THE 2016 ROAD TO
Financial Success
ARTICLE
GUIDE
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TAX NEWS YOU CAN USE FOR SUCCESS, KNOW WHERE YOU ARE AND WHERE YOU WANT TO GO
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UNDERSTANDING AND MAXIMIZING EMPLOYER BENEFIT PACKAGES IF YOU’RE THINKING ABOUT A CAREER CHANGE . . .
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MAKING COMPOUND INTEREST WORK FOR YOU USING CONTRACTS AS PART OF YOUR ESTATE PLAN
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ROAD TO FINANCIAL SUCCESS // 2016
Tax News
USE YOU CA N
STO RY PR OVIDED BY JO D I D U N FEE, CPA, R U D D & COMPANY
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t’s the beginning of a new year. For some, that means a fresh start and new resolutions. For CPAs in the valley, it’s time to focus on tax returns and updates in order to better serve you and save you more of what you’ve earned. In mid-December, the PATH (Protecting Americans from Tax Hikes) Act of 2015 made a number of tax breaks permanent and extended others for at least another year. Additionally, the regulations associated with the Affordable Care Act’s individual mandate continue to cause headaches, and the fines associated with not having health care can be more than triple the fines of 2014. Let’s take a short tour of what might affect your 2015 taxes. The PATH Act permanently extended three tax credits that may benefit you: 1) For 2015, the Child Tax Credit (CTC) is $1,000. Should this credit exceed your tax liability, it is eligible for refund equal to 15 percent of earned income in excess of a threshold dollar amount set at $3,000. 2) Another popular tax credit that you may be eligible for is the American Opportunity Tax Credit
(AOTC). The credit is set at $2,500 per year for four years of post-secondary education to cover tuition and related expenses. As with most tax breaks, it does phase out for AGI (adjusted gross income), starting at $80,000 for those filing as singles and $160,000 for married filing jointly. 3) The Earned Income Tax Credit (EITC) is a benefit for those who fall under a certain threshold of earned and investment income. The limits are based on your filing status and the number of children you claim on your tax return. The PATH Act permanently increased the credit amount for those with three or more children and increased the phase-out range by $5,000 for those who are married and file jointly. For those of you who operate your own business, we have highlighted three key extensions for you as well. Depreciation expense is often a large deduction that has the ability to move an individual or business between tax brackets. The following items pertain to this expense: 1) Section 179 immediate expensing limitations remain at $500,000. This means that certain personal property that you purchased in 2015 may be eligible to be expensed in that period, rather than depreciating it over the life of the asset.
ROAD TO FINANCIAL SUCCESS // 2016 2) Qualified leasehold improvements, qualified restaurant building improvements and qualified retail improvements are eligible for 15-year straight-line cost recovery. 3) Bonus depreciation of 50 percent was extended for tax years 2015-2017. Property acquired and placed in service during 2015 is eligible for 50 percent bonus depreciation, in addition to regular depreciation. The PATH Act also modified bonus depreciation to include qualified improvement property. The bonus depreciation amount reduces to 40 percent in 2018 and 30 percent in 2019. Another benefit that was permanently extended was the ability to contribute tax-free distributions from your IRA for charitable purposes if you are at least 70-and-a-half. This could be a useful planning tool for those who fall into the age bracket. It’s important to note that the exclusion may not exceed $100,000 per taxpayer. If you are married and file a joint return, you can give a total of $200,000, with no more than $100,000 distributed from each spouse’s IRA.
Act, if you failed to have health coverage, you will likely pay an additional tax as either a basic fine or an income-based levy. For 2015, the basic fine is $325 per adult ($162.50 per child) with a family ceiling of $975. These amounts are more than triple those of 2014. Looking forward to 2016, the fee per adult will be $695 with a family ceiling of $2,085. The income-based levy is 2 percent (2.5 percent in 2016) of the excess of household income over the tax return filing threshold in 2015. Be sure to let your accountant know if you did or did not have health insurance for the entire year. There are many more extensions and enhancements that might benefit you on your 2015 tax return. Contact your tax professional or give us a call at Rudd & Company to discuss your personal financial situation. We would be happy to help you navigate any questions you have!
