Financing a new or used car could spell big financial trouble if your vehicle is ever declared a total loss – even if the accident is 100% the other driver’s fault. Here’s what you need to know about staying safe financially if you take out a car, truck, or SUV loan in the future.
Background – The 80% Rule
Many Americans believe if their vehicle is declared a total loss following an accident, insurance companies will provide enough money to cover the cost to replace the vehicle with a similar vehicle. The truth, though, is that insurance companies never provide you with enough money to buy a true replacement vehicle.
The rule of thumb to use when planning is 80%…if the true cost to get the exact same vehicle you were driving before an accident is $30,000, your insurance will only give you 80% of this dollar amount, or $24,000. You’ll have to come up with the other 20%, or $6,000 in this example.
Why not 100%?
Unbeknownst to most of America, the valuation of vehicles deemed a total loss is determined by one company, CCC Intelligent Solutions. Per CCC, their services are used by most of the top 20 insurance companies. Instead of using a fair market valuation method to calculate the replacement cost of your vehicle, CCC uses a model that calculates a value that, when compared to valuation models found at Kelly Blue Book, Edmunds, and NADA, is systemically low.
How to Protect Yourself Financially
Here are some ideas to help you stay financially healthy when purchasing your next vehicle:
Put down at least 20%. An unavoidable accident, even with no medical bills, could place your financial life in chaos. So try to have at least 20% equity in the vehicles you own from the moment you make the purchase or your loan will be underwater leaving you with no room to replace your vehicle with a similar make and model.
Get a vehicle history report. Don’t buy a vehicle that’s been in an accident or has had other major issues such as flood damage. Buying a vehicle history report can help you identify cars, trucks, & SUVs that may create an even greater financial risk if you need to find a replacement.
Build a fund for vehicle repairs and maintenance. Save up for inevitable maintenance and vehicle repairs. You could even use these funds to cover your 20% portion of a vehicle’s replacement cost. Having enough money in this fund is critical. If you need to repair a car after a fender bender AND you do not have enough to cover your share of the cost, you will need to deal with the lender who has a lien on your vehicle. You can quickly find yourself in a financial trap.
Choose shorter repayment terms. While the average car loan length is now well over five years for both new and used vehicles, choosing a shorter repayment term can help you build equity faster. You’ll have a higher monthly payment, but you’ll be in a better financial situation sooner in the event of an accident.
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. Here are some benefits to consider if you’re trying to decide if being a sole proprietor is right for you:
You 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.
Your 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.
Fewer 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.
More control over revenue and expenses. 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.
Hire 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.
Funding a retirement account. You can also reduce your business’s 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 retirement account.
It’s 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 for yourself.
Please call if you have questions about your sole proprietor business.
Life can alter your taxes with little to no warning. Here are several situations where you may need to schedule a tax planning session:
Getting married or divorced. You could get hit with a Marriage Penalty in certain situations when the total taxes you pay as a married couple is more than what you would pay if you and your partner filed as Single taxpayers. The opposite can also occur, when you benefit from a Marriage Bonus. This often occurs when only one spouse has a job or earns income in other ways such as a business. Another situation when tax planning becomes critical is if you and your future spouse both own homes before getting married.
If you’re going from Married to Single, make the process include tax planning. Under divorce or separation agreements executed after 2018, alimony is no longer deductible by the spouse making payments and isn’t considered taxable income for the spouse receiving payments at the federal level. The opposite is true for divorce or separation agreements executed before 2019 – alimony is generally deductible by the spouse making payments and must be reported as taxable income by the spouse receiving payments.
Child support is also not deductible by the spouse making payments, and isn’t considered taxable income for the spouse receiving payments. In addition, not all assets are taxed the same, so their true value will vary.
Growing a family. Your family’s newest addition(s) also comes with potential tax breaks. You’ll need a Social Security number for your newborn child and to understand the impact this little gem will have on your full-year tax situation. These include breaks to help pay for child care or adoption-related expenses, the child tax credit, and the Earned Income Tax Credit.
Changing jobs or getting a raise. Getting more money at work is a good thing. But it also means a higher tax bill. So you may need to review your tax withholding to ensure there are no surprises at the end of the year. And when leaving an employer, expect a tax hit for severance, accrued vacation, and unemployment income payments.
Another potential tax problem if you get a raise or otherwise earn more money is that you may no longer qualify for certain tax breaks, as most tax deductions and tax credits phase out as your income increases. Consider scheduling a tax planning session to discuss the phase out thresholds that may affect you in 2024.
Buying or selling a house. You can exclude up to $250,000 ($500,000 if married) of capital gains when you sell your home, but only if you meet certain qualifications. A tax planning session can help determine if you meet the qualifications to take advantage of this capital gain tax break, or other home-related tax breaks such as the mortgage interest deduction or credits for installing qualified energy-efficient home improvements.
Saving or paying for college. There are many tax-advantaged ways to save and pay for college, including 529 savings plans, the American Opportunity Tax Credit, and the Lifetime Learning Credit. As you plan your future, understanding how these expenses can be managed often happens long before you begin your college journey.
At the end of the day, when in doubt please reach out. There is no reason to pay more than you need to and a simple tax planning session can make all the difference.
