Featured Posts, Tax

Tax Credits vs Tax Deductions: Understanding the Difference

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Introduction:

Navigating the complexities of the tax system can be a daunting task for individuals and businesses alike. When it comes to reducing tax liability, two common strategies are tax credits and tax deductions. While both options can potentially lower your tax bill, it is crucial to understand the differences between them and determine which one is more advantageous for your specific circumstances. In this article, we will explore the key distinctions between tax credits and tax deductions and help you make an informed decision.

Tax Deductions: A Brief Overview

Tax deductions lower your taxable income, which ultimately reduces the amount of income subject to taxation. Deductions are typically based on eligible expenses or contributions made during the tax year. Common deductions include mortgage interest, medical expenses, charitable donations, and certain business expenses. The value of a deduction is equal to the deduction amount multiplied by your marginal tax rate. For instance, if you have a $1,000 deduction and are in the 25% tax bracket, your tax bill will be reduced by $250.

Tax Credits: A Brief Overview

Tax credits, on the other hand, directly reduce your tax liability dollar-for-dollar. Unlike deductions, which lower your taxable income, tax credits are applied directly to the tax owed. This means that a tax credit of $1,000 will reduce your tax bill by the full $1,000 amount. Tax credits can be categorized into two types: non-refundable and refundable. Non-refundable tax credits can reduce your tax liability to zero, but any excess credit is not refunded to you. In contrast, refundable tax credits can result in a refund if the credit amount exceeds your tax liability.

Key Differences:

1. Impact on Tax Liability:

   – Tax Deductions: Deductions reduce your taxable income, indirectly lowering your tax liability.

   – Tax Credits: Credits directly reduce your tax liability, potentially resulting in a dollar-for-dollar reduction in taxes owed.

2. Value:

   – Tax Deductions: The value of a deduction depends on your marginal tax rate. Higher tax brackets generally yield greater savings.

   – Tax Credits: Tax credits provide a fixed dollar amount reduction, offering more predictable and potentially significant savings.

3. Refundability:

   – Tax Deductions: Deductions do not directly result in a refund. They only reduce the amount of income subject to taxation.

   – Tax Credits: Refundable tax credits can lead to a refund if the credit exceeds your tax liability, providing an additional financial benefit.

4. Eligibility and Limitations:

   – Tax Deductions: Deductions have specific eligibility criteria and may be subject to various limitations, such as income thresholds or percentage caps.

   – Tax Credits: Tax credits also have eligibility requirements, but they often target specific activities, such as energy-efficient home improvements or child and dependent care expenses.

Choosing the Better Option:

Determining whether a tax credit or a tax deduction is better depends on your individual circumstances. Consider the following factors:

1. Amount: If you have significant eligible expenses that qualify for deductions, and your marginal tax rate is high, deductions may provide substantial savings.

2. Eligibility: If you qualify for specific tax credits, such as those related to education, energy efficiency, or childcare, they can deliver direct and predictable tax savings.

3. Refundability: If you anticipate a tax liability lower than the potential credits you are eligible for 

Small Business

Streamline Your Small Business Finances

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Are you a small business owner and find yourself struggling to make sense of your numbers month after month? Efficiently managing your financial records, choosing the best financial software, and understanding your tax position is crucial for the success of your business. Read on for three essential practices for financial organization and streamlining.

  1. Organize Your Financial Records:

a) Create a filing system: Establish a logical and consistent system for organizing your receipts, invoices, bank statements, and other financial documents. Consider using categories such as income, expenses, taxes, and assets to make retrieval easier.

b) Digitalize your documents: Embrace technology by scanning and storing your paper documents electronically. Digital files are easier to search, access, and back up. Cloud storage solutions offer convenience and security.

c) Use accounting software: Utilize accounting software to streamline your record-keeping process. We’ll discuss this in more detail shortly.

d) Regularly reconcile accounts: Reconcile your bank and credit card statements with your financial records to identify any discrepancies and ensure accuracy.

  1. Choosing the Right Accounting Software for Your Business:
    Consider these factors when selecting the best option for your business:

a) Features and scalability: Assess your business needs and choose software that offers essential features like invoicing, expense tracking, financial reporting, and inventory management. Ensure the software can accommodate your business’s growth.

b) User-friendly interface: Look for software with an intuitive and user-friendly interface. A steep learning curve may hinder adoption and productivity.

c) Integration capabilities: Check if the software can integrate with other tools you use, such as point-of-sale systems or e-commerce platforms. This integration streamlines data flow and reduces manual data entry.

d) Security and data backup: Confirm that the software provider employs robust security measures to protect your financial data. Regular backups are vital to safeguard against data loss.

