses for one child, or $2,100 on up to $6,000 in expenses for
two or more children.
What kind of camps?
The only rule is: no
overnight camps.
The credit is designed to help working people care for
their kids during the work day, so summer camps where
kids stay overnight aren’t eligible for this credit.
Other than that, it doesn’t matter what kind of camp:
soccer camp, chess camp, summer school or even day care. All of these are
eligible expenses for this credit.
Other ways to use this credit
While summer day camp costs are a common way to use this
credit, any cost to provide care for your children while you are working may be
eligible.
For example, you can use this credit to pay a qualified
day care center, a housekeeper or a babysitter to take
care of your child while you are working. You can even pay a relative to care
for your child and claim the credit for that expense, as long as the relative
isn’t your dependent, minor child or spouse.
This is just one of many possible tax breaks related to
children and dependents. Please call if you have questions about this credit,
or if you’d like to discuss any other tax savings ideas.
Six
Simple Ideas to Help Your Small Business
Here are six ideas to help your business grow and thrive
this summer.
- Understand
your cash flow. One of the biggest causes of business
failure is lack of understanding cash flow. At the end of the day, you
need enough cash to pay your vendors and your employees. If you run a
seasonal business you understand this challenge.
The high season sales harvest needs to be ample enough to support you
during the slow non-seasonal periods.
Recommendation: Create a 12-month rolling forecast of
revenue and expenses to help understand your cash needs.
- Know
your pressure points. When looking at your business,
there are a few big items that drive your business success. Do you know
the top four drivers of your financial success or failure? By staying
focused on the key drivers of your business, success will be easier to
come by.
Recommendation: Look at last year's tax return and
identify the key financial drivers of your business. Do the same thing
with your day-to-day operations and staffing.
- Inventory
matters. If your business sells physical
product, you need a good inventory management system. This system doesn't
have to be complex, it just needs to help you
keep control of your inventory. Cash turned into inventory that becomes
stuck as inventory can create a major cash flow problem.
Recommendation: Develop an inventory system with periodic
counts to ensure you do not have shrink or theft issues, and that can help
identify when you need to take action to liquidate old inventory.
- Know
your customers. Who are your current customers? Are
there enough of them? Where can you get more of them? How loyal are they?
Are they happy? Several large customers can drive your company's growth or
create tremendous risk should they take their business to a competitor.
Recommendation: Know who your target audience is and then
cater your business toward them and what they are looking for in your
offerings.
- Know
your point of difference. Once you know who your
target customer is, understand why they buy your product or service. What
makes you different from other businesses selling a similar item?
Recommendation: If you don't know what makes your
business better than others, ask your key customers. They will tell you.
Then take advantage of this information to generate new customers.
- Develop
a great support team. Successful small business owners
know they cannot do it all themselves. Do you have a good group of support
professionals helping you? You need accounting, tax, legal, insurance, and
employment help along with your traditional suppliers.
Recommendation: Conduct an annual review of your
resources. Be prepared to review your suppliers and make improvements
where necessary.
While libraries are filled with small business advisory
books, sometimes focusing on a few basic ideas can help improve your business's
outlook. Please call if you wish to discuss your situation.
Make
Your Cash Worth More!
Banking tips to help you cash in
Your cash is parked in a bank account. Do you know if
it's making or losing you money? Here are some ideas to help you make the most
of your banked cash:
- Understand
your bank accounts. Not all bank accounts are created
equal. Interest rates, monthly fees, minimum balances, direct deposit
requirements, access to ATMs, other fees and customer service all vary
from bank to bank and need to be considered. Start by digging into the
details of your accounts. There may be some things you’ve been
unnecessarily living with like ATM fees or monthly account charges. Once
you have a handle on your current bank, conduct research on what other
banks have to offer.
- Know
your interest rates. As a general rule, the more liquid
an account, the lower the interest rate. Checking accounts offer the
lowest rates, followed by savings accounts, which yield lower rates than
Certificates of Deposits. Maximizing your earnings is as simple as keeping
your cash in accounts with higher interest rates. The overall interest
rate earned between all your accounts should usually be higher than the
inflation rate, which is generally around 2 percent during normal times.
But in the midst of high inflation like we are currently experiencing,
your combined interest rate may have a difficult time beating the
inflation rate.
- Make
smart moves. There are a couple of things to take into account when making transfers. First, federal
law allows for only six transfers from savings and money market accounts
per month. If you exceed this number, you'll be hit with a penalty for
each transaction that exceeds six transfers. Second, if you invest in
longer-term investments like CDs or bonds, there are penalties for
withdrawing funds before the maturity date. So
make sure you can live without the funds for the duration of the term.
- Stay
diligent. Putting together a cash plan is just
the start. The key to success is to be persistent. Besides losing out on
potential earnings, mismanaging your cash can result in hefty overdraft
fees. The more attention you devote to your cash, the more your money will
grow.
As always, should you have any questions or concerns regarding your tax
situation please feel free to call.
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The
information contained in this newsletter is of a general nature and should not
be acted upon in your specific situation without further details and/or
professional assistance. For more information on anything in ONLINE ADVISOR, or
for assistance with any of your tax, business, or financial strategy concerns,
contact our office.
Timothy W. Tuttle & Associates
www.tuttlefirm.com