If you have money in a traditional IRA and want to take advantage of a Roth conversion, you need to know about the pro-rata tax treatment of conversions.

If you have both tax deferred and after tax money in a traditional IRA, you could face hefty taxes on the deductible IRA money, since you must convert a pro-rata amount of deductible and non-deductible money.

If you want to convert just your after tax money, which is common when using a backdoor Roth IRA strategy, you can use this Roth IRA conversion strategy to avoid taxes if your 401k provider allows transfers of IRA money. It’s one of our 11 Unusual Roth IRA Strategies.

Roth IRA Conversion Strategy to Avoid Taxes

When you make a Roth IRA conversion for your IRA you must include a portion of tax-deferred money in the IRA in proportion to the amount held.

If your 401k provider allows transfers of IRA money, you can transfer your deductible IRA money to your 401k. When you convert your remaining non-deductible money in your traditional IRA to your Roth IRA, it will be tax free!

Tax Free Roth IRA Conversion Steps

  1. Identify how much money in your IRA was (or will be) deducted on your taxes.
  2. Move your deductible IRA money to your 401k.
  3. Make a Roth IRA Conversion with your non-deductible money.
  4. Report your conversion with 100% basis on form 8606.
  5. The conversion will be tax free.

Example:
Let’s say I have an IRA worth $100,000, with $50,000 (50%) tax deferred and $50,000 after tax. If I complete a conversion of $20,000 to a Roth IRA, I will be responsible for taxes on $10,000, or 50%. You cannot specify to convert only the after-tax money in the account.

If I used the strategy above, I would first move $50,000 of tax deferred money to my 401k. Then, when I make my $20,000 Roth IRA conversion, the taxable amount will be $0.

More Considerations

Which IRAs count? Don’t forget to account for all of your IRA money when you determine how you might make this work. All IRAs including rollover IRAs are considered one IRA for conversion purposes. The traditional IRA also includes your SEP-IRAs and SIMPLE IRAs.

Add additional money. Before your conversion, you can also contribute to a non-deductible traditional IRA at your broker of choice up to the IRA Limits.

Should you convert to a Roth IRA? To see if a Roth IRA Conversion makes sense for you, check out Should You Do a Roth Conversion?

Don’t have a 401k? If you don’t have a 401k, or your current 401k provider doesn’t accept incoming money, you could establish a solo 401k for the purpose of moving your deductible money in your traditional IRA.

Keep detailed records. If you do this, you need to keep very detailed records. For more see How to Track Your Roth IRA Contributions… and Why You Need To!

Early retirement and Roth IRAs. This strategy sounds like a lot of work to move money into a Roth IRA…. why would you want to hassle? If you are considering an early retirement, the Roth allows much more flexibility in early withdrawals than a traditional IRA. After a conversion, you only need to wait 5 years, then you can withdraw your conversion money tax free. A real benefit for anyone considering early retirement!

Avoid IRA fees. You can transfer your IRA to Scottrade and stop paying fees. Whether your account is Traditional, Roth, SEP or Rollover, you won’t pay set-up, annual, custodial, inactivity or closing fees with Scottrade. Open a No-Fee IRA now!

More on Roth IRAs





This one is for all the grandparents out there. Do you have to pay income tax on social security? How will it impact the taxes on your other income from interest and dividends?

Whether or not your social security benefits are taxable depends on your total income and filing status. In addition, it changes from year to year, so while your social security benefits may have been tax free last year, you could owe tax this year.

My grandma found herself in that very situation one year and was shocked she would owe tax on her social security benefits.

How Social Security Benefits Are Taxed

If Social Security is Your Only Income. There are general rules for minimum income to file taxes based on gross income. However, gross income doesn’t include social security benefits, so as long as Social Security benefits are your ONLY income, your benefits are not taxable.

You’ll get a SSA-1099 form which shows the amount of social security income you received.

Social Security Plus Other Income

If you have other income besides your social security, we’ll have to dig a little deeper:

When Social Security Benefits are Taxable. If you have other income in addition to your social security benefits, you’ll need to use the following formula to determine if your social security is taxable.