  1. Tax Considerations for Small Business Owners:
    Tax obligations can be complex for small business owners. Here are a few key considerations:

a) Understand your business structure: Different business structures have varying tax implications. Familiarize yourself with the tax obligations for sole proprietors, partnerships, LLCs, and corporations.

b) Keep thorough records: As mentioned earlier, maintaining accurate financial records is crucial for tax compliance. Document all income and expenses, including receipts and invoices.

c) Track deductible expenses: Deductible expenses can help reduce your taxable income. Familiarize yourself with deductible business expenses and ensure you have the necessary supporting documentation.

d) Consult a tax professional: Engaging a qualified tax professional can provide expert guidance on tax planning, ensuring compliance, and maximizing deductions.

Remember, while these tips provide a solid foundation, it’s advisable to consult with a tax professional or accountant to tailor your financial practices to your unique circumstances.

That wraps up our insights for this month. We hope you found these tips helpful in streamlining your small business finances. As always, if you have any specific questions or require further assistance, don’t hesitate to reach out to our team of experts.

Stay tuned for next month’s edition, where we’ll explore another important aspect of tax and accounting. Until then, may your business thrive and your financial records remain organized!

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Featured Posts, Small Business

Strategic Performance Monitoring: A Business Owner’s Guide

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As a business owner, you have to keep your finger on the pulse of your company’s performance. Performance monitoring is essential for identifying areas of strength and weakness, setting and achieving objectives, and ensuring the sustainability and growth of your business. In today’s dynamic and competitive business environment, it’s more critical than ever to understand the metrics that matter and how to use them effectively.

**Understanding Performance Monitoring**

At its core, performance monitoring involves tracking various aspects of your business to understand how well it’s functioning. This can include everything from financial metrics like revenue and profit margins, to operational metrics like production efficiency, to human resources metrics like employee productivity and engagement. By keeping an eye on these indicators, business owners can spot trends, anticipate problems, and make informed decisions.

**Key Performance Indicators (KPIs)**

Key performance indicators are specific, measurable values that demonstrate how effectively a company is achieving its key business objectives. KPIs differ depending on the nature of the business and its strategic goals. For instance, a retail business might focus on metrics like sales per square foot or customer satisfaction ratings, while a software company might prioritize metrics like monthly active users or customer acquisition cost.

It’s essential to select KPIs that are not only measurable but also closely aligned with your business goals. These indicators should give you a clear sense of whether you’re on track to achieve your objectives or whether you need to adjust your strategy.

**Performance Monitoring Tools and Techniques**

There’s a range of tools and techniques available for performance monitoring, from simple spreadsheets to advanced software solutions. These can help you collect, analyze, and visualize data, making it easier to understand your business’s performance.

Business intelligence tools can provide an in-depth look at your company’s data, allowing you to spot trends and correlations that might not be apparent from a surface-level analysis. Additionally, customer relationship management (CRM) systems can help you track customer behavior and engagement, providing valuable insights into your sales and marketing efforts.

**Performance Monitoring Best Practices**

To make the most of performance monitoring, consider these best practices:

1. Set Clear Objectives: You need to know what you’re aiming for before you can measure your progress. Make sure you have clear, actionable objectives that are aligned with your business’s overall goals.

2. Choose the Right KPIs: The metrics you choose to track should be closely tied to your objectives. They should give you a clear sense of whether you’re on the right track or need to make adjustments.

3. Use the Right Tools: Make sure you have the tools and resources necessary to collect and analyze your data. This might mean investing in business intelligence software or hiring a data analyst.

4. Review and Adjust Regularly: Performance monitoring isn’t a one-time activity. It’s something you should be doing regularly to keep track of your progress and make adjustments as needed.

5. Communicate Results: It’s important to share your findings with your team, stakeholders, and employees. This can help keep everyone on the same page and ensure that your strategies and decisions are data-driven.

**Conclusion**

Performance monitoring is a critical part of running a successful business. By keeping a close eye on your KPIs, using the right tools and techniques, and following best practices, you can use performance monitoring to drive growth, improve efficiency, and keep your business on the path to success.

