Reviewing Your Finances Mid-Year
You made it through tax season and now you’re looking forward to your summer vacation. But before you go, take some time to review your finances. Mid-year is an ideal time to do so, because the demands on your time may be fewer, and the planning opportunities greater, than if you wait until the end of the year.
Think about your priorities
What are your priorities? Here are some questions that may help you identify the financial issues you want to address within the next few months.
- Are any life-changing events coming up soon, such as marriage, the birth of a child, retirement, or a career change?
- Will your income or expenses substantially increase or decrease this year?
- Have you managed to save as much as you expected this year?
- Are you comfortable with the amount of debt that you have?
- Are you concerned about the performance of your investment portfolio?
- Do you have any other specific needs or concerns that you would like to address?
Take another look at your taxes
Completing a mid-year estimate of your tax liability may reveal tax planning opportunities. You can use last year’s tax return as a basis, then make any anticipated adjustments to your income and deductions for this year.
You’ll want to check your withholding, especially if you owed taxes when you filed your most recent income tax return or you received a large refund. Doing that now, rather than waiting until the end of the year, may help you avoid a big tax bill or having too much of your money tied up with Uncle Sam. If necessary, adjust the amount of federal or state income tax withheld from your paycheck by filing a new Form W-4 with your employer.
To help avoid missed tax-saving opportunities for the year, one basic thing you can do right now is to set up a system for saving receipts and other tax-related documents. This can be as simple as dedicating a folder in your file cabinet to this year’s tax return so that you can keep track of important paperwork.
Reconsider your retirement plan
If you’re working and you received a pay increase this year, don’t overlook the opportunity to increase your retirement plan contributions by asking your employer to set aside a higher percentage of your salary. In 2015, you may be able to contribute up to $18,000 to your workplace retirement plan ($24,000 if you’re age 50 or older).
If you’re already retired, take another look at your retirement income needs and whether your current investments and distribution strategy will continue to provide enough income.
Review your investments
Have you recently reviewed your portfolio to make sure that your asset allocation is still in line with your financial goals, time horizon, and tolerance for risk? Though it’s common to rebalance a portfolio at the end of the year, you may need to rebalance more frequently if the market is volatile.
Note: Asset allocation is a method used to help manage investment risk; it does not guarantee a profit or protect against investment loss.
Identify your insurance needs
Do you know exactly how much life and disability insurance coverage you have? Are you familiar with the terms of your homeowners, renters, and auto insurance policies? If not, it’s time to add your insurance policies to your summer reading list. Insurance needs frequently change, and it’s possible that your coverage hasn’t kept pace with your income or family circumstances.
Planned Charitable Giving
Today more than ever, charitable institutions stand to benefit as the first wave of baby boomers reach the stage where they’re able to make significant charitable gifts. If you’re like many Americans, you too may have considered donating to charity. And though writing a check at year-end is one of the most common ways to give to charity, planned giving may be even more effective.
What is planned giving?
Planned giving is the process of thinking strategically about charitable giving to maximize the personal, financial, and tax benefits of your gifts. For example, you may need to receive income in exchange for the assets you donate, or you may want to be involved in deciding how your gift is spent–things that typically can’t be done with standard checkbook giving.
Questions to consider
To help you start thinking about your charitable plan, consider these questions:
- Which charities do you want to benefit?
- What kind of property do you want to donate (e.g., cash, stocks, real estate, life insurance)?
- Do you want the gift to take effect during your life or at your death?
- Do you want to retain an interest in the property you donate?
- Do you want to be involved in deciding how your gift is spent?
There are many ways to donate to charity, from a simple outright cash gift to a complex trust arrangement. Each option has strengths and tradeoffs, so it’s a good idea to consider which strategy is best for you. Here are some common options:
Outright gift. An outright gift is an immediate gift for the charity’s benefit only. It can be made during your life or at your death via your will or other estate planning document. Examples of property you can gift are cash, securities, real estate, life insurance proceeds, art, collectibles, or other property.
Charitable trust. A charitable trust lets you split a gift between a charitable and a noncharitable beneficiary, allowing you to integrate financial needs with philanthropic desires. The two main types are a charitable remainder trust and a charitable lead trust. A typical charitable remainder trust provides an annuity or unitrust interest for one or two persons for life. An annuity interest provides fixed payments, while a unitrust interest provides for payments of a fixed percentage of trust assets (valued annually). At the end of the trust term, assets remaining in the trust pass to the charity. This can be an attractive strategy for older individuals who seek income. There are a few other variations of the charitable remainder trust, depending on how the income stream is calculated. With a charitable lead trust, the order is reversed; the charity gets the first, or lead unitrust or annuity interest, and the noncharitable beneficiary receives the remainder interest at the end of the trust term.
