January 2008 Financial Articles

• Keep Your Financial Resolutions This Year 
• Five Steps to Achieve Your Financial Goals
• Tax-Deductible Donations: What You Need to Know
• Tax-Smart Retirement Planning

Paying off debt and saving money are among the most popular New Year’s resolutions. The Virginia Society of CPAs has some helpful tips for those who want to meet to meet their financial objectives in the coming months.

Make a plan

People often to fail to keep their New Year’s resolutions because they don’t plan out the steps they need to succeed. It’s difficult to reach your goals if they aren’t clearly defined. Take the time to list your financial resolutions and be as specific as possible about what they are and how they can be achieved.

Pay off debts

When you make your resolutions list, CPAs advise that lowering your outstanding credit card debt should be a top priority. Credit cards typically carry high interest rates that drain cash that you could be using for more worthwhile purposes. To reduce your debt, resolve to cut back on other expenditures so that you can use these funds for credit card bill payments. Also, consider ways to lower the interest rates you are paying. Call your credit card company and see if you can negotiate a better rate. If that doesn’t work, transfer your balance to a credit card with a lower rate. Web sites like www.bankrate.com and  www.creditratings.com offer advice on the best cards for many different situations.

Taking out a home equity loan is another option, since they carry lower interest rates than charge cards and the interest is usually deductible for loans up to $100,000. Finally, if you have money in a savings account or certificate of deposit that is earning very low interest, it might be a good idea to use those funds to pay off debt. You will be saving more on interest payments than you earned on the savings account.

Start saving

As soon as you have reduced your high-rate debt, start adding to your savings, particularly your retirement account. The money you set aside can be earning interest or stock market returns that will come in handy later. Traditional individual retirement accounts (IRAs) or Roth IRAs also offer worthwhile tax advantages, CPAs advise. This step is easy if you arrange for automatic payments made to a savings or retirement account from your checking account.

Make the most if your investments

It’s a good idea to review all your investments every six months to be sure they are still meeting your financial planning needs. If interest rates have risen recently, for example, you may find certificates of deposit or other safe, short-term investments that will pay more interest than your savings account. Review your stocks and mutual funds, too, to see if they are performing as expected or if another investment would provide a better return.

Keep great records

You can’t make good financial decisions without the right information, so it’s important to maintain and update documentation on your major accounts and transactions. Set aside a file box and add important paperwork, such as your property tax bills, mortgage interest statements and receipts for donations to charity. And remember that your CPA can help you with your financial decision-making. Consult him or her on the best ways to keep all your financial resolutions.

The Virginia Society of Certified Public Accountants (VSCPA) is the leading professional association dedicated to enhancing the success of CPAs. Founded in 1909, the VSCPA has approximately 8,300 members who work in public accounting, industry, government and education. For more information, please visit the Press Room on the VSCPA Web site at www.vscpa.com, e-mail communications@vscpa.com or call (800) 733-8272. For more information on financial literacy topics like money management, or to search for a CPA in your geographic region, visit www.FinancialFitness.org. 

 

What are your financial aspirations for the coming year? Would you like to pay off some high-interest debt? Step up your retirement savings? Set aside enough for an exciting vacation? The Virginia Society of CPAs recommends that you take several wise steps to turn your financial dreams into realistic goals.

Create a budget

It will be difficult to lower your debt or save for your future if you don’t have a clear idea of your current finances and how you’re spending your money. Whether you use a software program or a sheet of paper, figure out what you earn and what you spend. In the spending category, include regular items such as rent or mortgage, car payments and other outstanding loans. Next, make accurate estimates about your variable expenses, such as food, transportation, entertainment and clothing. Try to include those easily forgotten expenses, such as the price of takeout lunch at work or stopping for a bottled water or coffee.