You must file a tax return if the following calculation is true:

1/2 (Total Social Security Benefits) + All Other Income > Base Amount

The Social Security base amounts are:

  • $25,000 (single, head of household, qualifying widow with dependent child, married filing separately who did not live with their spouses at any time during the year)
  • $32,000 (married filing joint)
  • $0 (married filing separately, but lived together)

When Social Security Benefits are Not Taxable. And in the reverse situation, you do not need to file a tax return, and your social security benefits are not taxable if the following is true:

Half of your Social Security plus all your gross income from other sources is less than or equal to $25,000 (or $32,000).

What is All Other Income?

In the calculation you have to add all other income to half the social security benefits. What is included in all other income? Almost everything. Be sure to include:

  • Taxable pensions
  • Wages
  • Interest and Dividends
  • Other taxable income
  • Tax-exempt interest
  • Interest from U.S. savings bonds
  • Employer-provided adoption benefits
  • Foreign earned income or foreign housing

Social Security Tax Filing

If you will have to file a tax return, you can see how much tax you will owe on your social security benefits using the Tax Calculator.

The free edition of TurboTax works well for filing simple returns with social security benefits, or you can figure it by hand, like my grandma prefers!

More Tax Topics





Most taxpayers are well aware of the deduction that comes from claiming dependent children on their taxes. But what are the rules on claiming dependents on taxes? And what about other relatives? And, when can those formerly claimed as dependents on someone else’s return begin to claim themselves?

If someone else can claim you as a dependent, you cannot receive a personal exemption for yourself, and your standard deduction is limited. If you are filing using TurboTax, the program will help you determine the limitations.

You can claim someone as a dependent if they are a United States citizen, do not file a joint return, and meet either the qualifying child test or qualifying relative test, both discussed in IRS Publication 501 and explained below.

Qualifying Child

The most common reason to claim someone as a dependent on your taxes is because they are a qualifying child. To be a qualifying child, the dependent must meet all six of the following tests:

  • Relationship: the dependent must be your child (including foster, step, or adopted child), your sibling (including half or step), or any of their descendants (e.g., your grandchild, niece, or nephew)
  • Age: the dependent must be under 19 and younger than you (younger than either you OR your spouse if filing jointly), under 24 and a full-time student for at least part of 5 months of the calendar year, or permanently and totally disabled regardless of age.
  • Residency: the dependent must live with you for at least half the calendar year.
  • Support: the child cannot have provided more than half of his or her own support (i.e., necessary living expenses) for the year.
  • Joint Return: the child cannot have filed a joint return with a spouse, except if the return was only filed to claim a refund.
  • Special Test: if the parents are divorced, only one can claim the child as a qualifying child. If both would be otherwise eligible, this is usually the parent with the highest gross income, unless the parents have agreed otherwise.

Qualifying Relative

If your potential dependent does not qualify as a qualifying child, he may instead be classified as a qualifying relative, and still be claimed as a dependent. To be a qualifying relative, the dependent must meet all of the following tests. Note that there is no age test for a qualifying relative.

  • Not a qualifying child: A dependent cannot be deemed your qualifying relative if he is a qualifying child for you or any other taxpayer.
  • Relationship: the dependent must live with you OR, if he does not live with you, be your child (including foster, adopted, step, or in-law), your sibling (including half, step, or in-law), your parent or grandparent (including step or in-law but NOT including foster), or a direct descendant of any of the preceding relatives.
  • Gross income: the relative’s gross income must be less than $3,950 for 2014 year taxes.
  • Support: you must provide more than half of the support for this person during the year. If multiple parties combine to provide more than 50% (e.g., two adult children each provide 30% of a parent’s support), any one taxpayer who provides more than 10% can claim the relative with the written permission of the others.

With the tax deadline approaching, it’s important to understand the rules on claiming dependents on taxes and when claiming dependents is appropriate.

