CFP Board eNewsletter
March 2009
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CFP Board eNewsletter |
| Time to Spring Ahead: Jump Start Your Personal Finances with Simple Tax Planning |
There’s both daylight and some savings this tax season. It is time to spring ahead and stop just looking behind. It is time to do some tax planning. You can stop waiting for the government to stimulate the economy: you can jump start your own finances right now by doing some basic planning. Every spring, Americans spend considerable effort going through their financial records and preparing their tax returns. But most of their time is spent looking backwards. They want to make sure their income and expense figures for the prior year are reported correctly. What they fail to do, however, is think strategically and plan for the year to come. According to the National Retail Federation, two-thirds of consumers will get a refund from their 2008 taxes. Of those Americans who have already filed for refunds, the average check is approximately $2,900, nearly 9 percent higher than the year before. Americans getting money back probably count themselves lucky, but they shouldn’t consider themselves smart. While they have been struggling to make their mortgage payments, or paying late fees and high interest charges on their credit cards, the government has been holding their money at zero percent interest. Once Americans get their refund check, if they don’t take the next step and make sure their current withholdings or estimated payments are adjusted accordingly, they will repeat the same cash-losing strategy all over again in 2009. Indeed, they may lose even more, assuming their 2009 tax liability will be further reduced under the new credits and deductions in the stimulus package. Taking the time to do some tax projections might add an hour or two to your usual tax return preparation, but it is time well spent, especially now when there is not a lot of “free” cash to be found. Focus on two types of changes taking place in 2009 that may impact your tax liability: first, changes to your personal circumstances, and second, new tax law provisions. In the first instance, think about your household, wages, and expenses. Will you be changing marital status, adding or subtracting a dependent, losing a job or expecting a bonus, moving, or buying or selling a home? Try to estimate the monetary impact of those events in terms of changes to your reportable income and itemized deductions. If you are using tax preparation software or an online tool, run a second “draft” 2008 return that you will not file but use to fill in your expected 2009 numbers. Because tax rates and brackets are not expected to change this year, using a 2008 form to project your 2009 liability will work reasonably well to give you a good ballpark estimate what to expect for the current year. The second type of change involves the various new credits and deductions provided in the stimulus package. The details can be somewhat complicated, but you should at least be aware that some additional tax relief may be in store if you are planning to do any of the following: buy a first home, buy a car, or make energy savings improvements to your home. You won’t be able use a draft of your 2008 form to calculate the savings from these events since these are all new this year. However, once you determine your eligibility for any of these credits or deductions, you can make an estimate of your savings by remembering the following rule: a credit (as with the $8000 credit available to first-time homeowners) offsets your tax liability dollar-for-dollar, whereas a deduction, as with the sales-tax deduction available on 2009 car purchases, reduces taxes only by the amount of the deduction multiplied by your marginal tax bracket. Your final step, assuming you are able to get a good estimate of how much you’ll owe in taxes for 2009: Go to your payroll department and ask them to help you figure out how much withholding you must elect for the rest of 2009 to result in an amount paid to the government that more or less equals your projected liability. Get them to specify this withholding amount in dollars, and not just in terms of W-4 withholding allowances. Of course, not everyone has a payroll professional available or willing to do this kind of calculation, but if you do, make use of him or her. One of the smartest men of our times, Albert Einstein, reportedly admitted, “The hardest thing in the world to understand is the income tax.” So if you find that preparing a tax projection for 2009 is beyond your ken, you can take comfort in the fact that you are in esteemed company. But at least be aware if you can’t do it, there are professionals who can! CERTIFIED FINANCIAL PLANNER™ professionals can be of real help here, since their focus will be on planning for the year ahead, and not just collecting the facts from the year just passed. They will go beyond “safe harbor” tax strategies, which only attempt to eliminate underpayment penalties, and will help you avoid the disruption to your cash flow of significant over- or under-withholding. With some basic tax planning, you can spend the rest of 2009 feeling more financially confident and control, and that alone is pretty stimulating! You can also trade feeling lucky next April to feeling wealthier (and smarter).