Another benefit that was permanently extended was the ability to contribute tax-free distributions from your IRA for charitable purposes if you are at least 70-and-a-half. This could be a useful planning tool for those who fall into the age bracket.
Contact Rudd & Company, 406-585-3393.
We hope that you did not fail to have health insurance in 2015. Under the Affordable Care
Tax Free Exchanges • Bookkeeping & Payroll Services
Call us today to speak to one of our Tax Professionals
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ROAD TO FINANCIAL SUCCESS // 2016
For Success, Know Where You Are and Where You Want to Go BY KE LLY FLEI N E R , C U B D P / / R OCKY MOUNTAIN CREDIT UNION
FINANCIAL SUCCESS IS EASY; YOU JUST HAVE TO KNOW HOW TO DO IT. Are you spending less than you earn? Do several loan payments easily consume your entire paycheck? To be financially successful, you have to consistently spend less than you earn.
Know your financial situation. What do you earn? What do you spend? Do you know your net worth? The majority of Americans do not know what they spend, and that can lead to financial trouble. Know all of these things and monitor them regularly.
A great rule for your financial success is to pay yourself first. Whether it is your employermatched 401(k) or a separate savings account you don’t see every day, pay yourself first. If you don’t pay yourself first, and just pay all of your bills, you are less likely to save anything. So pay yourself first. Know your financial situation. What do you earn? What do you spend? Do you know your net worth? The majority of Americans do not know what they spend, and that can lead to financial trouble. Know all of these things and monitor them regularly. Understand your attitude toward money. Do you know what affects your behavior toward money? Whether you are a spender or a saver, your history with money can help you determine those triggers. Take a look back at your spending history and decide what triggered those purchases. This
will give you a greater understanding of what to look for going forward. Setting financial goals gives us an idea of what you should aim for; what are your goals for this year, the next five years and even the next 10? Write them down and put them somewhere you will constantly see them. Your chances of achieving your goals greatly increase with the constant reminder. Here are six tips to help you on the road to financial success: 1) Automate your savings. Can your financial institution help you set up an automatic withdrawal to your savings that you never see? This will help you stick to those savings goals. 2) Control your impulse spending. Does that lip gloss in the checkout line look like a good deal? How about the candy, soda and chips? They are there for one reason – to increase your spending. 3) Live within your means. This is nonnegotiable if you want to be financially successful. You must spend less than you earn. 4) Invest in your future. In other words, SAVE!
ROAD TO FINANCIAL SUCCESS // 2016
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Save for retirement, save for that vacation, save for big purchases. If you make savings a part of your plan, you will be financially successful. 5) Pay off or pay down your debt. Do you have an extra $10 you can apply to that credit card debt every month? Do it. The minimum payment does not cut it anymore. Even an extra $10 above that will help save you money on interest charges on your debt. 6) Automate paying your bills. Does your institution offer a free bill-pay service? If so, use it. Or look for ways to utilize auto-payments on your bills. The more automated this process, the less likely it is that you will get in trouble not making your payments. Here’s one last tip for financial success. Even if you can only afford your minimum payments every month, make sure you are making them. Nothing destroys a credit score faster than late or missed payments.
Contact Rocky Mountain Credit Union at 406-586-1505.
OUR STRENGTH IS YOUR STRENGTH We’ll put more than 100 years of financial experience and stability on the side of your goals. • Rated A++ (Superior)—the highest of 16 ratings— by independent insurance analyst A.M. Best.1 • $182.5 billion of life insurance in force.2 • $105.4 billion in assets under management.2
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Thrivent Financial was named one of the “World’s Most Ethical Companies” by Ethisphere Institute 2012–2015.
