Long Term Care Insurance

Long Term Care Insurance provides a benefit for your long-term care as you age. Long term care is the care you need when you cannot perform your activities of daily living (ADL’s). There are six ADLs associated with long term care. They are bathing, dressing, eating, transferring, toileting and continence. Usually, your long-term care insurance kicks in after you cannot perform two ADL’s or memory care issues.

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Disability Insurance

Do you need disability insurance? Would you want to protect your largest asset? If so, then I would say yes, you need disability insurance. Your largest asset during your working years is your ability to make money. According to the Council for Disability Awareness, more than one in four of today’s 20-year old’s will be out of work for at least a year due to a disability before they reach full retirement age. That is an alarming statistic.

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Life Insurance

Why do you need Life Insurance? Not everyone does need life insurance. You need to think about your current situation. For example, if you own a home with your spouse and you pass away tomorrow, would you want to make sure your spouse has enough money to not worry about the mortgage payment? What if you have kids—would you want to make sure there are some assets available for childcare while your spouse works in addition to having funds for the mortgage payment?

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Emergency Fund – How Much?

Your Emergency Fund is your savings account that has no risk to principal—so it’s in cash. The purpose of your Emergency Fund is just as it sounds-for emergencies! Emergencies can be losing a job, unexpected home repair, illness, major car repair or your pet needs surgery—really anything that is completely unexpected.

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529 Plan For College Savings

If you have kids and saving for their college is on your mind, I am sure you have heard of a 529 College Savings Plan. A 529 plan (named from the Internal Revenue Code Section 529) can be a great tool to help you save for those college years. Do you know there are 2 types of 529 plans? The 2 different types are a Pre-paid plan and a Savings Plan.

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IRA vs. ROTH IRA

Whether you are preparing your income taxes yourself or you have hired someone to do them for you, you will most likely be seeing the question asking if you contributed to an IRA or ROTH IRA for the previous tax year.  By the way, you have until April 15th to make that contribution for the previous year-just make sure it is reported in your filing!

IRA’s

  • Tax Deferred—you get a tax break on the money you contribute.  You will pay tax on all distributions.  If you withdraw before age 59.5, there is a 10% penalty on top of the taxes unless you qualify for an exception.
  • Tax-Deductible Eligibility—If you and your spouse are not covered by a retirement plan at work, then your contributions are tax deductible.  If one or both of you are covered by a work retirement plan, then there are further income tests to determine if the contribution will be tax deductible.
  • Contribution Limits—For 2020 and 2021, the higher of your Earned Income or $6000 ($7000 if age 50+). 
  • Required Minimum Distributions—you are required to start taking money out of your IRA’s every year starting at age 72.   The government gave you a tax break all of these years, now they need some revenue.

ROTH IRA’s

  • After tax contributions—you contribute after tax money.  As long as the ROTH IRA has been open for 5 years and you are 59.5, then your distributions are TAX FREE.
  • Contribution Limits—the same for IRA’s above ($6K, $7K for age 50+).
  • Contribution Eligibility—there are income limits to be able to contribute to a ROTH IRA
  • No Required Minimum Distributions while the owner is alive, however, a beneficiary will be required to take minimum distributions but no tax will be due.

Let’s say you aren’t eligible to contribute to an IRA or a ROTH IRA, but you really like the idea of this ROTH IRA—because who doesn’t like TAX FREE MONEY?! If you have an IRA account you can do what is called a ROTH Conversion.  A ROTH Conversion is the process of converting your IRA account to a ROTH and paying the taxes now.  There are some other things to consider when doing this, so you should consult a professional.

Financial Journey LLC is a registered investment advisor offering advisory services in the state of Virginia and in other jurisdictions where exempted.  Information provided is for educational purposes only and not, in any way, to be considered investment or tax advice.

What are Deductions?

I get this question a lot: “Can’t I just deduct that expense on my taxes?”  My answer to this question, 9 times out of 10, is that it depends.  Let us look at some basic concepts on your personal income taxes and your self-employed income below.

