Become Debt-Free

Stack of unpaid invoices

The average household carries $137,063 in debt, while the median household income is less than $60,000, according to data from the Federal Reserve and U.S. Labor Department. While it’s easy to get into debt, it can be hard to get out. Here are five tips personal finance experts recommend to lower your debt burden:

 

 

 

 

 

1 List and prioritize
Create a list all of your debts by amount owed and the interest rate you are paying. Then prioritize your repayment based on one of two strategies:

  • The Avalanche. Focus on paying the debt with the highest interest rate first, to minimize the total interest you’ll pay.
  • The Snowball. Focus on paying the debt with the smallest balance first. While this may seem counterintuitive, it’s recommended for those who have difficulty sticking to a repayment plan. The smallest balance gets paid off sooner and then its debt repayments can be devoted to the next debt. This gives you a powerful psychological boost and sense of achievement.
2 Pay more
Pay more than the minimum amount due. Your lender receives more interest income from you if you pay the minimum, but that’s not what you want. Think of ways you can increase your income to make the extra payments, such as:

  • Taking a second job or freelancing.
  • Asking for a raise at work.
  • Devoting extra cash to debt repayment, such as your refund check.
3 Spend less
Review your monthly expenses to find things that you can eliminate to increase your debt repayment. You can reward yourself by renewing these luxuries, but only after you’ve paid off what you owe. You could cut spending on things like:

  • Cable TV
  • Gym fees
  • Restaurants
  • Entertainment
4 Downsize and declutter
Not only does it help to spend less, it may also be worth getting rid of what you already have. Consider selling possessions you no longer need, or finding a place to live with lower rent or smaller mortgage payments. Be ready to make some sacrifices in exchange for financial freedom. Things that you may be able to part with include:

  • Sporting equipment
  • Extra or recreational vehicles
  • Electronics, games
  • Collectibles
5 Negotiate
It’s worth calling your lenders to see if there’s a way to lower your interest rate. They will often do this if you’ve been a longtime customer with a history of timely payments. In some cases, you can even get them to forgive part of your debt. Also consider using zero-percent balance transfer options with different credit card providers. While these may come with fees, 12 months of no interest can be worth it.

Reducing your debt burden can seem overwhelming, but small steps can yield big results.

Six Home Ownership Tax Benefits

If you own or are considering purchasing a home, you can take advantage of many tax benefits. Here are six of the most commonly used homeowner tax breaks:

Check Mortgage interest deduction. You can deduct the interest you pay in your monthly mortgage bill when you itemize deductions on your tax return. This can be a huge benefit, especially in the early years of a mortgage. That’s because typically about 80 percent of your mortgage bill in your first year of home ownership on a 30-year mortgage goes toward interest. Principal payments typically don’t exceed interest until year 18 of a 30-year mortgage.Note: This benefit is capped to apply to $750,000 in indebtedness for new loans beginning in 2018 ($1 million for loans taken out in 2017 or earlier).
Check Property tax deductions. You can deduct up to $10,000 in combined state and local taxes. Called the SALT deduction, this can be used to deduct local property taxes, state income taxes, and state and local sales taxes.
Check Closing cost deductions. You can deduct some of the closing costs of a home purchase in the year you buy it. This includes things like real estate taxes and mortgage discount points you pay up front to lower your interest rate over the life of your loan. Because each point costs 1 percent of your total mortgage amount, the tax deduction on these costs can be substantial.
Check Home improvement tax breaks. If you take out a second mortgage or what is commonly called a home equity mortgage and use it to buy, build or substantially improve your home, you can deduct the interest on that loan from your taxes. This feature is now grouped into your total mortgage indebtedness, which is capped at $750,000.Caution: Interest on home equity loans used for any other means (e.g., to pay down credit card debt or to purchase a car) is no longer deductible.
Check Energy-efficiency tax breaks. There are special tax breaks available for renewable energy and energy-efficiency upgrades to your house:
a. The cost to buy and install solar, wind and geothermal equipment to your main residence or a second home can be deducted by 30 percent.
b. Energy-efficient upgrades can be deducted by 100 percent for items such as central air conditioning, furnaces and water heaters, capped at a total of $500.
Check Capital gains exclusion. You have the ability to exclude up to $250,000 of profits (or $500,000 if you are married) from the sale of your home, as long as it’s your primary residence and you’ve lived there at least two years.Remember, if you’re thinking of buying a home, you’ll want to make a tax review part of your preparation. Because the tax deductions on mortgage interest and points can be so substantial in the early years of home ownership, they may factor in to how much home you can afford.

Tax Planning Time

Tax planning noteNow is the ideal time to schedule a tax planning session. Your 2017 tax return outcome is still fresh, and it’s early enough in the year to take advantage of the numerous tax law changes taking place in 2018. Here’s a brief overview of some of the new tax issues that you need to plan for now.