Eleanor Blayney, CFP®
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When Bad Things Happen to Your Good Name |
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Would you like to earn $500 a day from the comfort of your own home simply by clicking your computer mouse? How about connecting with a “loss mitigation specialist” to save you money by modifying your home loan? Or would you like to receive extra unclaimed funds from the economic stimulus package? Better yet, would you like to win the lottery in Spain (or Germany or the Netherlands or Canada) and have your jackpot deposited into your U.S. bank account? The answer to all of these questions should be ‘No’, since these and similar schemes are classic tricks that thieves employ to obtain your Social Security, bank account, or credit and debit card numbers—which they then use to steal your identity and your money. Identity theft is among the fastest growing crimes in the U.S. Millions of people are affected by I.D. theft every year, and the cost runs into billions of dollars. The security of your personal information can be compromised if your purse or wallet is lost or stolen; if your computer is infected by a “spyware” virus that copies keystrokes and passwords; or if someone rummages through your trash to find documents containing sensitive information. Once your personal and financial information has been stolen, thieves can use it to hijack your credit card or set up a fraudulent credit card in your name; clone your debit card and withdraw money from your account; open a false bank account in your name; or even take out a major loan—without you even knowing about it. Given the current economic climate, identity thieves are targeting people who may be struggling with mortgage payments or confronting unemployment. So-called “mortgage consultants” and “job placement specialists” offer services they never actually deliver, and often convince their victims to reveal personal information that can lead to identity theft. “Fear can drive decisions that are not always the best decisions, especially at times like this,” says Marie Coyle, CFP®, who runs her own financial planning firm in Glen Cove, NY. “People may be running out of money or worried about job loss, so the chance to work at home or get out of mortgage debt can sound appealing. But you have to think it through. If what you are being offered sounds too good to be true, it probably is.” Fortunately, there is a lot consumers can do to thwart identity thieves. Here are some steps you can take to keep your identity safe. The most effective way to defend your identity is to keep important personal information secure. “Never answer personal questions on the phone or online,” says Coyle. “If something sounds interesting, verify the information first. Ask for a name and a contact number, then call back. Or do a Google search to make sure you’re dealing with a legitimate business. Be really cautious. If someone asks for your credit card or Social Security number on the phone or online, that’s a warning sign.” One of the most popular identity theft scams is phishing, a phone call or email message that asks you to verify an account or confirm personal or bank details. If you receive a message like this, do not respond. Banks and other financial institutions never ask customers to provide sensitive information via email or over the phone. Phishing emails, which often appear as if they come from a legitimate business, ask recipients to go online to fill in information on a specific Web site. The Web site is fake, and thieves will use the information to steal your identity. “Watch out for Web sites that look like the real thing but are not,” warns Coyle. “Look for the ‘lock’ symbol at the top of the site that means it’s a secure site.” If you have doubts about an email you have received, independently check the Web address by calling the company concerned and asking them to verify their URL. If you do make a call, though, don’t use the phone number given in the email itself, since that could simply connect you to the thieves who are trying to steal your identity. Make sure you also obtain the phone number independently. Identity thieves go on phishing expeditions using cell phones, too. This tactic involves sending text messages asking consumers to verify account information due to, say, a recent bank merger or an expired credit card. People are instructed to leave their details on an answering machine or Web site. The messages can be highly sophisticated, addressing recipients by name and featuring what appears to be authentic caller I.D.s. But these text messages are tricks to separate consumers from their personal information. Not all scams are high-tech. Your trash—in the form of bank statements, credit card receipts, utility bills, etc.