More Tax Topics for Parents





Being a college student is an expensive job. Throughout the year, hopefully you are keeping in mind ways to save money in college and how to avoid student loan debt. You can get creative to save money on food in college, apply for scholarships, and save money on textbooks that can become quite pricey.

But one very important time for every college student’s finances is tax time. While college is a costly venture, you can actually get a lot of breaks around tax time for being a college student. The U.S. Government Accountability Office estimates that more than $800 million worth of college tuition tax benefits go unclaimed every year.

If you are a parent, college tax credits are one of the top 10 ways to lower your taxes with kids.

Here are some questions you might have about claiming these benefits and the answers to point you in the right direction:

Are You Eligible for College Tax Credits?

  • You are eligible for tuition deductions or tuition tax credits if you, your spouse, or a dependent you claim is a student at an eligible education institution. Your college should be able to tell you if they are an “eligible education institution.” Most colleges, universities, vocational schools, or other postsecondary education institutions are eligible. Simply contact your college’s administrative office if you are unsure if they are an accredited school.
  • However, if you are married and filing separately, you can’t any claim any of these deductions.
  • If your parent or someone else is claiming you as a dependent, you are also not eligible for these deductions either. If you are a young college student, check with your parents to see if they are claiming you. For more see When Do Dependents Have to File Taxes?

Tax Credits for College Students

There are two main credits you can claim as a student. You can only choose one of these credits and cannot claim both. Use Form 8863 to claim either of the education tax credits.

  • American Opportunity Credit
    The American Opportunity Credit allows you to claim up to $2,500 the first four years you are in college. So this means if you’re in graduate school or anything after those four years, this credit is not for you. So what are you claiming for that $2,500? You can claim tuition, course fees, and books and supplies you were required to purchase through your college. If you are filing jointly, you and your spouse will need to learn less than $160,000 to claim the entire credit. ($180,000 for partial credit). If you’re single, you’ll need to make less than $80,000 ($90,000 for partial credit). $1,000 is a refundable tax credit on your tax return if you don’t owe any tax. If you and your spouse are both working on your first four years of college, you can both qualify for this credit.
  • Lifetime Learning Credit
    Unlike the American Opportunity Credit, this credit is for any stage of your education. So if you are working on an advanced degree, like a Masters or Doctorate, you can still claim the lifetime learning credit. You can claim 20% on up to $10,000 ($2,000 maximum credit) of college related expenses, such as tuition, books required by the school that you purchased at your school, and any course fees that you were charged throughout the year. This credit is available for couples who have a MAGI less than $128,000 and if you’re single, you must earn less than $64,000 per year.

Tax Deductions for College Students

There are other tax deductions you should keep in mind if you are a college student while filing your taxes. Here are a few things to keep in mind:

  • Student loan interest deduction.
    While in many cases, you do not have to make student loan payments while you are currently a student, you may have opted to pay interest while you were still in college. If so, you can deduct this. This is also something to keep in mind if you have already graduated or have stopped taking classes and have already begun paying back your student loans. You may receive Form 1098 from your loan provider. This contains the amount of interest your lender received from you in the year you are filing taxes for. If you have not received this, you can try logging onto your account online. Your loan provider may have included a link so you can access this form online and print off for your convenience. This is also something you can watch for in the mail as they may have also sent it out to you. If you don’t see it online or unsure if you even paid this interest, you can call your lender directly and someone can help you see if this is something you may be eligible to deduct.
  • Tuition and fees deduction.
    If you were enrolled in an accredited college the year you are filing taxes for, you may be eligible to deduct some of your higher education expenses. Use form 8917 for Tuition and Fees Tax Deduction. Keep in mind you must decide between the tuition deduction and the tax credits above; you cannot claim both. To help you decide which one is better see Tuition Deduction Versus Tuition Tax Credits.

    Some of these expenses include your tuition that you paid out of your own pocket or took out loans for, any fees associated with your course enrollment, and books that you are required to purchase through the school. Buying books that your professor asks you to purchase does not count as required books and cannot be factored into the amount you can deduct.