141 Discovery Dr., Suite 216 Bozeman, MT 59718 deb.matus@thrivent.com Thrivent.com/fr/deb.matus Facebook.com/deb.matus.thrivent
Insurance products issued or offered by Thrivent Financial, the marketing name for Thrivent Financial for Lutherans, Appleton, WI. Not all products are available in all states. Securities and investment advisory services are offered through Thrivent Investment Management Inc., 625 Fourth Ave. S., Minneapolis, MN 55415, a FINRA and SIPC member and a wholly owned subsidiary of Thrivent. Thrivent Financial representatives are registered representatives of Thrivent Investment Management Inc. They are also licensed insurance agents/producers of Thrivent. For additional important information, visit Thrivent.com/disclosures. 26226A R4-15 Appleton, Wisconsin • Minneapolis, Minnesota • Thrivent.com • 800-847-4836
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ROAD TO FINANCIAL SUCCESS // 2016
Understanding and Maximizing Employer Benefit Packages MOST PEOPLE WOULD GIVE THEMSELVES A RAISE IF THEY COULD. Yet some Montanans are missing the opportunity to do just that. More than 60 percent of American workers have access to an employer-based retirement plan, but those who don’t take advantage of it are leaving money on the table. There are several ways workers can increase their income by participating. Many plans are defined contribution plans which typically have a formula that determines the matching contribution an employee is entitled to receive from his or her employer. For example, a company may contribute $1 for every $2 the employee contributes. The formula may limit the matching contribution to a percentage of the employee’s salary, such as the first 6 percent. In this case, a person who contributed 6 percent of his or her salary receives an additional 3 percent for the same work. For someone making $35,000 per year, this is worth more than $1,000. Contributing to a retirement plan also lets the employee take advantage of tax benefits. Contributions to defined contribution plans are a pretax deduction. An employee earning $3,000 per month who does not contribute to the retirement plan will take home approximately $2,290 (total deductions vary depending on tax withholding status, tax brackets
BY JOEL SCHUMACHER, MONTANA STATE UNIVERSITY EXTENSION ECONOMICS SPECIALIST
and other factors.) If this same employee contributed $150 (5 percent) to the defined contribution retirement plan, the take home pay would be reduced by $115. The payroll tax savings would be $35. If the employer also matched 50 percent of the contribution, the employee would receive $225 in the retirement plan, at a personal cost of $115. This amounts to an additional $1,320 annually. Employees who are not certain of the benefit package offered by their employer should first talk to the employer’s payroll or human resources office for guidance. Understanding and maximizing employer benefit packages may be the easiest way to get a raise.
Montana State University Extension is a statewide educational outreach network that applies unbiased, research-based university resources to address community needs. It offers consumer economics education throughout the year. Visit http://msuextension.org Contact: Joel Schumacher at jschumacher@montana.edu, 406-994-6637.
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Estate Planning | Living Trusts | Trust Services Let’s talk about how Stifel can help you care for your family today and tomorrow. For more information on Stifel Trust services, please contact our office today.
(406) 586-1385 | (800) 955-3443 875 Harmon Stream Boulevard, Suite 200 Bozeman, Montana 59718 References to Stifel may apply to parent company Stifel Financial Corp. or any of its wholly owned subsidiaries, including Stifel, Nicolaus & Company, Incorporated. Trust & fiduciary services are provided by Stifel Trust Company, N.A. and Stifel Trust Company Delaware, N.A. (Stifel Trust Companies), wholly owned subsidiaries of Stifel Financial Corp. and affiliates of Stifel, Nicolaus & Company, Incorporated, Member SIPC & NYSE. Unless otherwise specified, products purchased from or held by Stifel Trust Companies are not insured by the FDIC or any other government agency, are not deposits or other obligations of Stifel Trust Companies, are not guaranteed by Stifel Trust Companies, and are subject to investment risks, including possible loss of the principal invested. Stifel Trust Companies do not provide legal or tax advice. Stifel, Nicolaus & Company, Incorporated | Member SIPC & NYSE | www.stifel.com
ROAD TO FINANCIAL SUCCESS // 2016
If You’re Thinking About a Career Change . . . BY ST E P H E N R . H A M P L E , P H . D .
