February Letter to Clients

Dear Clients and Friends:

Now that the Christmas season is over and things are getting back to somewhat of a normal schedule, it is a good time to give some consideration to your tax and financial goals and objectives. In this month’s letter, we would like discuss some ideas that may help you when deciding which direction to go with taxes and finances.

Tax Deferral’s Impact on Savings

When saving, especially for retirement, you really need to consider the impact of taxes on your earnings. There are two mathematical concepts that highlight the power of tax deferral. The Rule of 72 and the Rule of 96.

If your savings are in a tax-deferred investment like an IRA or annuity, the Rule of 72 can be used to estimate how long it will take to double your money. Simply divide the number 72 by your expected growth rate and that will give you the numbers of years it takes to double your money. For example, assume a growth rate of 4%. 72 divided by 4 is 18. It will take 18 years to double your money at 4% tax deferred.

The Rule of 92 is used to estimate the time it takes to double your money with a taxable investment like a savings account or CD. Assuming the same 4% as above, it will take 24 years (96/4) to double your investment. That is an additional 6 years. You can see that the impact of tax deferred investing can be significant.

What to do With Your Tax Refund

If you are lucky enough to be receiving a tax refund, you need to decide what to do with it. One of the best ways to use an unexpected windfall is to pay down some high-interest debt like your credit card balance. No credit card debt, then consider setting the refund aside in the form of savings; maybe a retirement plan, college funding, cash reserve or a vacation nest egg. If you received a rather large refund, you may want to consider adjusting your withholding or estimated taxes downward so you can keep more of that money in your pocket during the year.

Document your Charitable Deductions

If you plan to deduct your charitable contributions on your tax return, you must have proper documentation. If you donate less than $250 to a charity, a cancelled check, credit card statement or similar record will be sufficient. If you give more, a written acknowledgement from the charity is required. An appraisal may be needed depending upon the value of the donation. This assumes the charity you are giving to is a qualified charity under the IRS rules. Remember, donations of cash that do not have proper documentation are not deductible.

Phony IRS Communication

Say you receive a call from someone claiming to be with the IRS and they inform you that you owe some taxes and must pay immediately by wire transfer or a debit card. Or you receive an email supposedly from the IRS wanting to confirm your bank account number, social security number or your credit card information. What should you do? Hang up immediately and never respond to such an email. Unfortunately, this type of behavior is happening all the time. If you have questions about an IRS communication, call us and we can help. Or you can call the IRS directly at 1-800-829-1040 and inform them of the inquiry you received.

Disaster Planning

How often do we hear about individuals and businesses losing everything due to theft, fire, flood or other weather-related occurrences? We all need to be prepared for such an event. Consider electronic backup for such things as tax returns, insurance policies, bank and credit card information and any other vital information. The backup should be stored off-site to avoid also being lost in an accident. How many times have we heard to take pictures and videos of our homes and businesses to help document loss? Businesses need a plan to get back into business as soon as possible after a disaster.

Estate Planning

New estate tax laws were enacted in 2013 that you need to be aware of. The top tax rates rose from 35% to 40%. There is no estate tax on estates valued at less than 5.43 million for 2015. This may sound like a large amount, but you may be surprised at the value of everything you own if added together. Minnesota estate tax kicks in at a much lower amount- $1.4 million. So you may avoid federal estate tax but be subject to Minnesota estate tax. Estate planning should definitely be a priority.

Is Your Will Up to Date?

Have you blown the dust off your will lately? If not, it is time to get it updated. Wills are used to direct the disposition of your money and property after your passing. Not only have the laws changed, you may want to change how your property is distributed. Death, divorce or remarriage are some events that may cause you to want to update your will.

Hopefully, some of these items are going to get you motivated to make some changes in financial and tax lives. If you have any questions or need assistance, please give us a call and we will be happy to help.




St Cloud, MN