Helpful Websites & Phone Numbers

Oklahoma Society of CPAs www.KnowWhatCounts.org (800) 522-8261 Find Your CPA www.FindYourCPA.com Tinker Federal Credit Union www.TinkerFCU.org (800) 456-4828 OKC Estate Lawyer (Donna Jackson, CPA) www.OKCEstateLawyer.com (405) 840-1874 Quail Creek Bank www.QuailCreek.bank (405) 755-1000 Weokie Credit Union www.Weokie.org (800) 678-5363 Retirement Investment Advisors www.theretirementpath.com (405) 842-3443 360 Degrees of Financial Literacy from AICPA www.360financialliteracy.org Oklahoma Jump$tart Coalition www.OklahomaJumpstart.org Oklahoma 529 College Savings Plan www.ok4saving.org (877) 654-7284 Oklahoma Money Matters www.OklahomaMoneyMatters.org Oklahoma Council on Economic Education www.EconIsOK.org (405) 513-6315

Financial Education, Feed The Pig www.FeedThePig.org Speakers, Assistance Federal Student Aid www.fafsa.ed.gov (800) 433-3243 InvestEd www.investedok.org IRS www.irs.gov (877) 777-4778 Oklahoma Tax Commission www.tax.ok.gov (800) 522-8165 Oklahoma Society of CPAs www.KnowWhatCounts.org (800) 522-8261 Ta x

Help FindYour CPA www.FindYourCPA.com AICPA www.360taxes.org

Federal Trade Commission www.ftc.gov (202) 326-2222 Government-Authorized Free Credit Report www.AnnualCreditReport.com (877) 322-8228 Equifax www.Equifax.com (800) 685-1111

Help Experian www.Experian.com (888) 397-3742 TransUnion www.TransUnion.com (855) 681-3196

Consumer Quizzle www.Quizzle.com (800) QUIZZLE

Okla. Small Business Development Center www.oksbdc.org (580) 745-2877 Oklahoma Department of Commerce okcommerce.gov (800) 879-6552

Help U.S. Small Business Administration www.sba.gov (800) 827-5722 Small

Business Free CPA referral in Oklahoma www.KnowWhatCounts.org (800) 522-8261

Oklahoma Department of Veterans Affairs odva.ok.ov (855) 701-6382 Military Hub www.militaryhub.com National Resource Directory www.nrd.gov Help Military OneSource www.militaryonesource.mil (800) 342-9647 Miliatry Troops to Teachers (Okla.) sde.ok.gov/sde/troop-to-teachers (800) 231-6242

Money as You Grow www.MoneyAsYouGrow.org Rich Kid Smart Kid www.RichKidSmartKid.com H.I.P. Pocket Change www.USMint.gov/kids/ for Biz Kids bizkids.com/

Children Junior Achievement of Oklahoma www.jaok.org Education

American Red Cross www.redcross.org (800) 733-2767 Federal Emergency Management Agency www.fema.gov (800)-621-FEMA Oklahoma Office of Homeland Security www.ok.gov/homeland (405) 425-7296 Disaster Recovery Resources http://bit.ly/2m6iFOJ Disasters Emergency

Your Personal Phone Numbers Name How Related (Family, friend, Employer, CPA, attorney, doctor, etc?) Phone Number About the Financial Fitness Kit Oklahoma Society of table of Contents Certified Public Chapter 1: Taking Care of Your Family ...... 3 Accountants Family comes first, right? Use these tips to help take care of those you love most. This chapter is sponsored by Quail Creek Bank. The Oklahoma Society of Certified Learn more at QuailCreek.bank. Public Accountants (OSCPA) is the only statewide professional Chapter 2: Paying for College ...... 14 organization for Oklahoma CPAs. The cost of going to college continues to climb, but there are ways Formed in 1918 with a charter to lower prices. Find out how you can trim higher learning expenses. membership of 31, we unite more than 6,000 CPAs in public practice, private industry, government and education. Chapter 3: Young Adult Issues ...... 22 All members hold certificates issued A first job, a first apartment… being on your own has tslo of firsts, but pursuant to the laws of the state “deep in debt” doesn’t have to be one them. Put yourself on the right of Oklahoma or of other states and financial footing.This chapter is sponsored by Tinker Federal Credit subscribe to the Code of Professional Union. Learn more at TinkerFCU.org. Conduct embodied in the bylaws of our organization. The OSCPA works with the American Institute of Chapter 4: Credit and Debt ...... 30 Certified Public Accountants (AICPA) Credit can be tricky and debt is never fun. Learn how to clean up and to promote financial education, as part keep good credit and ways to climb out of debt. of the CPA profession’s nationwide 360 Degrees of Financial Literacy program. Chapter 5: Investing ...... 38 Investing is for everyone who has financial goals. Get the basics and The OSCPA is offering general let your money work for you. information for managing money and does not recommend specific actions. Chapter 6: Retirement Planning ...... 43 Please note the time of this book’s Does anyone really want to work forever? Start building a nest egg for publication and that tax laws change your golden years using these tips. frequently. For financial advice tailored to your situation, please contact a CPA. For a free referral and 30-minute Chapter 7: Estate Planning ...... 53 consultation in Oklahoma, please visit If you don’t have an estate plan in place, the state will have one for you— FindYourCPA.com. In compliance with but it may not be what you want. Protect your loved ones and make sure Treasury Department Circular 230, your assets go where you want them to go. This chapter is sponsored by unless stated to the contrary, any Donna J. Jackson, CPA, Attorney at Law, PC. Learn federal tax advice contained here was more at OKCEstateLawyer.com. not intended or written to be used and cannot be used for the purpose of avoiding penalties. Chapter 8: Tax Issues ...... 60 Uncle Sam will always take more than you want to give. Don’t pay more than you have to and make sure you get any refunds due to you.

Sample Budget ...... 70

1900 NW Expressway, Ste. 910 Oklahoma City, OK 73118-1898 Download a 2017 Financial Fitness Kit (800) 522-8261 at www.KnowWhatCounts.org. www.KnowWhatCounts.org 5 Steps to Improve Your Financial Literacy

In celebration of April as National Financial Literacy surprised by the many options you’ll have open to Month, the Oklahoma Society of Certified Public you down the road. Accountants (OSCPA) urge Oklahomans to take stock of their financial situations. 3. Get a handle on debt. The average credit card debt for households with credit cards is around Consider these findings compiled by the National $16,700, according to the NerdWallet.com. Not Jump$tart Coalition (“Making the Case for Financial only are those households likely facing years of Literacy,” jumpstart.org): monthly payments to pay off that debt, but they will also be paying hundreds or thousands of • 48% of teens think their parents will help pay dollars of interest on their balances over time. If for college but only 16% of parents(of teens) your household budget includes more debt than report planning to pay for post-secondary it should, there are a number of steps you can education. take. Instead of focusing on the minimum balance • Of those who are repaying their own student each month, think instead about the maximum loans or their children’s educational loans, 58% you can realistically pay. Figure out which of your expressed that they are unable to establish charge accounts carries the highest interest rate emergency or retirement savings or purchase a and plan to pay off that balance first. Many people car as a result of that financial commitment. would jump at the chance to earn 10 percent • Although 65% use a savings account, less to 15 percent on an investment. If you pay off than three in 10 use potentially higher-yielding high-interest-rate credit cards that charge those investment vehicles such as a 401(k) (29%) or rates, you will be putting that much money in IRA(25%). your pocket. If possible, transfer your outstanding • 68% of students expect financial support from balances to lower-interest-rate accounts. To their parents post-graduation. Nearly half of prevent your outstanding balances from growing, students, however, would be willing to pay rent leave your credit cards at home when you shop to live back at home. and buy only what you can afford with cash. • Generation X (age 35-49) has an average [credit score] of 650 and an average debt of $125,000. 4. Seek opportunities to pay less. Clip coupons and • 41% of millennials are “chronically stressed” look for sales whenever possible. If you haven’t about money. already done so, familiarize yourself with online sites that offer coupons for many popular retailers Do you wish you had more control over your fiscal or feature group shopping deals. Although your condition? There are a few simple steps you can take savings on each item may be small, you’ll find to begin getting your financial house in order. yourself with more money in your bank account at the end of each month. 1. First, make a plan. Put together a regular household budget that details how much money 5. Expand your knowledge. The CPA profession’s comes in each month and what you spend on 360 Degrees of Financial Literacy program necessities and other discretionary items (see the (360financialliteracy.org) and its campaign with sample budget in this kit to start). This will make the Ad Council, Feed the Pig (feedthepig.org) it easier to avoid spending more than you earn feature a wealth of information on challenges that or running up more debt that you can manage. consumers may face. The sites are organized to It can also identify areas where you need to cut provide advice to people in various life stages back. The budget can serve as the blueprint for and situations. It helps users educate themselves achieving your financial goals. about the issues they’re facing and provides practical tools you can use to better understand 2. Start saving now. If you’re not already a regular your own needs and options. You can also visit saver, use your budget to determine how much KnowWhatCounts.org (or like us on Facebook you can set aside each month in savings and or follow us on Twitter) to get more money retirement accounts. Whether it’s for a long-term resources from the Oklahoma Society of CPAs. goal such as college or retirement or for your Want to really take control? Consider getting a summer vacation, saving sooner rather than later free referral and free 30-minute consultation from allows you to build up more interest along the way. an Oklahoma CPA at FindYourCPA.com. Get in the habit now and you’ll be very pleasantly

The 2017 Financial Fitness Kit is brought to you by the Oklahoma Society of Certified Public Accountants in cooperation with the Oklahoma Jump$tart Coalition and Jump$tart Your Money Week. Chapter One: Taking Care of Your Family

You hear it often: Family first. Most of us would do • A study by nonprofit Feeding America shows anything to protect our families, but most families about one in four Oklahoma children lack still struggle financially, and, unfortunately, those consistent access to food (Oklahoma Watch, struggles can lead to much larger issues. February 2017).

• According to the Federal Reserve, 47 percent While some families face larger struggles than others, of Americans would have trouble coming up it’s important to get started and learn as much as with $400 in the event of an emergency (The possible. Atlantic, May 2016). In this chapter, you will learn ways to • Nearly seven in 10 Americans have less than $1,000 in savings (USA Today, October 2016). teach kids about money, tips for buying your teen’s car and adding him or her • Financial infidelity is not rare—a CreditCards. to your insurance, how to talk to aging com survey found that 13 million Americans admit to keeping a bank account or credit card parents about money and more. that a spouse doesn’t know about (Tulsa World, February 2017).

This chapter is sponsored by Quail Creek Bank.

Quail Creek Bank, n.a., has been recognized as one banking and all systems necessary to enhance our of the Top Performing Banks in the nation by the customers’ banking experience, whether in person Independent Community Bankers Association. We or on the go! The dedication of our local ownership have also been given the Bauer Financial 5 Star Rating and management team is a true testament to our The 2017 Financial Fitness Kit is brought to you by the Oklahoma Society of Certified Public Accountants and #11 in the Top 50 Proven Performers by the continued success. We invite you to visit our bank in cooperation with the Oklahoma Jump$tart Coalition and Jump$tart Your Money Week. Bank Directors Magazine. We attribute much of our online or in person to experience the difference! success to being on the leading edge of technology We know you will enjoy our Quail Creek Bank family that we have implemented in recent years. We and our loyalty and support to our employees and have state-of-the-art mobile banking, Internet customers! Learn more at www.QuailCreek.Bank. Quail Creek Bank

6 Ways to Teach Kids About Sensible Spending

ave you talked to your children earning, saving and spending. If you don’t 5. Repeat often. Dealing with financial about the value of money and the want to use apps, help your children create issues is part of everyday life for adults, H importance of managing it wisely? colorful charts that monitor their progress which means there are a lot of teachable All parents hope their children will grow up or illustrate the chores they can do around moments available. Talk to your children to make prudent use of their money, yet few the house to earn money. Suggest your about how you manage your money, actually spend time talking to them about how child draw a picture of what he or she is including your efforts to save for short- to accomplish these goals, a new study has saving for and use it to decorate the piggy term goals, like the family’s annual holiday found. According to the American Institute of bank or jar holding the savings. budget, and long-term objectives, like CPAs, parents are more likely to have talked college or retirement. Point out some of with their children about good manners, smart 3. Turn it into a family project. Talk to your the ways you save money each day, such eating habits, the importance of good grades, children about the steps you take to save as bringing a brown-bag lunch to work or the dangers of drugs and alcohol and the risks of toward long-term goals or to cut down on carpooling with coworkers. This kind of smoking than about sensible spending. If you’re your expenses. You can involve them by dialogue helps introduce them to good not sure how to get started, here’s some advice: giving them a grocery list and asking them habits that will last a lifetime. to find coupons for items on it. Take them 1. Don’t wait. Even young children are able to the store and comparison shop, even if 6. Stand your ground. Of course, your children to understand what it means to build—or you have a coupon. Figure out how much won’t have much motivation to save if you save—toward a goal, such as a toy or trip was saved and reward them with a portion buy them a toy whenever they ask or pull to an amusement park, especially if such of the savings. money out of your wallet whenever they an item tops their wish list. Parents can want to meet friends for pizza. Although it help by encouraging their children to set 4. Understand their priorities.Long-term can be hard to say no, keep in mind that by aside money they receive for birthdays or objectives, such as saving for college, likely doing so, you are helping them learn how holidays to save up for a special purchase. won’t mean as much to your child as more to budget and about the value of delayed Older children can save money earned from immediate goals, such as a new bike or gratification. afterschool or weekend jobs, and parents the latest video game console. So, while can give younger kids small jobs to help it’s a good idea to show them their college them earn money. savings account statement and discuss how and why you contribute to it, remember 2. Make it fun. There are lots of apps that they will get more excited about available to help your kids learn the joy of shorter-term rewards.

Beware Before You Buy: 6 Considerations for Kids’ Cell Phones

ave your kids started asking for cell responsibility of owning a mobile device? A about your child racking up extra charges on the phones or mobile devices of their phone is a big obligation. Before making a monthly bill and there is no contract involved. H own? Usage of mobile devices is purchase, it wouldn’t hurt to go over a few rules If the child wants a phone with all the bells and growing among the younger set. According for owning a mobile device. You can make up whistles, then the phone prices are usually hefty to a Pew Research study, 88 percent of U.S. your own rules or see a sample set at http:// because you pay the regular retail price. Another teenagers between 13 and17 have access to a www.ahaparenting.com/Ages-stages/tweens/ option is by adding another line to your account, mobile phone. Of those, 73 percent have their Cell-Phone-Rules-Safe-Responsible-Kids. it can be a more economical choice in order to own smart phone. Also, almost 60 percent of get a phone with all of the features, plus you children between the ages of 8 and 12 have Will you go with pre-paid or add a second line? may be eligible for a family discount. These their own phones. There are many options available, but you plans also offer discounts on phones. The OSCPA offers the following advice for should determine which would work best for parents considering taking the plunge and your budget and your child’s needs. One option Should there be limits? getting a mobile device for their child. is to go with pre-paid service. With this type, Do you want to limit the amount of time you only pay for a certain amount of minutes at your child can be on the phone? Going with a Decide whether your child is ready. a time, but if your child uses the phone often, plan that has only a certain amount of minutes Age is one thing to consider, but so you might be bugged to pay for additional might be a good choice. However, if the child is maturity level. Is your child up for the minutes. However, you also won’t have to worry goes over the allotted minutes, fees can mount

4 • OSCPA Financial Fitness Kit Chapter 1 • Taking Care of Your Family QuailCreek.Bank • (405) 755-1000 quickly, especially if you aren’t closely watching What about parental controls? callers or texts from strangers should be verified the usage. On the other hand, if you choose Most major phone carriers have parental before responding and kids should be extremely an unlimited plan, you aren’t likely to have any controls that can be purchased for an additional careful about giving out their phone numbers. additional fees, but you’ll usually pay more for cost. While the features do vary for different It also doesn’t hurt to remind them that they the plan each month. providers, some allow you to view usage from need to protect their phone by not dropping a computer or mobile device. There is also it or leaving it out where just anyone can have Is it all about the data? a content filter available for browsing online access. However, because kids will be kids, Besides talking, do you want your child to and a GPS feature to locate your child. You can you may want to investigate device insurance text and have internet access on their mobile also limit contacts and block certain incoming through your carrier. For a monthly fee, you can device? A phone without data may save you messages. Certain mobile devices also have often insure your device, but there are usually some money, but most want to send and receive features within the phone that can be adjusted. additional costs involved and, as with any text messages. If you want your child to text insurance, there are limitations. or surf the web, you’ll need to consider a data Safety is key. plan, which can also be limited or unlimited A quick safety lesson is also not a bad idea. depending on your preference. Unlimited plans While we know it’s dangerous to text and drive, generally cost more than plans that are limited. it’s also unsafe to text while walking and not paying attention to where you going. Unknown

Tips on Buying a Teen’s First Car

major milestone in a teen’s life is about buying a car for yourself and giving the online at the National Highway Traffic Safety earning a driver’s license. It means older car to your teen? If you go that route, Administration’s website at SaferCar.gov or Afreedom and fun for the teen, but at least you would know the car’s history and find top safety picks at the Insurance Institute it can certainly be a time of joy and/or panic your teen would already be familiar with the for Highway Safety’s website at iihs.org. You for parents. If you have a newly licensed car. If you decide to get a car and need a car can also find out what a good price would be driver in the family, you may be discussing loan, talk to your bank before looking at cars. on a car given it’s age, mileage and condition your families’ car situation and wondering You might get a better financing rate and it at Edmunds.com, kbb.com and others. if you need to add another set of wheels. could be a bargaining chip to use in order to Making a purchase of this size can be a great get the best rate available at the dealership. Take a test drive. teachable moment for families on finances, After you have narrowed down your car responsibilities and smart choices. Have the talk. choices, head to the car lot to take the cars for If you decide to purchase a car for your a spin. Take your teen along so everyone will Check your budget. teen, sit down and discuss what is financially get a feel for the car. Be sure to test a few cars The driver’s test has been passed and it’s feasible for your family’s budget. Discuss before making a final decision. time to talk cars. Before sitting down to talk to payment, maintenance, insurance and your teen, take a look at your finances to see consequences for tickets and other violations. It’s time for negotiations. what fits your budget. Can you afford to add When talking with your teen, remember that After you do the research, take a test a monthly car payment? Do you have some what he or she has in mind may be completely drive and find the one you like, you’re better spare money in savings to spring for an extra out of your price range or not the most equipped to negotiate a price. Don’t be afraid vehicle? What about the added expenses for dependable car model for a young person. It’s to ask for a better price or to walk away if insurance, gas and maintenance? This would best to get on the same page before you step you feel a deal can’t be made. You can look at be a great time to sit down with your CPA and foot on a car lot. other dealerships and find a reasonable price discuss your finances. you are comfortable paying. Know your stuff. Know your options. Before going out in search of a new or used If a car payment fits in your budget, do you car, get an idea of what you are looking for want to buy a gently used or new car for your and make a list of what you want on a car then teen? Will he or she be able to contribute to do some research. Thanks to the Internet, you the monthly payment, insurance and/or gas? can look at cars on manufacturers’ websites What if your teen saved up some money for and most local dealerships. In addition, you a car and you matched it? Have you thought can look up government crash test ratings

www.KnowWhatCounts.org • 5 Quail Creek Bank

Adding a Teen to Auto Insurance? Be Prepared

f adding a young driver to your policy is in driver, multi-car and good grade discounts. 5. Let your teen borrow your car. Insuring your future, you need to be ready for the There may be other discounts, but the a teen to drive your car as an occasional I added costs. key is to meet with your agent to find the operator could be cheaper than insuring The Insurance Institute for Highway Safety discounts that work best for your family. your teen as a primary operator on another Highway Loss Data Institute reports teen drivers car. crash three times more often than drivers 2. Forgo the sports car. All kids want to 20 and older. The Oklahoma Highway Safety look cool to their friends, but insuring a 6. Monitor their driving. Some insurance Office reported that in 2013, there were almost sedan, especially one equipped with safety companies can install a device that twice as many male as female drivers involved features like airbags, anti-lock brakes and monitor’s your teen’s driving habits and in fatal crashes. Additionally, OHSO reported daytime running lights, will likely cost much reports information (e.g., instances of 20.1 percent of drivers age 16‐19 involved in less than insuring a souped-up sports car. speeding, seat belt usage, hard braking) serious injury motor vehicle crashes in 2013 After narrowing down car choices, ask your back to the insurer. You can also purchase were driving at an unsafe speed, 14.5 percent agent to for an insurance quote on each a device that does not report to your failed to yield and 11.6 percent were inattentive. model. insurance provider. (See Consumer Reports It should be less surprising that, according to “How to Track Your Teen Driver.”) www.insurance.com, adding at teen to an auto 3. Can you skip collision? If your teen drives policy in Oklahoma increases the price by 114 an older model car, it may be worth it to While it will likely increase a family’s percent on average. omit collision coverage because the cost of premium, it’s important to discuss increasing While policies vary based on a multitude of coverage may be more than the value of liability coverage with your agent. This will factors, financial experts advise being prepared the car. provide added protection for the additional for the unavoidable expense of a teen driver friends that will likely be riding as passengers addition. However, there are ways to save some 4. Increase your deductible. Increasing a while your teen is driving. money on their protection. deductible generally lowers premiums, but be sure the deductible is an amount you 1. Ask for discounts. Most insurance can afford to pay out of pocket should an companies, especially those that have been accident occur. insuring your family for years, will offer safe

If your teen drives an older model car, it may be worth it to omit collision coverage because the cost of coverage may be more than the value of the car.

6 • OSCPA Financial Fitness Kit Chapter 1 • Taking Care of Your Family QuailCreek.Bank • (405) 755-1000

Protect Your Children Against Identity Theft

ou are probably aware of your own risk What you can do before and after a possible or needs to rent an apartment. of identity theft and maybe have taken data breach? • Teach your children to keep personal Y some precautions to guard your own • Check your child’s credit history. There information private when they are personal and financial data, but what about your are three recognized companies that can online. Social networking sites can be a minor children? Identity theft on a child can go assist with this process: goldmine for identity theft thieves. on for years undiscovered. Experts say children 1. Equifax (1-800-525-6285) represent an emerging market for identity theft 2. Experian (1-866-200-6020) Any taxpayer who believes they are at risk thieves who steal their social security numbers 3. TransUnion (childidtheft@ of identity theft due to lost or stolen personal knowing that these numbers may not be used transunion.com) information should contact the IRS immediately for years. Most victims do not even know about so the agency can take action to secure their it until they are young adults and find their How can you repair the damage? tax account. The taxpayer should contact the credit rating compromised, or are rejected for • Contact the credit reporting company IRS Identity Protection Specialized Unit at 800- student loans, jobs or from renting a place to and ask them to remove any files that 908-4490 Ext. 245. The taxpayer will be asked to live. have your child’s social security number complete the IRS Identity Theft Affidavit, Form Researchers at Carnegie Mellon conducted listed. 14039, and follow the instructions on the back a study on child identity theft and found that • Place a fraud alert with the applicable of the form based on their situation 10 percent of children are victims as compared entity on the credit report. The IRS has issued guidance for actual with less than 1 percent of adults. They analyzed • File a fraud report with the FTC on line or or potential identity theft, phone scam and more than 800,000 records. The loud and call 877-438-4338. phishing victims. clear message imparted at a recent identity • Taxpayer Guide to Identity Theft theft conference sponsored by the Federal Use these steps for prevention and protection: • Publication 5027, Identity Theft Trade Commission (FTC) is that this fraud • Find a safe location for papers and Information for Taxpayers (PDF) has a systemic financial impact and we have electronic records. • Data Breach: Tax-Related Information an ethical, moral and legal duty to help our • Cross shred documents with personal • Requesting Copy of Fraudulent Return children have a future that they can create for information. • Publication 4524, Security Awareness For themselves. • Don’t share your child’s SSN unless you Taxpayers (PDF) know and trust the other party. • Identity Theft Victim Assistance: How It What are the warning signs that your child’s • Ask at your child’s school or medical Works credit history may have been compromised? office how your child’s information is Access these resources at • Your child is denied a bank account or a collected, stored, used and thrown away. irs.gov/identitytheft. driver’s license • Be aware of events that may put • Credit card and loan offers addressed to information at risk like a break in at your your child child’s school, doctor’s office or in your • Collection allsc or bills addressed to your home. child • Before your child turns 16 get a credit • A notice from the IRS that your child report. If there are errors due to fraud, owes income taxes or was claimed as a you will have time to correct before your dependent on another return child applies for a job, a loan for tuition

www.KnowWhatCounts.org • 7 Quail Creek Bank

How Do I Talk to My Aging Parents About Finances?

Caring for your aging parents is Prepare a personal data record. Evaluate your parents’ abilities. something you hope you can handle Once you’ve opened the lines of If you’re concerned about your parents’ C when the time comes, but it’s the last communication, your next step is to prepare mental or physical capabilities, ask their thing you want to think about. Whether the a personal data record. This document lists doctor(s) to recommend a facility for a geriatric time is now or somewhere down the road, information that you might need in case your assessment. These assessments can be done at there are steps that you can take to make your parents become incapacitated or die. Here’s hospitals or clinics. The evaluation determines life (and theirs) a little easier. Some people live some information that should be included: your parents’ capabilities for day-to-day their entire lives with little or no assistance from • Financial information: Bank accounts, activities (e.g., cooking, housework, personal family and friends, but today Americans are investment accounts, real estate holdings; hygiene, taking medications, making phone living longer than ever before. It’s always better • Legal information: Wills, durable power of calls). The facility can then refer you and your to be prepared. attorneys, health-care directives; parents to organizations that provide support. • Funeral and burial plans: Prepayment If you can’t be there to care for your parents, Start the conversation. information, final wishes; or if you just need some guidance to oversee The first step you need to take is talking to • Medical information: Health-care providers, your parents’ care, a geriatric care manager your parents. Find out what their needs and medication, medical history; (GCM) can also help. Typically, GCMs are nurses wishes are. In some cases, however, they may • Insurance information: Policy numbers, or social workers with experience in geriatric be unwilling or unable to talk about their future. company names; care. They can assess your parents’ ability to live This can happen for a number of reasons, • Advisor information: Names and phone on their own, coordinate round-the-clock care including: numbers of any professional service if necessary, or recommend home health care • Incapacity; providers; and and other agencies that can help your parents • Fear of becoming dependent; • Location of other important records: Keys remain independent. • Resentment toward you for interfering; to safe-deposit boxes, real estate deeds. and/or Be sure to write down the location of Get support and advice. • Reluctance to burden you with their documents and any relevant account numbers. Don’t try to care for your parents alone. Many problems. It’s a good idea to make copies of all of the local and national caregiver support groups If such is the case with your parents, you may documents you’ve gathered and keep them in a and community services are available to help need to do as much planning as you can without safe place. This is especially important if you live you cope with caring for your aging parents. them. If their safety or health is in danger, far away, because you’ll want the information If you don’t know where to find help, contact however, you may need to step in as caregiver. readily available in the event of an emergency. your state’s department of eldercare services. The bottom line is that you need to have a plan. Or, call (800) 677-1116 to reach the Eldercare If you’re nervous about talking to your parents, Where will your parents live? Locator, an information and referral service make a list of topics that you need to discuss. If your parents are like many older folks, sponsored by the federal government that can That way, you’ll be less likely to forget anything. where they live will depend on how healthy direct you to resources available nationally or in Here are some things that you may need to talk they are. As your parents grow older, their your area. Some of the services available in your about: health may deteriorate so much that they can community may include: • Long-term care insurance: Do they have it? no longer live on their own. At this point, you • Caregiver support groups and training; If not, should they buy it? may need to find them in-home health care or • Adult day care; • Living arrangements: Can they still live health care within a retirement community or • Respite care; alone, or is it time to explore other nursing home. Or, you may insist that they come • Guidelines on how to choose a nursing options? to live with you. If money is an issue, moving in home; and/or • Medical care decisions: What are their with you may be the best (or only) option, but • Free or low-cost legal advice. wishes, and who will carry them out? you’ll want to give this decision serious thought. Once you’ve gathered all of the necessary • Financial planning: How can you protect This decision will impact your entire family, so information, you may find some gaps. Perhaps their assets? talk about it as a family first. A lot of help is out your mother doesn’t have a health-care • Estate planning: Do they have all of the there, including friends and extended family. directive or her will is outdated. You may necessary documents (e.g., wills, trusts)? Don’t be afraid to ask. wish to consult an attorney or other financial • Expectations: What do you expect from professional whose advice both you and your your parents, and what do they expect parents can trust. from you?

