Senior Paper

Now that I’m in my final semester of Undergrad, it’s time to face that beast that haunts every college student’s dreams: the Senior Paper. Actually, I’m rather excited about it.

ORU’s College of Business has a great system for Senior Paper: each student has their choice of four paths to take:

  • Writing a Business Plan
  • Consulting with a local company
  • Membership in our Enactus chapter, with weekly work minimums
  • Creating a business, getting funding, and making a profit in Entrepreneurship

Entrepreneurship was originally my path of choice, until life’s circumstances pointed out that it wasn’t feasible. That was quite a disappointment, since I know I could have made a good profit with a one-man Income Tax business.

Instead, I’m taking the Business Plan route. For some, this is kind of the default path- the easiest way to just get the grade and move on. That’s not my focus at all. In fact, the grade’s just a necessary anecdote. This is about writing my business plan, for the business I intend to start someday. It’s about taking the first concrete step in what I fully know is a 5 to 10 year goal, and maybe longer. It’s about my dream. And it’s about facing the realities that I’ll need to confront and overcome to make that dream a reality.

That’s a tall order, to be sure. But I don’t feel like it’s too much to ask of myself. After all, I planned my college route four years ago. Some goals have changed over time, but I’ve never scaled back my plan. And in early May I’ll take a short walk and prove that I can plan for years ahead and end up exactly where I decide to be.

Happy MLK Day, everyone. It’s a good day to talk about dreams.

 

Thanks for reading,

-Taylor

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Tax Rates: 2012 & 2013

2012

It can sometimes be a bit hard to find the year’s income tax rates (And who really wants to navigate the IRS website anyway?), so here they are for 2012 as much for my sake as for any reader’s. See below for the tax rates for 2012, which are the ones you need to use to file your return between now and April 15th.

2012 Tax Rates

2013

NOTE: These are the rates for 2013, and will apply to the return you file in 2014. Do not use them for the return you file this year.

2013 Tax Rates

 

Comparison

If you look, you’ll see that this year we have six tax brackets, ranging from 10% to 35%. We still have those six brackets for 2013, but with an increase in the limits of 2-3%. What’s really notable is that 2013 includes a seventh bracket at a rate of 39.6%. Ouch!

While that seems like a reasonable step-up at first, take a closer look at that 35% bracket. For Single taxpayers, that bracket is only $1650 wide! In fact, married couples have the widest margin in that bracket with $51,650. What the heck?!? That verges on punitive, especially when you consider that the 33% tax bracket is over $215,000 wide for a Single taxpayer. But where’d it come from?

Well, it’s the result of the “fiscal cliff” debate. Doctors and other well-paid professionals owe the Republicans a big thank-you for what they were able to accomplish, relatively little that it was. The Republicans’ original goal was to set the highest bracket at $1 million+ in income, but negotiations pared that down 60%. By contrast, President Obama and the Democrats wanted to set the bar down at $200,000 or $250,000.

I try not to comment on politics here, but felt I needed to explain where that craziness came from. And, yes, I’ll admit I’m biased. I’m pro-business, after all…something on which the President and I clearly differ. Well, such is life.

 

Thanks for reading,

-Taylor

Estate & Gift Tax

Well, I’m officially back at school. I’m looking forward to a great final semester of Undergrad (man, does that feel weird or what?) and looking forward in anticipation of my summer internship with Grant Thornton, L.L.P. A lot of things are getting close, now: Grad School, first full-time job, first apartment, etc.

But on the topic of this semester: I’ve got a class that I’ve looked forward to for quite a while now. As odd as it may seem, this class is Estate & Gift Tax. (I admit, I’m a bit of an Accounting & Finance nerd…but you already knew that.) So what will this involve? A lot of it, of course, will be the legal side of things. We’ll go over the relevant laws and regulations, and from what I hear we’ll memorize a good chunk of them. In and of itself, that’s not so exciting. What is exciting, though, is what it will lead into: the basics of estate planning.

The professor who teaches the class spoke in my Personal Financial Planning class last semester, and outlined a couple of basic setups for estate planning in the two class sessions he spent with us. I’ve gotta say: wow! There are some very simple tools available that can all but eliminate estate taxes on up to a million dollars. I’m guessing more advanced ones can take you quite a bit further, but there wasn’t really enough time for that. Thus, I’m taking the class now.

Why so excited? Well, here’s why: if you do’t have a proper plan in place you’ll pay up to around a third of your estate in taxes. That means important family property or the family business may have to be sold off just to pay the tax. That just sucks. But maybe that’s not a huge consideration for most people. That’s alright. I’d still recommend finding the most suitable and most effective plan for reducing your estate tax, and for this reason: you already paid income taxes on every bit of that value! In my opinion, that stuff’s been taxed already and the government has no right to take it away simply because you died. I believe you have a right to pass on what you’ve built up to your spouse and/or children, to charities, and to other beneficiaries…in it’s entirety. The government won’t be anything like responsible with it anyway, so placing as much of it as legally possible out of their reach is, to me, the best course.

 

Thanks for reading,

-Taylor

Back from the Holidays

I’d like to wish everyone a belated Merry Christmas and Happy New Year!

Also, we didn’t die on the 21st. Turns out ancient indians just aren’t that reliable. Or rather, our pointless hyping of something into a monster it never was just isn’t that reliable.