—can also provide thieves with all the information they need to steal your identity. That’s why Coyle says, “Safeguard your trash. Many criminals go through garbage for discarded paperwork. Everyone should have a shredder; it’s an absolute necessity. Shred checks, receipts, bank statements, anything with your personal information on it, even those annoying credit card offers you don’t respond to.” Coyle also urges consumers to monitor their postal mail, since I.D. thieves often secretly change a victim’s address as a way to hide their activity. “If your bills stop appearing, someone might have redirected them by filing a change of address form,” says Coyle. She also suggests regular and careful checking of all financial accounts and billing statements to make sure all charges are genuine. Often, the first indication of identity theft a person has is when unfamiliar charges appear on a credit card statement or checking account. “Be sure you recognize every purchase or phone number on your bills, and report the ones you don’t,” Coyle says. Consumers can do a lot to protect their identities. However careful you are with sensitive information, though, it’s always smart to remain alert for the warning signs of identity theft. “Use your instinct,” Coyle suggests. “People often sense when something is not right.” Here are a few things to do if you think something is not quite right: If you receive a suspicious email, don’t open it or forward it, especially if it has attachments. Make sure your computer has the latest anti-virus and anti-spam software installed. Change your passwords if you feel your computer has been targeted. If you receive a suspicious phone call, do not provide any personal or financial information. Independently contact your bank or other financial institution to verify that the call is legitimate. If you think you might be a victim of identity theft, check your credit report for unauthorized transactions. You can request a free copy of your credit report by logging on to Annual Credit Report.com. For more information on how to track your credit and obtain a free copy of your credit report, see How to Keep Score of Your Credit in the September 2008 issue of It’s Your Turn. If you spot fraudulent activity on your credit report, contact any of the three reporting agencies and request that a fraud alert be placed on your report. A fraud alert requires financial institutions and other businesses to verify your identity before issuing credit or engaging in other financial transactions. Since the information held by the three agencies can vary, request a copy of your report from each one—Equifax, Experian, and TransUnion—and review them carefully. “Report anything that doesn’t match your records,” advises Coyle. You can also file a complaint via the Federal Trade Commission’s Identity Theft Hotline: 1-877-ID-THEFT. If you receive a suspicious phone call, do not provide any personal or financial information. Independently contact your bank or other financial institution to verify that the call is legitimate. If you need help with your mortgage, contact the U.S. Department of Housing and Urban Development (HUD). HUD sponsors housing counseling agencies throughout the country that provide free or low-cost advice. Search online for a counseling agency near you on the HUD Approved Housing Counseling Agencies page of the Department of Housing and Urban Development’s Web site. If you want some professional advice, you can locate a CFP® professional in your vicinity through the Search for a CERTIFIED FINANCIAL PLANNER™ Professional page on CFP Board’s Web site. Online Resources American Consumer Credit Counseling (ACCC) offers an Identity Theft Web Seminar that describes how identity theft occurs and what you can do to prevent it. The ACCC site also features an Identity Theft Take Charge Guide and Deter, Detect, Defend, a 10-minute educational video that provides an overview of identity theft and outlines the steps consumers can take to safeguard themselves. The U.S. Department of Justice features a detailed list of frequently asked questions on Identity Theft and Identity Fraud, with practical tips on how to avoid becoming a victim and what to do if your personal information is compromised. The Federal Trade Commission Identity Theft Site is “a one-stop national resource to learn about the crime of identity theft.” The Consumer Publications section of the site features downloadable brochures on everything from the basics of I.D. crimes to remedying the effects of I.D. theft. The Identity Theft Resource Center® (ITRC) is a non-profit dedicated to the understanding and prevention of identity theft. The ITRC provides consumer and victim support as well as public education. Its Web site offers State and Local Resources, an interactive national map of I.D. theft help centers, and Prevention Tips on everything from phishing scams to online security. James Geary
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Don’t Scrimp on Your Insurance Coverage |
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During any recession, especially a recession as deep and long-lasting as this one, savvy consumers will take a careful look at their spending. Savings may lurk in the unlikeliest places. Do I really need all those TV channels, or can I save some money by pruning my cable subscription? How much could I save if I brought my own coffee to work instead of splurging every morning on a double mocha skinny latte? What else could I do with the money I normally spend on that weekly meal at my favorite Italian restaurant? (For tips on saving money, see It’s Nifty to be Thrifty in the September 2008 issue of It’s Your Turn.) Sometimes, though, the search for savings can go too far. We might be tempted to cut back on expenditures that are crucial for our own financial security and that of our families and loved ones. Insurance is one expenditure where cutbacks can do more harm than good. “Never risk a lot for a little,” says Michael Rubin, CFP®, founder of the Portsmouth, New Hampshire-based financial education firm Total Candor and author of the book and blog Beyond Paycheck to Paycheck. “Insurance is protection against events that may be unlikely to happen but would be financially devastating if they did happen and you had no protection.” Here is an overview of the main forms of insurance that provide essential protections for you and your family, recession or no recession.