    You cannot deduct any student health insurance you purchased, the cost of your room and board if you are living in a dorm or campus apartment, your transportation to and from your college, or any other supplies you were not required to buy directly from you school. For example, while you may have needed a computer to do your research on or a particular study guide to help you, these do not qualify for a deduction.

    Keep in mind that you will need to subtract the amount of any scholarships, grants, education assistance, and tuition reimbursement you received from the total cost of your tuition.

Sometimes there is a delay in your tax refunds when you claim a college tax credit. This is usually because the IRS is verifying the attendance at an accredited school.

What are your best tax tips for college students? Have you ever qualified for these credits on your taxes?

More Tax Topics for College Students





Did you recently start your own business and need to learn how to calculate your self employment tax to file your tax return?

If you are an individual who is self employed, you have many advantages over people who are employed by companies. Of course, you get to set your own hours and rates, which is something many other employees cannot do. However, at the same time, you will be required to pay your own self employment taxes, which can be somewhat complicated if you have never done so before. But don’t worry; once you walk through it, it’s pretty painless. Let’s walk through how to calculate self employment tax.

Self Employment Taxes

People who are self-employed differ from those employed by an outside company in that they do not have a portion of their salary deducted from their pay. Therefore, there is no withholding of money toward taxes or for Social Security or Medicare. If you work for an outside company, the company pays half and the individual pays half of the Social Security and Medicare taxes. However, when you are self-employed, you must pay the entire amount of Social Security and Medicare taxes yourself. This is known as self-employment tax.

Self employment tax is separate from and in addition to state and federal income tax rates. Self-employment tax must be paid in addition to your regular income taxes. Self employment tax is applicable at any age, and you are still responsible for paying self employment tax, even if you are already receiving Social Security benefits.

Self Employment Tax Rate

The self employment tax rate for 2014 is 15.3%. (12.4% for Social Security tax and 2.9% for Medicare tax). Since 2013 there is also an additional 0.9% Medicare Surtax that applies to earnings over the threshold for high earners.

How to Calculate Self Employment Tax

Calculating your self-employment tax is not as difficult as it may seem. Once your net earnings from self-employment are at least $400 (or church employee income of at least $108.28), you are responsible for paying self-employment taxes and filing a tax return. Here is how to calculate the self employment tax:

  1. Determine your net income. The net income for your business is income minus any of your expenses related to your work. For instance, if you have purchased a laptop and printer for your business, you are entitled to tally up the costs of them and other work related expenses and deduct them from your income. For a list of common expenses see Tax Deductions for the Self Employed.
  2. Calculate Net Earnings from Self Employment. To do this, multiply the net income by 92.35 percent.
  3. Calculate Self Employment Tax. Next, for any income less than the social security wage base (2014: $117,000 and 2015: $118,500) multiply the amount by 15.3%. For any amount over the wage base, multiply by 2.9%. Add the two figures together to arrive at your self employment tax.

Self Employment Tax Calculator

If you don’t want to calculate your self employment tax by hand, you can use the tax calculator to calculate it automatically. In addition, if you are using tax software like TurboTax, the software will also calculate your self employment tax automatically.

Self Employment Tax Form to Use

When you are ready to file your taxes, you will need the Schedule SE for self-employment taxes. The self employment tax form is in addition to your regular Form 1040 and business Schedule C for profit or loss; they are all due on the same tax deadline.

Self Employment Tax Deduction

In addition to paying the self employment tax, you also get a personal tax deduction for paying it! You can deduct half of the self employment tax, which will lower your adjusted gross income, and lower your income tax.

More Self Employed Topics





Usually filing taxes for the kids is an afterthought. Only after people scramble to finish filing in time for the tax deadline do they realize they didn’t even think about the kids. Let’s put in on the radar earlier this year. Will you remember to file taxes for your kids?

If your kids earn interest and dividends, or have a job, check out the requirements for filing taxes.