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f it feels like it’s time to make a change, it probably is. However, look before you leap.
It’s estimated that the average American will change careers five or more times during his or her working lifetime. Younger workers will likely switch fields or positions more often.
Today, Americans have almost unprecedented opportunity to make career choices and changes. If we had been born to a camel-herding family in a remote desert, we would probably expect a lifetime involvement with camel herding. If we had been born earlier in human history, we might have been too busy searching for the next meal or avoiding the next tiger to even think about long-range work options. Today, if we hit a bump in the road of life, we can at least imagine we’ll have flexible options. This article probably applies most to people who are undecided: for whom things are neither great nor terrible in their current job. Perhaps a new boss has changed working conditions, or an industry is changing and layoffs loom. Perhaps there is an opportunity, but with risk. Perhaps there is an inheritance that now allows doing something important but low-paying.
“Finding one’s passion” is a current form of saying “Do what you like doing.” Good advice. If a good fit is found, the worker will be happier, which can spread to coworkers and family and improve success. Seek input from others. Talk to people who currently work in the desired field and ask how they chose such work and its good and bad aspects. Use the resources of a job service or other career counseling. Use networking, too. Sometimes opportunities don’t even exist until a merger of ideas happens. Sometimes a big change does not work out. For that reason, first consider whether a modification in the current career could improve satisfaction while retaining relevant experience, credentials and connections. Don’t burn bridges as you leave. And don’t bet your entire life savings on the first attempt at a big change. When traveling in China I asked an elderly woman who had lived through the famine of the 1920s, the world wars and the Communist revolution if she had any advice on life. Through an interpreter she replied, “Be happy.” Recent financial industry retiree Dr. Stephen R. Hample, CFP is now a partner in an angel fund investment group. He was the founding president of the Bozeman Area Community Foundation and of the Bozeman Sunrise Rotary Club.
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Making Compound Interest Work For You ARTICLE PROVIDED BY BANK OF BOZEMAN
Compound interest is interest paid on interest already earned on a deposit or loan. Think of it as ‘interest on interest’. For those of you who struggle to pay off credit cards, compound interest is likely the culprit. Interest from the prior month is added to the principal you owe and you’re being charged interest on interest. Before long that $200 pair of shoes can end up costing you $600 or more. That is why many financial advisors recommend eliminating credit card debt. Saving money is a way to turn the tables and have compound interest work for you rather than against you. To gain an understanding of how powerful compound interest can be, let’s look at an example of four hypothetical individuals: Karl, Joanne, Kylie and Branson. We’ll assume an average savings interest rate of 5% over their lifetimes, monthly compounding of interest, and they all stop depositing additional funds at age 70. Karl is leading a very busy life and feels he has always had too many nearterm obligations to save money. First it was buying a car, then paying off his own student loans, then getting married and buying a house, then paying for all the expenses raising kids, then their college....but he has resolved to start saving when the last kid is out of school. So at age 55, Karl starts regularly saving $1,000 every month. Joanne spent all her money in her youth and incurred many expenses during and right after college that kept her from saving. But at age 25, Joanne starts saving $200 per month.
Kylie started saving as soon as she got her first job at age 15. She and her Dad walked down to her local community bank and opened a minor account for her and she has deposited $150 per month ever since. Branson’s grandparents opened an account for him the month he was born. They took advantage of the bank’s referral program for new accounts and deposited $100 per month until Branson became 15, then Branson took over the tradition and made the monthly $100 deposits. The lesson from the illustration (refer to the Investment Growth chart) is obvious: it’s never too late to start saving, but starting early can make a huge difference in achieving financial security. Saving regularly is practicing delayed gratification, and many psychologists view the practice of delayed gratification as a way to help develop emotional maturity. And unlike the swings of the stock market, your bank account never goes down unless the money is withdrawn. Your money slowly and steadily grows with the assurance that it’s safe because it is covered by the Federal Deposit Insurance Corporation up to $250,000. No one has ever lost money with an account that was FDIC insured - even if the bank went out of business - no one. Why start saving for your future with a community bank? Local community banks reinvest your money in the community. Start saving with a local community bank, your future self will thank you!