Charitable gift annuity. A charitable gift annuity provides a fixed annuity for one or two persons for life. It’s easier to establish than a charitable remainder trust because it doesn’t require a formal trust document.
Private foundation. A private foundation is a separate legal entity you create that makes grants to public charities. You and your family members, with the help of professional advisors, run the foundation–you determine how assets are invested and how grants are made. But in doing so, you’re obliged to follow the many rules and regulations governing private foundations.
Donor-advised fund. Similar to but less burdensome than a private foundation, a donor-advised fund is an account held by a charity to which you can transfer assets. You can then advise, but not direct, how your assets will be invested and how grants will be made.
Charitable giving can provide you with great personal satisfaction. But let’s face it, the tax benefits are valuable, too. Your gift can result in a substantial income tax deduction in the year you make the donation, and it may also reduce capital gains and estate taxes. With a charitable remainder trust, you generally receive an up-front income tax deduction equal to the estimated present value of the interest that will eventually go to charity.
Charitable contribution deductions are generally limited to 50% of your adjusted gross income (AGI), or 30% or 20% of AGI depending on the type of charity and the property donated. Disallowed amounts can generally be carried over and deducted in the following five years, subject to the percentage limits in those years. Your overall itemized deductions may also be limited based on the amount of your AGI.
The charity must be a qualified public charity in order for you to enjoy these tax benefits. Not all tax-exempt charities are qualified charities for tax purposes. To verify a charity’s status, check IRS Publication 78, or visit www.irs.gov.
Millennials vs. Boomers: How Wide Is the Gap?
Texting versus email (or even snail mail). Angry Birds versus Monopoly. “The Theory of Everything” versus “The Sound of Music.” “Dancing with the Stars” versus “American Bandstand.”
It’s no secret that there are a lot of differences between baby boomers, born between 1946-1964, and millennials, who were generally born after 1980 (though there is disagreement over the precise time frame for millennials). But when it comes to finances, there may not be as much difference in some areas as you might expect. See if you can guess which generation is more likely to have made the following statements.
Boomer or millennial?
1) I have enough money to lead the life I want, or believe I will in the future.
2) My high school degree has increased my potential earning power.
3) I rely on my checking account to pay for my day-to-day purchases.
4) I consider myself a conservative investor.
5) Generally speaking, most people can be trusted.
6) I’m worried that I won’t be able to pay off the debts that I owe.
1) Millennials. According to a 2014 survey by the Pew Research Center, millennials were more optimistic about their finances than any other generational cohort, including baby boomers. Roughly 85% of millennials said they either currently had enough to meet their financial needs or expected to be able to live the lives they want in the future; that’s substantially higher than the 60% of boomers who said the same thing. Although a higher percentage of boomers–45%–said they currently have enough to meet their needs, only 32% of millennials felt they had enough money right now, though another 53% were hopeful about their financial futures. Source: “Millennials in Adulthood,” Pew Research Center, 2014
2) Boomers. The ability of a high school education to provide an income has dropped since the boomers’ last senior prom, while a college education has never been more valuable. In 1979, the typical high school graduate’s earnings were 77% of a college graduate’s; in 2013, millennials with a high school diploma earned only 62% of what a college graduate did. And 22% of millennials with only a high school degree were living in poverty in 2013; back in 1979, the figure for boomers at that age was 7%. Source: “The Rising Cost of Not Going to College,” Pew Research Center, 2014
3) Boomers. Not surprisingly, millennials are far more likely than boomers to use alternative payment methods for day-to-day expenses. A study by the FINRA Investor Education Foundation found that millennials are almost twice as likely as boomers to use prepaid debit cards (31% compared to 16% of boomers). They’re also more than six times as likely to use mobile payment methods such as Apple Pay or Google Wallet; 13% of milliennials reported using mobile methods, while only 2% of boomers had done so. Source: “The Financial Capability of Young Adults–A Generational View,” FINRA Foundation Financial Capability Insights, FINRA Investor Education Foundation, 2014
4) Millennials. You might think that with thousands of baby boomers retiring every day, the boomers might be the cautious ones. But in one survey of U.S. investors, only 31% of boomers identified themselves as conservative investors. By contrast, 43% of millennials described themselves as conservative when it came to investing. The survey also found that millennials outscored boomers on whether they wanted to leave money to their children (40% vs. 25%) and in wanting to improve their understanding of investing (44% vs. 38%). Source: Accenture, “Generation D: An Emerging and Important Investor Segment,” 2013
5) Boomers. Millennials may have been around the track fewer times than boomers have, but their experiences seem to have given them a more jaundiced view of human nature. In the Pew Research “Millennials in Adulthood” survey, only 19% of millennials said most people can be trusted; with boomers, that percentage was 31%. However, millennials were slightly more upbeat about the future of the country; 49% of millennials said the country’s best years lie ahead, while only 44% of boomers agreed.