 

 

 

Check Income
Tax rates for both individuals and small businesses have changed substantially. Income tax deductions have also changed drastically, including a nearly doubling of the standard deduction and elimination of personal exemptions and miscellaneous itemized deductions.It’s important to review your income tax withholding schedule to see where you fall in the new income tax bracket structure. Small adjustments here could save you hundreds.
Check Bunching
Because of the changes to the deductions structure, using itemized deductions may now require bunching two or even three years of expenses into one tax year. Things like donations to charity and medical expenses that you may have spread across several years are now better bunched into a single year to maximize your tax savings.If you typically take care of medical expenses or charitable donations at a regular time every year, hold off this year until you have a new tax-efficient plan.
Check SALT (State and local taxes)
There’s now a $10,000 combined total cap on deductions of state and local income, sales and property taxes, which is going to impact a lot of people, especially in high-tax states. This may be a big factor to account for if you’ve relied on this deduction in the past.Get an analysis done to see how much larger your tax bill is going to be because of the cap on SALT taxes. There may not be much you can do about it, other than changing where you live and own property, but you’ll need to have a clear picture of how it will impact your tax return in 2018.
Check Mortgage interest changes
There are several new rules changing how mortgage interest is deducted. You can no longer deduct the interest on mortgage indebtedness greater than $750,000. And you can no longer deduct interest on mortgage indebtedness that wasn’t spent directly on buying, building or substantially improving your home.If you have previously claimed a home equity loan interest deduction, you’ll need to review how this will affect your itemized deductions.

These are just a few examples of things that you’ll need to review in the wake of the largest tax law change in more than 30 years. Take some time this summer to make sure you have a plan in place.

Rent Your Property Tax-Free

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Most income you receive is taxable income that is reported to you and to the federal/state tax authorities. However, renting out your home or vacation property on a short-term basis can be done tax-free if you follow the rules.

The rule: If you receive rental income for less than 15 days per year, that income is generally not taxable income.

Added benefit: In addition to tax-free rental income, you may still deduct your mortgage interest expense and property taxes as itemized deductions. Neither of these tax benefits is reduced by the income from up to two weeks of rental activity.

Would someone want to rent your property?

Sure it sounds good, but why would someone want to rent your property? Here are some ideas:

Special events. If a big event is in town, consider renting out your home for participants and fans. Common examples include:

  • Football games
  • Concerts
  • Golf tournaments
  • Conferences and expos
  • State high school tournaments

Vacation home rental. If you have a cabin or cottage, consider renting out your place for two weeks. If you find responsible renters, you may have an opportunity to find reliable repeat renters each year.

Hotel alternatives. Oftentimes travelers from other cities and countries would love to rent out homes or rooms within homes while traveling. This lets travelers have a real “local” experience.

Know the risks

The hassle factor needs to be considered prior to taking advantage of this free income opportunity. Having a proper rental agreement, damage deposit, and insurance are key factors to consider. Also remember that if you rent out your property for more than 14 days, all rent received is taxable and rental income rules apply. And don’t forget to review any local regulations prior to renting your property.

Home rental sites like VRBO and Airbnb can help you better understand your options for renting your property.

 

Alert: Expired Tax Breaks Revived for 2017

Mortar board and money

Congress passed a federal budget bill in early February that revived many expired tax breaks for the 2017 tax year. They include a deduction for education expenses as well as several tax breaks for homeowners.

If you have not yet filed your 2017 tax return, please be aware these changes are retroactive to the beginning of 2017. If you have filed, your return may be amended to capture any tax benefits that apply to your situation.

Review these tax breaks to see if they apply to your situation:

Check Tuition and fees deduction. If you paid qualified tuition or expenses related to higher education, you may be able to deduct as much as $4,000 of those costs. This can be done on a regular return (without itemizing). The deduction is capped at $4,000 for single filers with adjusted gross income (AGI) of $65,000 or less ($130,000 married filing jointly) and capped at $2,000 for single filers with AGI of $80,000 or less ($160,000 married filing jointly).
Check Mortgage insurance deduction. If you paid mortgage insurance premiums, you can once again deduct those amounts as an itemized deduction. This deduction begins to phase out for taxpayers with AGI of $100,000 or more.
Check Mortgage debt forgiveness exclusion. If qualifying mortgage debt on your primary residence was discharged or forgiven, you can exclude that amount from your income.
Check Energy-efficient home improvement credit. Energy-efficient home improvements (such as upgrades to windows, or heating and cooling systems), may be eligible for a tax credit equal to 10 percent of the amount paid, up to $500.