Look for red flags

Now that you’ve listed what you spend each month, consider problem areas. Do you have a high-interest loan or credit card balance? Are you spending a lot each month on take out meals or entertainment? Think about whether you can make better choices. Just because you can afford certain expenses, that doesn’t mean you are making the best use of your money. If you change bad spending habits or poor choices, you can preserve your cash and use it more wisely.

Make saving automatic

We all know that saving something each week is a good idea, but we can easily forget to do it. That’s why it’s a good idea to enroll in an automatic savings plan at your bank or a 401(k) plan through your employer. Remember that you don’t have to settle for a low-interest savings account. Some mutual funds accept initial deposits of as little as $50 or will even waive the deposit requirement if you agree to save a certain amount each month. Many people aim to save whatever remains at the end of each month but find that there’s little left. When you designate an amount for automatic savings, it becomes a part of your regular budget and can’t be forgotten.

Choose realistic goals

Paying off all of your debt is an excellent goal, but it may not be something you can accomplish this year. That’s no reason to give up, however. You can make great progress if you set reasonable short-term goals that are achievable and that will also make a difference in your financial life. If you resolve to reduce your debt by 25 percent this year, for example, you might be in a better position to make a meaningful, positive change in your financial situation and gain the satisfaction of accomplishing a goal.

Monitor your progress

Your aspirations and your financial situation may change as the months go by. As a result, review your goals and your progress toward them at least every six months to see how successful you have been and if you need to make changes in your goals, savings rate or any other factors.

Ask your CPA for advice

You can achieve your dreams if you understand where you stand now, chart a course toward your goals and take the necessary steps to get there. For these and any other financial issues, be sure to consult your CPA. CPAs have the expertise you need to put your financial picture in focus.

The Virginia Society of Certified Public Accountants (VSCPA) is the leading professional association dedicated to enhancing the success of CPAs. Founded in 1909, the VSCPA has approximately 8,300 members who work in public accounting, industry, government and education. For more information, please visit the Press Room on the VSCPA Web site at www.vscpa.com, e-mail communications@vscpa.com or call (800) 733-8272. For more information on financial literacy topics like money management, or to search for a CPA in your geographic region, visit www.FinancialFitness.org.  

 

Americans donated an estimated $295 billion to different charities in 2006, a new record, according to “Giving USA 2007,” a report from the Giving USA Foundation. Our generosity allows us to make a difference to a wide range of worthy causes.

There’s a reward for this generosity, too, because it also qualifies you to take tax deductions for your donations. Recent changes in the tax law have made a difference on which deductions you are allowed to claim, advises the Virginia Society of CPAs.

Get it in writing

First, you should be aware that you can only claim a charitable donation if you itemize on your tax return. In general, you are allowed to deduct your contributions of cash, checks or other monetary gifts to a qualified tax-exempt organization, such as a house of worship or charity. In the past, it might have been acceptable to keep personal notes showing that you had dropped some cash in the collection plate. Under the new rules, when you donate cash, you will need documentation.

If you give money, your documentation can be a cancelled check or a bank, credit union or credit card statement showing the donation. If you give monetary gifts, you will need a written record of what you gave. No matter what you give, a bank record or a receipt from the charity must include the organization’s name, the amount of the contribution and the date of the donation. If you donate through a payroll deduction, you will need a pay stub, Form W-2 wage statement or some other documentation from your company showing how much was withheld, along with a pledge card that gives the name of the charity. Without these records, you won’t qualify for a deduction.

Take pictures

We all know that any non-monetary items donated to a charity should be in good, useable condition, but the Internal Revenue Service (IRS) now requires that taxpayers prove that they are. This applies to all clothing and household items, which the IRS defines as furniture, furnishings, electronics, appliances, etc.

If you donate something now and you are questioned about its condition a year later, it will be difficult to establish that it was in good condition. As a result, CPAs advise that you photograph your donated items and make notes about their condition.

Confirm the value

In some cases, a receipt from a charity may not be sufficient to get your deduction. If you claim more than a $5,000 income tax deduction for items other than readily valued property, the property must be appraised.