8 • OSCPA Financial Fitness Kit Chapter 1 • Taking Care of Your Family QuailCreek.Bank • (405) 755-1000

4 Ways to Shop Smarter for Sudden Back-to-school Items

arents may learn that the first month of in their preferred store. Yet spending a Consider popular character backpacks or school is full of additional expenses that little time online doing some research can clothing. Purchasing a quality backpack P weren’t originally in the budget. Here save quite a bit of cash, specifically on big- ensures your child can use it throughout the are tips to getting better bargains on unexpected ticket items. Also, consider waiting until school year and clothing, as every parent items. September or October, when all the back-to- knows, must be durable to withstand the school items may move to clearance racks. wear and tear of active kids. If they want to 1. Evaluate the need. Students often come Want even bigger savings? See if it’s possible express their individuality, let them decorate home with the urge to have the latest to wait until Black Friday or Cyber Monday backpacks with stickers or look for ways to gadgets they saw at school. True, a tablet, sales. sew fun patches on clothing. smartphone or laptop could be very helpful, especially for older students, in completing 3. Consider going green. If popular technology Other ways parents can save money include homework assignments, especially if is on the list and it is needed quickly, look making sack lunches, having neighborhood downloading digital copies of books for into refurbished gadgets. Most online tech clothing swaps every few months and keeping required reading is an option. However, retailers offer refurbished items that are up with sales and special offers. As with any before giving in, it’s probably best to have still under warranty. If vogue clothes made shopping venture, back-to-school requires a realistic discussion about wants, needs the list of must-haves, take a trip to a few planning, even when it happens after the first and the family budget. The same is true for consignment stores before forking out full bell rings. However, parents can use this and popular clothing, and, for older students, price. The bonus of living in a warmer state other sudden spending events as teachable this is a perfect teaching moment for like Oklahoma is that summer clothing is moments because not all learning happens in the prioritizing their allowances. marked down early, but can usually still be classroom. comfortably worn right up to the middle of 2. Comparison shop. While it seems like a no- October. brainer, even the most educated shoppers can be tempted to go ahead and purchase 4. Go for quality. Making quality your priority the desired items because they’re already can ultimately save you more money.

Consider waiting until September or October to purchase back-to-school items, which may move to clearance racks by that time.

www.KnowWhatCounts.org • 9 Quail Creek Bank

4 Things to Know About Oklahoma’s Sales Tax Holiday

he weekend of August 4-6*, Oklahoma email or internet shall qualify for the sales during the sales tax holiday. Items can be will celebrate its sales tax holiday. tax exemption if the customer orders and taxed if their individual costs exceed $100. T Senate Bill 861, passed in 2007, sets out pays for the item and the retailer accepts The good news is, most stores are running to benefit both consumers and retailers in the the order during the exemption period for sales in conjunction with the sales tax state by providing sales tax exempt shopping on immediate shipment, even if delivery is holiday. You are also able to use coupons general clothing items. This will help businesses made after the exemption period.” and take advantage of buy one, get one by providing a boost in sales and the consumers sales on top of the tax savings, so you could by allowing them to save money when shopping 3. How can you exchange merchandise? It save quite a bit. for clothing and shoes. It is also intended to comes down to returns and exchanges. If coincide with back-to-school shopping. For you purchase an item and exchange it for Having a plan and understanding the law for 2017, the holiday begins at 12:01 am on Friday, the same item in a different size or color the sales tax holiday can save you a lot of time August 4, and ends at midnight on Sunday, variation, you won’t have to pay the tax, and money. Shopping online isn’t a bad option August 6. Here are four things you need to know even after the sales tax holiday. If you if braving the mall crowds overwhelms you. about it: return an item for credit or exchange an CPAs note, however, the sales tax holiday and item for a different one after the tax-free simultaneous back-to-school sales should never 1. How many retailers participate? Anywhere weekend, you will be charged tax. Lastly, if be a reason to overspend or go into credit card you can go to buy qualifying clothes and you purchase an item before the tax-free debt. It’s not much of a sale if you save sales tax, shoes will be participating. The Oklahoma weekend, and return it during the sales tax but then turn around and pay 10 to 20 percent Tax Commission says retailers may not holiday and receive credit on the purchase interest on your credit card. collect state and local sales or use tax of a different eligible item, no sales tax is on tax exempt items (see a partial list of due on the sale of a new item. However, *As of January 2017 qualified and unqualified purchases at do be sure you know the store’s return and https://www.ok.gov/tax/faqs.html#q2232). exchange policy before you shop.

2. Understand online shopping rules. 4. There is a $100 maximum. There is a $100 According to the SB 861, “Eligible items cap on eligible merchandise, meaning if an sold to purchasers by mail, telephone, item is less than $100, it is sales tax exempt

4 Tips to Resolve Financial Concerns in Stepfamilies

ccording to the Stepfamily Foundation, Remarrying couples may also maintain updated records that include all accounts. 64 percent of families today live a joint account for ongoing expenses as That way, the couple can easily see where A in some form of divorced and/or a couple, contributing either an equal they stand financially. stepfamily relationship. These blended families amount every month or a percentage of 2. Review and update documents. After have an opportunity to launch new relationships each spouse’s income. Any combination of remarrying, the beneficiaries named for life and traditions, but they often face pitfalls where accounts can work, but spouses should be insurance and various financial accounts finances are concerned. The Oklahoma Society sure to clarify the ground rules up front to should be reviewed. Remarrying couples of Certified Public Accountants provides these avoid confusion. Couples should determine should create or update a durable power four tips for issues within stepfamilies and how how much each person will deposit in of attorney, living will or a healthcare proxy to address them. certain accounts monthly and define what to designate a person to make decisions in expenses specific accounts cover. Because case of incapacitation. 1. Define types of accounts.One challenge financial circumstances change, couples for stepfamilies can be deciding how to should consider revisiting this arrangement 3. Revise your will. Inheritance issues can split finances into “yours,” “mine” or “ours.” regularly to ensure an approach that leave children and spouses anxious about Many remarrying couples often start out best serves their needs. This kind of their financial futures. As a result, it’s with separate accounts, which are used to ongoing communication will help prevent best for a newly remarried couple to have pay for personal expenses, including those misunderstandings later. It’s especially wills and revise existing wills after the for any children from a previous marriage. important to budget and maintain clear and wedding in order to address important

10 • OSCPA Financial Fitness Kit Chapter 1 • Taking Care of Your Family QuailCreek.Bank • (405) 755-1000

estate planning issues. Wills should set to be among your legal heirs, it is likely 4. Consult a CPA. A CPA can advise the best forth, as specifically as possible, what stepchildren won’t inherit if you pass away options to use such as life insurance, or even each beneficiary will inherit. This will not without a will. If a will says the estate is to trusts, to ensure all of your beneficiaries’ only help minimize potential squabbles be divided among your “children,” a court needs are met. It will also help to ensure among siblings, but also between the may decide if stepchildren are included. greater family harmony when you navigate surviving spouse and children from an Estate planning can also be complicated financial considerations for blended families. earlier marriage. If you want to leave some when one spouse wants to provide for a If you don’t have one, get a free referral assets to your stepchildren, it’s important surviving spouse and give their children and free 30-minute consultation at www. to remember to include them in your will. access to their inheritance as soon as FindYourCPA.com. Since they generally are not considered possible.

What If I Have a Special Needs Child?

s the parent of a child with special other nonprofit agencies, may have programs to Security Income (SSI) requirements or needs, you face many of the same help you care for your child. Sports events and lives in a residential care environment); A challenges that other parents face. But recreational camps are often sponsored by both • Join support groups affiliated with a you’ll have to cope with some unique issues as local and national organizations and can give national organization focused on your well. The term “special needs” is often used to your child a chance to interact with others while child’s disability or condition; describe a wide variety of conditions and may having fun. • Subscribe to publications that can alert mean different things to different people. For Many national organizations exist for special you to new treatments, prescription example, special needs can include medical needs information and advocacy. These groups drugs and research that may benefit conditions such as cerebral palsy. It can mean often have local chapters you can join that your child; physical conditions, such as blindness or the may sponsor support groups. In addition, • Keep copies of treatment records, loss of a limb. It can also mean neurological the Internet has become a leading source of correspondence with your conditions, such as learning disabilities, information and support for parents of children insurance company and supporting mental retardation, or autism. Getting reliable with special needs. On-line sites offer both documentation; and information and support is important when you general and technical information and can • Draft letters that you can keep on file have a child with special needs. Start by talking connect you to informal and formal resources. with child-care centers, the school to: nurse, babysitters or family members How do I find and pay for medical care? that describe your child’s medical needs • Your obstetrician, pediatrician, and Because of his or her special needs, your child and what to do in case of emergency. primary physician; may need expert medical care. Learning all you • Social workers familiar with federal, can about your child’s condition and treatment How do I deal with educational issues? state, and community resources; options, finding ways to handle health care costs Federal and state special education laws, • Mental health professionals (e.g., and organizing paperwork can cut down on the as well as the Americans with Disabilities psychologists and counselors); stress that inevitably accompanies frequent Act, require public schools to accept children • Parents of other children with special visits to health care providers. Here are some with disabilities and take whatever steps needs; tips: are necessary to meet their special needs. • Members of a community or on-line For example, bathrooms, hallways and support group; • Choose a qualified physician who other physical facilities must be designed • Individuals within your local school responds to your child’s needs, is to accommodate wheelchairs. In addition, systems (e.g., the superintendent, the knowledgeable about your child’s a public school may have to create special principal, guidance counselors, and condition and who explains treatment programs, revise its policies and curriculum special education teachers) options thoroughly; and offer counseling and other services to • Read your health insurance policy and disabled students. All states must provide a You’ll also want to find out what support find out what it does and does not “free and appropriate public education” to programs and services are available in your cover; eligible children with disabilities. Have your child community. Community volunteer agencies and • Apply for Medicaid if your child is evaluated by your state and local school district parent groups can also counsel and educate you eligible for it (in most states, your child to find out if he or she is eligible for special about the challenges of raising a child who has will automatically qualify for Medicaid education services, including early intervention special needs. Your local United Way, as well as if he or she meets the Supplemental services starting in infancy or in preschool.

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www.KnowWhatCounts.org • 11 Quail Creek Bank

guardian will offer advice and make decisions for government benefits by establishing a special Ensure your child’s future. your child, manage his or her assets and oversee needs trust to hold funds that your child might As the parent of a child with special needs, his or her care after your death. Choose a otherwise inherit directly upon your death. you’ll want to find ways to protect your child’s guardian carefully. He or she should be someone Funds in a properly drafted special needs trust inheritance and ensure that he or she is taken who has your child’s best interests at heart. are not considered “countable” for SSI and care of when you die. If your child is a minor In order to be eligible for most government Medicaid eligibility purposes. A special needs (under the age of majority, which is 18 in most benefits (e.g., SSI, Medicaid), your child must trust is a complex estate planning tool, so it’s states) or an adult who is unable to make have minimal income and assets. If you plan on best to consult an experienced estate planning decisions related to his or her own long-term leaving your child significant assets, you could attorney. welfare, your first step should be to name put his or her eligibility for these benefits at a guardian (e.g., a friend, relative or legal risk. However, you can leave money to your professional) in your will. After your death, this child without risking his or her eligibility for

5 Things to Know About HSAs

uring open enrollment season, it’s not year after year. There’s no limit to how is basically free money (especially if you uncommon to hear lots of insurance- much you can save. And if you leave your don’t spend much because you don’t have D related acronyms being tossed around: job or retire, the account goes with you. a lot of health care expenses). PPO, HSA, HDHP, FSA, LTD, AE, etc. It’s easy to get confused! But one of those acronyms, 3. You must be enrolled in a health insurance For people who rarely go to the doctor the HSA, or health savings account, can be plan. In order to deposit money, you’ll outside of preventive care visits (which are a powerful way for you to save on taxes and need a health insurance plan with a covered 100 percent on all health insurance possibly provide an alternate way to save for high deductible. The IRS defines “high plans by law), an HSA health insurance plan can retirement. deductible” as $1,300 for single coverage be a great way to save money on premiums Nearly three-fourths—72%— of employers and $2,600 for family coverage. That means while also allowing you to save taxes on offer plans that include an HSA component and your initial health expenses each year will money you set aside for the times you do the lower premium plans on the healthcare be at 100 percent out-of-pocket, no co- have expenses, both now and in the future. exchange are also HSA-eligible plans. Here are pays, until you’ve reached your deductible. Talk to your HR department to find out what some facts about HSAs from the American options are available and consult with your Institute of Certified Public Accountants (AICPA) 4. You can spend it on you or anyone else on CPA to discuss the best financial options for and the Oklahoma Society of Certified Public your tax return. Once money is deposited you and your family. For a free referral and free Accountants (OSCPA) to help you decide if that’s into your HSA, you can spend it on any 30-minute consultation with a CPA, visit www. the right choice for you. eligible health care expenses for you or FindYourCPA.com. anyone else on your tax return (dependent 1. HSAs are basically savings accounts. You or spouse), regardless of whether that can save money for your out-of-pocket person is on your insurance. You can even health care costs. Plus, the money goes in use it later on in life when you may not be tax-free and comes out tax-free, as long as enrolled in a high-deductible health plan. it’s spent on qualified health care costs. 5. You may be eligible to get free money. 2. They’re different from FSAs.They’re not Your job may deposit money into your HSA “use it or lose it.” You can roll over money to help offset your health care costs, which

12 • OSCPA Financial Fitness Kit Chapter 1 • Taking Care of Your Family QuailCreek.Bank • (405) 755-1000

5 Steps to Boost Your Home’s Value

ore than 5.7 million homes were attics and basements so buyers can clearly could be necessary to attract buyers and sold in 2015, according to the see how much space is available. Consider sell at the highest price. It’s best to handle M National Association of Realtors. removing items that personalize the more expensive problems—such as leaking For many people, a home is not only the place home—anything from family photos to hot roofs, wiring problems, aging furnaces or to make memories, but also their largest asset. pink throw pillows—so buyers can picture hot water heaters—before your house goes If you’re planning on putting a house on the themselves living there. on the market. market, you’ll want to get the best price for it. Here are five steps to enhance a home’s value. 3. Conquer the kitchen and bath. Whether 5. Accentuate the positive. A National cooking a favorite meal or sharing thoughts Association of Realtors survey found nearly 1. Consider curb appeal. Most buyers make at the kitchen table, much time is spent 40 percent of homebuyers would pay more an immediate assessment about a home in the kitchen. According to Consumer for a home if it had at least one fireplace. A based on its front yard and entryway. Since Reports, 53 percent of real estate wooden deck or attractive front porch can you want to encourage potential buyers to professionals identified the kitchen as one also make a home more appealing. Before come in, be sure to make the house look of the more important rooms to shape up selling, accentuate the most attractive parts as welcoming as possible. Mow the lawn, before selling. Drastic renovations aren’t of your home and add value to the sale. If prune the shrubs and banish weeds before necessary, but all minor repairs—such as a the fireplace needs updating or the porch your home is shown. Consider power leaky faucet or broken backsplash tile— are could use a paint job, invest in your home’s washing the exterior paint job, repainting a must before the for-sale sign goes in the assets to distinguish your home. your front door, polishing up hardware yard. Simple, cosmetic improvements— and fixing any exterior lights to add to the such as a fresh paint job or new energy- home’s aesthetics. efficient lighting—are also beneficial when upgrading the room’s look. Take similar 2. Combat clutter. Moving involves sorting steps to update a bathroom, where a new through possessions and deciding whether showerhead, faucet or floor tiles could to bring them to your next home, put make a more positive impact. them in storage or get rid of them. Start the process as early as possible to prevent 4. Burnish the basics. Although there are a messy or cluttered house from turning many inexpensive steps to raise a home’s away potential buyers. Organize closets, value, major upgrades to problem areas

According to Consumer Reports, 53 percent of real estate professionals identified the kitchen as one of the more important rooms to shape up before selling.

www.KnowWhatCounts.org • 13 Chapter Two: Paying for College

Although higher education is one of the best In this chapter, you will learn steps to investments a person can make, it can be quite costly. picking the right college, financial aid • Since 1990, average in-state tuition at public application basics, college student colleges has more than quintupled and the money management tips, advice for cost of living on campus has more than tripled (Time.com/Money, October 2016). paying back student loans and more.

• While tuition, fees, room and board at public universities has risen by almost $15,000 since 1990, the average amount of grants or Get more financial tips from www.FeedThePig.org, www.360FinancialLiteracy.org or www.KnowWhatCounts. scholarships awarded to undergraduates from org, Also on social media, each offers free tips, all sources has risen only about $5,000, which e-newsletters, resources and more. Also, look at essentially puts an extra $10,000 per year www.fafsa.ed.gov, www.OklahomaMoneyMatters.org burden on the typical college student (Time. and www.OK4Saving.org. com/Money, October 2016).

• The average Class of 2016 graduate has $37,172 in student loan debt, up 6 percent from 2015 (StudentLoanHero.com, February 2017). Chapter 2 • Paying for College

Research Tips When Choosing a College

t seems like only yesterday you were and location (i.e., rural, suburb, city). These are payment plan that lets you spread costs over 10 or bandaging scraped knees and waving at all factors on which most students have a keen 12 months? Is there a three-year degree program? I the school bus, and now it’s time for your opinion. Talk to your child about the type of college Is there a five-year joint graduate/undergraduate Chapter Two: child to choose a college. You may think a hands- environment that he or she prefers. degree program? Does the school offer a tuition off approach is best to avoid interfering, but it’s discount for siblings or alumni or an opportunity to important to help your child research schools. Make the grade. take courses on-line? Not only will you be able to offer guidance and Next, consider academic factors. If your child You’ll also want to examine the college’s record Paying for College suggestions, but you’ll likely have your own issues knows his or her major, make sure to note that on financial aid. What percentage of students to consider (cost, for one). Although your child will program’s availability and strength. This criterion receive need-based financial aid? Of these, what also have his or her own agenda, you can make alone may supersede any general criteria in percentage of students have 100 percent of their sure that the final wish list is something you both importance. You’ll also want to look at the median need met? If costs are a main concern, you’ll want agree on by collaborating. grade point average and SAT scores of the most to target those colleges that consistently meet a recent class. This information will give you an idea high percentage of their students’ financial needs. When should you start researching colleges? of your child’s chances for admission. Do your This statistic is readily available from college Most students start investigating colleges in child’s academic accomplishments place him or guidebooks. You might also ask what percentage of their junior year of high school, though you can her in the top 5 percent of the class, 25 percent, students take advantage of work-study programs. certainly start earlier if you want to. Beginning the 50 percent or 75 percent? Keep in mind that Does every student who requests a work-study search a full year before your child needs to apply highly selective colleges usually accept only those assignment get one? Also, does the college to college should allow plenty of time to compare students at the very top of the applicant pool. offer merit aid (not based on financial need) for schools and help you feel in control of the process. College guidebooks can verify the competitiveness academic, athletic, musical or other abilities? If so, Remember, your child will be spending the next of any particular college. It’s important to be who should be contacted? four years at this college—you’ll want to take the realistic about your child’s admission chances. While you’re in the financial arena, now may time to find a good match. You don’t want your Other academic factors to consider include: be a good time to discuss any related concerns child picking a school solely because his or her best • Overall course requirements for graduation; with your child. For example, will you expect your friend is applying there. • Opportunity to earn a double major or to child to contribute to his or her education? With switch majors (especially important if your savings? With student loans? And how much? It’s Where can you find this information? child doesn’t know his or her major); important for your child to have an awareness of Years ago, college guidebooks were the only • Average class size; the financial implications (for you and for him or source of information about schools. Now, there’s • Availability of faculty outside teaching hours; her) of choosing a college. the Internet, too. Both are valuable research and One final note: Even if a college’s sticker price tools. College guidebooks are available at all • Use of graduate-level teaching assistants for is daunting, your child should consider applying major bookstores and your local library. The best undergraduate courses. if the college is otherwise a good fit. Remember, ones describe and compare colleges down to the the college may award your child a generous smallest details. Ask your local reference librarian Take care of your wallet. financial aid package that may translate into a or your child’s high school guidance counselor It’s likely you’ll be more interested in financial lower actual out-of-pocket cost for you over four to recommend a resource. As for the Internet, factors than your child will be. In fact, your own years, compared with a less expensive school most colleges have websites where you and your financial constraints may limit your child’s ultimate on your child’s list that didn’t offer as generous child can conduct research and even take a virtual choice of colleges. It’s important to evaluate an aid package. However, you’ll need to set a tour of the campus. In addition, other education- colleges from a financial standpoint during the financial limit on what you can afford to pay related websites provide general information on research process so there won’t be any surprises before the acceptance letters start arriving—it’s selecting a college and college life. To get started, down the road. hard to resist the lure of having your child accept type your search query in one of the many search First, ask yourself whether the college a slot at a prestigious university, even if it means engines. Keep in mind, some websites may not be provides an overall good education for the price. overextending yourself financially. as reliable as others. Remember, tuition is not the only cost. Your child The goal of your research is to create a list will need money for room and board, books and Think about quality of life. of colleges that match up well with your child’s supplies, transportation, and other miscellaneous Beyond the general, academic and financial interests and abilities (and your pocketbook). fees. This combined cost is known as the cost factors, you and your child will want to consider of attendance. Compare the cost of attendance factors that relate to quality of life. Here are some Look at the big picture. at colleges that interest your child. Next, see questions to think about: The logical place to begin a college search is whether the college offers any special cost-cutting • W ould your child prefer an active campus, with general criteria like size, geographic region measures. For example, is there a flexible tuition with a wide variety of clubs, social

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www.KnowWhatCounts.org • 15 Oklahoma Society of CPAs

organizations, athletics and extracurricular • Does the college offer a mentoring program a manageable list of colleges for which to apply. activities, or a quieter campus? for freshmen? On the list should be a couple of “stretch” schools • What is the condition of the dorms, dining • What is the college’s alcohol policy? (it’s a stretch your child will be accepted), a core halls, student union, library and recreation • Are there fraternities and sororities? group of schools where your child fits in well center? • What does the college’s social life primarily academically (it’s likely your child will be accepted), • Are there any special housing requirements consist of (e.g., off-campus keg parties, trips and a couple of “safety” schools (it’s very likely (e.g., students must live off-campus for a to the nearest town, campus-sponsored that your child will be accepted). If possible, year)? events)? your child should apply to schools that directly • Have you and your child researched the compete with one another for students (e.g., two college’s crime statistics (available at the A campus visit can be very helpful when small, highly competitive liberal arts colleges in United States Department of Education’s comparing colleges. During such a visit, you and the same geographic region). The reason is that website) and the safety of the surrounding your child should feel free to seek out the opinions most colleges don’t mind losing students to a neighborhood? of students, teachers and other employees. more competitive or less competitive school, but • Does the college offer free van or bus service they generally don’t like losing students to a direct around the campus? If so, is transportation What should the final list look like? competitor. As a result, they may compete to offer provided late at night? Ideally, you and your child should end up with your child the best financial aid package.

529 Plans and F inancial Aid Eligibility

f you’re thinking about joining a 529 plan • A loan (which must be repaid in the How is your child’s financial need determined? or if you’ve already opened an account, future); Though the federal government and colleges I you might be concerned about how • A grant (which doesn’t need to be repaid); use different formulas to assess financial need, 529 funds will affect your child’s chances of • A scholarship; and the basic process is the same. You and your receiving financial aid. Of all the areas related • A work-study job (where the student gets child fill out a financial aid application by listing to 529 plans, financial aid is perhaps the most a part-time job either on campus or in the your current assets and income (exactly what uncertain and the one most likely to change in community and earns money for tuition). assets must be listed will depend on the formula the future. used). The federal application is known as the The typical financial aid package contains FAFSA (Free Application for Federal Student Aid). First, why should you be concerned? all of these types of aid. Obviously, grants are Colleges generally use an application known as The financial aid process is all about assessing more favorable than loans because they don’t the PROFILE. what a family can afford to pay for college and need to be repaid. However, over the past few Your family’s asset and income information trying to fill the gap. To do this, the institutions decades, the percentage of loans in the average is run through a specific formula to determine that offer financial aid examine a family’s aid package has been steadily increasing, while your expected family contribution (EFC). The income and assets to determine how much a the percentage of grants has been steadily EFC represents the amount of money that your family should be expected to contribute before decreasing. This trend puts into perspective family is considered to have available to put receiving financial aid. Financial aid formulas what qualifying for more financial aid can mean. toward college costs for that year. The federal weigh assets differently, depending on whether There are no guarantees that a larger financial government uses its EFC figure in distributing they are owned by the parent or the child. So, aid award will consist of favorable grants and federal aid and a college uses its EFC figure in it’s important to know how your college savings scholarships—your child may simply get (and distributing its own private aid. The difference plan account or your prepaid tuition plan have to pay back) more loans. between your EFC and the cost of attendance account will be classified, because this will affect The two main sources of financial aid (COA) at your child’s college equals your child’s the amount of your child’s financial aid award. are the federal government and colleges. In financial need. The COA generally includes determining a student’s financial need, the tuition, fees, room and board, books, supplies, Understand financial aid basics. federal government uses a formula known as transportation and personal expenses. It’s Financial aid is money given to a student to the federal methodology, while colleges use a important to remember that the amount of your help that student pay for college or graduate formula known as the institutional methodology. child’s financial need will vary, depending on the school. This money can consist of one or more The treatment of your 529 plan may differ, cost of a particular school. of the following: depending on the formula used. The results of your FAFSA are sent to every college that your child applies to. Every college

16 • OSCPA Financial Fitness Kit Chapter 2 • Paying for College

that accepts a student will then attempt to craft regarding the classification of 529 plans as a assets. Under the federal methodology, student a financial aid package to meet that student’s parental asset: assets are assessed at a rate of 20 percent in financial need. In addition to the federal EFC calculating the EFC. figure, the college has its own EFC figure to work • A parent is required to list a 529 plan as The federal government excludes some assets with. Eventually, the financial aid administrator an asset only if he or she is the account entirely from consideration in the financial aid will create an aid package made up of loans, owner of the plan. If a grandparent, other process. These assets include all retirement grants, scholarships and work-study jobs. Some relative, or friend is the account owner, accounts (e.g., traditional IRAs, Roth IRAs, of the aid will be from federal programs (e.g., then the 529 plan doesn’t need to be employer-sponsored retirement plans), cash Stafford Loan, Perkins Loan, Pell Grant), and the listed on the FAFSA. value life insurance, home equity and annuities. rest will be from the college’s own endowment • However, any student-owned or UTMA/ funds. Keep in mind that colleges aren’t UGMA-owned 529 account is reported How do institutions work with 529 plans? obligated to meet all of your child’s financial as a parental asset if the student files the When distributing aid from their own need. If they don’t, you’re responsible for the FAFSA as a dependent student. A 529 endowment funds, colleges aren’t required to shortfall. account is considered an UTMA/UGMA- use the federal methodology. As noted, most owned account when UTMA/UGMA colleges use the PROFILE application (a few How do 529 plans affect the federal assets are transferred to a 529 account. colleges use their own individual application). methodology? • If your adjusted gross income is less Generally speaking, the PROFILE digs a bit Under the federal methodology, 529 plans— than $50,000 and you meet a few other deeper into your family finances than the FAFSA. both college savings plans and prepaid tuition requirements, the federal government Regarding 529 plans, the PROFILE treats both plans—are considered an asset of the parent, if doesn’t count any of your assets in college savings plans and prepaid tuition the parent is the account owner. determining your EFC. So, your 529 plan plans as a parental asset. And once funds are So, if you’re the parent and the account owner wouldn’t affect financial aid eligibility at withdrawn, colleges generally treat the entire of a 529 plan, you must list the value of the all. amount (contributions plus earnings) from account as an asset on the FAFSA. Under the either type of plan as student income. federal formula, a parent’s assets are assessed How do other college savings options fare (or counted) at a rate of no more than 5.6 under the federal system? Note: Investors should consider investment objectives, risks, charges and expenses associated with 529 plans before percent. This means that every year, the federal Coverdell education savings accounts, mutual investing. Learn more about the Oklahoma 529 College Savings government treats 5.6 percent of a parent’s funds and U.S. savings bonds (e.g., Series EE Plan at www.ok4saving.org. assets as available to help pay college costs. By and Series I) owned by a parent are considered contrast, student assets are currently assessed parental assets and counted at a rate of 5.6 at a rate of 20 percent. percent. However, UTMA/UGMA custodial There are a few points to keep in mind accounts and trusts are considered student

The sooner you begin using a 529 plan to save for college, the greater your chances are to build tax-free interest and dividends over time.