2014 Kids Tax Filing Requirements

If you claim your child as a dependent on your return, the kids need to file taxes if ANY of the following are true for tax year 2014 (due in 2015):

  • Earned income, from a job for example, is more than $6,200.
  • Unearned income, including dividends or interest, is more than $1000.
  • Self employment net earnings are more than $400.
  • Earned and unearned total income is more than the larger of $1000 or earned income plus $350.

Also, if interest, dividends and other investment income are more than $2,000 in 2014, you’re going to get hit with the kiddie tax (which means you’ll pay your tax rate on part of your child’s income).

Filing a Child’s Tax Return

You can file your child’s taxes for free at TurboTax.

If you want, you can also attach it to your return if the income is less than $10,000 and only from interest or dividends. This option is available to children under age 19 (or a full time student under 24) using Form 8814.

A word of caution though, qualified dividends or capital gains may be taxed at a higher rate if you attach it to your return instead of filing the child’s return separately.

More Filing Requirements

There are other circumstances when children must file a tax return. For more information see Publication 929, Tax Rules for Children and Dependents.

For more information when others must file, see minimum income to file taxes.

More Tax Topics





How much money do you have to make to file taxes? What is the minimum income to file taxes?

Let’s take a look at the requirements for the minimum income to file taxes in 2014 (and due in 2015).

2014 Minimum Income Requirements

The IRS recently released the minimum income to file taxes in 2014.

For the 2014 tax year, you will need to file taxes if your gross income meets the minimum income for your filing status and age. Here are the minimum income limits for the 2014 tax year.

How Much Money Do You Have to Make to File Taxes 2014

 
Filing Status Minimum Gross Income
(under 65)
Minimum Gross Income (65+)
Single $10,150 $11,700
Head of Household $13,050 $14,600
Married Filing Jointly $20,300 $21,500 (one spouse)
$22,700 (both spouses)
Married Filing Separately $3,950 $3,950
Widow with Dependent Child $16,350 $17,550

This table does not apply to dependents. See When Do Kids Need to File Taxes? for minimum income to file taxes for children.

Once you find out if you meet the minimum income to file taxes, you can determine your tax rate using the current tax brackets.

Social Security Income

Gross income doesn’t include social security benefits.

However, there is an exception to this rule if half of your social security benefits plus your other gross income is more than $25,000 ($32,000 if married filing jointly). Once that happens, you’ll need to file a 2014 tax return. Married filing separate also have different social security rules. For more information, see Do You Have to Pay Income Tax on Social Security?

Other Income Sources

There are special rules for self employment earnings and church earnings. You must file taxes if your:

  • Self employment net earnings are greater than $400.
  • Church earnings are greater than $108.28 and are exempt from employer Social Security and Medicare.

If you are self employed, you will also need to file and pay self employment tax.

New Health Care Responsibility

New this year is the filing requirement for health insurance. If you received advancements of the new health insurance premium tax credit to pay for health insurance, you will need to file a tax return. Here’s how to reconcile your payments and Claim the Health Insurance Premium Tax Credit. In addition, you will also report any penalties for no health insurance on your tax return.

More Tax Filing Requirements

Optional filing. Even if you are not required to file a tax return, you can choose to file one. You may want to file an optional tax return if you had any federal withholding or are entitled to tax credits, like the earned income tax credit or the new Health Insurance Premium Tax Credit and want to get a refund.

Other filing requirements. In addition to the income requirements, there are other circumstances when you must file a tax return. One example is if you sold your home. For all the requirements, see Publication 17.

When to file. If you earn enough money to file a tax return, you must file your tax return by the tax deadline. However, you cannot file before the first day to file taxes.

After you file. Once you file, you can see How Long Does it Take to Get Your Tax Refund Back?

2014 Tax Calculator

If you are under the minimum income to file taxes, and are unsure whether or not filing your taxes will benefit you, use our Tax Calculator to compute your tax liability and refund.

Tax Filing Online

Now that you know how much money you have to make to file taxes, go ahead and file your free federal and state taxes online with TurboTax!