ROAD TO FINANCIAL SUCCESS // 2016 //
INVESTMENT GROWTH $2.0m $1.8m
Branson $1,707,821.81 FUND BALANCE
$1.6m $1.4m $1.2m
Kylie $1,168,933.98 $1.0m
Joanne $904,237.95 $800k $600k
Karl $596,349.09 $400k
A BANK FOR ALL OF US.
$200k $0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85
INVESTOR AGE
START SAVING FOR YOUR FUTURE TODAY If you have a vision for your future and are ready to make it a reality, let us be a part of your plan to get there. Our competitive rates will help you make your savings grow. Banking with a local, independently owned community bank means that your dollars are reinvested in the community. That’s the difference of truly, local banking.
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OWN ED
COMMUNITY About the Author: Clinton Gerst is the President of Bank of Bozeman, an Independent Community Bank in Bozeman, Montana. This article is provided for educational and informational purposes only, without any express or implied warranty of any kind, and should not be considered legal or financial advice. All expressions of opinion reflect the judgment of the author as of the date of writing and are subject to change. You should consult with an attorney or other professional to determine what may be best for your individual needs.
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406.587.5626 | BANKOFBOZEMAN.COM
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Using Contracts as Part of Your Estate Plan BY MA RSH A A . G O E T T I N G , M O NTANA STATE UNIVE RS I T Y E X T E N S I O N FA MILY EC ON OM ICS SPE C I A L I ST
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o leave assets to specific individuals or a charity, you may want to utilize “new and improved” estate planning tools provided by the Montana Uniform Probate Code (UPC). The UPC allows you to pass some of your assets by using specific contractual arrangements such as payable on death designations (PODs), transfer on death registrations (TODs) and beneficiary designations. Details on PODs, TODs, beneficiary designations and wills and trusts can be found in the resources at the end of this article. Contracts such as these will allow you to leave assets to family, friends, community foundations or other charitable organizations. You have an opportunity to make decisions about whom you want to receive your property after death. If you don’t write a will or establish a trust, the UPC provides a list of priority family members who will inherit your property. Although family members are the primary heirs for many Montanans, other Montanans are leaving some or all of their assets to charitable organizations or educational institutions. While wills and trusts have been the traditional methods of leaving assets to heirs and charities, the UPC provides additional methods that are often easier to update and less expensive.
As responsible Montanans we should consider who we want to receive our assets at death and then execute the appropriate legal documents to make certain our final wishes are carried out. PODs, TODs and beneficiary designations are legal documents, in addition to a will or trust, for assuring your property passes to the persons or charitable organizations you desire. More information about beneficiary designations is available in MSU Extension MontGuides (Fact Sheets). For people who do not have computer access, copies of “Non Probate Transfers” and “Designating Beneficiaries Through Contractual Arrangements” are available from your county MSU Extension office. The MontGuides are also available at http://www. montana.edu/estateplanning/eppublications.html or from, PO. Box 172800, Montana State University, Bozeman, MT 59717.
Montana State University Extension is a statewide educational outreach network that applies unbiased, research-based university resources to address community needs. It offers consumer economics education throughout the year. Visit http://msuextension.org. Contact Marsha A. Goetting at goetting@montana.edu, 406-994-5695.
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Dying Without a Will
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id you know that seven out of 10 Americans die without writing a will? Are you one of those seven? If you nodded yes, you need to know that upon death, your property will be distributed to your heirs according to the intestacy statutes in the state where you live. Montana’s intestacy statutes may not be the best solution for individual family circumstances. Believe it or not, 85 percent of Montanans who have participated in MSU estate planning programs indicated state law would not distribute property in the way they would like. Do you know how your property would be distributed under Montana law? Go to this MSU Extension website* to find out, www.montana.edu/dyingwithoutawill. MSU Extension specialists created this website to show where your property would be distributed if you pass away without writing a will.