Homeowner’s Insurance One thing to keep in mind when taking out homeowner’s insurance, Rubin suggests, is coverage limits. Premiums will be cheaper for policies with lower coverage limits. But if you insure yourself for $15,000 when the actual value of your possessions is $25,000, you are essentially leaving $10,000 worth of your stuff uninsured. The opposite is also true. If you insure yourself for $25,000 when the actual value of your possessions is $15,000, you are essentially paying for $10,000 worth of insurance against which you cannot claim. It’s important to choose a coverage limit that reflects the actual value of your home (the physical structure) and everything you own inside it.
Life Insurance Just as with homeowner’s insurance, it is essential to have a policy with the right amount of coverage. There are two basic ways to calculate coverage. With an income approach, you estimate the amount of money you can realistically expect to earn over the remainder of your working life, then subtract the amount of tax you would pay (life insurance benefits are not taxed when they are paid out), and use the resulting figure as the amount to insure. With an expense approach, you calculate the expenses your family and other dependents will incur over the course of their lifetimes and then buy sufficient insurance to meet all of those expenses. Whether you use the income or the expense approach, Rubin says, “You want to make sure you purchase the amount of life insurance you need.” For families, that will depend to a large extent on the age of your children. Families with very young children still have most of their biggest expenses—college, for instance—ahead of them, whereas families with older children face fewer major costs. The bottom line, according to Rubin: “The younger your children are, the more life insurance you will need.”
Automobile Insurance Of course, if the insurance company is running less risk, that means you are running more risk. But with proper planning, running a little more risk can be cost-effective. “You shouldn’t be worrying about a $350 fender bender,” Rubin says. “You should be worrying about the bigger events. If you’ve got a $500 deductible, that could be an acceptable risk to insure yourself against the really big, devastating stuff.” Cheaper premiums with higher deductibles may be great, but how do you pay for that $350 fender bender if you have a $500 deductible? That, Rubin says, is where your emergency fund comes in: “The biggest advantage of an emergency fund is that you can afford to have a higher deductible on auto insurance. If you have cash set aside for an unexpected event, then you can afford to take on a little more risk. Higher deductibles are a great way to save money—increasing the deductible can dramatically decrease premiums—and are more effective than cancelling your policy or lowering your coverage.” (For more on emergency funds, and how to start saving for one, check out In Case of Emergency Use This Fund! in the September 2007 issue of It’s Your Turn.)
Health and Disability Insurance Rubin also suggests not dismissing the importance of disability insurance, even though it can be difficult to get as an individual. “People spend far more time considering life insurance than disability insurance. But people in their 20s and 30s have a greater chance of becoming disabled than of dying. If you do become disabled, you will still need housing and food. Where is the money going to come from? If you’re disabled for two or three months, that’s what your emergency fund is for. If you’re disabled for two or three years, you needed long-term disability insurance.” When money is tight, it can be tempting to look at cutting insurance policies for potential savings. But the short-term gain is almost never worth the long-term financial risk to you or your loved ones. If you would like some professional financial advice on any of the financial planning issues raised in this article, you can locate a CFP® professional in your vicinity through the Search for a CERTIFIED FINANCIAL PLANNER™ Professional page on CFP Board’s Web site.
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About This eNewsletter |
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CFP Board's "It's Your Turn" eNewsletter is sent monthly to those who have subscribed through CFP Board's Web site, www.CFP.net/learn. CFP Board exists to make people aware of the benefits of financial planning and to encourage people to seek out individuals who can help them apply the financial planning process to improve their financial lives. This eNewsletter is designed to provide information about financial planning, financial planning tools and resources, consumer alerts and more. Suggestions and feedback are welcome at mail@CFPBoard.org.
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