In other news, I’ve received my grades for the Fall 2012 semester. (Disclaimer: I tend to hold myself to standards that sometimes verge on crazy, so some of my thoughts might seem a bit odd to you.) I was actually a bit shocked that I maintained my usual grades given the unusually demanding semester I had. My Undergrad GPA for the semester was a 3.92! I did lose my Grad School 4.0, though, falling 3.8 points (or about 0.5%) short of an A…talk about aggravating. I’d almost rather have been further from an A rather than be so close and not get it.

Look for some new posts from me soon. I’ll probably put a few more up on IRAs before finding a new topic.

Finally, good luck to everyone returning to school and to all the auditors, tax staff, and corporate accountants out there who’re staring the next several months in the face!

 

-Taylor

IRAs: Traditional IRAs

Image from CanIdoit.org

Traditional IRAs are the original format for the program, and were introduced in 1974. The traditional IRA is designed to shelter income from taxes in order to encourage people to save for their retirement.

How does it shelter income? A couple of ways:

  1. Tax Deferral: In other words, dividends and other gains that the investments in a traditional IRA earn are not taxed in the year they’re earned. Because they get to stick around untaxed, the account will grow faster. You will have to pay taxes on them upon withdrawal of them, though.
  2. Tax Deductability: If you meet certain requirements, income invested through an IRA can give you a deduction on your tax return for that year. You’ll pay less in taxes that year!

In a Traditional IRA, all distributions are taxed at your normal tax rate for the year you get the distribution. The only exception to this is if part of the money you contributed didn’t qualify for the tax deduction on the front end. That portion has a “tax basis” already and won’t be taxed again.

The requirements for contributed income to not qualify change from year to year, so I’ll include them in a later post.

Due to the deduction, contributing to a traditional IRA can reduce your taxes while you’re in a high tax bracket. Once you start withdrawing after retirement, those contributions and their earnings are taxed at your normal tax rate for the year you withdraw them…which should be a lot lower, since you’re not earning as much in retirement. Because of this you can get considerable tax savings. Just remember: If you’re under fifty nine and a half you’ll have to pay an extra 10% penalty for withdrawing money from your IRA.

Here’s a short example to illustrate the paragraph above:

You contribute $100 to your traditional IRA at age 40, while you’re in a 28% tax bracket. It qualifies for the deduction, so you pay $28 less in taxes!

At age 70 you withdraw $100 (let’s ignore the gains for this, but they’d be in there too) and pay taxes at your normal rate on the distribution. Now that you’re retired, your tax rate has dropped to 10% and you pay $10 in taxes.

$28 – $10 = $18 of tax savings. You paid 18% less than you might have. That can add up!

Thanks for reading,

-Taylor

IRAs: The Basics

What’s an IRA? For a lot of people, it’s just another confusing acronym the government throws around sometimes. In actuality, it’s an excellent retirement investment tool. So if you’re confused by the whole topic, read along and we’ll see if we can clarify things a bit.

IRA stands for Individual Retirement Account, which is shockingly clear and to the point by governmental standards. In basic terms, an IRA is a tax-deferred retirement savings account. It’s a tool through which you can invest in stocks, bonds, mutual funds, and other assets. Note: An IRA is not an investment itself. Think of it as a garage. The investment is the car inside, but the garage shelters it.

IRA example pic

There are actually several types of IRAs, and I’ll go through them one by one in my next mini-series. For reference, though, here’s a list:

  • Traditional IRA
  • Roth IRA
  • SEP IRA
  • SIMPLE IRA

SEP IRAs and SIMPLE IRAs are for self-employed individuals or small business owners, so most people don’t need to worry about them. Traditional and Roth IRAs are much more common, so I’ll address them first.

 

Thanks for reading,

-Taylor

Savings: For Retirement

saving, investingWhen you hear the phrase “saving for retirement,” what you should hear is “investing for retirement.” That’s the attitude you’ve got to have if you want to actually, you know, retire. Sometimes people think they can save for retirement simply by putting money in the bank. Taking the phrase a bit too literally, they just shove their nest egg into a savings account and forget about it. Let’s take a look at what that will get them.

Let’s say Tom goes to the bank and puts $1000 in a savings account so he can retire in 40 years. The savings account earns, say, 1.25% interest annually and he never puts anything else in. In 40 years Tom will have: $1,643.62

Fail.

But that example was a bit unreasonable. So let’s change it up a bit: this time, Tom’s putting in $1000 every year for 40 years. This time his retirement savings account comes out to: $52,133.18. Hmm…that’s better, certainly. But it’s not going to last him 10-30 years like it needs to.

This savings account thing just isn’t working out so well. Maybe it’s time for Tom to start thinking about his retirement in the frame of investing, rather than just saving. Let’s see how that changes things.

Tom’s gotten wiser. He knows a savings account won’t deliver what he needs, so he turns to a good mutual fund instead. A good mutual fund gives great diversity and is something of a fire-and-forget investment- you don’t need to monitor it constantly. It’s easy enough for anyone to do. So let’s say the mutual fund averages 8% return on investment over the 40 years. For the sake of example, let’s suppose Tom only invested $1000 once, like he did in the very first example. His retirement nest egg comes out to $21,724.52. It’s less than the constant investing with the savings account, but that 6.75% difference in interest rate gave him a $20,080.90 boost over the first example. Not bad. Not bad at all!

Now for the “best case” scenario amongst my four examples: Tom invests $1000 every year for 40 years and the mutual fund averages 8% again. He’ll need a bigger nest, because this retirement nest egg totals $279,781.04. That’s $227,647.86 more than the savings account earned under the same conditions!

I hope this helps you take a new look at retirement. Remember: if you’re reading this, you’re not too young to start planning to retire!

 

Thanks for reading,

-Taylor