6) Millennials. However, the difference between the generations might not be as significant as you might think. In the FINRA Foundation financial capability study, 55% of millennials with student loans said they were concerned about being able to pay off their debt. That’s not much higher than the 50% of boomers who were worried about debt repayment.
Am I liable for unauthorized transactions on my debit card?
It depends. Federal law provides consumers with protection against most unauthorized credit- and debit-card transactions.
Under federal law, consumer liability for unauthorized credit-card transactions is limited to $50. However, many banks and credit-card companies offer even more protection for credit cards in the form of “zero liability” for unauthorized transactions.
For unauthorized debit, rather than credit, transactions, the rules get a bit trickier. For the most part, you won’t be held responsible for any unauthorized debit-card withdrawals if you report the lost card before it’s used. Otherwise, the extent of your liability depends on how quickly you report your lost card. If you report your lost debit card within two business days after you notice your card is missing, you’ll be held liable for up to $50 of unauthorized withdrawals. If you fail to report your lost debit card within two days after you notice your card is missing, you can be held responsible for up to $500 of unauthorized withdrawals. And if you fail to report an unauthorized transfer or withdrawal that’s posted on your bank statement within 60 days after the statement is mailed to you, you risk unlimited liability.
The good news is that some banks and credit-card companies are offering the same “zero liability” protection to debit-card users that they offer to their credit-card users. This zero liability protection, however, does come with exceptions. In order to have zero liability for unauthorized debit-card transactions, consumers may be required to report the loss of their card “promptly” (typically, no more than two days after they learn of the card loss or theft). In addition, a consumer may need to exercise “reasonable care” to safeguard his or her debit-card information. For example, an individual who gives someone else his or her debit card and PIN could be held responsible for any unauthorized transactions.
It’s important to remember that, unlike credit cards, debit cards directly link to your financial accounts. As a result, you should act quickly and call your bank or credit-card company as soon as you learn of any unauthorized transactions on your account.
What is this new chip-card technology I’ve been hearing about in the news?
In recent years, data breaches at major retailers have increased across the United States. As a way to counteract these data breaches, many U.S. credit-card companies have started implementing a more secure chip-card technology called EMV (which is short for Europay, Mastercard, and Visa).
Currently, most retailers use the magnetic strips on the back of your debit or credit card to access your account information. Unfortunately, the information contained in the magnetic strips is easily accessed by hackers. In addition, the magnetic strips use the same account information for every transaction. So once your card information is stolen, it can be used over and over again.
With the new EMV technology, debit cards and credit cards are embedded with a computer chip that generates a unique authentication code for each transaction. So if your card information is ever hacked, it can’t be used again–it’s a “one-and-done” scenario.
While many developed nations moved to EMV technology years ago, U.S. retailers have previously been unwilling to shoulder the costs. Fortunately, there is good news for U.S. consumers on the horizon.
Beginning in 2015, many large retailers will switch to the new EMV technology by installing payment terminals designed to read the new chip-embedded payment cards. It may take additional time, however, for smaller retailers to adopt this latest technology.
Along with EMV, even more advanced encryption technology is being developed that will increase security for online transactions and payments made with smartphones. In fact, new mobile payment options like Apple Pay and Google Wallet could eventually make paying with plastic entirely obsolete.
In the meantime, in the wake of these data breaches, you should make it a priority to periodically review your credit-card and bank account activity for suspicious charges. If you typically wait for your monthly statements to arrive in the mail, consider signing up for online access to your accounts–that way you can monitor your accounts as often as needed.
IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any matter addressed herein.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2015