Staying out of debt is simple, but it’s not easy. It requires resilience — forgoing impulsive purchases in exchange for long-term financial freedom. You need to try these 3 debt-destroying habits everyone should follow.
Personal debt can be categorized as necessary or unnecessary. Necessary debt can generally be linked to assets such as your home mortgage, a basic car for getting to work, or a college degree. Unnecessary debt, on the other hand, might include routine credit card charges or installment loans for items that rapidly decline in value.
If your goal is long-term financial freedom, avoiding unnecessary debt is crucial. These simple habits can help you achieve this goal:
- 1. Live below your means. Living below your means requires that you discover what those “means” are. This could entail tracking your income and expenses over a period of time to learn where your money comes from and how it’s spent. You might be surprised. By spending less on the little items that add up quick (like daily coffee shop lattes), you’ll be able to save for the future and develop long-term wealth.
- Save for emergencies. By setting aside money in easily accessible accounts, you avoid racking up credit card bills when unexpected expenses occur. Such expenses could include trips to the emergency room, replacing the water pump on the family car, or patching a hole in the roof. A reserve fund can also help you survive periods of unemployment without incurring additional debt.
- Go into debt for a good reason. If you decide to incur debt, know what you’re doing. Think about how valuable the item or service will seem three months from today. Also, ask yourself whether you can pay off these new charges out of next month’s income.
Staying out of debt isn’t always exciting, but the long-term benefits are substantial. Give us a call if you’d like to learn more on how you can save by reducing your tax obligations.
If you’re a business owner and your company lends you money, you’ll enter it in the books as a shareholder loan. However, if your return is audited, the IRS will scrutinize the loan to see whether it is really disguised wages or a dividend taxable to you as income.
Knowing what the IRS might look at may be useful when you structure the arrangement. Here are some items that will be considered if you’re audited:
- Your relationship with the business. First, the IRS will look at your relationship to the company. If you’re the sole shareholder with full control over earnings, that may weaken your case that the loan is genuine. On the other hand, if you’re one of several shareholders and none of the others received similar payments, that suggests it may be a genuine loan.
- Loan details. The IRS will want to know all the details related to your loan. This may include whether or not you signed a formal promissory note, if you pledge any security against the loan and if the loan has a specific maturity date or a repayment schedule. Other questions may come up about the rate of interest you’re paying and if you missed any payments. The more businesslike the terms of the loan, the more it will appear to be a genuine debt.
- Other financial details. In addition to loan specifics, the IRS may ask you if your company is paying you a salary that’s in line with the work you perform, and if the company pays dividends.
Whether the IRS taxes you on the loan will depend on all these factors. If you’ve paid attention to the details, the loan should withstand IRS scrutiny. Contact us if you’d like more information about getting a loan from your business.
As you look forward to starting your new job, it’s important to keep in mind how your employment change will affect your taxes. Here are three tax-smart tips that’ll put you in the best position come tax season if you’re switching jobs this summer:
- Roll over your retirement plan. You may be tempted to cash out the balance in an employer-sponsored plan such as a 401(k). But remember that distributions from these plans are generally taxable.
Instead, ask your plan administrator to make a direct rollover to your IRA or another qualified plan. This avoids the additional 10 percent penalty on early distributions you would face if you’re under age 59½. Your retirement money will continue to grow tax-deferred.
- Adjust your withholding. Assess your overall tax situation before you complete a Form W-4 for your new employer. Did you receive severance pay, unemployment compensation or other taxable income? You might need to increase your withholding to avoid an unexpected tax bill when you file your return.
- Don’t expect to deduct job-related moving expenses. Unless you are a member of the U.S. Armed Forces, you can no longer deduct moving expenses related to your employment.
More tax issues to consider when you change jobs include stock options, employment-related educational expenses and the sale of your home. Give us a call. We’ll be happy to help you with your new employment tax updates.