www.KnowWhatCounts.org • 17 Oklahoma Society of CPAs

Saving for Retirement and a Child’s Education at the Same Time

You want to retire comfortably when the should be treated independently. time comes. You also want to help your Figure out what you can afford to put aside C child go to college. So how do you juggle each month. Help! I can’t meet both goals! the two? The truth is, saving for your retirement After you know what your financial needs If the numbers say that you can’t afford to and your child’s education at the same time can are, the next step is to determine what you educate your child or retire with the lifestyle you be a challenge. But take heart—you may be able can afford to put aside each month. To do so, expected, you’ll have to make some sacrifices. to reach both goals if you make some smart you’ll need to prepare a detailed family budget Here are some things you can do: choices now. that lists all of your income and expenses. Keep in mind, though, that the amount you can • Defer retirement: The longer you Know your financial needs. afford may change from time to time as your work, the more money you’ll earn and The first step is to determine what your circumstances change. Once you’ve come up the later you’ll need to dip into your financial needs are for each goal. Answering the with a dollar amount, you’ll need to decide how retirement savings. following questions can help you get started: to divvy up your funds. • Work part-time during retirement. For retirement: • Reduce your standard of living now Retirement takes priority. or in retirement: You might be able • How many years until you retire? Though college is certainly an important goal, to adjust your spending habits now • Does your company offer an employer- you should probably focus on your retirement in order to have money later. Or, you sponsored retirement plan or a pension if you have limited funds. With generous may want to consider cutting back in plan? Do you participate? If so, what’s corporate pensions mostly a thing of the past, retirement. your balance? Can you estimate what the burden is primarily on you to fund your • Increase your earnings now: You might your balance will be when you retire? retirement. But if you wait until your child is in consider increasing your hours at • How much do you expect to receive college to start saving, you’ll miss out on years your current job, finding another job in Social Security benefits? (You of tax-deferred growth and compounding of with better pay, taking a second job can estimate this amount by using your money. Remember, your child can always or having a previously stay-at-home your Personal Earnings and Benefit attend college by taking out loans (or maybe spouse return to the workforce. Statement, from the Social Security even with scholarships), but there’s no such • Invest more aggressively: If you have Administration, www.ssa.gov.) thing as a retirement loan! several years until retirement or college, • What standard of living do you hope you might be able to earn more money to have in retirement? For example, do If possible, save for your retirement and your by investing more aggressively (but you want to travel extensively, or will child’s college at the same time. remember that aggressive investments you be happy to stay in one place and Ideally, you’ll want to try to pursue both mean a greater risk of loss). live more simply? goals at the same time. The more money you • Expect your child to contribute more • Do you or your spouse expect to work can squirrel away for college bills now, the less money to college: Despite your best part-time in retirement? money you or your child will need to borrow efforts, your child may need to take out later. Even if you can allocate only a small student loans or work part-time to earn For college: amount to your child’s college fund, say $50 or money for college. • How many years until your child starts $100 a month, you might be surprised at how • Send your child to a less expensive college? much you can accumulate over many years. For school: You may have dreamed your • Will your child attend a public or private example, if you saved $100 every month and child would follow in your footsteps college? What’s the expected cost? earned 8 percent, you’d have $18,415 in your and attend an Ivy League school. • Do you have more than one child for child’s college fund after 10 years. (This example However, unless your child is awarded whom you’ll be saving? is for illustrative purposes only and does not a scholarship, you may need to lower • Does your child have any special represent a specific investment.) your expectations. Don’t feel guilty—a academic, athletic or artistic skills that If you’re unsure how to allocate your funds lesser-known liberal arts college or a could lead to a scholarship? between retirement and college, a professional state university may provide your child • Do you expect your child to qualify for financial planner may be able to help you. with a similar quality education at a far financial aid? This person can also help you select the best lower cost. investments for each goal. Remember, just • Think of other creative ways to reduce Many on-line calculators are available to help because you’re pursuing both goals at the same education costs: Your child could you predict your retirement income needs and time doesn’t necessarily mean that the same attend a local college and live at home your child’s college funding needs. investments will be appropriate. Each goal to save on room and board, enroll in

18 • OSCPA Financial Fitness Kit Chapter 2 • Paying for College

an accelerated program to graduate child’s college education if doing so will leave subject to a six month suspension if you make a in three years instead for four, take you with no funds in your retirement years. hardship withdrawal. There may be income tax advantage of a cooperative education However, you can certainly tap your retirement consequences, as well. (Check with your plan where paid internships alternate with accounts to help pay the college bills if you administrator to see what withdrawal options course work or defer college for a year need to. With IRAs, you can withdraw money are available to you in your employer-sponsored or two and work to earn money for penalty free for college expenses, even if retirement plan.) college. you’re under age 59½ (though there may be income tax consequences for the money you Can retirement accounts be used to save for withdraw). But with an employer-sponsored college? retirement plan like a 401(k) or 403(b), you’ll Yes. Should they be? Probably not. Most generally pay a 10 percent penalty on any financial planners discourage paying for college withdrawals made before you reach age 59½ with funds from a retirement account. They (age 55 in some cases), even if the money is also discourage using retirement funds for a used for college expenses. You may also be

5 F inancial Tips for College Students

bout 20 million students attended any meals you’ll have to pay for that aren’t eligible to receive a free credit report from U.S. colleges and universities in 2015, already covered in a meal plan, as well each of the three major credit reporting A according to the National Center for as the costs of books, fees or activities companies once every 12 months. Go to Education Statistics. These students may have related to your courses and any travel or www.annualcreditreport.com for more spent years in school preparing academically commuting costs. Once you’ve identified information. for higher education, but they may not feel your monthly needs, whatever is left is completely ready to handle their finances. Here yours to spend on your wants. It’s a good 4. Don’t spend more than necessary. are five tips for students who want to get high idea to track your spending as you go, to be If you’re signed up for meals at the college marks in managing their money: sure you’re on target with your budget and cafeteria, don’t waste cash buying food to get a sense of where you’re spending elsewhere. In addition, many businesses 1. Take charge with a budget. your money. give discounts to students or sell gently Have you been responsible for your own used books or other supplies. Research all monthly budget in the past? Or are you 3. Keep a lid on credit. your opportunities to save a few bucks on new to being responsible for what you More than half—56 percent—of purchases and make the most of them. spend on food, rent and other expenses? undergraduates have credit cards, Your first step should be creating a budget according to a national Sallie Mae study. 5. Set some aside for later. that will serve as a roadmap for your Managed properly through controlled Remember that it’s never too early to get spending. It will also help you time your spending, credit cards can be an important into the habit of putting some of your expenditures so you can avoid running part of building a solid credit history. money into a savings account. Doing so short on funds at the end of the month. However, be sure to monitor your balance. can help you afford things like a trip to a Be sure you include all monthly expenses. You may be surprised by how quickly your sunny location during your break or your For any yearly expenses, divide the total purchases add up. To avoid overspending, account can serve as a nest egg for life by 12 to get your monthly payment or the stick to your budget and pay off your beyond college. And saving is a habit that amount you need to put away to reach the balance each month. And before you sign will serve you well throughout the years total by the time it’s due. up, be sure to read the fine print. Look ahead. for a card with low or no annual fees and 2. Don’t overthink it. compare offers to find the lowest interest Making a budget doesn’t have to be rate. Also, find out how long the grace complicated. It can be as simple as figuring period, the amount of time you have to out how much you have to spend each pay your balance in full without paying a month—which will include money you finance charge, on the credit card is and receive from your parents, scholarships what you’ll be charged for a late payment. and other financial aid, a job and other Once you begin to use credit, the three sources—and how much you expect to major credit reporting companies will begin spend. Your spending will include things calculating your credit score based on such as rent, if you’re not in a dorm, plus factors such as your payment history. You’re

www.KnowWhatCounts.org • 19 Oklahoma Society of CPAs

3 Ways Tax Credits Can Help Lower College Costs

re you looking for options to minimize be $80,000 or less ($160,000 or less if those filing jointly). However, there is one the costs of higher education? The married filing jointly). You may be eligible important fact to remember: Taxpayers A average cost of tuition and fees for a reduced credit if your income is less aren’t allowed to take both the AOTC and for a four-year college education can range than $90,000 (below $180,000 if filing the LLC credits in the same tax year. from about $40,000 for in-state students at a jointly). The AOTC is available for up to public college to nearly $135,000 at a private four years of qualifying expenses. As of 3. Look beyond credits. If you don’t qualify college, according to College Board data (www. this publication, it is set to expire on Dec. for either of these credits, there’s collegeboard.org). Fortunately, there are some 31, 2017, but Congress has extended the another tax-advantaged option that can tax laws that can help lower your outlays. Here credit in the past. help you manage college costs, but it are three ways to lower college costs using tax- will require some advance planning. A advantaged options: 2. Claim the Lifetime Learning Credit.There 529 college savings plan allows you to are several important differences between invest money that can earn interest and 1. Claim the American Opportunity Tax the AOTC and another valuable option, dividends tax free, as long as you spend Credit. The American Opportunity Tax the Lifetime Learning Credit, or LLC. The the money for qualifying expenses at an Credit (AOTC) is a tax credit of up to LLC is a tax credit for the cost of tuition eligible educational institution. There $2,500 of the cost of tuition, fees and and fees not only for undergraduate, but are no income limits on who can start a course materials paid during the tax also graduate and professional degrees plan, but plans will have varying lifetime year. Room and board, transportation, at an eligible institution—as well as for contribution limits. You can choose among insurance, medical expenses and fees courses that will help you get or improve different plans and investment options and beyond those required as a condition of job skills. To be eligible for the credit, change your investment up to twice each enrollment or attendance at an eligible you, your spouse or your dependent can calendar year. The sooner you begin using education institution are not considered be enrolled in as few as one course at a a 529 plan to save for college, the greater qualified expenses. You can generally time. In addition, there is no limit on how your chances are to build tax-free interest receive the credit if you, your spouse or many years you can take the credit, so it and dividends over time. Additionally, your dependent were enrolled at least half can come in handy for many educational Oklahoma residents who contribute time in a college program leading toward needs. The LLC provides up to $2,000 per to an Oklahoma 529 plan can deduct a degree, certificate or other recognized taxpayer, and the income limits differ from contributions up to $10,000 for single educational credential—for at least one those for the AOTC. To qualify for the full filers ($20,000 for married filing jointly) academic period during the tax year—and LLC, your modified adjusted gross income from their Oklahoma taxable income. had not completed the first four years of must be $55,000 or less ($111,000 or less (For additional information, visit www. college education at the beginning of the for those married filing jointly). You may ok4saving.org. tax year. To qualify for the full credit, your be eligible for a reduced credit if your modified adjusted gross income must income is less than $65,000 ($131,000 for 3 Tips for Paying Back Student Loans

housands of college grads take advantage less stressful when they’re due, but it will interest you’ll pay over the life of the loan. of a student loan grace period. Grace also help you establish the start of your The standard repayment plan of ten years of T periods are granted to give new grads emergency fund, one of the pillars of level payments may be the highest amount time to find new jobs armed with their new financial security. Experts advise building per month, but it’s also the lowest amount degrees. However, if your grace period is about to three to six months’ worth of living of interest (meaning less money overall out end or if you want to be prepared, here are three expenses, but it will depend upon your of your pocket). Try for that option if you tips for repaying student loans. situation. However, any emergency fund is can. If you simply can’t afford that monthly better than no emergency fund, so don’t let payment, it’s ok to choose an income- 1. Pretend you’re already paying and start the higher amount scare you into not saving based or graduated plan. Remember you your emergency fund. Log in to your at all. can always pay more than your monthly accounts now and find out what your payment if you find extra money in your payment will be. Next, create a budget 2. Choose your repayment plan wisely. Federal budget. where you start setting that much aside student loans have a variety of repayment each month in a separate savings account. plans available. Before opting for the lowest 3. Try not to stress about your loans. Not only will this help make the payments payment, pay attention to the amount of Depending on the total amount of loans you

20 • OSCPA Financial Fitness Kit Chapter 2 • Paying for College

have outstanding, your balance or payments your education and ability to earn a higher an investment in a home. It will pay off for could feel overwhelming, especially when income throughout your life. While it may the rest of your life, so next time you find you think about what else that dollar seem to limit your financial goals, especially yourself stressing about those big numbers, amount could buy. Try not to focus on that early in your career, student loan debt is remember what you’ll be able to accomplish and instead remember what it did buy: an investment—much like a mortgage is because of your education.

What are “Qualif ied Education Expenses?”

The term “qualified education expenses” is used frequently in education (Note: The term “post-secondary education” includes graduate school circles, but it can mean various things depending on the context. This table unless otherwise noted.) describes what the term means in specific situations.

Qualif ied Education Expenses are...

529 College Savings Plan Tuition, fees, books, supplies, equipment, and room Computers: qualified for 2009 and 2010, along with and board for post-secondary education (college Internet access and certain software, while beneficiary savings plans generally include graduate school; is in college (previously, computers qualified only if the 529 Prepaid Tuition Plan prepaid tuition plans generally don’t) college specifically required one in order to enroll or attend) Room and board: qualified only if the student is enrolled at least half time (if student lives on campus, Special needs services: qualified if incurred by a room and board is limited to the actual amount beneficiary with special needs in order to enroll or charged by the school; if student lives off campus or attend at home, room and board is limited to the college’s specific published room and board allowance figure)

Coverdell ESA Elementary, secondary, and post-secondary education Computers: qualified for students in elementary and expenses, including tuition, fees, tutoring, books, secondary school, even if the school doesn’t require it; supplies, room and board, uniforms, transportation, aren’t qualified at the post-secondary level unless the and related equipment college requires one

U.S. Savings Bonds Tuition and fees for post-secondary education (courses Room and board and books: not qualified education (To be eligible to exclude interest must be part of a degree or certificate program), and expenses from federal income tax when contributions to 529 plans (prepaid tuition plans or bonds are redeemed) college savings plans) and Coverdell ESAs

Hope Credit Tuition and related expenses only (Hope credit can be in order to enroll or attend, for Hope credit, course (Renamed the American Opportunity used only for undergraduate costs; Lifetime Learning materials are qualified even if not required by college credit and deduction for qualified higher education tax credit for 2009 and 2010) expenses can be used for both undergraduate and Not qualified expenses (even if they must be paid to graduate costs) the college in order to enroll or attend):room and Lifetime Learning Credit board, medical expenses (including student health Course-related books, supplies, equipment, and fees), insurance, transportation, and personal living student activities: for Lifetime Learning credit, expenses Deduction for Qualified Higher qualified only if the fees must be paid to the college Education Expenses

Student Loan Interest Deduction Tuition, fees, room and board, books, equipment, and For loan to be qualified: student must have been other necessary expenses, such as transportation, for enrolled in a degree or certificate program on at least a post-secondary education half-time basis when the loan was obtained

Source: American Institute of CPAs

www.KnowWhatCounts.org • 21 Chapter three: Young Adult Issues

When you become an adult, you have to take on some In this chapter, you will learn basics on serious responsibilities. Start out right by establishing starting out, evaluating a job offer, pros good financial footing. Consider the following: and cons of renting versus buying, ways • Homeownership among Americans under age 35 to save on wedding costs and more. is barely half the national average at 34.1 percent (Washington Post, August 2016).

• Just 26 percent of millennials are married, Get more financial tips from www.FeedThePig.org, compared to 36 percent of Gen X-ers 20 years www.360FinancialLiteracy.org or www.KnowWhatCounts. ago and 48 percent of boomers in 1980 (New York org, Also on social media, each offers free tips, Post, March 2016). e-newsletters, resources and more.

• About one-third of 18-to-34-year-olds live with Also, check out the “On Your Own” section of Life Stages at www.TinkerFCU.org. their parents (Washington Post, August 2016).

This chapter is sponsored by Tinker Federal Credit Union.

Tinker Federal Credit Union has been helping their cooperative, TFCU returns profits to its members members achieve their goals and realize their through higher dividends, lower loan rates and many dreams since 1946. Oklahoma’s largest credit union, no-fee or low-fee services. TFCU keeps our members’ TFCU offers its members the latest technology that finances secure, so they can focus on what makes gives them access to their accounts anytime that’s them happy. To find out more about the benefits of convenient for them. As a not-for-profit financial membership with TFCU, visit TinkerFCU.org. Chapter 3 • Young Adult Issues TinkerFCU.org • (800) 456-4828

4 Financial Tips for Starting Out

ou’re on your own now. You’ve finished debt burden, perhaps you can consolidate need life insurance to protect your school, are working your first real job your student loans to lower the monthly loved ones. Y and maybe you’re even buying a home payment. As for credit card debt, resolve Chapter three: or getting married. Here are a few tips to help to pay it off in a systematic fashion: always 4. Plan for your future. One “expense item” you start managing your finances. pay more than the minimum payment due, you should include in your budget is saving and if you have more than one card, direct for your future. Although retirement seems 1. Construct a budget. The foundation of any extra money you have toward the card far off, start saving as soon as possible. Due Young Adult Issues any financial plan depends on knowing with the highest interest rate. to compound interest, the sooner you start what your income and expenses are saving even a modest amount, the greater and budgeting accordingly. Your income 3. Review your insurance coverage. the amount you can potentially accumulate may be easy to figure out (look at your a. Health insurance: Hopefully, you’ll over time. For example, $50 per month paycheck), but don’t forget to add in have coverage through your employer. saved at 6 percent compounded monthly other income such as interest income and If not, as part of recent health-reform for 30 years yields a total accumulation of maybe earnings from a seasonal job. Most legislation, you may be able to remain more than $50,000, even though you only of your expenses will also be fixed, such on your parents’ health insurance if you deposited $18,000 of that ($50 x 12 months as rent, utilities, and groceries, but don’t are under age 26. x 30 years). (This is a hypothetical example forget about occasional expenses, such b. Disability insurance: You’re fine now, and is not intended to reflect the actual as clothes or car repairs. If your income is but that could change in a heartbeat performance of any investment--results greater than your expenses, you’re in good if an injury or illness puts you out of will vary.) Save for your short-term needs, shape, but if it’s the other way around, commission. Disability insurance pays too. Try to sock away at least three to six you’ll need to generate more income or benefits that will help cover your living months’ worth of expenses in a savings or cut expenses, or both. If cutting expenses, expenses if you can’t work due to money market account, so that you’ll have look at your wants first (e.g., travel). There’s an injury or illness. It may be offered funds you can access in an emergency. less flexibility when it comes to your needs through your employer, or you can Take advantage of any employer-sponsored (e.g., groceries). purchase it on your own. retirement plans you’re offered. Your c. Life insurance: If you’re employed, contributions come out of your salary on a 2. Prioritize your debt. Maybe you’ve got you may receive life insurance as part pretax basis, and any investment earnings student loans, a car loan and some credit of your employee benefits package. are tax deferred until withdrawn. These card debt. Paying all your debts on time If not, you may want to purchase a plans often include employer-matching will help you establish and maintain a small policy to cover any final expenses contributions. You may also want to look good credit history, so it’s important to (e.g., funeral expenses) that might be into opening an individual retirement make debt repayment a priority expense incurred if you die. If you’re getting account (IRA). in your budget. If you need to reduce your married or planning a family, you’ll

Evaluating a Job Offer

f you’re looking for a first job or considering that’s right for you by following a few sensible working in the same field. You can do this by changing jobs, you should understand steps. talking to others who hold similar jobs, calling a I how to assess a job offer. It’s likely that recruiter (i.e., a headhunter), or doing research at some point during your career, you’ll be How does the salary offer stack up? at your local library or online. The Bureau of looking for a new job. You may be looking to What if the salary you’ve been offered is Labor Statistics (bls.gov) is a good source for this make more money or seeking greater career less than you expected? First, find out how information. opportunities. Or, you may be forced to look for frequently you can expect performance reviews new employment if your company restructures. and/or pay increases. Expect the company to Will you receive bonuses and other Whatever the reason, you’ll eventually be faced increase your salary at least annually. To fully benefits? with an important decision: When you receive evaluate the salary being offered, compare it Next, ask about bonuses, commissions and an offer, should you take it? You can find the job with the average pay of other professionals profit-sharing plans that can increase your total

(Cont. on 24)

www.KnowWhatCounts.org • 23 Tinker Federal Credit Union

income. Find out what benefits the company something about the company’s key executives negotiate. You may be reluctant to negotiate offers and how much of the cost you’ll bear as and to read a copy of the company’s mission because you fear that the company will rescind an employee. Don’t overlook the value of good statement. the offer or respond negatively. However, employee benefits. They can add the equivalent if you truly want the job but find the offer of thousands of dollars to your base pay. Ask to Decide whether to accept the job offer. unacceptable, you may as well negotiate for a look over the benefits package available to new You’ve spent a lot of time and energy better offer rather than walk away from a great employees. Also, find out what opportunities researching and evaluating a potential job, opportunity without trying. The first step in exist for you to move up in the company. This but the hardest part is yet to come: Now that negotiating is to tell your potential employer includes determining what the company’s goals you have received a job offer, you must decide specifically what it is that you want. State the are and the type of employee that the company whether to accept it. Review the information amount of money you want or the exact hours values. you’ve gathered. Think back to the interview, you wish to work. Make it clear that if the paying close attention to your feelings and company accepts your terms, you are willing and Understand personal and professional intuition about the company, the position and able to accept its offer immediately. consequences. the people with whom you came in contact. What happens next? It’s possible the Will you be better off financially if you take Consider not only the salary and benefits you’ve company will accept your counteroffer. Or, the the job? Will you work a lot of overtime, and been offered, but also the future opportunities company may reject it, because either company is the scheduling somewhat flexible? Must you might expect with the company. How policy does not allow negotiation or the you travel extensively? Consider the related strong is the company financially and is it part company is unwilling to move from its original costs of taking the job, including the cost of of a growing industry? Decide if you would offer. The company may make you a second transportation, new clothes, a cell phone, be happy and excited working there. If you’re offer, typically a compromise between its first increased day-care expenses and the cost of having trouble making a decision, make a list offer and your counteroffer. In either case, the your spouse leaving his or her job if you are of the pros and cons. It may soon become clear ball is back in your court. If you still can’t decide required to relocate. Also, take a look at the whether the positives outweigh the negatives or whether to take the job, ask for a day or two to company’s work environment. You may be vice versa. think about it. Take your time. Accepting a new getting a good salary and great benefits, but you job is a big step. may still be unhappy if the work environment Negotiate a better offer. doesn’t suit you. Try to meet the individuals Sometimes you really want the job you’ve with whom you would be closely working and been offered, but you find the salary, benefits see if you click. It may also be helpful to find out or hours unfavorable. In this case, it’s time to Taking Advantage of Employer-sponsored Retirement Plans

mployer-sponsored qualified retirement • Your employer automatically deducts your • Your employer may match all or part of plans, such as 401(k)s, are some of the contributions from your paycheck. You your contribution up to a certain level. You E most powerful retirement savings tools may never even miss the money--out of typically become vested in these employer available. If your employer offers such a plan sight, out of mind; dollars through years of service with the and you’re not participating in it, you should be. • You decide what portion of your salary company; Once you’re participating in a plan, try to take to contribute, up to the legal limit. And • Your funds grow tax deferred in the full advantage of it. you can usually change your contribution plan. You don’t pay taxes on investment amount on certain dates during the year; earnings until you withdraw your money Understand your employer-sponsored plan. • With 401(k), 403(b), 457(b), SARSEPs, and from the plan; Before you can take advantage of your SIMPLE plans, you contribute to the plan • You’ll pay income taxes and possibly an employer’s plan, you need to understand how on a pretax basis. Your contributions come early withdrawal penalty if you withdraw these plans work. Read everything you can off the top of your salary before your your money from the plan about the plan and talk to your employer’s employer withholds income taxes; • You may be able to borrow a portion of benefits officer. You can also talk to a financial • Your 401(k), 403(b), or 457(b) plan may let your vested balance (up to $50,000) at a planner, a tax advisor or other professional. you make after-tax Roth contributions— reasonable interest rate; and Recognize the key features many employer- there’s no up-front tax benefit but • Your creditors cannot reach your plan sponsored plans share: qualified distributions are entirely tax- funds to satisfy your debts. free;

24 • OSCPA Financial Fitness Kit Chapter 3 • Young Adult Issues TinkerFCU.org • (800) 456-4828

Contribute as much as possible. $370,000. (Note: This example is for illustrative your personal goals, your attitude toward risk, The more you can save for retirement, the purposes only and does not represent a specific how long you have until retirement and other better your chances of retiring comfortably. If investment.) factors. Your financial professional can also help you can, max out your contribution up to the you coordinate your plan investments with your legal limit. If you need to free up money to do Capture the full employer match. overall investment portfolio. that, try to cut certain expenses. If you can’t max out your 401(k) or other Finally, you may be able to change your Why put your retirement dollars in your plan, you should at least try to contribute investment allocations or move money between employer’s plan instead of somewhere else? up to the limit your employer will match. the plan’s investments on specific dates during One reason is that your pretax contributions Employer contributions are basically free money the year (e.g., at the start of every month or to your employer’s plan lower your taxable once you’re vested in them (check with your every quarter). income for the year. This means you save money employer to find out when vesting happens). in taxes when you contribute to the plan—a By capturing the full benefit of your employer’s Know your options when you leave your big advantage if you’re in a high tax bracket. match, you’ll be surprised how much faster employer. For example, if you earn $100,000 a year and your balance grows. If you don’t take advantage When you leave your job, your vested contribute $10,000 to a 401(k) plan, you’ll pay of your employer’s generosity, you could be balance in your former employer’s retirement income taxes on $90,000 instead of $100,000. passing up a significant return on your money. plan is yours to keep. You have several options at (Roth contributions don’t lower your current For example, if you earn $30,000 a year and that point, including: taxable income but qualified distributions work for an employer that has a matching 401(k) of your contributions and earnings—that is, plan. The match is 50 cents on the dollar up to 6 • Taking a lump-sum distribution. This distributions made after you satisfy a five-year percent of your salary. Each year, you contribute is often a bad idea, because you’ll pay holding period and reach age 59½, become 6 percent of your salary ($1,800) to the plan and income taxes and possibly a penalty on disabled, or die—are tax free.) receive a matching contribution of $900 from the amount you withdraw. Plus, you’re Another reason is the power of tax-deferred your employer. giving up continued tax-deferred growth. growth. Your investment earnings compound • Leaving your funds in the old plan, year after year and aren’t taxable as long as Evaluate your investment choices carefully. growing tax deferred (your old plan may they remain in the plan. Over the long term, this Most employer-sponsored plans give you a not permit this if your balance is less than gives you the opportunity to build an impressive selection of mutual funds or other investments $5,000, or if you’ve reached the plan’s sum in your employer’s plan. You should end up to choose from. Make your choices carefully. normal retirement age--typically age 65). with a much larger balance than somebody who The right investment mix for your employer’s This may be a good idea if you’re happy invests the same amount in taxable investments plan could be one of your keys to a comfortable with the plan’s investments or you need at the same rate of return. retirement. That’s because over the long term, time to decide what to do with your For example, you participate in your varying rates of return can make a big difference money. employer’s tax-deferred plan (Account A). in the size of your balance. • Rolling your funds over to an IRA or a You also have a taxable investment account Research the investments available to you. new employer’s plan if the plan accepts (Account B). Each account earns 8 percent per How have they performed over the long term? rollovers. This is often a smart move year. You’re in the 28 percent tax bracket and Have they held their own during down markets? because there will be no income taxes or contribute $10,000 to each account at the end How much risk will they expose you to? Which penalties if you do the rollover properly of every year. You pay the yearly income taxes ones are best suited for long-term goals like (your old plan will withhold 20 percent on Account B’s earnings using funds from that retirement? You may also want to get advice for income taxes if you receive the funds same account. At the end of 30 years, Account from a financial professional (either your own, before rolling them over). Plus, your funds A is worth $1,132,832, while Account B is worth or one provided through your plan). He or she will keep growing tax deferred in the IRA only $757,970. That’s a difference of over can help you pick the right investments based on or new plan.