We’re pretty familiar with the tax deadline on April 15. However, the first day to file taxes each year often depends on what Congress has done recently with any new laws that were implemented. This year is no different as congress signed new legislation at the end of December to extend various tax laws another year.

In addition to the last minute tax law changes, this this the first tax season that will include filing requirements for the new health insurance premium tax credit and the penalties for no health insurance. You’ll get new forms this year to claim the health insurance premium tax credit. I have a feeling these new forms and requirements will generate lots of questions this year!

When is the Earliest You Can File Taxes?

The IRS announced the first day to file 2014 year taxes in 2015 will be on January 20, 2015.

Is there a delay this year?

The IRS is currently predicting an on time start to filing season. Last year, there was an IRS Tax Delay after the government shutdown. While the IRS is planning an on-time start, at the same time the IRS Warns Of Delayed Refunds, Long Waits For Taxpayers & Possible Shutdown.

Will the tax deadline be extended if there are delays?

No. Delays to the start of tax season usually do not lengthen the tax filing season; the tax deadline will still be April 15, 2015. You can request a tax extension if you need additional time to file.

When is the earliest I can file my taxes by paper?

If you file your taxes on paper, can you file before the first day? No. Tax returns, including paper returns, will not be processed before January 20. E-filing will still be the faster option to get your tax refund. The earliest you can file your taxes is set for January 20 for all filing methods.

Why Would You Want to File Your Taxes Early?

If you are expecting a tax refund the sooner you file the sooner you’ll get your refund. You can use our 2014 Tax Calculator to project your tax refund.

Also, if you need your completed tax return to show your income for other financial decisions, you’ll be able to complete those transactions sooner. This is usually necessary for financial aid applications for college students or mortgage applications if you are self employed.

Why you might need to know the first day to file taxes.

If you are feuding with an ex-spouse over dependents, be prepared that he or she may plan to file the first day to try to claim dependents.

You should be aware that the first to file a tax return will be able to claim dependents. If you are entitled to claim a dependent, and someone else files first claiming them, when you file using the same SSN you’ll get an error message. This doesn’t mean that you won’t be able to claim them, but be prepared with documentation to prove you are the correct person to claim the dependent and your tax filing status.

Filing Your Taxes Early

What do you need to file on the first day?

Even if you want to file on the first day, you must have your paperwork, including your W2 Form from your employer before you can file. If you don’t receive your W2, you can file a substitute W2 using Form 4852, but only after February 14.

Can you enter your information earlier?

Yes, many tax preparation programs, including TurboTax, will let you begin working on your tax return before the first day to file. You can enter your information, but you will not be able to file your tax return until the first day to file.

Will your tax refund be delayed?

Normally, you can expect your tax refund in 21 days: How Long Does it Take to Get Your Tax Refund? If the IRS issues an update, I’ll let you know!

When do you plan to file your taxes?

More Tax Filing Questions





Almost anywhere you turn, you see news stories about the widening gap between the rich and the poor. As a result of this inequality, many prominent figures have come forth with their thoughts on how to fix things. Some want to raise taxes on the rich. Others want to raise wages for those working certain jobs.

Why the Rich Keep Getting Richer

What I don’t hear a lot of talk about though is why the gap really is widening. The reason is twofold: the rich invest their money and the government taxes income, not wealth. Let’s look at these two in more detail.

stock market

(Photo Credit: worradmu)

The Rich Invest

If you create an investment plan and hold a diversified portfolio for the long-term, you are going to experience an increase in the value of your investments. Just look at any historical chart of the stock market and you see that over the long-term the market trends up. Note when I say long-term, I am talking 20 years or more. Even with recessions and stock market crashes, in time the market always comes back.

The rich know this and they invest in the stock market, both for price appreciation and for income. I’ll get to the income part shortly. But the price appreciation is where most other investors fail. The market takes an unexpected drop and people sell out. I bet with the recent volatility a bunch of people ran for the hills. This is exactly the wrong thing to do. When an airplane hits turbulence, does the pilot land the plane and cancel the flight? No, he pushes through knowing that it’s just a little bump along the way. If most investors could take this same view, they would experience the price appreciation of the stock market over the long-term as well.