Featured Posts, Investing, Personal Finance

What Is Your Net Worth?

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How many times have you googled Net worth of *insert celebrity name* ?? I know I’ve done this quite a few times. We often hear people mention the term, but do you know how to calculate your net worth? If not, let’s sip some latté and break this thing down…

Quick Accounting 101 Lesson:

Assets are anything owned of use or value that can be converted into cash. Assets include cash, investments, land, building, equipment, etc. On the other side, we have liabilities. A liability is money owed; an obligation against an asset.

Your net worth is basically everything that you own minus everything that you owe. If you sold all your assets and paid off all debts, how much money would you have left over? Consider this your financial report card. It’s a reflection of your financial health. Calculating your net worth should be one of the first steps to achieving your financial goals. You can’t plot a financial goal map if you don’t know where you currently stand. 

How To Calculate Net Worth:

List all assets and the estimated value.

  • Checking and savings account balance
  • Brokerage/Investment accounts
  • Estimated house/vehicle value
  • Jewelry and collectibles

List all debt.

  • Credit card debt
  • Mortgage balance
  • Car loan balance
  • Medical bills owed
  • Student loans

Subtract your total debt from your total assets. You have now calculated your net worth!!!

Net Worth Analysis:

Okay, so you’ve calculated your net worth. If your assets exceed your liabilities, then you have a positive net worth. Now, if your assets do not exceed your liabilities, then you have a negative net worth. If you calculated a negative net worth, don’t worry. A negative net worth is common for young millennials. This is often due to high student loan debt. This means that you have not earned enough money to offset the debt that you currently owe. The goal is to focus on increasing your net worth. In order to increase net worth, you should increase assets and/or decrease liabilities – paying down debt, building equity in your home, purchasing more investments (stocks, bonds), etc.

There is no standard when it comes to net worth expectations. Every individual has different financial needs and based on his/her lifestyle will have different financial goals. A formula that is often used as a benchmark when it comes to determining your “target” net worth is:

Net Worth = (Your age – 25) × (Gross Annual Income ÷ 5)

Regardless of where you currently stand financially, it is very important to know and understand your net worth. Understanding where your money is going will hopefully help you make better financial decisions, especially when deciding between if something is a need versus a want. Whether you are using an excel file or your favorite finance app, tracking your finances is key. If you need a recommendation, head over to Mint. It’s a free tool, that makes tracking your money easy for all levels.

 

Featured Posts, Personal Finance

Increasing Your Financial Literacy

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April is National Financial Literacy Awareness Month! Statistics show that only 24% of millennials have basic financial literacy knowledge. Regardless of your age, NOW is the perfect time for you to decide to take control of your finances. Understanding your finances and money management are essential tools for success. Over the last couple of weeks, several people have asked me, “WHERE DO I START??”.

Well… here are some good places to begin your financial awareness journey:

Search the internet – this might sound pretty basic, but it works. Do you have a particular topic that sparks your interest? Debt Management. Credit Report. Investing for Beginners. GOOGLE IT!  The world wide web is a great resource tool which is available to most 24/7 by using his/her cell phone. Top financial education sites:

Read books, articles and magazines. Picking up a book, financial magazine and/or newspaper is another great way to increase your financial literacy, and these are typically more credible sources than what you may find searching the internet. Top picks:

  • Forbes Magazine
  • Money Magazine
  • Wall Street Journal
  • Rich Dad Poor Dad by Robert T. Kiyosaki
  • Money: Master the Game by Tony Robbins

Watch finance based television programs. Reading isn’t everyone’s cup of tea, but don’t let that stop you from increasing your financial knowledge. There are several television programs that will provide you with the tools you are seeking. Top picks:

  • CNBC TV
  • Bloomberg TV
  • CNN
  • Fox Business News

Listen to talk radio/podcasts – Personally, I’m an avid reader, but lately podcasts have become my go-to. With the daily demands of life, it is often hard to sit down and focus 100% of my time to reading. For those individuals who are often on-the-go, podcasts are the ideal solution. I often listen to my shows while driving or while I’m working. Top picks:

  • The Clark Howard Show
  • Listen Money Matters
  • The Dave Ramsey Show
  • Stacking Benjamins

Take a financial literacy class – You can often find personal finance classes offered at your local public library. If your local library does not have classes available, then you may be interested in enrolling in a course at a 2 or 4 year college. Depending on the school, you may be able to find an online course which will enable you to learn from home. 