Employer contributions are basically free money once you’re vested in them (check with your employer to find out when vesting happens).

www.KnowWhatCounts.org • 25 Tinker Federal Credit Union

Should You Pay Down Debt or Save and Invest?

here are certainly a variety of strategies $10,000 available to invest or pay off debt and payments that must be paid each month. for paying off debt, many of which can the outlook for earning an after-tax rate of Failure to make the minimum payment T reduce how long it will take to pay off return greater than 4.32 percent is good, it may can result in penalties, increased interest the debt and the total interest paid. But should be better to invest the $10,000 rather than using rates, and default. Are your funds needed you pay off the debt? Or should you save and it to pay off the debt. to make those payments? invest? To find out, compare what rate of return Of course, it isn’t an all-or-nothing choice. • How much debt do you have? Is it a you can earn on your investments versus the It may be useful to apply a strategy of paying problem? How do you feel about debt? interest rate on the debt. There may be other off debts with high interest rates first, and then Is it something you can easily live with or factors that you should consider as well. investing when you have a good opportunity to does it make you uncomfortable? Probably the most common factor used make investments that may earn a higher after- • If you say you will save the money, will to decide whether to pay off debt or to make tax rate of return than the after-tax interest rate you really invest it or will you spend it? investments is to consider whether you could on the debts remaining. If you pay off the debt, you will have earn a higher after-tax rate of return on Say, for example, you have a credit card assured instant savings by eliminating the the investments than the after-tax interest with a $10,000 balance on which you pay 18 need to come up with the money needed rate on the debt if you were to invest your percent nondeductible interest. You also have a to pay the interest on the debt. money instead of using it to pay off the debt. mortgage with a $10,000 balance on which you • Would you be able to borrow an For example, say you have a credit card pay deductible interest of 6 percent, and your additional amount, if needed, and at with a $10,000 balance on which you pay tax rate is 28 percent. So, if you have $20,000 what interest rate, if you paid off current nondeductible interest of 18 percent. You would available to invest or pay off debt, it may make debt? Do you have an emergency fund, generally need to earn an after-tax rate of return sense to pay off the credit card with $10,000 or other source of funds, that could be greater than 18 percent to consider making an and invest the remaining $10,000. used if you lose your job or have a medical investment rather than paying off the debt. So, When investing, keep in mind that, in general, emergency, or would you have to borrow? if you have $10,000 available to invest or pay the higher the rate of return, the greater the • If your employer matches your off debt and the outlook for earning an after- risk, which can include the loss of principal. If contributions in a 401(k) plan, you should tax rate of return greater than 18 percent isn’t you make investments rather than pay off debt generally invest in the 401(k) to get the good, it may be better to pay off the debt than and your investments incur losses, you may still matching contribution. For example, if to make an investment. have debts to pay, but will you have the money your employer matches 50 percent of On the other hand, say you have a mortgage needed to pay them? your contributions up to 6 percent in a with a $10,000 balance on which you pay When deciding whether to pay down debt or 401(k) plan, getting the 50 percent match deductible interest of 6 percent. If your income to save and invest, you might also consider the is like getting an instant 50 percent return tax rate is 28 percent, your after-tax cost for following: on your contribution. In addition, there the mortgage is only 4.32 percent (6 percent are tax advantages to investing in a 401(k) x (1 – 28 percent)). You would generally need • What are the terms of your debt? Are plan. to earn an after-tax rate of return greater than there any penalties for prepayment? 4.32 percent to consider making an investment • Do you actually have money that you rather than paying off the debt. So, if you have could invest? Most debts have minimum

26 • OSCPA Financial Fitness Kit Chapter 3 • Young Adult Issues TinkerFCU.org • (800) 456-4828 Should You Rent or Buy a Home?

uying a home is one of the biggest property, and you may need to adhere • You’re basically at your landlord’s mercy. investments most people will make in to requirements from a homeowners’ If he defaults on his loan, you might lose B their lives. Before starting your search, association, which may also charge your home. take the time to sit down and evaluate which is monthly fees. most feasible for you, renting or buying. Here’s a What are the pros of renting a home? After examining the pros and cons, there are look at some pros and cons: • With renting, you’ll likely have to put a few other items to consider before making down a security deposit, but there isn’t a your final decision. What are the pros of buying a home? big initial investment. • With a fixed-rate mortgage, you’ll know • Rent and utilities may increase annually, • How long do you plan to live in the area? your principal and interest payment for but that is about it as far as expenses • Do you expect a job change or promotion the life of the loan (note: local property go. No outlays are necessary for flooded in the near future? If so, it might not be tax rates may change your payment over basements or new windows. That’s all up the best time to buy. Selling a home can time). to your landlord to finance. take time and involve more costs. • You’ll own the property, so you’re building • When you’re renting, you can pick up • If you’re new to a city, take the time to get equity — and presumably, a return on and move when you’d like, according to know the area. A neighborhood that your investment if you sell. to the terms of your lease. If you’ve seems suited to your lifestyle now may • Homeowners can usually deduct the unintentionally rented in what turns out not be to your liking after a while. interest that is paid on a mortgage for a to be a less than desirable area, you’re • When you sit down to crunch the first home or a second home, but there not tied down by a 30-year loan or the numbers, does it make more financial are some restrictions. Mortgage interest inability to sell a house. When your lease sense to buy or rent? What do you want is any interest that you pay on a loan that expires, you can move on. and what can you afford? You can use you secured for a first or second home. free online calculators to help create and What are the cons of renting a home? analyze this financial scenario and many What are the cons of buying a home? • You’re getting a roof over your head, more. • The biggest initial expense of home but you’re not building any equity. Your ownership is the down payment. landlord gets that benefit. The thought of buying a home is exciting, Depending on the terms of your loan, • There aren’t any tax write offs available to but it’s a long-term financial commitment. you may have to put down as much as 20 renters, only for landlords. Understand everything that’s involved in percent of the purchase price. That’s a big • You’ll likely be limited on many changes. homeownership before you take the plunge. chunk of change to part with at one time. If you want to paint or remodel, you’ll If now isn’t the right time, you can start or • You’ll encounter ongoing monthly need to clear it with your landlord first. continue to save for a down payment until expenses such homeowner’s insurance, If you are permitted to make cosmetic you’re ready. utilities and general maintenance. changes, you can’t take them with you. • Home ownership also comes with The next renter will get to hang on to any a responsibility to maintain your improvements you make.

The biggest initial expense of home ownership is the down payment. Depending on the terms of your loan, you may have to put down as much as 20 percent of the purchase price.

www.KnowWhatCounts.org • 27 Tinker Federal Credit Union

Getting Hitched? Consider These Six Issues

etting married is exciting, but it brings and lower maintenance fees. However, against the cost of two single plans. It’s a many challenges. One such challenge it’s sometimes more difficult to keep track good idea to examine your auto insurance G that you and your spouse will have to of how much money is in a joint account coverage, too. If you and your spouse own face is how to combine your finances. Planning when two individuals have access to it. Of separate cars, you may have different auto carefully and communicating clearly are course, you could avoid this problem by insurance carriers. Consider pooling your important, because the financial decisions that making sure you tell each other every time auto insurance policies with one company. you make now can have a lasting impact on your you write a check or withdraw funds from Many insurance companies will give you a future. the account. Another option is for you to discount if you insure more than one car both maintain separate accounts and both with them. If one of you has a poor driving 1. Discuss your financial goals. The first contribute a set amount or a percentage record, however, make sure that changing step in mapping out your financial future of your paycheck to a join account, out of companies won’t mean paying a higher together is to discuss your financial goals. which you pay joint expenses (expenses premium. Start by making a list of your short-term you both incur as a family). Or, you could goals (e.g., paying off wedding debt, new always decide to maintain separate 6. Learn your employer-sponsored car, vacation) and long-term goals (e.g., accounts entirely. Make sure you both retirement plans. If both you and your having children, your children’s college agree on what you will be doing and why. spouse participate in an employer- education, retirement). Then, determine One of the biggest issues couples fight sponsored retirement plan, you should which goals are most important to you. about is money, and you want to avoid as be aware of each plan’s characteristics. Once you’ve identified the goals that are many potential arguments as possible. Review each plan together carefully and a priority, you can focus your energy on determine which plan provides the best achieving them. 4. Should you have joint credit cards? benefits. If you can afford it, you should Carefully consider whether you should each participate to the maximum in your 2. Prepare a budget. Next, you should add a spouse to your credit card accounts. own plan. If your current cash flow is prepare a budget that lists all of your When you and your spouse have joint limited, you can make one plan the focus income and expenses over a certain time credit, both of you become responsible of your retirement strategy. Here are some period (e.g., monthly, annually). You can for 100 percent of the credit card debt. In helpful tips: designate one spouse to be in charge of addition, if one of you has poor credit, it managing the budget or you can take will negatively impact the credit rating of • If both plans match contributions, turns keeping records and paying the bills. the other. If you or your spouse does not determine which plan offers the best If both you and your spouse are going to qualify for a card because of poor credit match and take full advantage of it; be involved, make sure that you develop and you’re willing to give your spouse • Compare the vesting schedules for the a record-keeping system that both of you account privileges anyway, you can make employer’s matching contributions; understand. And remember to keep your your spouse an authorized user of your • Compare the investment options records in a joint filing system so that credit card. An authorized user is not a offered by each plan—the more both of you can easily locate important joint cardholder and is therefore not liable options you have, the more likely you documents. Begin by listing your sources of for any amounts charged to the account. are to find an investment mix that income (e.g., salaries and wages, interest, Also, the account activity won’t show up suits your needs; and dividends). Then, list your expenses (it may on the authorized user’s credit record. But • Find out whether the plans offer be helpful to review several months of remember, you remain responsible for the loans. If you plan to use any of your entries in your checkbook and credit card account. contributions for certain expenses bills). Add them up and compare the two (e.g., your children’s college education, totals. Hopefully, you get a positive number, 5. Discuss insurance. If you and your spouse a down payment on a house), you may meaning that you spend less than you earn. have separate health insurance coverage, want to participate in the plan that has If not, review your expenses and see where you’ll want to do a cost/benefit analysis of a loan provision. you can cut down on your spending. each plan to see if you should continue to keep your health coverage separate. For 3. Decide on bank accounts—separate or example, if your spouse’s health plan has joint? At some point, you and your spouse a higher deductible and/or co-payments will have to decide whether to combine or fewer benefits than those offered by your bank accounts or keep them separate. your plan, he or she may want to join Maintaining a joint account does have your health plan instead. You’ll also want advantages, such as easier record keeping to compare the rate for one family plan

28 • OSCPA Financial Fitness Kit Chapter 3 • Young Adult Issues TinkerFCU.org • (800) 456-4828 Last Minute Ways to Save on Your Wedding

n the last few weeks before you say, “I from a particular family member, ask if with depending variables. Seek out a family do,” you are probably looking at ways to he or she will be in charge of cleaning up friend that may have an old classic car or I eliminate excess expenses. Deciding where the place. In the grand scheme of things, rent an Uber. It will take a little extra work to trim dollars can be overwhelming and distract $250 may not seem to be that critical of a on your part to make sure your bags make you from what is meant to be a monumental savings, but it will definitely be a welcome it to the trunk, but it will be more money to moment in your life. Here are some ways to added savings on the budget. spend on that special honeymoon. solidify your budget leading up to that special day. 3. Reception photos. You are definitely going 5. Honeymoon. Tradition tells us that you get to need a professional for the wedding, married and then take a vacation together 1. Be your own DJ. Musical entertainment which usually only lasts about 30 minutes. to somewhere exotic. Prioritize where you is a big part of the wedding reception. The reception is an opportunity for the want to go and if it’s an once-in-a-lifetime According to Value Penguin, the average photography to gouge you on the price trip, crowdfund it. You can go to website cost for a band is upwards of $3,500. While because it takes more time. Create a like Honey Fund, where you post it, share hiring a DJ can be far less expensive, it still wedding hashtag (e.g., #wegothitched) the link on social media and via email, and comes in at a cost of $1,000, on average. and encourage your family, wedding party then watch as people invest in your dream You can download the app “Djay” for and whoever else will be there to become trip. To date, more than $435 million dollars around $10 and create your own playlist free photographers. You’ll build a wedding have been donated. Even if donations don’t and it’ll crossfade for you. Put a friend or brand and have tons of pictures for your completely cover your costs, getting some relative in charge of it and save some cash. collection. of it funded would make registering worth it. 2. Venue cleanup. Most places will charge 4. Transportation. Taking a limo from the you a deposit or even build in charges for wedding to the airport or hotel? These “facility cleanup.” In lieu of a wedding gift charges can be an additional $250-$700

Should My Spouse and I Both Work After a Child is Born?

ollowing the birth of your child, you may prepare your own; employer-sponsored retirement plan. Further, feel that both you and your spouse need • House cleaning and gardening: Hired help with only one income, you are more vulnerable F to work to meet household expenses to clean the house and mow the lawn; in the event of an economic downturn. Finally, and maintain your current lifestyle. However, and/or the stay-at-home spouse may lose the sense of you may discover that one of you can stay home • Taxes: With only one salary, you may accomplishment and community one gets from without seriously affecting your net income. move into a lower tax bracket. working outside the home. Though you would have to do without a second You should balance all the issues, both pros income, you need to factor in what you’d save: Now, consider the adverse effects of and cons. And remember, although it may make becoming a single-income household. The most sense for both of you to continue working, • Child-care costs: The cost per child for a obvious, of course, is a reduced family income. some nonfinancial considerations, such as the day-care facility, nursery school or nanny; You should also consider what effect a leave of opportunity to raise and supervise your child in • Commuting osts:c Gasoline, wear and tear absence will have on the stay-at-home spouse’s your own home, may outweigh your financial on your car, tolls and parking; career and your family’s retirement plans. You concerns. • Clothing: Work clothes and dry cleaning; may both be at a point in your careers where • Restaurant and take-out food: Prepared you are earning high salaries. Leaving your job dinners you purchase because you have now may mean having to start over lower on no time to cook; the career ladder. And if one of you leaves work, • Lunches out: You have more time to you may miss the opportunity to fully fund your

www.KnowWhatCounts.org • 29 Tinker Federal Credit Union

Should You Work with a Financial Advisor?

he world of 50 years ago was a lot accommodate changing investment How are financial advisors compensated? different than it is today. An individual markets or tax laws. When it comes to compensation, advisors fall T often worked at the same job all his into four categories: or her adult life, lived in the same house, and There are some misconceptions about financial stayed married to the same spouse. In those advisors. 1. Salary based—You pay the company for days, too, one spouse could support a family, Maybe you have reservations about which the advisor works, and the company paying for college ordinarily didn’t require consulting a financial advisor because you’re pays its advisors a salary. taking out a second mortgage, and people could uncertain about what to expect. Here are 2. Fee based—You pay a fee based on an look forward to retiring on Social Security and some common misconceptions about financial hourly rate (for specific advice or a financial possibly a company pension. advisors, and the truth behind them: plan) or based on a percentage of your Today, your hopes and dreams are no assets and/or income. different. Like most people, you probably • Most people don’t need financial advisors. 3. Commission based—The advisor receives want to buy a home, put your children While it’s true that you may have the a commission from a third party for any through college, and retire with a comfortable knowledge and ability to manage your products you may purchase income. But the world has become a more own finances, the financial world grows 4. Commission and fee based—The advisor complex place, especially when it comes to more intricate every day. A qualified receives both commissions and fees. your finances. You may already be working financial advisor has the expertise to help with financial professionals—a CPA or estate you navigate a steady path toward your You’ll need to decide which type of planner, for example—each of whom advises financial goals. compensation structure works best for you, you in a specific area. But if you would like a • All financial advisors are the same. based on your own personal circumstances. comprehensive financial plan to help you secure Financial advisors are not covered by your future, you may benefit from the expertise uniform state or federal regulations, so When is it time to consult a financial advisor? of a financial advisor. there can be a considerable disparity in In many cases, a specific life event or a their qualifications and business practices. perceived need may prompt you to seek Here are some services a financial advisor may Some may specialize in one area such as professional financial planning guidance. Such provide. investment planning, while others may events or needs might include: Even if you feel competent enough to develop sell a specific range of products, such as a plan of your own, a financial advisor can act insurance. A qualified financial advisor • Getting married or divorced; as a sounding board for your ideas and help generally looks at your finances as an • Having a baby or adopting a child; you focus on your goals, using his or her broad interrelated whole and can help you with • Paying for your child’s college education; knowledge of areas such as estate planning and many of your financial needs. • Buying or selling a family business; investments. Specifically, a financial advisor may • Financial advisors serve only the wealthy. • Changing jobs or careers; help you: Some advisors do only take on clients with • Planning for your retirement; a minimum amount of assets to invest. • Developing an estate plan; • Set financial goals; Many, however, only require that their • Coping with the death of your spouse; • Determine the state of your current clients have at least some discretionary and/or financial affairs by reviewing your income, income. • Receiving an inheritance or a financial assets, and liabilities, evaluating your • Financial advisors are only interested in windfall. insurance coverage and your investment comprehensive plans. Financial advisors portfolio, assessing your tax obligations and generally prefer to offer advice within the In these situations, a financial professional examining your estate plan; context of a client’s current situation and can help you make objective, rather than • Develop a plan to help meet your financial overall financial goals. But financial advisors emotional, decisions. goals that addresses your current financial frequently help clients with specific matters However, you don’t have to wait until an weaknesses and builds on your financial such as rolling over a retirement account or event occurs before you consult a financial strengths; developing a realistic budget. advisor. A financial advisor can help you develop • Make recommendations about specific • Financial planners aren’t worth the an overall strategy for approaching your products and services (many advisors expense. Like other professionals, financial financial goals that not only anticipates what are qualified to sell a range of financial advisors receive compensation for their you’ll need to do to reach them, but that also products); services, and it’s important for you to remains flexible enough to accommodate your • Monitor your plan and periodically evaluate understand how they’re paid. But a good evolving financial needs. its progress; and financial advisor may help you save and • Adjust your plan to help meet your earn more than you’ll pay in fees. In Oklahoma, get a free referral and 30-minute changing financial goals and to consultation at www.FindYourCPA.com.

30 • OSCPA Financial Fitness Kit Chapter Four: Credit and Debt

When you become an adult, you have to take on some In this chapter, you will get tips on serious responsibilities. Start out right by establishing choosing the right credit cards, how to good financial footing. The goal of all Americans should be to be debt free! Consider the following: consolidate debt, how to get out of debt and stay out of debt, how to read your • The total debt owed by U.S. consumers in 2016 was $779 billion (NerdWallet.com, January 2017). credit report and more.

• For households that carry credit card debt, it costs them about $1,300 a year in interest Get more credit and debt tips from www.360FinancialLiteracy.org or (NerdWallet.com, January 2017). www.KnowWhatCounts.org, • While household income has grown by 28 percent in the past 13 years, the cost of living has increased 30 percent in that same time period (NerdWallet.com, January 2017).

• Oklahoma Society of CPAs

How Can I Get Credit if I Have No Credit History?

t's the old catch-22. You cannot establish of your cash reserve line!). Alternatively, ask with the companies that issue them, the lending a credit history without having credit, and the bank for a small personal loan. As you repay guidelines may be more liberal than those for I you cannot get credit without a credit these debts, you establish a credit history. Make major credit cards. history. But if you work at it, this problem can sure the bank reports that history to the credit If you still have difficulty obtaining credit in be overcome. While you create a history, be bureaus. your own name, consider a collateralized or sure your efforts will be reported to the credit Secured credit cards are also a good way to cosigned loan. With a collateralized loan, the bureaus. get started. Your credit line is secured by your item you pledge as collateral (such as a car) Use the credit history of a family member or deposit in the bank, minimizing the creditor's minimizes the risk to the credit grantor. With friend to leverage yourself into credit in your risk. For example, if you deposit $500 in the a cosigned loan, your cosigner is equally liable own name. If you are added as a joint party or bank, you get a credit card with a maximum for the balance. Spreading the responsibility for authorized user to another person's credit card, limit of $500. As you use the card and make repayment in this fashion minimizes the lender's the lender may report the account's payment payments, you establish a credit history. These risk. Successful repayment of these types of history on your credit report. cards have high interest rates, but your goal is loans can then be used to establish your own If you have a checking account, ask your only to charge what you can afford to repay. As credit history. bank for overdraft protection (or cash reserve) you repay the debt, you establish a repayment privileges. With this feature added to your pattern seen by other creditors. account, you can create credit by writing a You may qualify for a department store check for an amount greater than the balance charge card or gas card. Because these cards in your account (but not greater than the limit have lower credit limits and may be used only

How Should You Choose a Credit Card?

ike dandelions in a spring lawn, credit outstanding balance on which you’re evaluating a credit card offer, here are card offers pop up everywhere--stuffing charged interest for the billing period. some points to consider: L your mailbox, flashing on the Internet, a. What’s the interest rate? Is it fixed even falling from the magazines in your doctor’s c. Finance charge: the cost of credit for or variable? If variable, how is it waiting room. And they all sound so attractive. the billing cycle, expressed as a dollar calculated? “0% APR until next year!” “No fee if you transfer amount and determined by multiplying b. Will you be charged different interest a balance now!” “Low fixed rate!” You’re the outstanding balance by the periodic rates for purchases, balance transfers, thinking of applying for a card, but how do you rate. and cash advances? decide which offer is best for you? c. What method determines the d. Fees: charges (other than the finance outstanding balance used to calculate 1. Learn the lingo. In order to evaluate charge) that may be levied against your the finance charge? credit card offers, you’ll need to learn the account. Common examples include an d. Is there an annual fee, and what language they use. Here are some of the annual fee, cash advance fees, balance other fees may be charged? more important terms. transfer fees, late payment fees, and e. What’s the length of the grace period over-the-limit fees. (if any)? a. Annual percentage rate (APR): the cost of credit as indicated by a yearly e. Grace period: the length of time prior What you should look for depends in (fixed or variable) interest rate. This to your payment due date during which part on how you’ll use the card. If you rate and the periodic rate (the APR you may pay off your account without intend to pay off the balance each month expressed as a daily or monthly factor) incurring any finance charge. and won’t incur any finance charges, must be disclosed to you before you obtaining a low interest rate is less become obligated on the card. 2. Once you can talk the talk, ask questions. important than finding a card with no Any credit card will cost you something, but annual fee, minimal transaction fees, and a b. Balance computation method: depending on the terms and conditions, long grace period. If you’ll carry a balance the formula used to determine the some are more costly than others. When from month to month, you’ll want a low

32 • OSCPA Financial Fitness Kit Chapter 4 • Credit and Debt

interest rate and a balance calculation the card again (at a higher rate of interest • The Fair and Accurate Credit Transactions method that minimizes your finance once the introductory offer period has Act of 2003 (FACTA) amends and charges. expired), and you’ll minimize the potential strengthens the FCRA, provides protections for fraudulent use or identity theft. What’s against identity theft, improves resolution 3. Understand balance transfers. Perhaps more, if you don’t close such accounts and of consumer disputes, improves the you’re not currently using your credit card, later try to transfer your balance again, accuracy of consumer records and makes but you want to minimize the finance a new card issuer might turn down your improvements in the use of and consumer charge on your existing balance. One application, afraid you’ll incur too much access to creditor information. way to do so is to transfer your balance debt by running up new balances on • The Equal Credit Opportunity Act (ECOA) periodically to a new card with a low dormant, but open, credit card accounts. ensures that when you apply for credit, you introductory “teaser” rate of interest. If won’t be discriminated against because of you choose to “surf” in this fashion, be Voice your concern if you’re turned down your gender, race, marital status or age. cautious. Watch out for: and speak up for your rights. If you’re turned • The Fair Credit Billing Act (FCBA) offers down for a credit card, the issuer must inform protection against billing errors (including a. A low interest rate on new purchases, you specifically why you were turned down or limiting your liability for unauthorized but a higher interest rate on balance tell you how to get this information. When the purchases) and may help you reverse the transfers; rejection is based even in part on information purchase of inferior goods or services b. A low introductory interest rate that contained in your credit report, you’re entitled charged to your credit card. applies only for a very short period of to a free copy of the report from the credit • The Fair Debt Collection Practices Act time; bureau that issued it. Get the report and review (FDCPA) spells out what practices collection c. Balance transfer fees, particularly it; if you discover incorrect notations on it, agents may and may not use to collect a uncapped amounts calculated as a dispute them. Then contact the card issuer to debt. percentage of the balance transferred; plead your case, informing the issuer of any and corrections made to your credit report. With If you feel your rights have been violated d. Termination fees and retroactive persistence, you may be able to convince the and you can’t resolve the issue with the interest charges levied if you decide issuer to approve your credit application. creditor, you may file a complaint with one of to surf the next wave and close the Your consumer rights related to credit cards the federal agencies responsible for enforcing account or transfer the balance to are protected by various federal laws. consumer credit laws, including the Federal another card before a specified time Trade Commission (FTC), or you can contact the period has elapsed. • The Fair Credit Reporting Act (FCRA) Oklahoma Attorney General protects your right to know what’s in your (www.ok.gov/oag/). When you transfer a balance from an credit file and sets up procedures to ensure existing card to a new one, it’s a good that credit reporting agencies or credit idea to close the account you’re leaving. bureaus furnish correct information about By doing so, you won’t be tempted to use you.

If you’re turned down for a credit card, the issuer must inform you specifically why you were turned down or tell you how to get this information.

www.KnowWhatCounts.org • 33 Oklahoma Society of CPAs

Understand Advantages and Disadvantages of Credit Cards

Before you use plastic, whether it’s debit or credit, it pays to know everything you can about the implied agreement you have with a credit card company the moment you swipe.

Advantages Disadvantages

Convenience--Credit cards can save you time and trouble-- Overuse--Revolving credit makes it easy to spend beyond no searching for an ATM or keeping cash on-hand. your means.

Record keeping--Credit card statements can help you Paperwork--You'll need to save your receipts and check track your expenses. Some cards even provide year-end them against your statement each month. This is a good summaries that really help out at tax time. way to ensure that you haven't been overcharged. Low-cost loans--You can use revolving credit to save today (e.g., at a one-day sale), when available cash is a week High-cost fees--Your purchase will suddenly become much away. more expensive if you carry a balance or miss a payment.

Instant cash--Cash advances are quick and convenient, Unexpected fees--Typically, you'll pay between 2 and 4 putting cash in your hand when you need it. percent just to get the cash advance; also cash advances usually carry high interest rates. Perks--From frequent flier miles to discounts on automobiles, there is a program out there for everyone. No free lunch--The high interest rates and annual fees Many credit card companies offer incentive programs associated with credit cards often outweigh the benefits based on the amount of purchases you make. received. Savings offered by credit cards can often be obtained elsewhere. Build positive credit--Controlled use of a credit card can help you establish credit for the first time or rebuild credit Deepening your debt--Consumers are using credit more if you’ve had problems in the past--as long as you stay than ever before. If you charge freely, you may quickly find within your means and pay your bills on time. yourself in over your head--as your balance increases, so do your monthly minimum payments. Purchase protection--Most credit card companies will handle disputes for you. If a merchant won’t take back a Homework--It's up to you to make sure you receive proper defective product, check with your credit card company. credit for incorrect or fraudulent charges.

Balance surfing--Many credit card companies offer low Teaser rates--Low introductory rates may be an attractive introductory interest rates. These offers allow you to move option, but they last only for a limited time. When the balances to lower-rate cards. teaser rate expires, the interest rate charged on your balance can jump dramatically.

34 • OSCPA Financial Fitness Kit Chapter 4 • Credit and Debt

Understand Your Credit Report

our credit report contains information What’s in my credit report? likely to turn you down for credit or extend it to about your past and present credit Your credit report usually starts off with your you at a higher interest rate if your credit report Y transactions. It’s used primarily personal information: your name, address, indicates that you are a poor risk. by potential lenders to evaluate your Social Security number, telephone number, Too many inquiries on your credit report in creditworthiness. So if you’re about to apply for employer, past address and past employer, and a short time can also make lenders suspicious. credit, especially for something significant like a (if applicable) your spouse’s name. Check this Loan officers may assume that you’re being mortgage, you’ll want to get and review a copy information for accuracy; if any of it is wrong, turned down repeatedly for credit or that you’re of your credit report. correct it with the credit bureau that issued the up to something—going on a shopping spree, report. financing a bad habit, or borrowing to pay off First, get a copy of your credit report. The bulk of the information in your credit other debts. Either way, the lenders may not Every consumer is entitled to a free credit report is account information. For each creditor, want to take a chance on you. report every 12 months from each of the you’ll find the lender’s name, account number, Your credit report may also indicate that three credit bureaus. To get your free annual and type of account; the opening date, high you have good credit, but not enough of it. For report, you can contact each of the three credit balance, present balance, loan terms, and instance, if you’re applying for a car loan, the bureaus individually, or you can contact one your payment history; and the current status lender may be reviewing your credit report centralized source that has been created for of the account. You’ll also see status indicators to determine if you’re capable of handling this purpose. Besides the annual report, you are that provide information about your payment monthly payments over a period of years. The also entitled to a free report under the following performance over the past 12 to 24 months. lender sees that you’ve always paid your charge circumstances: They’ll show whether the account is or has been cards on time, but your total balances due and • A company has taken adverse action past due, and if past due, they’ll show how far monthly payments have been small. Because against you, such as denying you credit, (e.g., 30 days, 60 days). They’ll also indicate the lender can’t predict from this information insurance, or employment (you must charge-offs or repossessions. Because credit whether you’ll be able to handle a regular request a copy within 60 days of the bureaus collect information from courthouse car payment, your loan is approved only on adverse action); and registry records, you may find notations the condition that you supply an acceptable • You’re unemployed and plan to look for a of bankruptcies, tax liens, judgments, or even cosigner. job within the next 60 days; criminal proceedings in your file. • You’re on welfare; and/or At the end of your credit report, you’ll How do I correct errors? • Your report is inaccurate because of fraud, find notations on who has requested your Under federal and some state laws, you including identity theft. information in the past 24 months. When you have a right to dispute incorrect or misleading You can order your free annual report online apply for credit, the lender requests your credit information on your credit report. Typically, at www.annualcreditreport.com, by calling report--that will show up as an inquiry. Other you’ll receive with your report either a form 877-322-8228, or by completing an Annual inquiries indicate that your name has been to complete or a telephone number to call Report Request Form and mailing it to Annual included in a creditor’s prescreen program. If so, about the information that you wish to Credit Report Request Service, P.O. Box 105281, you’ll probably get a credit card offer in the mail. dispute. Once the credit bureau receives your Atlanta, GA 30348-5281. You may be surprised at how many accounts request, it generally has 30 days to complete a Alternatively, you can contact each of the show up on your report. If you find inactive reinvestigation by checking any item you dispute three credit bureaus: accounts (e.g., a retailer you no longer do with the party that submitted it. One of four • Experian National Consumer Assistance business with), you should contact the credit things should then happen: Center, www.experian.com, P.O. Box 2104, card company, close the account, and ask for a • The credit bureau reinvestigates, the party Allen, TX 75013-2104, (888) 397-3742 letter confirming that the account was closed at submitting the information agrees it’s • Trans Union Annual Credit Report Request the customer’s request. incorrect, and the information is corrected. Service, www.transunion.com, P.O. Box • The credit bureau reinvestigates, the party 105281, Atlanta, GA 30348-5281, (800) How do lenders base the future on the submitting the information maintains 888-4213 past? it’s correct, and your credit report goes • Equifax, Inc., www.equifax.com, P.O. Box What all this information means in terms of unchanged. 740241, Atlanta, GA 30374, (800) 685-1111 your creditworthiness depends on the lender’s • The credit bureau doesn’t reinvestigate criteria. Generally speaking, a lender feels safer and so the disputed information must be If you make your request online, you should assuming that you can be trusted to make timely removed from your report. get access to your report immediately. If you monthly payments against your debts in the • The credit bureau reinvestigates, but the request your report by phone or mail, you future if you have always done so in the past. A party submitting the information doesn’t should receive it within 15 days. history of late payments or bad debts will hurt respond, and so the disputed information you. Based on your track record, a new lender is must be removed from your report.