Kids can pose challenges from every direction for their parents – feeding times, car seats, sleep schedules, strollers, child care, and of course…taxes! What most parents don’t consider is that these bundles of joy complicate their tax situation. Here are some tax tips that may help:
Start a 529 education savings plan. 529 education savings plans are a great way to kick off the baby’s savings for the future. These plans offer low-cost investments that grow tax-free as long as the funds are used to pay for eligible education expenses (including elementary and secondary tuition). States administer these plans, but that doesn’t mean you are stuck with the plan available in your home state. Feel free to shop around for a plan that works for you. Starting to save early, even a little bit, maximizes the amount of tax-free compound interest you can earn in the 18+ years you have before kids go to college.
Bonus tip for family and friends: Anyone can contribute up to $18,000 to the plan in 2024 for each child! In addition, there is a special provision for 529 plans that allows five years worth of gifts to be contributed at once — a great estate-planning strategy for grandparents.
Update Form W-4. Every year, parents need to review their tax withholdings. Remember, the birth of a child brings new tax breaks, including a $2,000 Child Tax Credit, along with the Child and Dependent Care Credit for childcare expenses. These credits can be taken advantage of now by lowering tax withholdings and increasing take-home pay to help cover the cost of diapers and other needs that come with babies and children. On the other side of the coin, these benefits fall away as your kids grow older. The Dependent Care Credit is for children under the age of 13 and the Child Tax Credit is available for kids under the age of 17. So plan accordingly.
Prepare for medical expenses. Having a baby is expensive. So is watching your kids grow up! Fortunately, there are ways to be tax smart in covering the predictable medical and dental expenses. The first thing to do is try to pay for as many out-of-pocket expenses with pre-tax money. Many employers offer tax-advantaged accounts such as a Health Savings Account (HSA) or a Flexible Spending Account (FSA). So check this out and fund these accounts as much as possible. And while it’s more difficult to claim medical expenses as an itemized deduction, it’s impossible to do so if you don’t keep receipts.
Having a kid can be expensive. Schedule a tax review today to make sure you’re getting all the child tax breaks you deserve!
According to this survey by TheKnot.com, the average wedding in 2023 had a price tag of $35,000. And it’s not just the lucky couple doling out serious money. Wedding guests can also face steep costs between gifts and traveling to and from the big event. If you’re planning on attending a wedding or two (or three or four?) this summer, here are several ideas to help keep your wedding costs under control.
Give cash instead of buying a gift off a registry. Most people want to give a wedding gift that, on some level, reflects the relationship they have with the couple. This desire to find that perfect gift can sometimes lead to overspending. Instead of buying a gift off a registry, consider giving cash. Sticking with cash can help you stick to your wedding season budget and avoid your gift being stuck in a box or closet that never gets used.
Think outside the box for lodging. If traveling to a wedding, start looking at lodging options as soon as you know the date. First, check to see if you have family or friends in the area you would be comfortable staying with. Next, consider reconnecting with friends that are attending and share a room. Perhaps the wedding couple saved a block of rooms in a local hotel at a special rate. If so, compare the cost of that hotel with nearby hotels and short-term rentals. Remember to figure out your accommodations early so you don’t get stuck with just one expensive option.
Share your travel expenses. It’s possible you’ll have some friends or family attending the same wedding as you. If the wedding involves traveling, split some of the costs with them. This can include carpooling, sharing a rental car, teaming up on taxi or ride-share expenses, as well as sharing hotel accommodations.
Rent your attire. Going to a bunch of weddings in a short amount time can create a wardrobe challenge. Purchasing a new outfit for each one will get really expensive really quickly. If you take the one-and-done approach with your formal wear, renting a dress or suit will only set you back a fraction of the cost of buying new clothes for every wedding.
Respectfully decline. Whether it’s the cost of travel, poor timing, or something else, it’s OK to decline the invitation. The wedding couple expects some people won’t be able to make it to their big event. But it’s important to let them know you won’t be there. When sending back the RSVP, include a kind greeting and the reason for your absence without going into great detail. When the wedding day comes, remember to send a card or a gift.
Wedding season is a time of fun and celebration. Knowing that you also made the best financial decisions possible makes the occasion even better.
It’s never too early to start teaching your kids about money. By proactively explaining how money and banking work in the real world, you can help them begin their adult lives on solid financial footing. Here are some ideas.
Help kids to start earning money. Letting kids earn money is a good first step to learning positive financial habits. Teenagers can get a traditional job or line up babysitting work to earn some cash, whereas younger children can mow lawns, pick weeds, or do other age-appropriate household chores.
Open a bank account. Kids need a place to store any money they earn, as well as cash they receive for birthdays and holidays. Plenty of banks offer checking and savings accounts for children and teens, provided parents or a guardian are also on the account. This is also a great opportunity to teach how to balance a bank account every month.
Get a debit card for older kids. There are many teen checking and debit card options available today, including some free options. For example, Capital One offers a teen checking account option with no fees, no account minimums, and a debit card for kids.
Help teenagers build credit for the future. You can add teenagers to credit card accounts as an authorized user to help them build credit history over time. Just remember that the impact on a teen’s credit will only be positive if you pay bills on time and keep debt levels within a reasonable range.
Teach about investing. Kids with earned income can contribute money to their own IRA. There are also online apps for teenagers that can help them monitor their investments, such as the Greenlight app, which lets families manage money and research stocks and ETFs.
Teaching kids about money can give them a head start with being financially savvy. The lessons they learn can help them minimize debt, save more money, and potentially have enough money when they retire.