Research the charitable organization

You can only deduct donations made to groups that the IRS considers to be “qualified.” In general, that means that the group is a religious, charitable, educational or other philanthropic organization approved by the IRS to receive deductible contributions.

If you want advice on charitable giving, your CPA can help you understand the guidelines.

The Virginia Society of Certified Public Accountants (VSCPA) is the leading professional association dedicated to enhancing the success of CPAs. Founded in 1909, the VSCPA has approximately 8,300 members who work in public accounting, industry, government and education. For more information, please visit the Press Room on the VSCPA Web site at www.vscpa.com, e-mail communications@vscpa.com or call (800) 733-8272. For more information on financial literacy topics like money management, or to search for a CPA in your geographic region, visit www.FinancialFitness.org.

In the past, companies supplied retirement funds for their employees through defined-benefit pension plans that paid a set amount to retirees. Today, those plans are rare, and employers are increasingly shifting the responsibility for retirement savings to employees. That means that workers must take an active role in planning — and saving — for their retirement. The good news is that there are many tax-advantaged options that can enhance the growth and earnings power of your retirement nest egg, according to the Virginia Society of CPAs.

Don’t overlook the 401(k)

Company-sponsored 401(k) plans offer tax advantages and an easy way to automatically accumulate retirement money, so they’re well worth investigating. In a 401(k), you choose a percentage of your salary, up to an annual limit, that is set aside in an investment retirement account. Employees over age 49 may make additional catch-up contributions. You save money on the contribution because it is not taxed in the year you earn it. In addition, you don’t have to pay taxes on the earnings on your money until distributions are made — a time when you’ll likely be in a lower income tax bracket. Distributions made before age 59½ generally also are subject to a 10 percent penalty for premature withdrawals.

Choose wisely

Not all 401(k) plans are alike, however, so you should examine your investment options under the plan. Look for a reputable investment manager and fund choices that enable you to pick an investment that meets your risk tolerance and investment goals. Monitor the plan’s performance to see if it’s time to move into a different investment.

Take advantage of employer matching

Many employers will deposit a certain amount to your retirement plan based on your own contributions. For example, a company might match 50 percent of your contribution up to 6 percent of your salary deferral. The company match essentially amounts to a tax-free bonus, so it’s well worth contributing enough to your account to qualify for the match.

Open an Individual Retirement Account

401(k) accounts are great investments because of the employer match and because the maximum contributions are typically higher than those of Individual Retirement Accounts (IRAs). However, if your employer does not provide for a 401(k), you should consider opening an IRA. There are two basic choices: traditional IRA and a Roth IRA.

With a traditional IRA, your contributions are tax deductible provided you receive compensation that is includable in income and are not age 70½ or older during the tax year. Amounts earned are not taxed until distributions are made. With a Roth IRA, the contribution itself is never deductible. However, the earnings and price appreciation generally are free from income tax when money is withdrawn from the account.

Your choice of an IRA will depend on your financial situation and what you expect your tax burden to be when you retire. No matter which you select, remember to consider a spousal IRA if you are married and filing a joint return. Even if only one spouse is employed, the other spouse is generally allowed to make an IRA contribution as well, which is a great opportunity to expand your family’s tax-deferred retirement savings.

If you are unsure of the best retirement options, be sure to turn to your CPA with questions on retirement and any other important financial issues facing your family.

The Virginia Society of Certified Public Accountants (VSCPA) is the leading professional association dedicated to enhancing the success of CPAs. Founded in 1909, the VSCPA has approximately 8,300 members who work in public accounting, industry, government and education. For more information, please visit the Press Room on the VSCPA Web site at www.vscpa.com, e-mail communications@vscpa.com or call (800) 733-8272. For more information on financial literacy topics like money management, or to search for a CPA in your geographic region, visit www.FinancialFitness.org.