(Cont. on 36)

www.KnowWhatCounts.org • 35 Oklahoma Society of CPAs

You should be provided with a report on the report a statement of 100 words or less that who has gotten your credit report in the past reinvestigation within five days of its conclusion. explains your side of the story with respect to six months. Unfortunately, though, this may If the reinvestigation resulted in a change to any disputed but unchanged information. A not help you much—creditors often ignore or your credit report, you should also get an summary of your statement will go out with dismiss these statements. updated copy. every copy of your credit report in the future, You have the right to add to your credit and you can have the statement sent to anyone

Should You Consolidate Your Debts?

hether you’re trying to improve loan. Most banks and mortgage companies Disadvantages of debt consolidation: your money management, having offer home equity loans. You’ll need to fill out • If you use a home equity loan to W difficulty making ends meet, want an application and demonstrate to the lender consolidate your debts, the loan is to lower your monthly loan payments or just that you’ll be able to make regular monthly secured by a lien on your home. As a can’t seem to keep up with all your credit card payments. Your home will then be appraised result, the lender can foreclose on your bills, you may be looking for a way to make to determine the amount of your equity. home if you default on the loan; debt repayment easier. Debt consolidation Typically, you can borrow an amount equal • If the term of your consolidation loan is may be the answer. to 80 percent of the value of the equity in longer than the terms of your smaller your home. Interest rates and terms for home existing loans, you may end up paying What is debt consolidation? equity loans vary, so you should shop around more total interest even if the rate is Debt consolidation is when you roll all of and compare lenders. lower. So you won’t actually be saving your smaller individual loans into one large Some lenders offer loans specifically any money over time, even though your loan, usually with a longer term and a lower designed for debt consolidation. Again, you’ll monthly payments will be less; and interest rate. This allows you to write one need to fill out an application and demonstrate • If you use a longer-term loan to check for a loan payment instead of many, to the lender that you’ll be able to make consolidate your debts, it will take you while lowering your total monthly payments. regular monthly payments. Keep in mind, longer to pay off your debt. however, that these loans usually come with How do you consolidate your debts? higher interest rates than home equity loans Should you consolidate your debts? There are many ways to consolidate your and, depending on the amount you borrow, For debt consolidation to be worthwhile, debts. One way is to transfer them to a credit may require collateral on the loan (e.g., your the monthly payment on your consolidation card with a lower interest rate. Most credit car or bank account). loan should be less than the sum of the card companies allow you to transfer balances monthly payments on your individual loans. If by providing them with information, such Advantages of debt consolidation: this isn’t the case, consolidation may not be as the issuing bank, account number, and • The monthly payment on a consolidation your best option. Moreover, the interest rate approximate balance. Or, your credit card loan is usually substantially lower than on your consolidation loan should be lower company may send you convenience checks the combined payments of smaller loans; than the average of the interest rates on your that you can use to pay off your old balances. • Consolidation loans usually offer lower individual loans. This allows you not only to Keep in mind, however, that there is usually a interest rates; and save money but also to lower your monthly fee for this type of transaction, and the lower • Consolidation makes bill paying easier payment. rate may last only for a certain period of time since you have only one monthly (e.g., six months). payment, instead of many. Another option is to obtain a home equity

36 • OSCPA Financial Fitness Kit Chapter 4 • Credit and Debt

5 Steps for Getting Out (and Staying Out) of Debt

re you carrying a large amount of creating a budget, add up monthly income 4. Dedicate windfalls to debt. It’s natural debt? According to NerdWallet, credit and then subtract recurring expenses— to want to spend tax refund money or A card debt averages almost $15,000 in such as rent or mortgage, food, commuting a work bonus on fun. Set aside a small American households. The Oklahoma Society costs and any regular debt payments. percentage to put toward a vacation or of Certified Public Accountants offers five steps Remember that spending over the other indulgence and use the rest of the to pay off outstanding balances and beat high remaining amount will just increase your money to lower outstanding balances. In interest costs. outstanding debt balances, so be thorough. fact, whenever extra funds are available, earmark a portion for debt payments. Once 1. Spend less. It sounds easy, but whipping 3. Pay off problem accounts.With a this becomes a habit, it will also become out the credit card and going completely manageable mortgage with low interest apparent that smaller or eliminated off budget can be a temptation. If rates, make timely payments, but don’t balances are easier to maintain. tempted, leave credit cards at home and make erasing the balance the highest resolve to rely on cash throughout the priority since interest payments can 5. Reap the rewards. After paying off a big day. Also, delete credit card information be deducted if itemized. High-interest balance, give yourself a pat on the back and from frequently visited online merchants. charge cards are another story. The best a nice reward. Think small so all of the hard That way impulse purchases are more option is to economize enough to make work doesn’t go to waste. For example, difficult and unnecessary purchases must higher payments in order to get rid of plan a weekend away at a local amusement be reconsidered. When splurging seems those balances entirely. If making higher park instead of a week in the Caribbean. inevitable, ask yourself, “Is this purchase payments isn’t an option, find a credit card With personal incentives, a smart spending worth the interest costs if I charge it and that offers a lower interest rate. Aim to pay plan is easier to stick with. don’t pay my balance off immediately?” more than the minimum balance every The purchase might become easier to month, without adding on any additional bypass if seen as a budget buster. debt. Although paying off a low balance first might seem tempting, if the interest 2. Build a better budget. It’s tough to rate on that account is reasonable, high determine how much spending is too much interest accounts should be a priority. unless you know what’s affordable. When

Find a credit card that offers a lower interest rate. Aim to pay more than the minimum balance every month, without adding on any additional debt.

www.KnowWhatCounts.org • 37 Chapter Five: Investing

If you are unfamiliar with the terms or the process, In this chapter, you will learn the basics investing can be intimidating. The important thing of investing, how compounding works, is to understand the rise (bull market) and fall (bear market) of stock prices, plan accordingly and seek how to evaluate your portfolio, handling help when you need it. market volatility and more. • Those at 25 should put away 15 percent of their earnings for a comfortable retirement, whereas those who don’t start saving until they’re 45 Get more investment advice at will need to put away 45 percent, a statistic that www.360financialliteracy.org/Topics/Investor- points out the key advantage to investing in Education. stocks—time (Center for Retirement Research at Boston College, September 2014).

• Almost half—40 percent— of stocks have lost 70 percent or more of their value since 1980 (JP Morgan, 2014).

• A difference of 0.75 percent in fees equates to $30,000 less out of an example portfolio of $100,000 over a 20-year span (Investmentzen. com, May 2016) Chapter 5 • Investing

Understand the Basics of Investment Planning

hy do so many people never obtain Because everyone has different goals and Understand the impact of time. the financial independence they expectations, everyone has different reasons for Take advantage of the power of W desire? Often, it’s because they investing. Understanding how to match those compounding. Compounding is the earning don’t take the first step—getting started. Besides reasons with your investments is simply one of interest on interest, or the reinvestment of procrastination, other excuses people make are aspect of managing your money to provide a income. For instance, if you invest $1,000 and that investing is too risky, too complicated, too comfortable life and financial security for you get a return of 8 percent, you will earn $80. time consuming or only for the rich. and your family. By reinvesting the earnings and assuming the The fact is, there’s nothing complicated about same rate of return, the following year you common investing techniques, and it usually What is the best way to invest? will earn $86.40 on your $1,080 investment. doesn’t take much time to understand the • Get in the habit of saving. Set aside a The following year, $1,166.40 will earn $93.31. basics. The biggest risk you face is not educating portion of your income regularly. (This hypothetical example is intended as an yourself about which investments may be able • Invest in financial markets. That way your illustration and does not reflect the performance to help you achieve your financial goals and how money can grow at a meaningful rate. of a specific investment). to approach the investing process. • Don’t put all your eggs in one basket. Use the Rule of 72 to judge an investment’s Though it doesn’t guarantee a profit or potential. Divide the projected return into 72. Know the difference between saving and ensure against the possibility of loss, The answer is the number of years that it will investing. having multiple types of investments may take for the investment to double in value. For Both saving and investing have a place in help reduce the impact of a loss on any example, an investment that earns 8 percent per your finances. However, don’t confuse the two. single investment. year will double in 9 years. With savings, your principal typically remains • Focus on long-term potential. Don’t fixate constant and earns interest or dividends. Savings on short-term price fluctuations. Consider working with a financial professional. are kept in certificates of deposit (CDs), checking • Ask questions. Become educated before Whether you need a financial professional accounts and savings accounts. By comparison, making any investment. depends on your own comfort level. If you have investments can go up or down in value and may • Invest with your head. Do not invest with the time and energy to educate yourself, you or may not pay interest or dividends. Examples your stomach or heart. Avoid the urge to may not feel you need assistance. However, of investments include stocks, bonds, mutual invest based on how you feel about an don’t underestimate the value of the experience funds, collectibles, precious metals and real investment. and knowledge that a financial professional estate. can offer in helping you define your goals and Get started. objectives, creating a net worth statement and Why invest? Organize your finances to help manage your spending plan, determining the level and type of You invest for the future, and the future is money more efficiently. Remember, investing risk that’s right for you and working with you to expensive. For example, college expenses are is just one component of your overall financial create a comprehensive financial plan. For many, increasing more rapidly than the rate of overall plan. Get a clear picture of where you are today. working with a professional is the single most inflation. And because people are living longer, What’s your net worth? Compare your assets important investment that they make. retirement costs are often higher than many with your liabilities. Look at your cash flow. people expect. Though all investing involves the Be clear on where your income is going each Review your progress. possibility of loss, including the loss of principal, month. List your expenses. You can typically Financial management is an ongoing process. and there can be no guarantee that any identify enough expenses to account for at least Keep good records and recalculate your net worth investment strategy will be successful, investing 95 percent of your income. If not, go back and annually. This will help you for tax purposes and is one way to try to prepare for that future. look again. You could use those lost dollars for will show you how your investments are doing You have to take responsibility for your own investing. Are you drowning in credit card debt? over time. Once you take that first step of getting finances, even if you need expert help to do so. If so, pay it off as quickly as possible before you started, you will be better able to manage your Government programs such as Social Security start investing. Every dollar that you save in money to pay for today’s needs and pursue will probably play a less significant role for interest charges is one more dollar that you can tomorrow’s goals. you than they did for previous generations. invest for your future. Corporations are switching from guaranteed Establish a solid financial base: Make sure you pensions to plans that require you to make have an adequate emergency fund, sufficient contributions and choose investments. The insurance coverage and a realistic budget. Also, better you manage your dollars, the more likely take full advantage of benefits and retirement it is that you’ll have the money to make the plans that your employer offers. future what you want it to be.

www.KnowWhatCounts.org • 39 Oklahoma Society of CPAs

Evaluate the Risk in Your Portfolio

f you’re like most people, you probably higher the beta, the more volatile the portfolio achieving his retirement target. If he chose to evaluate your portfolio in terms of the is. A beta of 1.05 means the portfolio involves 5 save more, he might increase his odds of success I return it earns. However, as we were all percent more market risk than the benchmark to 95 percent. Or Bob might decide that he’s reminded in 2008, returns aren’t the only factor to which it’s compared. If the benchmark rises comfortable with having an 85 percent chance you should consider when determining whether 10 percent, a portfolio with a beta of 1.05 of success in reaching his target amount if that your portfolio is allocated appropriately. Also should theoretically rise 10.5 percent; a fall also means his portfolio might be less volatile. important is the level of risk you take in pursuing of 10 percent in the benchmark should mean (However, be aware that though a projection those returns. a corresponding 10.5 percent decline in the might show a high probability that you’ll reach There are a number of ways to estimate portfolio. A 0.95 beta means a portfolio has your financial goals, it can’t guarantee that the level of risk in a portfolio. The term “risk” 5 percent less market risk than that index; outcome.) is often used interchangeably with “volatility” in theory, the portfolio would rise and fall 5 (the tendency of a portfolio’s value to rise or percent less than the benchmark. (However, Are you getting paid enough to take fall sharply, especially within a relatively short remember that investments also have unique risk? period of time). However, for most people, a risks that are not related to market behavior. Another approach to thinking about portfolio portfolio is simply a means to an end—paying Those risks can create volatility patterns that are risk involves the reward side of the risk-reward for retirement or a child’s college tuition, for different from the underlying benchmark.) tradeoff. You can compare a portfolio’s return to example. In that context, risk also means the risk that of a relatively risk-free investment, such as of not meeting your financial needs. How do I measure my risk? the inflation-adjusted return on a short-term ( Another way to evaluate risk is to estimate three months or less) U.S. Treasury bill. Modern How do I measure volatility? the chances of your portfolio achieving a desired portfolio theory is based on the assumption that One of the most common measures of financial goal. In this case, “risk” means not you should receive greater compensation for volatility is standard deviation, which gauges the volatility but the odds that your portfolio will taking more risk (though there’s no guarantee degree of an investment’s up-and-down moves. succeed in meeting a specific financial liability. it will work out that way, of course). A stock It shows how much the investment’s returns A technique known as Monte Carlo simulation should offer a potentially higher return than a have deviated from time to time from its own uses computer modeling based on multiple Treasury bond. The difference between the two average. The higher the standard deviation of an scenarios for how various types of investments returns is the equity’s risk premium. A small-cap investment or portfolio, the bumpier the road to might perform based on their past returns. stock that’s relatively new should offer a higher those returns has been. Though past performance is no guarantee of risk premium than a well-established, dividend- Another way to assess a portfolio’s volatility future results, such a projection can estimate paying stock. While understanding risk premium is to determine its beta. This statistic compares how close your plan might come to meeting a doesn’t necessarily minimize risk, it can help you a portfolio’s ups and downs to those of a future target amount. evaluate whether the return you’re getting is benchmark index, such as the S&P 500, and Let’s look at a hypothetical example. Let’s worth the risk you’re taking. indicates how sensitive the portfolio might be say Bob wants to retire in 15 years. A Monte Whatever your approach to portfolio risk, to overall market movements. An investment Carlo simulation might suggest that, given his understanding the nature and level of the risks or portfolio with a beta of 1 would have exactly current level of saving and his portfolio’s asset you face can be critical in sticking to a long-term as much market risk as its benchmark. The allocation, Bob has a 90 percent chance of investing strategy.

Be aware that though a portfolio projection might show a high probability that you’ll reach your financial goals, it can’t guarantee that outcome.

40 • OSCPA Financial Fitness Kit Chapter 5 • Investing

Taxation of Investments

t’s nice to own stocks, bonds and other • Taxable income: This is income that’s deck, your adjusted basis in the house may investments—until it’s time to fill out your not tax exempt or tax deferred. If you be $105,000. You should be aware of which Ifederal income tax return. At that point, you receive ordinary taxable income from your items increase the basis of your asset and may be left scratching your head. Just how so investments, you’ll report it on your federal which items decrease the basis of your you report your investments and how they are income tax return. In some cases, you may asset. See IRS Publication 551 for details. taxed? have to detail your investments and income on Schedule B. Calculate your capital gain or loss. Is it ordinary income or a capital gain? • Tax-exempt income: This is income that’s If you sell stocks, bonds or other capital To determine how an investment vehicle free from federal and/or state income assets, you’ll end up with a capital gain or loss. is taxed in a given year, first ask yourself what tax, depending on the type of investment Special capital gains tax rates may apply. These went on with the investment that year. Did it vehicle and the state of issue. Municipal rates may be lower than ordinary income tax generate income, such as interest? If so, the bonds and U.S. securities are typical rates. income is probably considered ordinary. Did you examples of investments that can generate Basically, capital gain (or loss) equals the sell the investment? If so, a capital gain or loss tax-exempt income. amount that you realize on the sale of your asset is probably involved. (Certain investments can • Tax-deferred income: This is income whose (i.e., the amount of cash and/or the value of any generate both ordinary income and capital gain taxation is postponed until some point property you receive) less your adjusted basis in income, but we won’t get into that here.) in the future. For example, with a 401(k) the asset. If you sell an asset for more than your If you receive dividend income, it may be retirement plan, earnings are reinvested adjusted basis in the asset, you’ll have a capital taxed either at ordinary income tax rates or and taxed only when you take money out of gain. For example, assume you had an adjusted at the rates that apply to long-term capital the plan. The income earned in the 401(k) basis in stock of $10,000. If you sell the stock for gain income. Currently, dividends paid to plan is tax deferred. $15,000, your capital gain will be $5,000. If you an individual shareholder from a domestic sell an asset for less than your adjusted basis in corporation or qualified foreign corporation A quick word about ordinary losses: It’s the asset, you’ll have a capital loss. For example, are generally taxed at the same rates that apply possible for an investment to generate an assume you had an adjusted basis in stock of to long-term capital gains. These rates are 15 ordinary loss, rather than ordinary income. In $10,000. If you sell the stock for $8,000, your percent for an individual in a marginal tax rate general, ordinary losses reduce ordinary income. capital loss will be $2,000. bracket that is greater than 15 percent, or 0 Schedule D of your income tax return is where percent for an individual in the 10 or 15 percent Understand what basis means. you’ll calculate your short-term and long-term marginal tax rate bracket. But special rules and Let’s move on to what happens when you capital gains and losses and figure the tax due, if exclusions apply. Some dividends (such as those sell an investment vehicle. Before getting into any. You’ll need to know not only your adjusted from money market mutual funds) continue to capital gains and losses, though, you need to basis and the amount realized from each sale, be treated as ordinary income. understand an important term—basis. Generally but also your holding period, your marginal The distinction between ordinary income speaking, basis refers to the amount of your income tax bracket and the type of asset(s) and capital gain income is important because investment in an asset. To calculate the capital involved. See IRS Publication 544 for details. different tax rates may apply and different gain or loss when you sell or exchange an asset, reporting procedures may be involved. Here are you must know how to determine both your • Holding period: Generally, the holding some of the things you need to know. initial basis and adjusted basis in the asset. period refers to how long you owned an asset. A capital gain is classified as short Categorize your ordinary income. • Initial basis:Usually, your initial basis term if the asset was held for a year or Investments often produce ordinary income. equals your cost or what you paid for the less, and long term if the asset was held for Examples of ordinary income include interest asset. For example, if you purchased one more than one year. The tax rates applied and rent. Many investments—including savings share of stock for $10,000, your initial basis to long-term capital gain income are accounts, certificates of deposit, money market in the stock is $10,000. However, your initial generally lower than those applied to short- accounts, annuities, bonds and some preferred basis can differ from the cost if you did term capital gain income. Short-term capital stock—can generate ordinary income. Ordinary not purchase an asset but rather received gains are taxed at the same rate as your income is taxed at ordinary (as opposed to it as a gift, an inheritance or in a tax-free ordinary income. capital gains) tax rates. exchange. But not all ordinary income is taxable— • Adjusted basis: Your initial basis in an • Marginal income tax bracket: Marginal and even if it is taxable, it may not be taxed asset can increase or decrease over time in income tax brackets are expressed by their immediately. If you receive ordinary income, certain circumstances. For example, if you marginal tax rate (e.g., 15 percent, 25 the income can be categorized as taxable, tax buy a house for $100,000, your initial basis percent). Your marginal tax bracket depends exempt or tax deferred. in the house will be $100,000. If you later on your filing status and the level of your improve your home by installing a $5,000 taxable income. When you sell an asset, (Cont. on 42)

www.KnowWhatCounts.org • 41 Oklahoma Society of CPAs

the capital gains tax rate that applies to the against ordinary income. See your CPA for specific • Your net investment income (generally, net gain will depend on your marginal income amounts. Losses not used can offset future income from interest, dividends, annuities, tax bracket. Generally, a 0 percent long-term capital gains. Schedule D of your federal income royalties and rents, and capital gains, as well capital gains tax rate applies to individuals in tax return can lead you through this process. as income from a business that is considered the 10 or 15 percent tax bracket, while the a passive activity), or long-term capital gains of individuals in the Get help when things get too • The amount of your modified adjusted gross other tax brackets are currently subject to a complicated. income that exceeds $200,000 ($250,000 maximum rate of 15 percent. The sale of some assets are more difficult to if married filing a joint federal income tax • Type of asset: The type of asset that you sell calculate and report than others, so you may return; $125,000 if married filing a separate will dictate the capital gain rate that applies, need to consult an IRS publication or other tax return) and possibly the steps that you should take references to properly calculate your capital gain to calculate the capital gain (or loss). For or loss. Also, remember that you can always seek So, effectively, you’re subject to the additional instance, the sale of an antique is taxed at the assistance of an CPA or other tax professional. 3.8 percent tax only if your adjusted gross income the maximum tax rate of 28 percent even exceeds the dollar thresholds listed above. if you held the antique for more than 12 Medicare contribution tax on unearned It’s worth noting that interest on tax-exempt months. income may apply. bonds is not considered net investment income High-income individuals may be subject to for purposes of the additional tax. Qualified Use capital losses to reduce your tax a 3.8 percent Medicare contribution tax on retirement plan and IRA distributions are also not liability. unearned income (the tax is also imposed on considered investment income. You can use capital losses from one estates and trusts, although slightly different investment to reduce the capital gains from rules apply). The tax is equal to 3.8 percent of the other investments. You can also use a capital loss lesser of: Teach Your Children About Stocks

ore and more young people are market is to buy shares in strong companies with You and your child should first determine the becoming fascinated by the stock the potential to grow, and to hold onto them. companies in which the child should invest. One M market. Choosing stocks, tracking Young investors (and older ones, too) need to of the best strategies is to select stocks in kid- their performance and making money can be understand the concept of risk versus reward — friendly companies, such as McDonalds, Disney exciting, challenging and rewarding. But, as the higher the potential reward from a particular and Microsoft, that are associated with products experienced investors know, the market can also investment, the higher the risk of losing money. your child identifies and knows. be frustrating and risky, especially during volatile Buying a small number of shares without times. To help kids understand the risks and Let them test the waters. paying high commissions can be a challenge. rewards of the stock market, parents need to Before putting real money on the line, your Some companies will let you make an initial talk to their children about investing. child can test his or her stock selection skills purchase directly without going through and interest level by choosing two or three a broker, after which you can enroll in the Explain the importance of financial stocks and following their performance. Teach company’s dividend reinvestment plan (DRIP) goals. your child how to find the stock price in the and buy additional shares. The non-profit Don’t start off by trying to explain options, newspaper financial listings or online. Each day, National Association of Investors Corp. (NAIC) selling short, margin calls and other complicated he or she can check to see how the stocks are (www.better-investing.org) has a stock purchase concepts. Instead, begin by explaining the doing. Watch for stories on the company and program that lets you buy a small number of difference between short- and long-term share them with your child. Discuss how the shares in quality companies. At First Share financial goals and between saving and story is likely to impact the stock’s performance. (www.firstshare.com), you can buy a single investing. To help your child understand that Then, monitor the financial listings for changes share of stock in companies that have a direct investing is about making money grow to in share price. purchase program. An online discount broker is meet long-term financial goals, use examples another possibility. he or she will understand. For example, if Make the purchase. By getting your kids interested in investing, your child wants to buy a new video game, While minors can’t own stocks or open you’re buying more than shares of stock. You’re he or she should focus on saving. However, if brokerage accounts in their own names, parents teaching your child financial skills he or she can he or she hopes to buy a Harley in ten years, can set up custodial accounts under the Uniform use for a lifetime. investing in stocks or mutual funds may be more Gifts to Minors Act or Uniform Transfer to appropriate. Minors Act, depending on state laws. Simply complete a form with the child’s name and Teach them about risk and rewards. Social Security number and the name of the The safest way to make money in the stock custodian.

42 • OSCPA Financial Fitness Kit Chapter SIX: Retirement Planning

The statistics about Americans and retirement are In this chapter, you will learn how to disappointing, to say the least. Consider this: build a more secure retirement, ways to • About 41 percent of American households with maximize Social Security, exceptions to adults ages 55 to 64 have no retirement savings early retirement withdrawals and more. whatsoever (USA Today, May 2016).

• The average 65-year-old couple retiring in 2016 Find additional retirement planning tips and will need an estimated $260,000 to cover health calculators at www.360financialliteracy.org/Topics/ care costs in retirement, an increase of 6 percent Retirement-Planning, www.SocialSecurity.gov from 2015 (Fidelity, August 2016). or www.KnowWhatCounts.org. • More than a third—36 percent— of retirees rely on Social Security as their primary source of income (ssa.gov, June 2016). Oklahoma Society of CPAs

Retirement Investment Advisors designs portfolios for a lifetime.

Wherever you are on the retirement path, talking with an For your complimentary copy experienced, professional financial advisor is a step in the right of the informative booklet “The Retirement Path,” direction. Retirement Investment Advisors act as fiduciaries – call your nearest Retirement Investment bound to provide objective advice based solely on your best interests. Advisors office or visit These CERTIFIED FINANCIAL PLANNER™ professionals design TheRetirementPath.com. portfolios balanced to invest for retirement while providing asset protection with less volatility. The retirement path can be a long journey. Fortunately, the first step is easy. Simply call Retirement Investment Advisors or visit them online at TheRetirementPath.com.

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44 • OSCPA Financial Fitness Kit Chapter 6 • Retirement Planning

Understand the Basics of Retirement Planning

ou may have a very idealistic vision expenses, will likely increase during your action. It’s never too early to get started (ideally, of retirement—doing all of the things retirement years. A realistic estimate of your begin saving in your 20s). To the extent possible, Y that you never seem to have time to do expenses will tell you about how much yearly you may want to arrange to have certain now. But how do you pursue that vision? Social income you’ll need to live comfortably. amounts taken directly from your paycheck Security may be around when you retire, but the and automatically invested in accounts of your benefit you get from Uncle Sam may not provide Calculate the gap. choice (e.g., 401(k) plans, payroll deduction enough income for your retirement years. To Once you have estimated your retirement savings). This arrangement reduces the risk of Retirement Investment make matters worse, few employers today income needs, take stock of your estimated impulsive or unwise spending that will threaten offer a traditional company pension plan that future assets and income. These may come from your savings plan. In other words, out of sight, guarantees you a specific income at retirement. Social Security, a retirement plan at work, a part- out of mind. If possible, save more than you On top of that, people are living longer and time job and other sources. If estimates show think you’ll need to provide a cushion. Advisors designs must find ways to fund those additional years of your future assets and income will fall short of retirement. Such eye-opening facts mean sound what you need, the rest will have to come from Understand your investment options. retirement planning is more critical than ever. additional personal retirement savings. You need to understand the types of portfolios for a lifetime. But there’s good news: Retirement planning investments that are available and decide which is easier than it used to be, thanks to the many Figure out how much you’ll need to ones are right for you. If you don’t have the tools and resources available. The AICPA and save. time, energy or inclination to do this yourself, OSCPA offer some basic steps to get you started. By the time you retire, you’ll need a nest egg hire a financial professional. He or she will Wherever you are on the retirement path, talking with an that will provide you with enough income to fill explain the options and will assist in selecting For your complimentary copy Determine your retirement income the gap left by other income sources. But exactly investments that are appropriate for your goals, experienced, professional financial advisor is a step in the right of the informative booklet needs. how much is enough? The following questions risk tolerance and time horizon. Note that many “The Retirement Path,” It’s common to discuss desired annual may help you find the answer: investments may involve the risk of loss of direction. Retirement Investment Advisors act as fiduciaries – call your nearest retirement income as a percentage of your principal. Retirement Investment current income. Depending on who you’re • At what age do you plan to retire? The bound to provide objective advice based solely on your best interests. Advisors office or visit talking to, that percentage could be anywhere younger you retire, the longer your Use the right savings tools. These CERTIFIED FINANCIAL PLANNER™ professionals design TheRetirementPath.com. from 60 to 90 percent, or even more. The retirement will be, and the more money The following are among the most common appeal of this approach lies in its simplicity. The you’ll need to carry you through it. retirement savings tools, but others are also portfolios balanced to invest for retirement while providing asset problem, however, is that it doesn’t account • What is your life expectancy? The longer available. for your specific situation. To determine your you live, the more years of retirement you’ll protection with less volatility. The retirement path can be a long journey. specific needs, you may want to estimate your have to fund. • Employer-sponsored retirement plans annual retirement expenses. • What rate of growth can you expect from that allow employee deferrals (like Fortunately, the first step is easy. Simply call Retirement Investment Use your current expenses as a starting your savings now and during retirement? 401(k), 403(b), SIMPLE, and 457(b) Advisors or visit them online at TheRetirementPath.com. point, but note that your expenses may change Be conservative when projecting rates of plans) are powerful savings tools. Your dramatically by the time you retire. If you’re return. contributions come out of your salary as nearing retirement, the gap between your • Do you expect to dip into your principal? pretax contributions (reducing your current current expenses and your retirement expenses If so, you may deplete your savings faster taxable income) and any investment may be small. If retirement is many years away, than if you just live off investment earnings. earnings are tax deferred until withdrawn. the gap may be significant, and projecting your Build in a cushion to guard against these These plans often include employer- future expenses may be more difficult. risks. matching contributions and should be your Remember to take inflation into account. The first choice when it comes to saving for average annual rate of inflation over the past Build your retirement fund. retirement. Some plans, like 401(k), 403(b) 20 years has been approximately 2.4 percent. When you know roughly how much money and 457(b), can also allow after-tax Roth (Source: Consumer price index—CPI-U—data you’ll need, your next goal is to save that contributions. While Roth contributions published by the U.S. Department of Labor, amount. First, you’ll have to map out a savings don’t offer an immediate tax benefit, 2012.) Also, keep in mind your annual expenses plan that works for you. Assume a conservative qualified distributions from your Roth may fluctuate throughout retirement. For rate of return (e.g., 5 to 6 percent), and then account are free of federal income tax. Retirement Investment Advisors example, if you own a home and are paying determine approximately how much you’ll has been awarded for ethical a mortgage, your expenses will drop if the need to save every year between now and your • IRAs, like employer-sponsored retirement business practices and Oklahoma City Edmond mortgage is paid off by the time you retire. retirement to reach your goal. plans, feature tax deferral of earnings. community service while being 3001 United Founders Blvd., Suite A 2952 Via Esperanza Other expenses, such as health-related The next step is to put your savings plan into If you are eligible, traditional IRAs may recognized by local and national financial publications as among 405.942.1234 405.246.0404 (Cont. on 46) the best in the nation. TheRetirementPath.com

www.KnowWhatCounts.org • 45 Oklahoma Society of CPAs

enable you to lower your current taxable can typically choose from a wide range of payments may last for your life, for the income through deductible contributions. investments to fund your IRA. joint life of you and a beneficiary, or for a Withdrawals, however, are taxable as specified number of years (guarantees are ordinary income (unless you’ve made • Annuities are contracts issued by insurance subject to the claims-paying ability of the nondeductible contributions, in which case companies. Annuities are generally funded issuing insurance company). Annuities may a portion of the withdrawals will not be with after-tax dollars, but their earnings are be subject to certain charges and expenses, taxable). tax deferred (you pay tax on the portion including mortality charges, surrender of distributions that represents earnings). charges, administrative fees and other • Roth IRAs don’t permit tax-deductible There is generally no annual limit on charges. contributions but allow you to make contributions to an annuity. A typical annuity completely tax-free withdrawals under provides income payments beginning at certain conditions. With both types, you some future time, usually retirement. The