Read More: 3 Steps to Successful Investing

Taxing Income, Not Wealth

As it stands now, our tax code is set up to tax income. If you make $500,000 from a job this year, you are going to pay close to 40% of that in federal income taxes. On the other hand, if you earn $500,000 from your investments as long-term capital gains or qualified dividends, you are looking at a maximum tax rate of 20% (plus a portion which could be subject to the Investment Tax). That is a huge difference!

The rich know this and “earn” a good amount of their money from investments and not a job like you and I have. This allows them to keep 20% more of their money.

Read More: Do the Rich Pay More or Less in Taxes?

Generate Investment Income: How To Make The Transition

Obviously, you should want to make the transition from generating most of your income from a job to your investments. How do you go about doing this?

First, you need to start investing in the stock market and then stay invested, no matter what happens. By staying invested, I mean keep the holdings you currently have. You can’t jump from one mutual fund or ETF to another every 6 months or year. You have to hold the same positions for the long-term.

But, you can’t just invest $20 here and there and expect to see any results. If you truly want to reach a point where you are living off of the income from your investments, you need to invest a decent amount of money. In order to do this, you are going to have to make some sacrifices. Question the things you buy. Do you really need the new iPhone 6? Can you shop around for insurance coverage and get a better deal? Does refinancing make any sense for you? The more ways you can cut costs and invest more, the better off you will be.

Read More: Why You Should Save 1% More Each Year

An Example of Making The Transition

Let’s say you really want to make the transition. Start by looking at how much you spend in a year currently. Let’s say you spend $40,000 per year. We will assume that the investments you choose (a healthy mix of stocks and bonds) will throw off around 3% worth of income each year. If we do some fancy reverse engineering ($40,000 divided by 3%) we get $1.3 million. This tells us that you need to invest $1.3 million. That amount will generate an annual income of roughly $40,000. (Note that I did some rounding to make this easier to follow.)

You are probably looking at this and thinking there is no way I can save/invest $1.3 million. While it may not be easy, it is possible. You just have to do some thinking outside of the box. How close are you to paying off your mortgage? If you get rid of that expense, your annual expenses will be much less than $40,000 meaning you need to save less than the $1.3 million. Same goes for getting rid of a car loan or buying an older car so your insurance coverage is lower. Or maybe even moving to an area where the property and school taxes aren’t so high.

I’m not saying you have to do any of these things, I am just showing you it is possible if you expand your thinking. Maybe none of those things are worth it to you. If this is the case, then maybe you revise your goal. Maybe instead of living off of 100% investment income, you replace 50% of your income with investment income. This would allow you to quit your job and work in a field that pays less, but makes you much happier.

I am certain that if you just take some time to think about various ways to cut your expenses or to change the overall plan, you can find something that will work for you and allow you to earn an income through your investments. Don’t give up hope too quickly, there are always other options.

Final Thoughts

The real reason why the rich are getting richer is because they are investing their money in the stock market and taking advantage of lower tax rates. You too can take advantage of the lower tax rates, you just have to start investing for the long-term. While the challenge of building up your investment income might sound overwhelming, focus on the benefits that it will provide you and how much happier you will be.

More on Investing and Retirement





It’s time for end of year tax planning! Time to get your financial house in order for tax season! What could be more fun that taking a break from holiday festivities and shopping to start thinking about taxes?

It seems like every year when we do our taxes, there’s a few things we wish we would have done in December to reduce our tax bill just a little more. Sound familiar?

That’s where a little end of year tax planning results in great rewards!

Here’s an updated list of money moves to make before the new year.