Standard vs. Itemized Deductions

You have your standard deduction or itemized deductions—you get to pick the higher of the two (unless Married Filing Separately-but that is beyond the scope of this article).  Your standard deduction is set by the IRS each year and it is based on your tax filing status.  Itemized deductions come from Schedule A.  The 4 most common entries on a Schedule A are:

  • Medical Expenses—this does NOT include your insurance premiums that were taken out of your paycheck.  It does include money you paid for medical expenses with any after-tax money.  The caveat here is that there is a threshold you must meet before these expenses become a number on the Schedule A.  That magic number is 7.5% of your Adjusted Gross Income (AGI).  For example, if your AGI is $100K, then the first $7500 of your medical expenses are not part of your Itemized Deductions.  If your medical expenses are $8000, then $500 will be the medical expense number in your Itemized Deductions.
  • Taxes you Paid—Think taxes paid to your State and Local government.  State Income Tax, Personal Property Tax and Real Estate Taxes paid to your state and county are the most common in this section.  There is a cap on this number which is $10K (less if Married Filing Separate), so that means that this number will not be more than $10K in your Itemized Deductions.
  • Interest you Paid—this is mortgage interest for your primary home.  It can include interest from your home equity loan IF that money from the loan was used to buy, build, or improve your primary residence.  If that money on your home equity line of credit is used to pay off other debts, then that interest does not count towards your Itemized Deductions.
  • Gifts to Charity—these are donations you make to charities—both cash and other items.
  • There are some other deductions that are less common that can go into the ‘other’ category as well.  

To get your Itemized Deductions you add all these numbers up and compare it to your standard deduction.  For a taxpayer filing as Single on their 2020 taxes, the standard deduction is $12,400.  Your Itemized Deductions should exceed the $12,400 for you use those deductions on your tax return.

Above the Line & Below the Line 

Before we talk about above or below the line, it is important to know what the line is.  ‘The line’ is your AGI—specifically Line 11 on your 1040.  Above the line deductions come off your income before calculating your AGI.  Most of these above the line deductions come from Part II of your Schedule 1 of the 1040.  Capital losses are also above the line and can only offset your income by $3K per year, but you can carry those losses forward or use them to offset any capital gains.  Below the line are credits like credits for taxes already paid, credits for self-employment taxes, child tax credits, earned income credit, education credits, etc.  

Self-Employed Deductions & Credits

If you are self-employed, most likely you will be filing a Schedule C.   What expenses offset your income?  The best starting point for this to look at the Schedule C and see the categories listed directly on the form.  There are many things that fall into each category and of course there is also the catch all ‘Other’ category.  Some of the broad categories include:

  • Advertising
  • Fees paid to Contractors
  • Depreciation
  • Employee Benefits
  • Insurance (not health)
  • Legal & Professional Services
  • Office Expenses
  • Supplies
  • Pension & Profit-Sharing Plans
  • Taxes and Licenses
  • Wages to Employees
  • Utilities 
  • Travel and meals (there are some caps here)

All the above get you to your net income for your business.

Potential credits on your 1040

  • Self Employed Health Insurance—if the plan is established under your business, you could deduct premiums paid for your health insurance for you, your spouse and dependent.  You also must have net income from your business to be able to do this.  Check out the Self-Employed Health Insurance Deductions worksheet in the Form 1040 instructions.
  • Qualified Long-Term Care Insurance—you can deduct a portion of your premium based on your age.  
  • Self-Employment Tax—when you are self-employed, you must pay both the employEE and employER part of payroll taxes.   Uncle Sam gives you a little bit of break and allows you to deduct ½ of your Self Employment Tax on your 1040.
  • Don’t forget you have to pay your Self Employment Taxes quarterly (3/15, 6/15, 9/15 and 1/15 for the previous quarter).
  • Self-Employed Retirement Plan Contributions—note that this depends on the type of plan you have.  This will only be a deduction if you are NOT contributing to a ROTH plan.

WOW, that was a lot of information and only a high-level overview of some deductions!  Click here to get more information on common tax forms.

Financial Journey LLC is a registered investment advisor offering advisory services in the state of Virginia and in other jurisdictions where exempted.  Information provided is for educational purposes only and not, in any way, to be considered investment or tax advice.