Understand Social Security

n 2016, nearly 61 million Americans help you estimate disability and survivor’s that you eventually receive will be as much as 6 received approximately $918 billion in benefits. to 8 percent higher. That’s because you’ll receive I Social Security benefits. Nearly 9 out of a delayed retirement credit for each month 10 individuals age 65 and older receive Social When is someone eligible for Social that you delay receiving retirement benefits, Security benefits (Source: Fact Sheet: Social Security benefits? up to age 70. The amount of this credit varies, Security, 2016, www.ssa.gov). But Social Security When you work and pay Social Security taxes, depending on your year of birth. is more than just a retirement program. Its you earn credits that enable you to qualify for scope has expanded to include other benefits Social Security benefits. You can earn up to 4 What are disability benefits? as well, such as disability, family and survivor’s credits per year, depending on the amount of If you become disabled, you may be eligible benefits. income that you have. Most people must build for Social Security disability benefits. The up 40 credits (10 years of work) to be eligible SSA defines disability as a physical or mental How does Social Security work? for Social Security retirement benefits, but need condition severe enough to prevent a person The Social Security system is based on a fewer credits to be eligible for disability benefits from performing substantial work of any kind simple premise: Throughout your career, you or for their family members to be eligible for for at least a year. This is a strict definition of pay a portion of your earnings into a trust fund survivor’s benefits. disability, so if you’re only temporarily disabled, by paying Social Security or self-employment don’t expect to receive Social Security disability taxes. Your employer, if any, contributes an equal How are retirement benefits benefits—benefits won’t begin until the sixth amount. In return, you receive certain benefits calculated? full month after the onset of your disability. And that can provide income to you when you need Your Social Security retirement benefit is because processing your claim may take some it most—at retirement or when you become based on your average earnings over your time, apply for disability benefits as soon as you disabled, for instance. Your family members can working career. Your age at the time you start realize that your disability will be long term. receive benefits based on your earnings record, receiving Social Security retirement benefits also too. The amount of benefits that you and your affects your benefit amount. If you were born How are family benefits determined? family members receive depends on several between 1943 and 1954, your full retirement If you begin receiving retirement or disability factors, including your average lifetime earnings, age is 66. Full retirement age increases in two- benefits, your family members might also your date of birth and the type of benefit for month increments thereafter, until it reaches be eligible to receive benefits based on your which you are applying. age 67 for anyone born in 1960 or later. earnings record. Eligible family members may Your earnings and the taxes you pay are But you don’t have to wait until full include: reported to the Social Security Administration retirement age to begin receiving benefits. No (SSA) by your employer, or if you are self- matter what your full retirement age, you can • Your spouse age 62 or older, if married at employed, by the Internal Revenue Service. The begin receiving early retirement benefits at age least 1 year; SSA uses your Social Security number to track 62. There is one advantage: Although you’ll • Your former spouse age 62 or older, if you your earnings and your benefits. receive a reduced benefit if you retire early, were married at least 10 years; You can estimate your retirement benefit you’ll receive benefits for a longer period than • Your spouse or former spouse at any age, if online based on your actual earnings record someone who retires at full retirement age. caring for your child who is under age 16 or using the Retirement Estimator calculator on You can also choose to delay receiving disabled; the Social Security website, www.ssa.gov. Other retirement benefits past full retirement age. If • Your children under age 18, if unmarried; benefit calculators are also available that can you delay retirement, the Social Security benefit • Your children under age 19, if full-time

46 • OSCPA Financial Fitness Kit Chapter 6 • Retirement Planning

students (through grade 12) or disabled; or • Your widow(er) or ex-spouse age 60 or older also begin the process by calling (800) 772-1213 • Your children older than 18, if severely (or age 50 or older if disabled); or by filling out an online application on the Social disabled. • Your widow(er) or ex-spouse at any age, Security website. The SSA suggests you contact its if caring for your child who is under 16 or representative the year before the year you plan Each family member may receive a benefit disabled; to retire, to determine when you should apply that is as much as 50 percent of your benefit. • Your children under 18, if unmarried; and begin receiving benefits. If you’re applying for However, the amount that can be paid each • Your children under age 19, if full-time disability or survivor’s benefits, apply as soon as month to a family is limited. The total benefit students (through grade 12) or disabled; you are eligible. that your family can receive based on your • Your children older than 18, if severely Depending on the type of Social Security earnings record is about 150 to 180 percent disabled; and benefits for which you are applying, you will be of your full retirement benefit amount. If the • Your parents, if they depended on you for at asked to furnish certain records, such as a birth total family benefit exceeds this limit, each least half of their support. certificate, W-2 forms and verification of your family member’s benefit will be reduced • Your widow(er) or children may also receive Social Security number and citizenship. The proportionately. Your benefit won’t be affected. a one-time $255 death benefit immediately documents must be original or certified copies. after you die. If any of your family members are applying for What are survivor’s benefits? benefits, they will be expected to submit similar When you die, your family members may How can you apply for Social Security documentation. The SSA representative will let qualify for survivor’s benefits based on your benefits? you know which documents you need and help earnings record. These family members include: You can apply for Social Security benefits in you get those you don’t already have. person at your local Social Security office. You can

Do You Know the Difference Between Medicare and Medicaid?

edicare and Medicaid were signed spouse has paid Medicare taxes while working, Although Medicare pays for short-term skilled into law to protect older and poorer you generally won’t pay a premium for Medicare nursing or rehabilitative care in a skilled nursing M Americans against the high cost Part A coverage, but you’ll pay a premium if facility, it does not pay for extended care in a of health care. Ironically, it’s the high cost of you want to enroll in Part B or in some (but not nursing home or for other custodial long-term providing health care through these programs all) Part D plans. You’ll also need to pay certain care. Custodial care is help with daily activities that now threatens federal and state budgets, out-of-pocket costs such as deductibles, co- such as eating, bathing, dressing and using leading to calls for Medicare and Medicaid payments or coinsurance costs, depending on the bathroom. Some individuals need both reform. Although these programs are often the types of coverage you have. short-term and long-term care. For example, lumped together, they function quite differently. someone who has suffered a stroke may receive What is Medicaid? rehabilitation services in a skilled nursing facility, What is Medicare? Medicaid is a health insurance program but may later be admitted to a nursing home Medicare is a health insurance program funded by both the federal government and in order to receive custodial long-term care funded and run by the federal government that state governments to provide coverage to services. guarantees health coverage to older Americans. Americans of all ages who have low incomes and Medicare is not income-based. People who no health insurance. States administer their own Can you be eligible for both Medicare have paid Medicare taxes on their earnings Medicaid programs under federal guidelines. and Medicaid? are automatically eligible at age 65, but some They must cover individuals on public assistance, Yes. If you’re eligible for both programs, people with disabilities qualify for Medicare but they may also opt to cover other groups you’re known as a “dual eligible” beneficiary. coverage earlier than age 65 and people with and establish eligibility requirements. Children, Generally, individuals who are eligible for end-stage renal disease qualify at any age. families, people with disabilities and older both programs are older or disabled (or both) Medicare offers three main types of coverage. individuals may all receive Medicaid. and need help paying their Medicare costs Part A covers inpatient hospital care, as well as If you’re eligible for Medicaid, you may have to because they have very low incomes. Medicaid short-term skilled nursing care, hospice care pay a small co-payment when receiving medical covers premiums, deductibles, co-payments, and home health care under certain conditions. services, but most of your health-care costs will coinsurance and other Medicare costs and Part B covers medical services such as doctor’s be covered. provides some health benefits that Medicare visits, outpatient care and laboratory tests. Medicaid, not Medicare, is the primary payer does not. Individuals in nursing homes are Part D covers prescription drugs. If you or your of nursing home care in the United States. often dual eligible beneficiaries, and that’s

(Cont. on 48)

www.KnowWhatCounts.org • 47 Oklahoma Society of CPAs

partly behind the misconception that Medicare individuals cannot afford the high cost of nursing For more information, visit the Centers for pays for nursing home or other long-term home care and exhaust their savings, they Medicare & Medicaid Services website at care. Instead, Medicaid is the primary payer eventually become eligible for Medicaid. www.cms.gov. of nursing home bills. Because many older

Medicare Medicaid

• Primarily age-based; individuals age 65 and older qualify, • Primarily means-based; individuals of any age with low along with some individuals with disabilities incomes who meet eligibility requirements may qualify

• The federal government runs Medicare, and the program is • State governments run programs under federal guidelines, the same for all Americans so programs vary from state to state

• Financing comes from federal funds; partly financed • Financing comes from federal, state, and local revenue through payroll taxes and premiums • Broader coverage of health costs than Medicare, including • Medicare Part A provides coverage for hospital stays; inpatient and outpatient care, prescription drugs, Medicare Part B covers the cost of doctor’s bills, laboratory laboratory costs, family planning, and nursing home care costs, and some outpatient costs; Medicare Part D covers (types of coverage may vary from state to state) some prescription drug costs • Medicaid generally pays all approved charges, though a • Medicare beneficiaries may pay deductibles, co-payments, small deductible or co-payment may be required coinsurance costs, and premiums

Forget to Save for Retirement? Here’s How to Catch Up.

ill you have enough to live on during downsize or move to an area with a lower IRA (SEP). With a SEP, you can contribute up your golden years? According to an cost of living, those changes should be to 25 percent of your compensation, to a W Employee Benefit Research Institute taken into account. You should also prepare maximum of $53,000. With SEP plans, the survey, roughly one-quarter of Americans are for the possibility of rising health care costs amount you contribute is deductible, which not sure they will have sufficient funds for a or paying for technology, travel or other lowers your taxable income. However, comfortable retirement and only 22 percent items your company might have previously catch-up contributions are not permitted. are very confident they will. Many people work picked up for you. Share your budget with If you’re running behind on retirement hard for years, doing a good job paying bills and your CPA and ask what steps you need to savings, talk to your CPA about your tax- covering life’s many unexpected costs, but they take to ensure you can cover all retirement advantaged options for catching up. may not think about retirement savings until costs. their last day at work is only a few years down 3. Reset your deadline. Although age 65 was the road. If you’re uncertain about whether 2. Consider catch-up contributions.If it’s time once considered the accepted retirement you’ll have sufficient cash to fund the retirement to ramp up your retirement savings, the age, more people are working well beyond you’re planning, the AICPA and OSCPA offer good news is tax laws can actually make it that age. If you choose to do so, even part three important tips. easier for you. If you’re 50 or older, you can time, not only will you have more time set aside a little more in tax-advantaged to add to your nest egg, but you could 1. Know what you’ll need. Just how much is retirement plans, using annual catch-up also qualify for higher Social Security enough? The amount of money you need contributions. With a 401(k), 403(b) and payments. You can begin collecting Social for a secure retirement varies based on most 457(b) plans, you can normally Security benefits as early as age 62, but numerous individual circumstances and contribute up to $18,000 annually, but taking payments before you reach the full- many personal factors, including where and once you pass age 49, you can add another retirement age can lower your payments how you plan to live and any medical issues $6,000. For a Roth or traditional IRA, the by as much as 30 percent. However, if that affect your longevity. If you’re close base maximum is $5,500, but rises by you were born after 1942 and continue to retirement and able to anticipate your another $1,000 if you’re 50 or older. Also, working after the full-retirement age, you needs, then it may make sense to develop don’t overlook the significant opportunity can increase your checks by 8 percent for a detailed budget that tracks your future open to small business owners who qualify each year you delay taking Social Security monthly cash requirements. If you plan to to set up a Simplified Employee Pension benefits until age 70.

48 • OSCPA Financial Fitness Kit Chapter 6 • Retirement Planning

Going Back to Work After You Retire? Here’s How Social Security, Taxes and Health Care Could Be Affected.

he old notions about retirement have, for everyone born in 1960 and later). If • Between $25,000 and $34,000, you well, retired. Rather than leaving work you’re at the year when you will reach may have to pay income tax on up to T at age 65 and going fishing or focusing your full retirement age, but haven’t 50 percent of your benefits. on gardening, many retirees are celebrating had your birthday yet, your benefits will • More than $34,000, up to 85 percent retirement by going back to work. decrease, but not by as much. Benefits of your benefits may be taxable. According to a January 2015 Gallup poll, will be reduced by one dollar for every 80 percent of boomers in their 50s are in the three dollars you earn above the annual • File a joint return, and you and your spouse workforce; 50 percent of boomers in their 60s limit ($41,880 in 2015), until your birthday. have a combined income that is are in the workforce and 30 percent of boomers You can estimate how much your annual • Between $32,000 and $44,000, you ages 67 to 68 are working. Either by design or benefits will be reduced by using the may have to pay income tax on up to out of financial need, boomers are working online Retirement Earnings Test Calculator 50 percent of your benefits longer, but not all of them want or need to at www.ssa.gov. Once you reach full • More than $44,000, up to 85 percent maintain full-time positions. One in 10 baby retirement age, your benefits will no longer of your benefits may be taxable. boomers works part-time, a statistic that may be reduced, no matter how much money increase as employers discover the magical you earn. • Are married and file a separate tax return, mix of benefits that will keep high-performing If you return to work after starting to you probably will pay taxes on your boomers contributing to their bottom lines. receive benefits, you may be able to receive benefits. Additionally, Gallup reports that boomers a higher benefit based on those earnings. are one of the fastest growing groups of The SSA automatically re-computes your 3. Health Care: Health insurance is one of entrepreneurs because many look for an encore benefit amount after the additional the biggest reasons many people under career after retirement. earnings are credited to your earnings age 65 remain employed or return to Regardless of the reason, it’s important to record. Moreover, you can repay all SSA the workforce. If you’re age 65 or older understand how going back to work might benefits collected to date with no interest, and already covered by Medicare, check impact retirement benefits and taxes. and the benefits will be reset to a higher with your employer’s human resources Individuals thinking about returning to the number based on your current age and past department about how the insurance workforce after retiring need to learn if and earnings. coverage would work with your Medicare. how Social Security benefits, health insurance You can also view the online publication and taxes will be affected so they don’t lose 2. Income Tax: Going back to work might Medicare and Other Health Benefits: Your benefits or end up in a higher tax bracket. mean more money, but it also might bump Guide to Who Pays First at www.medicare. Keep the following in mind when considering you into a higher tax bracket. In addition, gov. According to its website, Medicare employment after retirement: extra distributions or benefits received on Part B insurance premiums range from top of your salary may count as additional $104.50 to $335.70 per month as adjusted 1. Social Security Benefits: If you’re aged 62 income. You could also find yourself in gross income ranges from $85,000 (single or older, you may have already decided a higher tax bracket by taking pension filers or married filing single) or $170,000 to start receiving retirement benefits. distributions on top of a regular salary or (married filing jointly) to $214,000 (single However, if you get a new job and expect by collecting Social Security benefits while filers), $129,000 (married filing single) or your income to increase, you’re required you continue working. You should consider $428,000 (married filing jointly). If you have to notify the Social Security Administration having a CPA crunch the numbers to see private health insurance, carefully compare (SSA). If you receive benefits, but are not how close your current income is to the your benefits and coverage to what might yet at full retirement age (as defined by next tax bracket. As much as 85 percent of be available from your new employer. the SSA), some of your benefits may be your Social Security benefits can be taxable Although group plans tend to be cheaper reduced if you earn more than the annual if your other income, including tax exempt than individual policies, it might make income limit (which is $15,720 in 2015). interest plus half of your Social Security, sense to keep what you have rather than Generally, for every two dollars you earn exceeds the threshold. According to the cancelling and re-applying at a later date. above the annual limit, your benefits are online Benefit Planner at www.SSA.gov, if This is especially true if you have retiree reduced by one dollar. you: health insurance from a former employer. The SSA full retirement age has been gradually increasing, but it’s currently • File a federal tax return as an 4. Pension Plans and Retirement Accounts: between 65 and 67 years old, depending “individual” and your combined Returning to work will likely ease your on the year you were born (it is age 67 income is financial situation and allow you to delay

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accessing your 401(k) account. If you have ½ doesn’t affect the required minimum and health care. A CPA can help you analyze a traditional pension plan or IRA, rules will distribution (RMD) rules for traditional your current situation and determine the best vary. Check with your pension plan provider IRAs—RMDs are still required and will course of action with regard to your personal and the human resources department at generally be taxed as ordinary income. financial plan. your company to see if returning to work There are no RMD requirements for Roth will impact your benefits, especially if IRAs. you’re returning to the same employer. The 401(k) rules get more restrictive for There are many variables involved in business owners with ownership interest returning to work and evaluating the short- and exceeding 5 percent. Working past age 70 long-term tax impacts, Social Security benefits

4 Ways Women Can Build a Secure Retirement

Women carry a lot of responsibilities 2. Factor in earnings gaps. One hurdle 3. Strategize your Social Security. Your on their shoulders, and women must consider is the possibility earnings history will also have an impact W considerations like saving for that they will have to take maternity leave on your Social Security retirement benefits. retirement can easily fall through the gaps. or work part-time at some point during At the Social Security Administration site, In a survey by BlackRock, only 53 percent of their careers in order to juggle family you can create an account to find out what women have been putting away money for responsibilities. In fact, according to the your benefit payments will be and use retirement, as compared to 65 percent of men. BlackRock survey, only about one-half of the benefit calculators. For example, you Even worse, those women who are saving for women between the ages of 25 and 44 can figure how your age at retirement will retirement put back less than half of what men are working full time, which could leave affect your payment and how spouses can do. The Oklahoma Society of Certified Public them with much less in savings than their plan to make the most of their benefits. Accountants offers four tips for women who male counterparts. Women also continue want to ensure they are on track for a secure to earn less, getting about 78 cents for 4. Be aware of your risk tolerance. When future. every dollar earned by men, according to you invest, do you typically look for high- the Institute for Women’s Policy Research. performing stocks and bonds or more 1. Consider the long(er) term. Women No matter how your employment changes, reliable ones, such as Treasury bills or should be prepared to save more than CPAs advise that you take advantage of any money market funds? Your answer to that men because, on average, women live employer retirement plans when you are question can help you get a sense of your longer. According to the Social Security working. If the employer offers matching risk tolerance when it comes to investing. Administration, a man turning 65 now can contributions, at a minimum, contribute That’s important because a lower risk expect to live to about 84, while a woman enough to qualify for the highest possible tolerance may mean that your money reaching 65 might live to nearly 87. With match. If you’re not working, find out if may grow more slowly over time, leaving improving health and longevity among you’re eligible to contribute to an IRA. For you with a smaller nest egg. Dodging older people, your retirement strategy those who are self-employed, investigate unnecessary risk is not necessarily a bad should be based on a realistic assessment the benefits of Simplified Employee thing, since it can help you avoid losses on of how long your money needs to last. Pension (SEP) and SIMPLE retirement plans. your money. Knowing your own approach While it’s always advisable to begin saving There are plenty of opportunities to pump to risk can help you estimate how quickly early and to set aside an appropriate up your retirement savings, so be sure to your money will grow and how much you amount, this would be especially true take them. need to put away in order to meet your for women because of their longer life retirement goals. expectancy.

50 • OSCPA Financial Fitness Kit Chapter 6 • Retirement Planning

Understand the Economics of Borrowing from Your 401(k)

hen times are tough, that pool of Here’s why: To pay interest on a plan loan, you Consider other factors. dollars sitting in your 401(k) plan first need to earn money and pay income tax on There are other factors to think about before Waccount may start to look attractive. those earnings. With what’s left over after taxes, borrowing from your 401(k) plan. If you take a However, before you decide to take a plan loan, you pay the interest on your loan. That interest loan, will you be able to afford to pay it back and be sure you understand the financial impact. It’s is treated as taxable earnings in your 401(k) plan continue to contribute to the plan at the same not as simple as you think. account. When you later withdraw those dollars time? If not, borrowing may be a very bad idea from the plan (at retirement, for example), in the long run, especially if you’ll wind up losing Know the basics of borrowing. they’re taxed again because plan distributions your employer’s matching contribution. A 401(k) plan will usually let you borrow are treated as taxable income. In effect, you’re Also, if you leave your job, most plans provide as much as 50 percent of your vested paying income tax twice on the funds you use that your loan becomes immediately payable. account balance, up to $50,000. (Plans aren’t to pay interest on the loan. (If you’re borrowing If you don’t have the funds to pay it off, the required to let you borrow, and may impose from a Roth 401(k) account, the interest won’t outstanding balance will be taxed as if you various restrictions, so check with your plan be taxed when paid out if your distribution is received a distribution from the plan, and if administrator.) You pay the loan back, with “qualified”—i.e., it’s been at least five years since you’re not yet 55 years old, a 10 percent early interest, from your paycheck. Most plan loans you made your first Roth contribution to the plan, payment penalty may also apply to the taxable carry a favorable interest rate, usually prime plus and you’re 59½ or disabled.) portion of that “deemed distribution.” one or two percentage points. Generally, you Still, plan loans may make sense in certain have up to five years to repay your loan, longer However, consider the opportunity cases (for example, to pay off high-interest credit if you use the loan to purchase your principal cost. card debt or to purchase a home). But make sure residence. Many plans let you apply for a loan When you take a loan from your 401(k) plan, you compare the cost of borrowing from your online, making the process quick and easy. the funds you borrow are removed from your plan with other financing options, including loans plan account until you repay the loan. While from banks, credit unions, friends and family. To You pay the interest to yourself. removed from your account, the funds aren’t do an adequate comparison, you should consider: When you make payments of principal and continuing to grow tax deferred within the plan. • Interest rates applicable to each alternative; interest on the loan, the plan generally deposits So the economics of a plan loan depend in part • Whether the interest will be tax deductible those payments back into your individual on how much those borrowed funds would (for example, interest paid on home equity plan account (in accordance with your latest have earned if they were still inside the plan, loans is usually deductible, but interest on investment direction). This means you’re not only compared to the amount of interest you’re paying plan loans usually isn’t); and receiving back your loan principal, but you’re also yourself. This is known as the opportunity cost of • The amount of investment earnings you may paying the loan interest to yourself instead of a plan loan, because by borrowing you may miss miss out on by removing funds from your to a financial institution. However, the benefits out on the opportunity for additional tax-deferred 401(k) plan. of paying interest to yourself are somewhat investment earnings. misleading. 4 Retirement Planning Mistakes to Avoid

early half of all working families have you’re 50 or older, you have added incentives Mistake #2: Don’t revisit your choices. no retirement savings, according to the to do so through catch-up contributions2 to Whether you’re contributing to an employer- N Economic Policy Institute1. Further, your tax-advantaged retirement accounts. This sponsored retirement savings plan or to an even if you’ve saved diligently, there are some year, you can contribute up to $18,000 to a individual account, you’ll typically have a wide pitfalls that can undermine even the best-laid 401(k), 403(b) and many profit-sharing plans, variety of investment options. Each situation is retirement plans. The AICPA and OSCPA identify plus an added $6,000 if you’re age 50 or older. different, but as a general rule the investments four common retirement planning errors and With an IRA, you can contribute up to $5,500, you select for your overall retirement offer advice on how to avoid them. and another $1,000 if you’re 50 or older. For investment portfolio should reflect the number Savings Incentive Match Plans for Employees of years you have until retirement and the Mistake #1: Save too little too late. (SIMPLE) offered by some small employers, the level of risk with which you’re comfortable. If you’re running behind when it comes top contribution is $12,500, plus an extra $3,000 Keep in mind, too, that no matter what mix to savings goals, the best advice is simply to for those 50 or older. Your CPA can help you of investments you choose when you begin get started as soon as possible. Even if you’re create a customized plan to address your needs, saving, it’s important to revisit your choices already in your 50s, there’s still time to build so consult him or her about the best choices for at least once a year, or whenever there is a up your nest egg before retirement. Plus, if your situation. significant change in market conditions or your

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www.KnowWhatCounts.org • 51 Oklahoma Society of CPAs

own financial situation. Continue to review your time, but there’s a decent chance they may be Exam — a comprehensive financial planning investment choices even when you retire to higher when you’re in retirement than they are exam that covers all of the planning process and ensure your money is growing as you expected, now for current retirees. professional responsibilities and disciplines that that your annual withdrawals are still reasonable make up personal financial planning, including and that your funds are on track to last as long Mistake #4: Don’t get help or don’t get tax, estate, retirement, investments and as you need them. the right help. insurance planning as well as a few niche areas These are just a few of the many like employee benefits, education, and elder Mistake #3: Don’t factor in taxes. considerations that should be taken into account planning. For a free referral and free 30-minute Most people assume their taxes will decrease in your retirement planning. For a thorough consultation with a CPA, including ones who when they retire, but that may not necessarily review of retirement planning considerations specialize in retirement planning, visit be the case. For example, many retirees take and practical advice you can use, contact your www.FindYourCPA.com. on part-time jobs3. That income, combined local CPA. When you’re looking for expert with income from taxable investment accounts, financial advice, be sure and find out what 1. http://www.epi.org/press/401ks-have-left-the-over- whelming-majority-of-americans-unprepared-for-retirement- might create a situation where your tax rate is credentials that person holds and what kind 32-charts-show-how-the-retirement-system-has-exacerbat- actually the same or even higher than when of education and training goes into obtaining ed-inequality/ you were working full time. On another front, if and retaining those credentials. Many CPAs, 2. https://www.irs.gov/retirement-plans/cola-increases-for- your children are now grown and your mortgage in addition to being tax experts, are financial dollar-limitations-on-benefits-and-contributions is now paid off, you’ll lose tax breaks and planning and retirement planning experts. For 3. https://www.irs.gov/uac/newsroom/in-2016-some-tax- benefits-increase-slightly-due-to-inflation-adjustments-others- deductions you previously received. Once again, example, a Personal Financial Specialist (PFS) are-unchanged you’ll have more taxable income as a result. is a credential for a CPA who specializes in Finally, it’s difficult to predict whether tax rates various areas of financial planning. In order to will increase, decrease or remain the same over receive the credential, CPAs must pass the PFS 3 Questions to Ask About Reverse Mortgages

ne retirement planning resource that used for one purpose, which is specified of Housing and Urban Development has gained interest in recent years is by the lender (i.e., home repairs). Single- (HUD). O the reverse mortgage, which allows purpose reverse mortgages are offered you to convert part of a home’s equity into cash by some state and local government 3. Is a reverse mortgage right for me? There without paying additional monthly bills. If you’re agencies, as well as non-profit are pros and cons of a reverse mortgage, 62 or older and want money to pay off your organizations, but they’re not available and only you can determine the right mortgage or to help pay for other expenses, you everywhere. Check with your financial decision. Because there isn’t a specific might consider a reverse mortgage. Consider advisor to see what options are available income requirement on reverse mortgages, these three questions to decide if a reverse in your state. you are likely to pay higher fees and mortgage is right for you. interest rates with these loans. Reverse • Proprietary reverse mortgages: Also mortgages can make leaving a home to 1. What is a reverse mortgage? A reverse known as private company reverse an heir difficult because the loan must be mortgage is a type of home loan that allows mortgages, proprietary reverse repaid once you die. This usually means you to convert a portion of your home’s mortgages are backed by companies that selling the home or using inheritance to equity into cash. Reverse mortgages take develop them, not federally insured and pay off the loan. In many cases, a reverse part of the home’s equity and converts typically designed for borrowers with mortgage isn’t worthwhile because of it into payments – a type of advanced higher home values. If you own a higher- these drawbacks. payment on home equity where money valued home, you may receive a higher However, if you need cash for retirement received is usually tax-free. Generally, the loan advance and qualify for more funds expenses, you might want to explore a money doesn’t have to be repaid, as long as with this type of loan. reverse mortgage. These loans can help you live in the home. However, you or your ease financial strains, especially if a large estate must repay the loan when you move • Home equity conversion mortgages portion of money is locked into a home. to a new home or pass away. (HECMs): These are federally-insured and can be used for any purpose – from Ultimately, the pros and cons need to be 2. What kind of reverse mortgage can I get? supplementing retirement income weighed and applied to your situation. You may • Single-purpose reverse mortgages: This to covering daily living expenses, to want to consult your financial advisor to make is the least expensive option and most preventing foreclosure on your home. sure you’re making the best decision for your homeowners with low or moderate These loans tend to be the most popular financial situation. income can qualify. The loan can only be and are backed by the U. S. Department

52 • OSCPA Financial Fitness Kit Chapter seven: Estate Planning

Nobody likes to think about dying, but eventually, it In this chapter, you will learn why will happen to all of us. What will happen to your assets everyone needs estate planning, trust or your loved ones when you’re gone? Consider this: and life insurance basics, how probate • More than half—55 percent—of Americans works and more. die without a will or estate plan (American Bar Association, 2014). Find additional estate planning tips at www.360financialliteracy.org/Topics/Retirement- • The number of American adults with living wills Planning/Estate-Planning-Basics and at www. increased between 2004 and 2007, rising from okcestatelawyer.com. 31 percent to 41 percent (LexisNexis, as quoted by LegalZoom.com, 2008).