 

 

Know Your Rights When Debt Collectors Call

Past due noticeAt some point you may be on the receiving end of a debt collection phone call. It could happen any time you are behind on paying your bills, or if there is an error in billing. In the U.S. there are strict rules in place that forbid any kind of harassment. If you know your rights, you can deal with debt collection with minimum hassle. Here are some suggestions.

 

Bullet Point Phone Ask for non-threatening transparency. When a debt collector calls, they must be transparent about who they are. The magic words they must utter are: “This is an attempt to collect a debt, and any information obtained will be used for that purpose.” In addition, debt collectors cannot use abusive or threatening language, or threaten you with fines or jail time. The most a debt collector can truthfully threaten you with is that failure to pay will harm your credit rating, or that they may sue you in a civil court to extract payment.
Bullet Point Rules Know the contact rules. Debt collectors may not contact you outside of “normal” hours, which are between 8 a.m. and 9 p.m. local time. They may try to call you at work, but they must stop if you tell them that you cannot receive calls there. Debt collectors may not talk to anyone else about your debt (other than your attorney, if you have one). They may try contacting other people, such as relatives, neighbors or employers, but it must be solely for the purpose of trying to find out your phone number, address or where you work.
Bullet Point Action Take action. If you believe the debt is in error in whole or in part, you can send a dispute letter to the collection agency within 30 days of first contact. Ask the collector for their mailing address and let them know you are filing a dispute. They will have to cease all collection activities until they send you legal documentation verifying the debt.
Bullet Point Stop Tell them to stop. And, whether you dispute the debt or not, at any time you can send a “cease letter” to the collection agency telling them to stop making contact. You don’t need to provide a specific reason. They will have to stop contact after this point, though they may still decide to pursue legal options in civil court.

If a debt collection agency is not following these rules, report them. Start with your state’s attorney general office, and consider filing a complaint with the U.S. Federal Trade Commission and the Consumer Financial Protection Bureau as well.

Save on Insurance By Raising Deductibles

Having insurance for your home and vehicle is essential to ward off financial disaster should accidents occur. Unfortunately, insurance policies continue to become more expensive. One of the things you can do to lower your insurance cost is to consider increasing your coverage deductibles.

Car key and insurance form

Higher deductible, lower insurance cost

Deductibles are the out-of-pocket cost you must pay before your insurance company steps in with their coverage. If you are willing to increase your deductibles, your insurance company will lower your monthly insurance premium.

By increasing car insurance deductibles from $500 to $2,000, the average American would save 16 percent a year, according to the online insurance broker InsuranceQuotes.com. The actual amount you would save on either car or home insurance depends on the state you live in, your demographic profile and claims history.

Do the math

Before you decide whether upping your deductibles is right for you, find out how much you would save. Suppose you would save $200 a year by increasing your car insurance collision and comprehensive deductibles to $2,000 from $500. After 7½ years, you would accumulate enough savings to make up the extra $1,500 out-of-pocket cost should you have an accident.

Now consider how likely you are to have an accident. About six in every 100 U.S. motorists file a collision claim every year and 3 in 100 file a comprehensive claim, according to the Insurance Information Institute. If those claims were spread out evenly, that means every motorist would go 16½ years before filing a collision claim and more than 33 years before filing a comprehensive claim.

Of course, claims are not spread out evenly and no one person’s experience is “average.” Your actual risk will depend greatly on how safe a driver you are, how many miles you drive a year, and where you drive. You have to make a similar estimate of your likelihood of filing a claim on your homeowners insurance.

Avoid the rate-hike game

Insurance companies are renowned for raising your premium after you file a claim. A higher deductible reduces this risk as fewer claims need to be filed.

A word of caution

Remember that increasing your deductibles can create a financial hardship. In our example, you’ll now have to have $2,000 on hand to cover the cost of an insurance claim. Before you change your policy you need to be prepared by having enough cash in a savings account to cover your higher deductible.

The Most- and Least-Taxed States for Retirement

When it comes to choosing where to live during retirement, weather isn’t the only consideration. State and local tax laws have a big impact on your nest egg.

The charts here show the highest and lowest state tax rates and costs of living, from data provided by nonprofit think tanks the Tax Foundation and the Council for Community and Economic Research.