Year End Tax Moves

  1. Run a preview. Before the end of the year run an estimate using the tax calculator or Turbo Tax. If you wait until the new year, it’s often too late to go back and make changes. Start running projections now before the year end!
  2. Bump up contributions to retirement plans. Contribute more to your 401k by the end of the year to reduce your taxable income and your tax bill.
  3. Plan for health insurance changes. The new penalty for no health insurance in 2014 and the Health Insurance Premium Tax Credit both apply for the first time this year. Here’s How to Claim the Health Insurance Premium Tax Credit on your tax return.
  4. Take your losses. Did you lose money on your investments? If so, you might as well sell them and take the capital loss. Commonly referred to as tax loss harvesting, losses (that exceed gains) are capped at $3,000, but you can carry them forward into future tax years. To understand why you might do this, here are 3 Benefits of Tax Loss Harvesting.
  5. Take your gains. Once again, you can pay 0% long term capital gains if you are in the 10% or 15% tax bracket. If you are planning to sell, you might as well do it before year end if you fall in this tax bracket!
  6. Review investment tax rules. Don’t forget about the 3.8% Investment Tax on investment income, including capital gains and dividends, that kicks in for high income filers. If you are subject to the investment tax pay close attention to your end of year strategy to realize gains and losses.
  7. Prepay your mortgage and real estate taxes. Even if your payments aren’t due until January, you can pay them in December to deduct this year, if you itemize. Should you pay this year or wait? For more information, see how to determine if you should accelerate your property tax deduction into the current year.
  8. Give away your money. If you were planning to give a lot of money to someone special, utilize your annual gift exclusion of $14,000. More than that and you are subject to the gift tax.
  9. Use your flex spending money. The use-it-or-lose it rule makes your money disappear if you don’t use it. Check your plan for the deadline to incur costs and submit reimbursement requests. If you don’t know what to spend your money on, see the list of ways to use all of your flex spending account. It’s also a good time to remember to enroll in your 2015 flexible spending account if you haven’t done so already. The $2,550 flex spending plan limit will go up $50 for 2015.
  10. Donate. We all know we can donate clothes, books, and household stuff to Goodwill. But dig deeper and you might be able to find more ways to make a charitable donation. For example, I like to remind newlyweds that you can donate wedding dresses and attire to take a tax deduction. Be sure to research the charity to make sure you know how your donations will be used.
  11. Finalize your records. If you plan to deduct mileage on your personal car make sure your mileage logs are complete. Remember you will save yourself time by being organized! Review how long you need to keep your paperwork before throwing out any records.
  12. Review your checklist. I keep an end of year tax planning and finance checklist. The checklist comes in handy to determine what needs to be done each year to keep our finances in order. If you don’t have an annual list, now is a great time to make one. Just write everything down as you go.
  13. Make 529 plan contributions. If your state has a deduction for 529 plan contributions, make your contribution before year end.
  14. Do an AMT analysis. If there’s a chance that you will be subject to AMT, analyze your deductions to see if you are better off waiting to make some of the above moves.
  15. Close your IRA. While this one is very extreme, I keep it in the list to remind you to review the performance of your IRA. If you carefully evaluated the pros and cons, and decided to take a loss on an IRA, you must close your account before year end to claim your loss on your taxes this year.
  16. Fund your IRA. You have until the tax deadline to maximize your Roth IRA contributions. However, if you’re getting an end of year bonus, it might be a good time to stash it away!
  17. Convert your IRAs. After running our tax estimates, I determine if it makes sense to make a Roth IRA Conversion. If you need to make one, don’t forget it needs to be done by the end of the year. In addition, if you are planning to use the Backdoor Roth IRA strategy this year, you also need to determine if you want to make your conversion by the end of the year.

Determine if You Need to Pay Tax or File

Finally, after you’ve reviewed all the end of year planning, review the requirements for filing and paying taxes. Finding out in April that you need to pay tax on unemployment, you made over the minimum income to file taxes, your kids need to file taxes or that your social security benefits are taxable aren’t usually welcome surprises. Do yourself a favor and review the requirements before the end of the year.

What additional moves are you planning to make for 2014 end of year tax planning?

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