Whether you are married with kids, married without kids or single, you can simply click “yes” or “no” to a variety of questions at the website. Once you answer all the questions, the program illustrates where your property passes. While the 39 illustrations describe “typical” family situations, if you discover that your family situation is not illustrated, send me an email asking for more information.
BY MARSHA A. GOETTING MONTANA STATE UNIVERSITY EXTENSION FAMILY ECONOMICS SPECIALIST
If you agree with how the state distributes your property, perhaps you don’t need to write a will. But how many of us actually know what the state law says or when the law changes? A will gives you control over where your property passes at death. * For people who have slow or no Internet service, an interactive CD with the same information as the website is available at no charge by contacting Marsha Goetting by email, or ordering from the address below. For people who want to share this information with family members without computer access, copies of a fact sheet “Dying Without a Will” are available from your county MSU Extension office, or from P.O. Box 172800, Montana State University, Bozeman, MT 59717. The MontGuide fact sheet is also available online at: http://msuextension.org/publications/FamilyFinancialManagement/ MT198908HR.pdf
Montana State University Extension is a statewide educational outreach network that applies unbiased, research-based university resources to address community needs. It offers consumer economics education throughout the year. Visit http://msuextension.org. Contact Marsha A. Goetting at goetting@montana.edu, 406-994-5695.
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Invest Early and Often BY ST E P H E N R. H A M P L E , P H . D .
Good financial habits, started early in life, can be amazingly beneficial. Years ago I had a client who made regular monthly investments. Sometimes she could not afford to do so, and sometimes she invested extra. She followed that good habit without paying much attention to the account. Years later when she came into my office for retirement financial planning, she was amazed that the account had grown to $162,000. Here’s some interesting math: If a person age 25 starts investing $100 per month in a tax-deferred account constantly growing at a 6 percent annual rate compounding monthly, in 480 months, when the person is 65, the account will be worth $200,000. Some interesting things happen along the way. At about Month 140, the monthly reinvested earnings on the balance become $100, and thus the account is then growing at $200 per month. By Month 278, the account grows at three times the $100 contribution. The compound growth of earnings becomes a powerful money generator on its own. An actual investment probably won’t have such a smooth rate of return, but over 40 years, the assumptions are not out of line. While our example doesn’t account for inflation, it also doesn’t factor in likelihood that over 40 years, the person would increase the monthly investment. The point is that even a relatively small, painless, regular monthly investment can become a significant asset. Two basic tax concepts apply to such tax-deferred retirement accounts:
1) Money going into an IRA or similar account must come from “earned income.” It would be hard to prove that a five year old actually did work to earn an income. However, a 15 year old with a summer job might meet that requirement and arguably should start a Roth style IRA. Parents or grandparents could provide incentives. 2) Money going out of a retirement account is subject to a tax penalty if withdrawn before a normal retirement age, but the penalties might not be as harsh as they sound and do not apply in some cases. For example, a penalty tax percentage for a Roth withdrawal applies only to the earnings and not the principal (and possibly a significant additional helpful feature may apply). Also, there is generally no early withdrawal penalty for up to $10,000 taken out and applied to the first-time purchase of a home. Finally, Roth IRA withdrawals should not be taken until five years after the first deposit is made; after that a five-year-penalty rule does not apply, such as for a 20 year old who opened the account at age 15. Tax rules for retirement accounts can be complex, so verify details with a tax adviser. Some good news is that you will not be subject to a quiz on these numbers. Just remember that starting a painless, small, automatic monthly investment can work well over time, especially for young people who can be encouraged to start early.
Recent financial industry retiree Dr. Stephen R. Hample, CFP is now a partner in an angel fund investment group. He was the founding president of the Bozeman Area Community Foundation and of the Bozeman Sunrise Rotary Club.