• Thirty-eight percent of American adults have a health care power of attorney (LexisNexis, as quoted by LegalZoom.com, 2008).

This chapter is sponsored by Donna J. Jackson, CPA, Attorney at Law.

Donna J. Jackson, CPA, JD, is a nationally recognized including trusts, special needs trusts, wills, durable attorney, speaker and educator in estate planning, power of attorneys and living wills. In addition, Ms. probate and elder law. Ms. Jackson is a CPA and Jackson’s practice includes taxes: corporate, trust, holds a master’s degree (LL.M.) in elder law. She has individual, gift and estate; probates and business more than 25 years of legal experience and limits organizations, including corporations, limited her practice to estate planning with an emphasis on partnerships and limited liability companies. Learn Medicaid, VA benefits and special needs planning, more at www.OKCEstateLawyer.com. Donna J. Jackson, CPA, Attorney at Law

Why Do I Need Estate Planning?

By Donna J. Jackson, CPA, Attorney at Law

elieve it or not, you have an estate. In and updated as your family and financial B. Health Care Power of Attorney:While a fact, nearly everyone does. Your estate situations (and laws) change over your living will/advance directive for health care B is comprised of everything you own - lifetime. provides guidance for loved ones in “end-of- your car, home, other real estate, checking and life” situations, it does not provide anyone savings accounts, investments, life insurance, Elder law and special needs planning are the power to make every day decisions, furniture and personal possessions. No matter intertwined with estate planning and are such as which medication a person should how large or modest, everyone has an estate defined more by the clients to be served than be taking or which medical services should and something in common—you can’t take it technical and legal distinctions. Elder law takes be employed. That’s where the health care with you when you die. into account not only the estate planning needs power of attorney comes in. A health care When that happens—and that is a “when” and of a client but also their needs as it is related power of attorney (also known as an attorney- not an “if”—you probably want to control how to their age. Likewise, special needs planning in-fact, health care proxy or health care those things are given to the people or other not only take into account the estate planning agent) is an agent who is appointed to make organizations you care about. To ensure your needs of a client but also their needs as they are necessary health care decisions on a person’s wishes are carried out, you need to provide related to the client’s disabilities. behalf when they are unable to speak for instructions stating who you want to receive Hiring an attorney who is knowledgeable themselves. A health care power of attorney something of yours, what you want them to in all three areas will insure that the client’s can be as expansive or limited as a person receive and when they are to receive it. You will, general estate planning needs and their chooses. For instance, a person can specify of course, want this to happen with the least individualized needs are met. For elder law whether or not their agent should be required amount paid in taxes, legal fees and court costs. clients, this may involve planning for long-term to follow the wishes outlined in their living That is estate planning—making a plan in care needs including nursing home care and will or if the agent can set those wishes aside advance and naming who you want to receive coordinating private and public resources to at their discretion. the things you own after you die. However, finance the cost of that care. For special needs good estate planning is much more than that. It clients, that may include court procedures such C. Health Insurance Portability and should also: as obtaining guardianship. It is important (not Accountability Act (HIPAA): The Health to mention more convenient) to be able to Insurance Portability and Accountability Act • Include instructions for passing your values comprehensively plan with one firm. (HIPAA) is a federal privacy rule intended (religion, education, hard work, etc.) in to protect private health information from addition to your valuables; Understand the basics. being revealed to third parties without • Include instructions for your care if you authorization. Accordingly, a HIPAA become disabled before you die; A. Living Will/Advance Health Care Directive: Authorization is required by the Privacy • Name a guardian and an inheritance a living will, also known as an advance Rule if a client wishes for third parties manager for minor children; health care directive, outlines the medical (family, friends, etc.) to be able to access • Provide for family members with special procedures a person wants pursued if they their protected health information. A HIPAA needs without disrupting government become too ill to state their wishes on their Authorization not only gives covered health benefits; own. A living will specifies which steps should care entities permission to disclose protected • Provide for loved ones who might be be taken in different medical situations. For health information to a designated third irresponsible with money or who may need example, if a person is in an irreversible coma, party, but also the ability to use protected future protection from creditors or divorce; they can direct in a living will whether or health information for specified purposes • Include life insurance to provide for your not they want to continue receiving artificial other than treatment, payment, or heath care family at your death, disability income nutrition and hydration via feeding tubes operations. Executing a HIPPA authorization insurance to replace your income if you or if they’d prefer to pass away naturally is vital to empowering the health care power cannot work due to illness or injury, and without artificial nutrition and hydration. A of attorney and other family members or long-term care insurance to help pay for living will not only speaks for a person when friends to access protected health information your care in case of an extended illness or they cannot speak for themselves, but it also when the client is not able to release it injury; relieves the health care power of attorney themselves, usually because they are • Provide for the transfer of your business at or family members from having to make the incapacitated. Without access to protected your retirement, disability or death; decision to “pull the plug” or keep the person health information or a health care power of • Minimize taxes, court costs and on life support. Instead, they can simply attorney, family members or friends may not unnecessary legal fees; and follow the person’s wishes as outlined in their have access to the information they need to • Be an ongoing process, not a one-time living will. make informed decisions about health care. event. Your plan should be reviewed

54 • OSCPA Financial Fitness Kit Chapter 7 • Estate Planning okcestatelawyer.com • (405) 840-1874

D. Financial Durable Power of Attorney: A obtains certain goals (e.g., a college degree). is a payable on death designation (POD) for financial durable power of attorney (DPOA) Another great thing about having a trust bank accounts. A POD appoints a person to is a limited power of attorney that allows a is that it can allow a person to avoid probate. whom the cash in a client’s account should client to appoint an agent to manage their Probate is the legal process that family be distributed to upon death. Once again, the financial affairs and conduct business during members or friends of a deceased person appealing aspect of a POD is that it’s typically the client’s absence or incapacitation. The must often go through to obtain the assets of cheaper than hiring an attorney or getting a DPOA can be as broad or limited in scope as a person who died without a trust. Not only will or trust. However, PODs have the same the client wishes and can be activated either can probate be extremely expensive, it also downside as TODs in that they only cover one upon incapacity or immediately upon signing very time-consuming and tedious. The person specific account whereas wills and trusts can the document. A person can also execute a who is appointed to be responsible for the cover all of the client’s assets. There are also DPOA that will only become effective upon estate must inventory all of the deceased’s several other problems that can arise, such incapacity while reserving the option to sign assets, file accounting with the court, notify as (1) the death of the designated beneficiary a certificate of authorization activating the and deal with creditors, open estate bank - simultaneous with or prior to the client powers of their agent at any time. accounts and transfer assets to the heirs or without a contingent beneficiary appointed, beneficiaries. This can be very burdensome or (2) the distribution of the cash in the E. Last Will and Testament: A last will and on the friend or family member handling the account to children who are not equipped to testament is a vital estate planning document deceased person’s estate. Not to mention, manage the inheritance. that allows a person, rather than the law in once a probate for an estate is filed with the the state in which they live, to control how court, most of the documents containing I. Beneficiary Designations for Insurance his or her estate and belongings get divided. information about a person’s assets become a Plans: If a person has insurance plans of any Additionally, it can allow someone to “pour matter of public record. type they should make sure to designate over” assets into a trust (also known as a a primary beneficiary and contingent pour-over will) and plan for the care of minor G. Transfer on Death Deeds: Transfer on beneficiaries of the proceeds of the insurance children. In a last will and testament, a client death deeds (TODs) can allow people with plan in the event of their death, if possible. can appoint a guardian for minor children, smaller estates to avoid probate without If a client has a trust, they can designate the born or unborn, and can also designate a trust or even a last will and testament. Trust as the primary or contingent beneficiary that assets be held in trust for the care of Essentially, a TOD is a legal document filed in and the proceeds can then be distributed per said children until they reach a certain age, the County Clerk’s office in the county where the terms of the trust. graduate from college, etc. a person lives that designates a beneficiary to whom their real property (i.e., your house) J. Memorial Instructions:Memorial F. Trusts: A question estate planners often should be transferred to upon death. The instructions are a statement of a person’s hear is, “Why do I need a trust if I already appealing aspect of a TOD for a client is that personal wishes as to how they would like to have a will?” There are several reasons why. it is typically much cheaper than hiring an be memorialized upon death. For instance, For starters, if a person has minor children attorney to draft a trust. However, TODs have they can instruct whether or not they would and leaves all of his or her money and their limits! For instance, in Oklahoma the like to be buried or cremated, which songs belongings to the children, if you don’t have beneficiary must file a death certificate and an should be played and where they would like a trust, the money typically gets distributed affidavit proving the client’s death within nine to be laid to rest. Memorial Instructions not outright to the children. Hopefully, the other (9) months of the date of death. Otherwise, only allow a person to have a say in their parent or legal guardian is an honest person the beneficiary loses their right to inherit the services, but also take some guesswork out because that person will likely be in control of client’s real property via the TOD. Also, TODs of the equation for the family members or managing the money until a child is no longer do not provide for the distribution of any friends who are tasked with planning the a minor. Or, consider a scenario where a child assets other than the real property while a service. is 18 and does have control over his or her will and trust can provide for the distribution inheritance. What would you have done with of everything. $20,000 at the age of 18? On the other hand, a trust can direct that the child’s inheritance H. Payable on Death Designations for Bank be held in the trust and managed by a reliable Accounts: A second vehicle that will allow person until the child reaches a certain age or probate avoidance without a trust or a will

www.KnowWhatCounts.org • 55 Donna J. Jackson, CPA, Attorney at Law

Estate Planning Issues for Unmarried Couples

here are several laws that are potentially the home after your partner dies. In this case, A health care power of attorney or health- beneficial to married couples that are you could create a life estate for your partner, care proxy is a legal document in which you give T not available to unmarried partners, allowing him or her the right to remain in the your appointed agent the right to make certain especially when it comes to estate planning. home for life, while naming other beneficiaries health care decisions on your behalf if you are That’s why it’s important to recognize the risks to receive title to the property at the death of unable to do so. Without this document, doctors faced by unmarried partners and some potential your partner. and hospitals often rely on family members ways to help mitigate them. to make health care decisions for someone Beneficiary designations:Certain types of who’s incapacitated. Often state law does not Wills or trusts: All states have probate laws assets allow for their transfer at death through recognize unmarried couples as family, so if you that provide some protections for the surviving beneficiary designations. IRAs, life insurance, want your partner to be able to make these spouse, but generally no such protections exist annuities, and 401(k)s are some examples. decisions on your behalf, you should name your for a surviving domestic partner. Therefore, it’s However, it’s important to remember that partner as your health-care agent. vitally important for live-in partners to prepare generally, the beneficiaries named in these estate planning documents including wills and, assets will receive them at your death, even if Domestic partnership agreement: in some cases, trusts. Through wills and trusts, you make other provisions in your will or trust. Generally, the law does not always spell out you can provide for the financial support of your So be sure your beneficiary designations are the financial rights and responsibilities of surviving partner after your death. current and comply with your wishes. domestic partners. To address these issues, Titling assets: How your assets are titled can live-in partners can use a domestic partnership determine their disposition upon your death. Power of attorney and health-care agreement (if recognized in their state), which is For example, if you want your partner to receive documents: A durable power of attorney is a contract that addresses the sharing of income, your home at your death, you could title it a legal document that allows you to authorize expenses, and property. in both names as joint tenants with rights of someone to carry on your financial affairs and Unmarried couples face potential estate survivorship. However, retitling your home in protect your property if you are unable to do planning pitfalls. And state laws vary, so it’s this manner gives your partner ownership rights so during a period of incapacity. Without this important to consult an estate planning attorney in the property. Also, depending on the value type of authorization, the courts may appoint or personal financial specialist (PFS) who is of the home, there may be gift tax implications, one or more persons to act on your behalf. familiar with state and federal laws that affect and the home may be exposed to claims of your This proceeding can be expensive and time unmarried couples. partner’s creditors. consuming, and you may not have any control While you could simply leave your home to over the person(s) appointed by the court. More your partner through your will or trust, you may importantly, your partner may not have access want other family members to ultimately receive to needed financial support through your assets.

How Does Probate Work?

By Donna J. Jackson, CPA, Attorney at Law

he probate process can be confusing • Identifying the heirs of the deceased depending on the complexity of the case. You and very cumbersome for the pro se person’s estate and the shares they are should find an attorney you trust who is prepared T client, which is why it’s recommended entitled to receive; to walk you through the probate process and to consult an attorney if you find yourself in • Collecting and determining the value of the provide you with all of the assistance you need a position needing to probate the estate of a deceased person’s property; so your loved one’s estate can be managed loved one. Probate is a court process that family • Insuring the debts and taxes of the efficiently and effectively. members often face when a loved one has deceased person are paid from the estate; passed away without a trust-based estate plan in and place. Unfortunately, simply having a will won’t • Distributing the remaining property in the avoid probate in Oklahoma. estate as the will, or the laws of intestacy, directs. Probate generally includes: • Proving in court that the deceased person’s In Oklahoma, the probate process can take will is valid (if that person had a will); anywhere from several months to several years,

56 • OSCPA Financial Fitness Kit Chapter 7 • Estate Planning okcestatelawyer.com • (405) 840-1874 Do I Need an Attorney to Prepare My Will?

egally, no. Practically speaking, yes. A some questions that should be addressed by as controlling the management and will does not need to be prepared by an an experienced estate planning attorney. In distribution of your property after your L attorney for it to be legally effective. A addition, some people have more than just basic death; or will that you draft yourself, or even a preprinted concerns or are in complex situations where • You have heirs you wish to disinherit will form purchased in an office supply store, drafting the will properly is vital. Legal assistance or there is a chance your will may be will be legally effective if you are of legal age can help ensure that your intentions are clearly contested after your death. in your state (i.e., 18), are mentally competent communicated and no questions exist at the and execute the will properly. This means the time of your death. You should also seriously will must be acknowledged and signed by you consider professional assistance if your personal in front of witnesses. The required number and situation includes concerns such as: age of the witnesses varies from state to state, though two witnesses who are at least age 18 is • You have minor children, children from a typical. In addition, the witnesses should not be prior marriage or a beneficiary with special anyone who will benefit under your will. Some needs; states also require that a will must be notarized • You own significant assets and are to be legally effective. concerned about minimizing estate taxes at However, most people feel uncomfortable your death; with a do-it-yourself will. They generally have • You want to achieve certain goals, such

How Often Do I Need to Review My Estate Plan?

lthough there’s no hard-and-fast rule all of your goals. For example, an executor, • There has been a substantial change in the about when you should review your trustee or guardian may change his or her mind value of your assets or in your plans for A estate plan, the following suggestions about serving in that capacity, and you’ll need to their use; may be of some help: name someone else. • You have received a sizable inheritance or Other reasons you should do a periodic gift; • You should review your estate plan review include: • Your income level or requirements have immediately after a major life event. changed; • You’ll probably want to do a quick review • There has been a change in your marital • You are retiring; and each year because changes in the economy status (many states have laws that revoke • You have made a change in your estate and in the tax code often occur on a yearly part or all of your will if you marry or plan (e.g., you created a trust or executed a basis. get divorced) or that of your children or codicil to your will). • You’ll want to do a more thorough review grandchildren; every five years. • There has been an addition to your family through birth, adoption or marriage Reviewing your estate plan will not only give (stepchildren); you peace of mind, but will also alert you to any • Your spouse or a family member has died, other changes that need to be addressed. has become ill or is incapacitated; There will be times when you’ll need to make • Your spouse, your parents or other family changes to your plan to ensure that it still meets member has become dependent on you;

www.KnowWhatCounts.org • 57 Donna J. Jackson, CPA, Attorney at Law

How Will Estate Taxes Be Paid If I Leave No Provision in My Will?

he IRS places an automatic lien against spouse will not be responsible for any taxes if share of the taxes owed when they are due— your estate for any estate taxes that may he or she received all your property free of tax generally nine months from the date of your T be due. If your will leaves no specific under the unlimited marital deduction. Likewise, death. They may have to sell their inheritances provision about how these taxes are to be paid, charities that received property free of tax to get the cash. If their inheritances are already state law generally controls how the burden of under the charitable deduction will not have to spent, however, they still must pay the taxes and paying the taxes will be distributed among your carry any of the tax burden. the IRS can go after any of their other assets to beneficiaries. As a result, your beneficiaries may In addition, most state apportionment acts satisfy the lien. end up paying taxes out of their own pockets divide up the tax burden on a prorated basis. For or selling some of the property that you left to example, if your taxable estate was evenly split them to meet this obligation. between two beneficiaries, each beneficiary Most state apportionment statutes impose would be responsible for 50 percent (one-half) the tax payment liability only on those assets of the taxes due. Beneficiaries who received the that contributed to the tax imposed. Thus, your taxable portion of your estate must pay their

Can I Disinherit Relatives I Don’t Like?

isinheritance is intentionally depriving under the decedent's will, he or she may elect that this was an oversight on the part of the someone who would otherwise be to take under the state intestacy laws instead. parent or contest the will on other grounds. D a rightful heir from receiving your These laws vary from state to state but generally Moreover, courts are often reluctant, in the estate. Typically, your heirs include your spouse, entitle the spouse to receive from one-third to absence of evidence to the contrary, to rule your descendants, and possibly other relatives. one-half of the decedent's estate. against the disinherited child. Therefore, if a child Although you may feel you have a good reason Although only one state provides similar is disinherited, it is best to mention him or her in for disinheritance, be aware that a majority protection for the children of a decedent, simply the will, even if only for a token amount. of non-community-property states provide leaving a child out of the will may not succeed statutory protection for spouses. That is, most in disinheriting that child. In the absence of any states provide that if a spouse is disinherited mention in the will, the child can either argue

Although you may feel you have a good reason for disinheritance, be aware that a majority of non-community-property states provide statutory protection for spouses.

58 • OSCPA Financial Fitness Kit Chapter 7 • Estate Planning okcestatelawyer.com • (405) 840-1874 Learn the Basics of Life Insurance hile facing the death of a loved one is vary the premium payment within certain 3. Special funding needs, such as college never easy, one way to help ease some limits. The death benefit can be increased or funding, charitable bequests, funding a Wof the stress is to try to be prepared decreased as defined in the policy without buy/sell agreement or business succession financially. Life insurance is one of the best having to buy a new contract. Like whole life, planning. ways to do that. Three out of five Americans (60 the cash value can be borrowed. percent) report owning some sort of life insurance Once you determine the total amount of (individual and/or group), and more than a third • Variable life insurance: Variable life your family’s financial needs, you subtract from of Americans (34 percent) said they are at least insurance is permanent insurance that this total the available assets your family could somewhat likely to purchase life insurance in builds cash value. What makes variable use to defray some or all of their expenses. The the next year, according to the 2016 Insurance life insurance different is the cash value is difference, if any, represents an amount that life Barometer Study by LIMRA and Life Happens. dependent on the investment performance insurance proceeds—and the income from future When you think about life insurance, you may of one or more separate accounts. In investment of those proceeds—can cover. dismiss it as something only older people need. At other words, the policy owner is subject to Trying to figure out how much life insurance its very basic, a life insurance policy is taken out financial risk, which may result in the loss of is enough isn’t always easy, and the amount on someone’s life that pays out when the insured its cash value. will likely change with changing circumstances. dies, helping to financially protect dependents Once a year, examine your family’s anticipated and loved ones. Insurance proceeds are used to Life insurance coverage may be bundled (or expenses in the event of your death and you will pay ongoing expenses, educate young children, combined) with other insurance policies. For get a timelier, more realistic estimate of your life pay off mortgages and cover final expenses. example, the package may pair life coverage with insurance needs. People put off buying life insurance because they long-term care coverage. Unfortunately, many people underestimate don’t want to think about their own mortality, but their insurance needs and are under-insured. CPAs say it’s important to your family’s financial How much should you buy and what will it cost? Often, the purchase of life insurance is based security. Understanding your options is the first Figuring out how much life insurance you on cost instead of what’s needed. By the same step. should purchase comes down to crunching the token, it’s possible to have more insurance than numbers and knowing your personal level of needed. You may have purchased a large policy Decipher the jargon. risk. You can come up with a number by either during a particular point in your life and then “Life insurance” is a broad term covering many estimating the potential income for the rest of didn’t adjust your coverage when your insurance types of policies in two main categories: term your life, multiplying your annual salary by the need was reduced. Both of these circumstances policies and permanent policies. Permanent life number of years left to retirement, or you can use are reasons to review your insurance coverage policies are divided into three categories: whole the family needs approach. This method focuses periodically with your financial professional. Doing life, universal and variable life insurances. on the amount of life insurance it would take to so can reveal opportunities to change your levels allow your family to meet its various financial of coverage to match your current and projected • Term policies: Term policies are pure obligations and expenses in the event of your life insurance needs. Agents use actuarial tables, temporary insurance coverage purchased death. With the family needs approach, you divide which project your life expectancy and determine for a fixed time period such as one year, your family’s financial needs into three main your costs. If you purchase a policy when you’re five years, 10 years or more. If the insured categories: younger, the premiums are generally less person dies during the insurance period, the expensive. amount of the policy is paid to the named 1. Immediate needs at death, such as cash beneficiary. At the end of the term, assuming needed for estate taxes and settlement Follow these tips: the policy has not been renewed, the policy costs, credit card and other debts, including • Work with a reputable agent; no longer has any value. mortgages (unless you choose to include • Work with your professional advisers to help mortgage payments as part of ongoing family choose the right amount of coverage for your • Permanent life policies: Permanent life needs), an emergency fund for unexpected purposes; policies provide insurance coverage and costs and college education expenses; • Understand the terms and costs so you don’t build cash value you can borrow against. buy a policy that isn’t just right for you; and They are typically more expensive than term 2. Ongoing income needs for expenses related • Reduce your premiums by stopping smoking, insurance. to food, clothing, shelter and transportation, losing weight, wearing your seatbelt and not among other things. These income needs will having a dangerous hobby, like skydiving. • Whole life insurance: Whole life insurance vary in amount and duration, depending on a has a set premium payment and builds cash number of factors, such as your spouse’s age, If you have a spouse or other dependents, value at a guaranteed rate of return. your children’s ages, your surviving spouse’s it’s vital to have some type of life insurance in capacity to earn income, your debt (including place. Depending on your specific needs, your life • Universal life insurance: Universal life mortgages) and whether you’ll provide funds insurance policy can play an important role in your insurance is a flexible-premium, adjustable for your surviving spouse’s retirement; and long-term personal financial plan. life insurance product that allows you to

www.KnowWhatCounts.org • 59 Chapter eight: Tax Issues

Will Rogers said, “The only difference between death In this chapter, you will get tips on and taxes is that death doesn’t get worse every time choosing the right preparer, understand Congress meets.” The lovable Oklahoman may have had a point. According to the Tax Foundation, the reporting gambling winnings and losses, U.S. tax code, as of 2015, was approaching 10.1 million protecting yourself from tax fraud and words. With the typical novel averaging 64,000 words, more. the U.S. tax code would fill up more than 157 novels (The Motley Fool, December 2016). Find additional tax help, visit www.360financialliteracy. • The PDF download from the IRS detailing the org/Topics/Taxes and www.KnowWhatCounts.org. For instructions to complete Form 1040, the a free CPA referral and free 30-minute consultation in “simplest” tax form, is 105 pages long (The Motley Oklahoma, visit www.FindYourCPA.com. Fool, December 2016).

• One-fifth of Americans would get an IRS tattoo to have a tax-free future; 10 percent would stop talking for six months and 4 percent would sell a kidney (WalletHub, March 2017).

• The IRS estimates taxpayers spent an aggregate of 8.9 billion hours complying with federal income taxes in 2016—nearly the equivalent of 13,000 lifetimes (The Motley Fool, December 2016). Chapter 8 • Tax Issues

10 Tips to Choosing a Tax Preparer

ith a new president, new legislators an average of 24 hours of continuing filed, even after the April due date, in case and no crystal ball of what will education per year. questions arise. W happen in tax reform, it makes good financial sense to hire a professional tax • Tax Attorneys:Tax attorneys don’t 6. Provide all records and receipts needed to preparer. Many people may promote themselves necessarily specialize in filing tax prepare your return. Reputable preparers as tax preparers —especially as the tax return returns. You may want one if you will request to see your records and deadline nears. What does this mean? You need encounter legal issues regarding your receipts and will ask you multiple questions to understand the qualifications of the person taxes. Tax attorneys can represent you to determine your total income and your who will be preparing your return. The AICPA before the IRS as well as in court. Many qualifications for expenses, deductions and and OSCPA say it’s important because taxpayers specialize in certain areas, so be sure other items. Do not use a preparer who are legally responsible for what’s on their you choose one who suits your needs. is willing to electronically file your return returns even if someone else prepares it. before you receive your Form W-2 using The IRS developed a public online database • CPAs: Though not all CPAs are tax your last pay stub. This is against IRS e-file of tax preparers who obtained a Preparer Tax preparers, all CPAs first must pass the rules. Identification Number (PTIN), which is required rigorous Uniform CPA Examination for anyone to prepare a federal return for in order to qualify for their licenses. 7. Never sign a blank return. Avoid tax compensation. There are no minimum education Additionally, they are required to take preparers that ask you to sign a blank tax or experience requirements to obtain a PTIN or an average of 40 hours of continuing form. be listed in the IRS database. education per year, as well as ethics According to the IRS, here are a few points to courses. (To learn more about the 8. Review the entire return before signing keep in mind when someone else prepares your differences between accountants and it. Before you sign your tax return, review return: CPAs, go to www.oscpa.com/for-the- it and ask questions. Make sure you public/why-hire-a-cpa.) understand everything and are comfortable 1. Check the person’s qualifications. New with the accuracy of the return before you regulations require all paid tax return 3. Find out about their service fees. Avoid sign it. preparers to have a PTIN) In addition to preparers who base their fee on a making sure they have a PTIN, ask if the percentage of your refund or those who 9. Make sure the preparer signs the form preparer is affiliated with a professional claim they can obtain larger refunds than and includes his or her preparer tax organization and attends continuing other preparers. Also, always make sure identification number (PTIN). A paid education classes. any refund due is sent to you or deposited preparer must sign the return and include into an account in your name. Under his or her PTIN as required by law. Although 2. Check the preparer’s history. Check to see no circumstances should all or part of the preparer signs the return, you are if the preparer has a questionable history your refund be directly deposited into a responsible for the accuracy of every item with the Better Business Bureau and check preparer’s bank account. on your return. The preparer must also give for any disciplinary actions and licensure you a copy of the return. status through the Oklahoma Accountancy 4. Ask if they offer electronic filing.Any paid Board (www.ok.gov/oab) for certified preparer who prepares and files more than 10. Report suspected fraud or abuse. Most tax public accountants; the Oklahoma Bar 10 returns for clients must file the returns return preparers are honest and provide Association for attorneys; and the IRS Office electronically, unless the client opts to file a good service to their clients. However, of Enrollment for enrolled agents. paper return. More than 1 billion individual some are dishonest. Report abusive tax tax returns have been safely and securely preparers and suspected tax fraud to the • Enrolled Agents: An enrolled agent (EA) processed since the debut of electronic IRS using Form 14157, available at www. is licensed by the federal government filing in 1990. Make sure your preparer irs.gov. and is authorized to represent a offers IRS e-file. taxpayer at any IRS meeting or hearing. Having your return prepared accurately by Many are former IRS employees and 5. Make sure the tax preparer is accessible. a knowledgeable tax expert can save you both those who aren’t need to pass an IRS You should always be able to contact the time and money—and help prevent possible IRS test. They are also required to complete tax preparer after the return has been penalties or audits in the future.

www.KnowWhatCounts.org • 61 Oklahoma Society of CPAs

Your Tax Return: What Could Go Wrong?

ccording to the Internal Revenue If you realize that you owe more tax than you if you can’t afford to pay some or all of your Service, more than 140 million tax reported because of an error or omission, you outstanding taxes immediately. The sooner you A returns were filed in 2016. Many of should pay the extra amount as soon as possible file and pay what you can, the less exposure you the people filing those returns undoubtedly had to avoid being charged penalties or interest. will have to interest and penalties. If your tax at least a little anxiety, worrying about errors If you expect a refund but now believe you bill remains unpaid, the IRS will begin collection they might have made or audits they might face. qualify for a larger one because of your error or efforts that could result in a levy on your wages The good news, according to the AICPA and the omission, the IRS advises that you wait to receive or bank account or a federal tax lien. But you can OSCPA, is that there are remedies for some of your initial refund before filing your amended help prevent those steps by filing your return and the potential problems that could keep you up at return. An amended return claiming a refund explaining your financial constraints to the IRS. night as the tax deadline looms. must generally be filed within three years of the The IRS has an installment agreement program date you filed your original return. And here’s and other programs designed to make it easier What if you make a mistake? one omission that you have some time to fix: for those who can’t pay their taxes immediately. If You’ve filed your return. What a relief! But then, Did you forget to make all your contributions to you’re owed a refund, you’ll miss out on it if you to your horror, you find income or a credit that a tax-advantaged Individual Retirement Account don’t file a return, so, once again, it’s in your best you failed to include. When you’ve made a (IRA) last year? Don’t worry. In most cases, you’re interest to get your taxes done. mistake or omission on your taxes, you can fix the eligible to make a contribution right up until tax There are some mistakes you may not even be problem by filing an amended return. In some filing day, which, in 2018, is April 17. aware of, such as missing out on deductions you cases, no amendment may be necessary, such as could have taken. That’s why it’s so important when you make a math error or if you didn’t send What if you file your return late? to turn to your local CPA for advice on how to in a form related to information that is included If you miss this year’s April deadline, or you’ve claim the right deductions and address all your on your return. The IRS will normally correct math failed to file in the past, your critical first step compliance concerns. errors and mail you a request for missing forms. is to file your return as soon as possible, even

Should I Itemize or Take the Standard Deduction?