Start and investment club – Starting an investment club can have multiple benefits (networking, accountability partners, increased capital for investing, etc). Whether it be for the purpose of increasing your knowledge around personal finances or actually investing (real estate and/or stock market), being around like-minded individuals is always a plus. I will caution you to vet all individuals when it comes to investing your money with a group.

… and last, but definitely not least.. THE MOOLAHTTÉ BUZZ™ *sips latté* .. this site was created for the purpose of increasing financial literacy by sharing the wealth of knowledge I’ve gained over the last decade from books, mentors, and personal experience. 

Please comment and share your favorite books, TV programs, and podcasts below!! 

Featured Posts, Investing

What Type of Investor Are You?

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So, you’re ready to start investing… but first, what is your risk tolerance level? WHAT TYPE OF INVESTOR ARE YOU? Understanding your risk tolerance level is one of the most important factors in investing. This will shape your investment strategy and become a guide to building your portfolio. Risk tolerance is the level of risk you are willing to accept. We all get excited about the gains, but can you handle the losses? The three risk tolerance/investor types:

A conservative investor is all about protecting his/her principal (original investment) by minimizing risk. This investor “plays it safe”, similar to the granny who likes to stuff her savings in her mattress as opposed to trusting the bank. A conservative investor is okay with smaller gains between 0-5% because they are taking a smaller level of risk. These investors have likely already built their portfolio to ensure a comfortable and steady income stream or they are just scared to lose money. A conservative investor has a portfolio comprised of:

  • Regular bank savings account
  • Certificate of deposit (CDs)
  • Government bonds (municipal, treasury, etc.)
  • Annuities

A moderate investor focuses on diversifying his/her portfolio in a way that limits risk while pursuing stronger returns. Think of this as a hybrid between conservative and aggressive. A moderate investor may have an expectation of between 5-20% annual return. Moderate is typically the most recommended portfolio for most investors:

  • Equities (focusing on diversification)
  • Mutual funds
  • Exchange-traded Funds (ETFs)
  • Individual bonds

An aggressive investor understands “the greater the risk, the greater the return”… similar to that one uncle willing to risk it all at the casino to triple his paycheck. These investors are able to handle the unpredictable shifts that Wall Street brings. By accepting less diversification in comparison to moderate, this investor is susceptible to far greater levels of risk. An aggressive investor typically looks for returns greater than 20%. This investor’s portfolio could oftentimes include:

  • Equities (individual stocks)
  • Cryptocurrencies (Note: though there have been many success stories, be careful with cryptocurrencies as these are not regulated).
  • Options and other special contracts

Though some portfolios may include the same type of investments (bonds, stocks, etc), they are weighed differently depending upon your investment strategy. Overall, it is typically advised to be more aggressive in your earlier stages of life. The closer an investor gets to the age of retirement, the more conservative the investor should become. Regardless of your investment type, investing in the stock market is a good strategy to provide long-term wealth. Once you have an understanding of what category you may fall under, consult a financial advisor on ways to incorporate your preferred strategy into your respective financial plans.

Featured Posts, Personal Finance

2018 Tax Reform… how does it affect me??

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By now, we are all aware of the new tax reform bill and many have already seen changes reflected in their paycheck. However, the number one question still on the minds of many is: HOW DOES IT AFFECT ME??

The Tax Cuts and Job Act will not affect the 2017 taxes that you are filing in April 2018. This act will impact the 2018 tax year with an April 2019 filing date. Affecting both individuals and corporations, the 2018 tax reform has the most changes the United States has seen in the last 30 years. For individuals, the bill reduced income tax rates, eliminated personal exemptions, and doubled the standard deduction.

The highest income tax rate was reduced from 39.6% to 37%. Please keep in mind that this benefit is only temporary. In 2026, we will revert back to 2017 tax rates. BUMMER!! The standard deduction was doubled from $6,350 to $12,000 for individuals filing single ($18,000 for head of household and $24,000 for married). Due to the increase in the standard deduction, there will be a drastic decrease in the amount of filers able to cross the threshold to itemize their returns (Schedule A form). On a positive note: if you are taking the standard deduction as opposed to itemizing, then your days of keeping track of receipts are over!!!