State Income Tax Rates
Highest Lowest
1. California (13.3%) 50. Alaska (0%)
2. Oregon (9.9%) 49. Florida (0%)
3. Minnesota (9.85%) 48. Nevada (0%)
4. Iowa (8.98%) 47. South Dakota (0%)
5. New Jersey (8.97%) 46. Texas (0%)
6. Vermont (8.95%) 45. Washington (0%)
7. Washington DC (8.95%) 44. Wyoming (0%)
State and Local Sales Taxes (state and average local tax rates combined)
Highest Lowest
1. Louisiana (10%) 50. Delaware (0%)
2. Tennessee (9.5%) 49. Montana (0%)
3. Arkansas (9.3%) 48. New Hampshire (0%)
4. Alabama (9%) 47. Oregon (0%)
5. Washington (8.9%) 46. Alaska (1.8%)
Property Taxes (Rankings based on the statewide average of local rates.)
Highest Lowest
1. New Jersey 50. Hawaii
2. Illinois 49. Alabama
3. New Hampshire 48. Louisiana
4. Connecticut 47. Delaware
5. Wisconsin 46. Washington DC
If taxes were the only consideration in our retirement destinations, everyone would move to Alaska, which has no state income or sales taxes. However, the “last frontier” state also has one of the highest costs of living in the U.S. Therefore, you may also wish to consider which states have high and low costs of living.
Don’t Forget: Cost of Living
Highest Lowest
1. Hawaii 50. Mississippi
2. District of Columbia 49. Arkansas
3. California 48. Oklahoma
4. Alaska 47. Michigan
5. New York 46. Tennessee

Common Mistakes When Buying or Selling a Business

It is said with every major purchase there’s some kind of remorse either on the part of the buyer or the seller. This can be especially true when buying or selling a business. No matter which side of the negotiating table you sit on, there are some critical areas that could leave you with feelings of regret. Avoid these mistakes and you’ll feel better about your deals after they’re done.

SELLER MISTAKES BUYER MISTAKES
Not researching the value of similar businesses within the industry
Overestimating the value of the company and losing a well-qualified buyer
Insisting on cash-only terms
Selling price
Overpaying based on emotion
Stretching personal resources too thin
Maintaining sloppy financial records that potential buyers cannot trust
Accounting records
Relying on company financials not prepared by a third-party accounting professional
Not requesting payroll returns and other tax filings in the financial review
Agreeing to seller-financing without proper vetting of the buyer’s creditworthiness
Financing
Settling for a high-interest loan, or one with too short a maturity
Selling the assets of the business when it would have been more tax-efficient to sell the corporate shares instead
Assets
Purchasing less than all of the assets used in the business, overlooking items such as licenses, patents or important contractual arrangements
Making a stock-purchase transaction without understanding the benefits of an asset purchase
Neglecting to check the background of the buyer and assessing their ability to run a business
Failing to verify the buyer’s liquid assets
Due diligence
Not asking why the business is for sale
Conducting too little research into the competition or overall industry trends
Not searching for the existence of company loans and other liabilities
Signing a non-compete agreement that is too restrictive in scope or timeframe
Non-compete
Failing to require a non-compete clause from the seller, especially in a service-industry business
Leaving too much of the sale price dependent on the ongoing success of the company
Transition
Having unclear expectations for seller participation in the business after the sale
Not positioning the business to sell well in advance of the first offer
Requesting professional help too late in the sales process
Expert help
Not assembling a team of legal, tax, and insurance experts before agreeing to terms

Buying or selling a business is likely one of the most important transactions an entrepreneur faces. It is always best to seek professional help.

Don’t Forget to Review Your Insurance

Home office deductionsWhen was the last time you reviewed your insurance coverage?

An annual insurance review makes good financial sense.

 

Here are points to consider as you review your various insurance policies.

Bullet Point Health care. If you have an individual policy, investigate whether your employer, union or professional association offers a less expensive group policy.
Bullet Point Long-term care. Long-term care insurance may be advisable if you’re between the ages of 55 and 72 and you don’t have enough assets to fund long-term care.
Bullet Point Life. The protection you need depends on the number of people who rely on you for support. Whole, variable, and universal life policies combine insurance coverage with an investment future. If you want insurance only, consider term life.
Bullet Point Disability. Studies show that less than one in six Americans own enough disability insurance to provide a comfortable lifestyle during a two-year disability. Disability coverage is generally limited to 60 percent to 70 percent of salaried income. If you have adequate emergency funds, electing a longer waiting period for coverage to kick in will reduce your premiums.
Bullet Point Homeowners. With fluctuations in the real estate market, it’s possible that your home is now under- or over-insured. Coverage equal to the current replacement cost (excluding land), not its original cost, is advisable.
Bullet Point Auto. Liability insurance is a must, but consider dropping collision coverage if you can afford to repair or replace the vehicle on your own. Collision insurance is probably required if your car is financed or leased.
Bullet Point Umbrella liability. Personal liability coverage is included with most homeowner and auto policies. However, if you own substantial assets, umbrella coverage will provide additional protection at minimal cost.
Bullet Point Unnecessary insurance. Carefully examine policies with narrowly defined coverage (such as credit, travel, or cancer insurance). They often duplicate other coverage in policies you may already own.