By IRS

hen you file a tax return, you usually deduction amount depends on your their spouse itemizes deductions. See have a choice to make: whether filing status. For 2016, the basic amounts the Form 1040 instructions for the rules Wto itemize deductions or take the were: about who may not claim a standard standard deduction. You should compare both • Single = $6,300 deduction. methods and use the one that gives you the • Married Filing Jointly = $12,600 greater tax benefit. • Head of Household = $9,300 5. Choose the best method. Compare Here are six facts to help you choose: • Married Filing Separately = $6,300 your itemized and standard deduction • Qualifying Widow(er) = $12,600 amounts. You should file using the 1. Figure your itemized deductions.Add up method with the larger amount. the cost of items you paid for during the 3. Apply other rules in some cases. Your year that you might be able to deduct. standard deduction is higher if you 6. File the right forms. To itemize your Expenses could include home mortgage are 65 or older or blind. Other rules deductions, use Form 1040, and interest, state income taxes or sales taxes apply if someone else can claim you as Schedule A, Itemized Deductions. You (but not both), real estate and personal a dependent on his or her tax return. can take the standard deduction on property taxes, and gifts to charities. To figure your standard deduction Forms 1040, 1040A or 1040EZ. They may also include large casualty in these cases, use the worksheet in or theft losses or large medical and the instructions for Form 1040, U.S. For more information about allowable dental expenses that insurance did not Individual Income Tax Return. deductions, see Publication 17, Your Federal cover. Unreimbursed employee business Income Tax, and the instructions for Schedule A. expenses may also be deductible. 4. Check for the exceptions.Some people Tax forms and publications are available on the do not qualify for the standard deduction IRS website at www.irs.gov. You may also call 2. Know your standard deduction. If you and should itemize. This includes married 800-TAX-FORM (800-829-3676) to order them by do not itemize, your basic standard people who file a separate return and mail.

62 • OSCPA Financial Fitness Kit Chapter 8 • Tax Issues

3 Frequent Tax Questions on Gains and Losses

id you know that when you sell an so consult your CPA for all the details of What about gains and losses on asset you may have to pay taxes on the determining your gain.) The basic rules are investments? Your gains on assets you’ve Dproceeds? Knowing the rules on capital similar for other kinds of personal property. owned for one year or less are considered gains and losses can help you make decisions If you bought an antique chair for $1,000 short-term gains and are taxed at your about whether it makes sense to sell. and later sold it for $1,500, your taxable ordinary income rate, which can range capital gain is $500. from 10 to 39.6 percent. Gains on anything 1. What gains are taxable? You may have you’ve held longer than a year are long- taxable gains when you sell a capital 2. Is there a break when I sell my house? term gains, and are taxed at the capital asset, which can include your home, car The good news is that you get a large tax gains rate for your bracket. For most or other property, as well as investments break on capital gains associated with people, that means their long-term capital like stocks and bonds. The capital gain is the sale of your home. In fact, profits of gains will be taxed at 15 percent. If you’ve the difference between your basis, which up to $250,000 for a single filer and up had losses on assets, they can be applied is usually the purchase price you paid for to $500,000 for a married couple filing against your gains. Let’s say that you’ve the asset, and the sale price. The cost of jointly are tax free. Anything above those sold a portfolio of stocks and bonds. Some improvements made may increase your amounts must be reported on your income went up in value a total of $500 above your basis in the property. In a simple example, tax return as a capital gain. You can use basis, but others went down in value by a if you paid $200,000 for your home and the proceeds however you like, and the total of $700 below your basis. In that case, added on a bedroom that cost you $25,000, exclusion is generally available every time you can deduct your net $200 capital loss. $225,000 would be your basis. If you later you sell a home, as long as you owned There is a $3,000 limit on losses you deduct sell the house for $500,000, the $275,000 the home and used it as your main home in any tax year, but you can carry over the difference between your basis and the sale during at least two of the last five years excess amount to following years. And price is your capital gain. (Most settlement before the sale. There are a different set remember that you can’t deduct capital fees and closing costs can also be added to of rules for second homes and real estate losses on personal-use property, such as your basis and most selling expenses can investment property, so ask your CPA for your home or car. also be subtracted from your sale price, more details.

The capital gain is the difference between your basis, which is usually the purchase price you paid for the asset, and the sale price.

www.KnowWhatCounts.org • 63 Oklahoma Society of CPAs

3 Frequent Tax Questions on Gains and Losses

o you have dreams of hitting it big with other wager where the proceeds are at least winnings or losses. Keep an accurate diary or the lottery or raking in a jumbo jackpot 300 times the amount bet. It does not matter similar records of your winnings and losses, Dat a local casino? If so, be sure to wake whether proceeds are in cash, property or which support where your numbers came from. up to the reality that gambling winnings are fully annuity form. Proceeds that are not in money When it comes to deducting gambling losses, taxable and must be reported as income on your are considered at fair market value. Remember you must be able to provide receipts, tickets, tax return. also that, although gambling winnings from statements or other records that show the The AICPA and OSCPA remind you that bingo, keno and slot machines are not subject amount of both your winnings and losses. gambling income includes, but is not limited to regular gambling withholding, you may Professional gamblers can report the results to, winnings from lotteries, raffles, casinos and need to make estimated tax payments to avoid of their activity on Schedule C, which is attached races, as well as the fair market value of prizes underpayment penalties. If you do not provide to their 1040. Schedule C, designed for income such as cars, houses, trips or other non-cash a correct taxpayer identification number, from a trade or business, allows for various prizes. your winnings may be subject to 28 percent categories of income and expense. The Supreme Depending on the type and amount of your backup withholding even if regular gambling Court has defined a professional gambler as one winnings, the payer might provide you with withholding is not required. who is involved in gambling on a regular and a Form W-2G and may have withheld federal The tax withheld is reported on line 64 of continuous basis. income taxes from the payment. Any legitimate Form 1040. The full amount of your gambling And remember — there’s a reason they call gambling institution must report winnings over winnings for the year should be reported as it “gambling.” The odds are not always in your certain amounts and withhold income tax if other income on line 21 of IRS Form 1040. You favor and you run the risk of losing income winnings are greater than certain amounts. may not use Form 1040A or 1040EZ. This rule or savings essential for your livelihood. Be For example, bingo or slot machine winnings applies regardless of the amount and regardless responsible. Should you or someone you love of $1,200 or more must be reported. Keno of whether you receive a Form W-2G or any need assistance with a gambling problem, winnings of $1,500 or more must be reported. other reporting form. call (800) 522-4700 or visit the the Oklahoma For poker tournaments, winnings of more than If you itemize deductions, you can deduct Association for Problem and Compulsive $5,000 must be reported. For horse racing or your gambling losses for the year as other Gambling at www.oapcg.org. other wagers, winnings must be reported if the miscellaneous deductions on line 28 of For more information, see IRS Publication amount is $600 or more and at least 300 times Schedule A, Form 1040, but only to the extent 529, Miscellaneous Deductions, or Publication the amount of the wager. of winnings. Therefore, your gambling loss 525, Taxable and Nontaxable Income, both Certain gambling winnings are subject deduction cannot be more than the amount of available at www.IRS.gov. to a flat 25 percent tax (33.33 percent for gambling winnings. There is no such thing as a certain noncash payments). This includes “net” gambling loss. gambling winnings of $5,000 or more from Good recordkeeping is extremely important, any sweepstakes, wagering pool, lottery or particularly if you have significant gambling

Is It a Hobby or a Business?

n avid photographer occasionally does more of profits, the IRS may take nine other wedding photography or sells some How does the IRS define a business? Both factors into account. They include: Ashots to the local paper. A stay-at- hobby and business income is generally taxable. home parent with a passion for baking takes However, if your activities can be considered • Whether you carry on the activity in a orders for birthday cakes or desserts for parties a business, then you can deduct the qualified businesslike manner; or someone who’s great with crafts sells some expenses involved, even if they exceed the • Whether the time and effort you put into of her creations online. Are they involved in a income that the business brings in. A key feature the activity indicate you intend to make it hobby or a business? That can be a challenging of a business is that it is undertaken to earn profitable; determination for taxpayers, and there are a profit. In the eyes of the IRS, an activity is • Whether you depend on income from the special Internal Revenue Service rules to answer presumed to be carried on for a profit if it has activity for your livelihood; that question. You may be surprised by what made a profit in at least three of the last five • Whether your losses are due to they mean to you. Here is some information to tax years, including the current year. (There’s circumstances beyond your control (or are help you understand where you stand, how it a slightly longer horizon for businesses that normal in the startup phase of your type of affects your tax situation and help keep you in involve breeding, showing, training or racing business); good standing with the IRS. horses.) If you haven’t had the three years or • Whether you change your methods

64 • OSCPA Financial Fitness Kit Chapter 8 • Tax Issues

of operation in an attempt to improve situation. Your CPA can advise you not only on expense is one that is common and accepted for profitability; whether you likely qualify as a business under the activity. A necessary expense is one that is • Whether you or your advisors have the IRS rules, but also on the best strategic steps appropriate for the activity. knowledge needed to carry on the activity you can take to strengthen your company and There is an estimated $30 billion a year as a successful business; put it on the road to greater productivity and in unpaid taxes, according to the IRS, and • Whether you were successful in making a profitability. the incorrect deduction of hobby expenses profit in similar activities in the past; How does the IRS define a hobby? A hobby is contributes to that total. Your local CPA can help • Whether the activity makes a profit in some something you do because you enjoy it, without you ensure your tax return accurately reflects years and how much profit it makes; and necessarily expecting to make a profit. If you your activities and work with you to take steps • Whether you can expect to make a future incur expenses—on supplies, transportation, that can help minimize your tax bill and achieve profit from the appreciation of the assets equipment or other costs—related to your your other financial planning goals. used in the activity. hobby, you may be able to deduct them, but there are limits. Generally, you can only deduct The IRS will weigh your answers to these your hobby expenses up to the amount of hobby questions, consider your specific circumstances income. In addition, the expenses must be and come up with a determination for each considered ordinary and necessary. An ordinary

5 Tax Questions the Self-Employed Should Answer

ccording to CNBC, roughly 10 million be subject to a penalty. However, if you are health care coverage or pay an individual Americans are self-employed. If you earning income through self-employment shared responsibility payment when they Aplan on starting a new business this while still holding another staff job, you will file their tax returns. Through the ACA, self- year or recently did start a new business, there receive credit for Social Security and other employed individuals are able to shop for are important tax issues to keep in mind, even if taxes that your employer withholds, which flexible coverage through the government’s you simply plan on converting a spare bedroom may lower your self-employment taxes. Health Insurance Marketplace. Check into a new office. Here are five common tax with your CPA to decide what health care questions for the self-employed: 3. What deductions can I take? There are coverage plan is the best option for you and many business-related deductions available your family. 1. What’s the self-employment tax? When you for those who are self-employed. You could strike out on your own, tax considerations be eligible for a home office deduction for 5. How do I save for retirement? The self- can get a little complicated—and any space in your house that is set aside employed have some appealing retirement potentially more expensive. For example, exclusively for regular business use if it’s savings choices that can help minimize the self-employment tax will loom large in your principal place of business. Other tax outlays, which helps secure a future. your plans because you will have to pay all related costs you may be able to deduct According to the IRS, you can contribute of your Social Security and Medicare taxes include a percentage of your rent or up to 25 percent of your net earnings each year instead of splitting them with depreciation on a home you own, property from self-employment—up to $54,000 in an employer. Although this might seem taxes, utilities, home maintenance costs 2017—to a simplified employee pension daunting, you are allowed to deduct up to and home insurance. Of course, you may (SEP). Alternatively, you can set aside 50 percent of self-employment taxes from also be eligible to deduct a variety of other up to $12,500 of self-employment net your net income. expenses related to running your business earnings in a savings incentive match plan – including Internet and phone use, the for employees (SIMPLE IRA Plan), plus an 2. How do tax payments work? Since an costs of equipment or supplies, travel, additional $3,000 if you’re 50 or older. Be employer is no longer withholding your meals and entertainment. Talk to your CPA sure to ask your CPA about more details of federal, state and local taxes, you will also to ensure you’re taking all the deductions all your retirement plan options. have to figure out what income tax you available to you. owe—based on your earnings—and make quarterly estimated tax payments. If you 4. How does the ACA affect me? The don’t pay enough in taxes by withholding Affordable Care Act (ACA) requires all or through estimated payments, you could individuals to have minimum essential

www.KnowWhatCounts.org • 65 Oklahoma Society of CPAs

Don’t Miss These 4 Overlooked Tax Deductions

re you missing out on chances to lower financial support to aging parents may be pay a 12.4 percent Social Security tax on up your tax bill? No matter what your able to claim them as dependents? You to $118,500 of income and a 2.9 percent Atax bracket, you will pay more than must meet certain requirements to qualify. Medicare tax on all of their income, but necessary if you don’t take advantage of all the They generally include, among other things, they can deduct one-half of that tax. Also, tax breaks for which you qualify. Here are some that your parent’s gross income for the does your business require you to travel commonly overlooked deductions that could year can’t be higher than the IRS exemption away from home? Then you can deduct save you money: amount, that you provided more than half your travel expenses, including mileage or of your parent’s support for the year and airline ticket costs, baggage fees, taxi fares • State sales tax: Taxpayers who file a Form that your parent is not being claimed as a and other ordinary and necessary expenses 1040, and itemize deductions on Schedule dependent on someone else’s return. Your related to your business travel. A, are allowed to deduct either their state CPA can further explain all the rules. and local income taxes or their state and • Hidden charitable deductions: How much local sales taxes, but not both, on their • Valuable self-employment deductions: did you spend on the ingredients that you federal tax return. There are seven states Self-employed people may know they can used when you contributed treats to a with no income tax. It may make sense to take deductions for qualifying expenses school bake sale? What were your gas, tolls deduct your state and local sales taxes, such as the costs of an office, supplies and parking costs for driving that you did to instead of your state and local income and equipment, but they may overlook perform services for your favorite charity? taxes, if your state has a low income tax other deductions. For example, you may The little things add up, and if you make rate or if you made a substantial purchase be able to deduct the amount you paid for these kinds of contributions to a qualified during the tax year, such as a car or boat. medical and dental insurance and qualified organization, you can claim your expenses The federal state sales tax deduction long-term care insurance for yourself, your as a deduction. Be sure to keep records to became permanent in December 2015 spouse and your dependents. Medicare prove the amount of the contributions you through the Protecting Americans from Tax premiums you voluntarily pay to obtain made during the year. Hikes Act. insurance in your name that is similar to qualifying private health insurance These are just some of the overlooked • Support for a parent: You may know that can be used to figure the deduction. The deductions you might be able to claim on your tax you can claim your children as dependents, deduction is not available, however, for return. Your CPA can help you decide if itemizing as long as they are either under 19 (or any month you were eligible to participate your deductions is the best choice and spot other under 24 and a student) or any age if they in a health plan subsidized by your or your deductions you might have missed. are permanently and totally disabled. But spouse’s employer. In addition, for the were you aware that families who offer 2016 tax year, self-employed people will

4 Year-end Tax Steps to Save You Money

s January approaches, you should ask for freelance or consulting income or to you can immediately channel it into an yourself if you took advantage of all put off any other earnings you can delay. interest-bearing savings account or other Athe tax planning—and minimizing— You may also consider taking qualified investments. You can do the same with opportunities available to you. Even late in the deductions before year-end so you can your tax refund check, of course, but you year, you still have the chance to reduce your tax claim them against a higher income next miss out on the interest you could have burden. The AICPA and OSCPA offer tips on just year. The opposite would be true, of earned throughout the year. Conversely, a few of the options you can use to keep more course, if you think your income would go consider increasing your withholding if money in your pocket. up next year. you expect to receive extra income in the year. On another front, did you experience 1. Manage your income and deductions. 2. Check your withholding. Consider adjusting milestone events—such as a marriage or If you expect your economic situation to your withholding status if you received a the birth of a child? They can affect your change next year, you may want to consider tax refund. If you lower your withholding tax situation and your withholding status, managing when you receive income or take amount you may not get a refund, but as well, so make sure to factor them into deductions. If your income may go down, you’ll get more money in each paycheck your decisions. take this last chance to postpone invoicing rather than at tax time, which means

66 • OSCPA Financial Fitness Kit Chapter 8 • Tax Issues

3. Manage your retirement planning.You retirement. If you’re just getting started, you’ll face a 50 percent excise tax on the have until the April tax deadline to make talk to your CPA about the best retirement amount not distributed as required. If you contributions to a qualified retirement savings strategy for you. don’t need your RMD for income, consider plan and deduct them on your return. For contributing some or all of it directly to 2017, you can contribute up to $18,000 to 4. Take your RMDs. If you’re age 70½ or a charity in what’s known as a qualified a 401(k), 403(b) and many profit-sharing over, you must take required minimum charitable distribution (QCD). You can plans (and another $6,000 if you’re age 50 distributions (RMDs) from certain donate up to a maximum of $100,000. The or older). If you contribute to an individual retirement accounts each year. Those amount of the RMD you donate will not be retirement account, you can set aside up distributions are generally included in included in your taxable income. to $5,500 (plus $1,000 more if you’re 50 or your taxable income, but you can’t skip older). Don’t postpone building a secure them even if you don’t need the money or

5 Things You Can Learn from Your Tax Return

id you know analyzing your tax return taxes until you decide to withdraw money. help protect you against losses related to can offer many advantages? It may not Therefore, any investments are tax-free any one company or industry. Take the time Dseem that way when you’re scrambling until withdrawal. to review your investments and consider to finish it before the filing deadline, but the whether a broader mix is needed, based information on your return can offer new 2. You’re keeping too much money in your on your age, income, family situation and insights into your financial situation, help you bank savings account. other factors. identify changes that could help save you money If you earned less than $10 in interest and make some decision making easier over the on your interest-bearing bank accounts 4. You may not be keeping track of coming year. The AICPA and OSCPA highlight last year, the bank is not required to report donations. some of the wake-up calls you might find on it, so that section of your return may be Does your return show your charitable your return. blank. If your interest dollars are low, deductions were pretty sparse this year? you might want to consider moving your If you think some of your contributions 1. You missed out on tax-advantaged savings to another bank with better rates. have been forgotten in the past, be sure to retirement savings. As part of your research, be sure to check document donations as you go along and If your return shows that you set out online banks, which often pay higher get receipts to help you keep track of what aside very little—or nothing at all—in interest rates. If your interest dollars are you give. You may be surprised by what your retirement account last year, you high, depending on your short- and long- you’ll be able to deduct next year! could be losing money and putting your term goals and your risk tolerance, it may future at risk. You lose out when you also be time to move some of your savings 5. You’re having too much or too little don’t take advantage of the matching into investments that offer a better yield. withheld. retirement account contribution programs When doing research on different banks, Does your return show you will get your employer may offer, which match a make sure to check and see if there are any a surprisingly large refund this year? percentage of the dollars you put away fees associated with the account, such a Congratulations, but you may still want to in your retirement account. You also lose minimum balance or multiple transfers per review your withholding so your money out on all the dividends and interest that month. goes directly into your pocket as you earn your retirement savings can earn each it and you don’t have to wait until tax time year. Also, you put your future at risk when 3. You may need a better mix of investments. to get it back. On the other hand, did you you fail to create a nest egg that you’ll be When you listed your interest and get hit with a penalty for underpayment of able to count on once you’re ready to stop dividends on your return, did you notice a taxes because of insufficient withholding? working—or are forced to stop working due high percentage of your investment dollars Tax filing time is a good opportunity to spot to job loss or declining health. Additionally, (say 10 percent or more) were invested in and correct these errors. your retirement contributions are typically one security? Every situation is different, made with pre-tax dollars, so you won’t pay but a diversified investment portfolio can

www.KnowWhatCounts.org • 67 Oklahoma Society of CPAs

5 Things to Know About Battling Tax Identity Theft

any people are aware of the dangers or investment account details or other be placed on your credit records. That of identity theft but may not realize personal or confidential information. The organization will alert the other agencies Mhow quickly it is growing or the IRS never initiates contact with taxpayers and the fraud alert can help prevent further numerous areas in which it can occur. Did you by email, text or social media to request illegal activity under your name or in your know, for example, that identity theft reports to personal or financial information. Further, accounts. the Federal Trade Commission jumped by nearly they do not call taxpayers with threats 50 percent in 2015, to almost half a million of lawsuits or arrests. If you experience 5. Take advantage of valuable resources. claims? Here’s another surprising statistic: Tax any of these situations, it’s almost certain The Federal Trade Commission has refund fraud is considered the biggest and you’re dealing with an identity thief. Don’t updated the theft recovery plan available fastest-growing kind of identity theft. If you’re reply to the message or click on any links at www.IdentityTheft.gov. It includes a not sure how to respond to or protect against within it. If you suspect phishing, which checklist you can follow when you become tax identity theft, the AICPA and OSCPA offer happens when identity thieves send you a aware of identity theft. You can also contact some answers. communication that tries to trick you into the IRS Identity Protection Specialized Unit revealing confidential information, report at (800) 908-4490 so the appropriate steps 1. Be on notice if ouy get an IRS notice. it to the IRS and forward any emails to can be taken to secure your tax account. One example of tax identity theft [email protected]. You should also report ID theft incidents involves a scammer using your Social to the Federal Trade Commission at www. Security number to file a false return and 3. Watch out for wage discrepancies. consumer.ftc.gov or the FTC Identity Theft then collecting a tax refund he or she Scammers will sometimes use someone Hotline at (877) 438-4338. After you have doesn’t deserve. For that reason, you may else’s Social Security number when completed these steps, you will want learn you’re a victim of tax identity theft applying for a job because they don’t have to file a report with the local police and when you receive a notice from the Internal their own Social Security number or to contact the fraud departments of the three Revenue Service stating more than one tax avoid paying taxes. The employer will then major credit bureaus: Equifax at (800) return was filed with your information. Your report their earnings to the IRS using the 525-6285; Experian at (888) 397-3742; and best response is to respond immediately by stolen number. When tax time rolls around, TransUnion at (800) 680-7289. Don’t forget following the instructions in the notice. If you will receive an IRS notice reporting an to close any accounts opened fraudulently you believe you are at risk of identity theft error in your tax return because it doesn’t or that appear suspicious. There’s also a list due to lost or stolen personal information, include the income reported by the identity of follow up steps and special instructions you should immediately contact the IRS thief’s employer. Once again, respond to consider if affected accounts include Identity Protection Specialized Unit at (800) immediately by following the instructions in utilities or phone companies, banks, 908-4490 so the agency can take action to the notice. investments, student loans, government secure your tax account. agencies, apartment or house rentals or 4. Put a recovery plan in motion. deal with bankruptcy filing issues. The IRS 2. Don’t take the phishing bait. If you think you’ve been a victim of also offers identity theft resources on its Be wary if you get a call, email, text or identity theft, contact one of the three site at www.IRS.gov. other message from the IRS asking you to major credit reporting agencies to let them supply your Social Security number, bank know and to request that a fraud alert

68 • OSCPA Financial Fitness Kit Chapter 8 • Tax Issues

6 Hints for Appealing an IRS Decision

hat happens if you disagree with 3. Put it in writing. If the entire amount of that it will likely be an expensive and time- an Internal Revenue Service additional tax and penalty proposed for consuming option. Wdetermination about your taxes? each tax period is $25,000 or less, then There are options available to you if you’d like you may qualify for a small case request. If 5. What’s the timeframe? Normally, you to plead your case. Each year, thousands of the amount you want to appeal is greater should receive a response to your request taxpayers address tax disputes through the than $25,000, you will have to file a formal for an appeal within 90 days. Once you’ve IRS’s appeals process. Here’s when you might written protest in order to have an appeal. had your appeals conference, it may take consider an appeal and how it works: The written protest should cover the anywhere from 90 days to a year for your decisions with which you don’t agree and case to be resolved. 1. First steps sometimes fail.Let’s say you’re your reasons and the facts supporting your undergoing an IRS audit. You’ve had lengthy opinion, including any legal or regulatory 6. Should you consider an offer in discussions with the IRS auditor, but you support. compromise? Sometimes a taxpayer may not two still can’t agree on the amount you necessarily disagree with the IRS’s conclusions owe. Your first step should be to ask to 4. Talk it out. The next step usually involves about his or her tax situation but may simply speak to the auditor’s manager to find out having a conference, either by phone, mail be unable to pay. In that case, an offer in if you can come to a successful resolution or in person, with an objective IRS appeals compromise may be the best answer. The IRS with him or her. If that attempt fails, the officer to discuss your case. Conferences will consider your case based on your income, appeals process is another option. are informal. You aren’t required to expenses, assets and overall ability to pay and have any type of representation, but a determine a payment amount that may be 2. Get started. An appeal is designed to representative who is recognized by the less than your total outstanding tax bill. You be a free and relatively straightforward IRS—such as your CPA or an attorney—can must be up to date on your tax return filings alternative to help you avoid having to take participate if you’d like to have an expert and not involved in a bankruptcy proceeding. your case to court. In addition to an audit, involved. Before the conference begins, you Any refunds you are due within the calendar a taxpayer may turn to the appeals process should have all the paperwork you need to year in which your offer is accepted will be because of a disagreement over an IRS support your appeal. However, this is not applied to the offer that the IRS accepts. You assessment, penalty, interest charge, offers the time to introduce new documentation. can pay off the amount you owe either in one in compromise or liens or levies. Typically, If you do, you may be sent back to the IRS lump sum or in monthly payments. if there is a dispute, you will receive a auditor for further consideration. If you’re letter from the IRS explaining your right to not satisfied with the results of the appeals appeal, but you can also initiate a request process, you will generally still be able to for an appeal. take your case to court, although be aware

Your first step should be to ask to speak to the auditor’s manager to find out if you can come to a successful resolution with him or her.

www.KnowWhatCounts.org • 69 Oklahoma Society of CPAs

SAMPLE BUDGET

MONTHLY BUDGET MONTHLY ACTUAL CATEGORY AMOUNT AMOUNT DIFFERENCE (+/‐)

INCOME (AFTER TAXES) Wages/Bonuses Interest Income Investment Income Child Support/Alimony Other Income Income Total

EXPENSES HOME: Mortgage or Rent Homeowners/Renters Insurance Property Taxes Home Repairs/Maintenance/HOA Dues UTILITIES: Electricity/Gas (add if both) Water/Sewer/Garbage Telephone (Land Line/Cell) TV Cable/Satellite/Internet Subscriptions FOOD: Groceries Eating out/Lunches/Snacks FAMILY NEEDS: Child Support/Alimony Day Care/Babysitting HEALTH AND MEDICAL: Insurance (Medical/Dental/Vision) Gym/Fitness Memberships Unreimbursed expenses/copays TRANSPORTATION: Car payments Gas/Auto Insurance Auto Repairs/Maintenance/Fees Other Transportation (bus, subway, tolls)

70 • OSCPA Financial Fitness Kit SAMPLE BUDGET

Student Loans Other loans ENTERTAINMENT/RECREATION: Movies/Nights Out Vacations Subscriptions/Dues PETS: Food Grooming/Boarding Vet/Medical CLOTHING: Purchases (Include accessories, shoes, etc.) Dry cleaning SAVINGS AND INVESTMENTS: 401(K) or IRA Stocks/Bonds/Mutual Funds College Fund Emergency Savings Other Savings MISCELLANEOUS: Toiletries Household Products Gifts Donations Other TOTAL INVESTMENTS/EXPENSES Surplus or Shortage (Income minus expenses)

Happy Budgeting!

www.KnowWhatCounts.org • 71

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