There were also several itemized deductions either eliminated of limited. Though you can still deduct state and local taxes and property taxes, these are now capped at $10,000. Are you in the market to purchase a new home? Well, the new reform bill has reduced the limit for those claiming a deduction on mortgage interest. In 2017, homebuyers could itemize and deduct the mortgage interest payments for homes with a mortgage that did not exceed $1million. Now, the mortgage amount is limited to $750,000. Please note, this will only affect new homebuyers. So… if you purchased your million dollar home last year… you’re good!!!  

Another major change to note is the adjustment in the child tax credit which increased from $1,000 to $2,000 per qualifying child. Prior to the Act, taxpayers could subtract $4,150 from income for each person claimed. Going forward, personal exemptions are eliminated. This will greatly affect those households with many children.

Other noteworthy changes:

  • Alimony payers can no longer deduct payments and the recipients are no longer required to report income (effective for filings after December 31, 2018).
  • Moving expenses are no longer deductible, excluding military personnel relocating due to military order

I hope this brief overview has given you some additional insight into what to expect with you 2018 tax year. Feel free to contact me through the CONTACT US tab if you have additional tax questions.

 

Investing

A Million Ways to Get It… CHOOSE ONE!

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Sorry Jay-z!! If there are a million ways to get it, then why just choose one?! I’m thinking two, three, four…

Statistics show that millionaires have an average of seven sources of income. (I’m sure Jay-z has more than that). Hence the saying, “the rich get richer” because the more you have the more you’ll get.

There are two types of income:

Active income: refers to income received from performing a service. This includes wages, tips, salaries, commissions and income from businesses in which there is a material participation.

Passive income: earnings derived from a rental property, limited partnership or other enterprise in which a person is not actively involved.

There is often this misconception that passive income requires absolutely no work at all; however, there is some work involved in the creation stage. However, the income is not tied to work hours.

For the average American, we start with active income. The “day job/9 to 5” that we use as an investment tool to fund our side hustles until they are running on their own. There are only 24 hours in a day so the ideal goal is to maximize your streams of passive income.

Common types of passive income:

  1. Interest – from a variety of loans, either to individuals or companies
  2. Dividends – from investments or partnerships
  3. Capital gains – from the sale of investments
  4. Royalties – from products you sell or licenses
  5. Rental income – from real estate investments
  6. Publishing an e-book or online course
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Personal Finance

8 Smart Money Moves for Your Tax Refund

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IT’S TAX SEASON… For many Americans, the first word that comes to mind is: REFUND!!!

The 2017 filing season opened on January 29, 2018, so by this point I am sure many of you have already received your IRS Refund. People have mixed feelings when it comes to tax refunds: some look at this as the government repaying them the money they should have been able to use throughout the year while others look forward to this annual act of “finding money”.

No worries, I will post more blogs on tax planning for those who would prefer to keep their money during the year and balance out at year-end.

So, the refund has hit your bank account. STOP!!! Before you “do it for the gram”, let’s discuss 8 smart money ideas for your refund:

1)     Start Or Increase Your Emergency Fund

An essential part of adulting is preparing for the rainy days. Though putting your refund in a high-interest bearing savings account will not yield the highest possible return, it will provide a return while the money is not being used.

2)     Pay Off Debt

As we focus on this path toward financial freedom, opting to pay down/off debt is always an ideal choice. Depending on the size of your refund, this could impact you in more ways than one. For example, paying down a credit card balance will not only reduce or eliminate the monthly minimum payment owed, but it will always increase your credit score.

3)     Fund Your Retirement

Regardless of your age, funding your retirement should always be a focus for NOW rather than LATER. If you’re not sure where to start, then consider opening a Roth IRA. I will elaborate on retirement in an upcoming post so stay tuned for that latté.

4)     Invest In The Stock Market

Similar to your retirement funds, choosing to invest in the stock market sooner than later is ideal. If you aren’t comfortable making this jump alone, that is completely understandable. Consult with a financial advisor to help determine your risk tolerance and get your portfolio started. I will advise that regardless of the professional advice you seek, it is always wise to fully understand where your money is going.

5)     Home Improvement

Using your tax refund to make home improvements can always be helpful. Whether it’s painting a room or finishing a later project, your home should always be comfortable. Depending upon the type of home improvements completed, it may increase the value of the home.

6)     Prepay Mortgage

Majority of homeowners are aware they have the option, but few understand the great degree of benefit that is derived from mortgage prepayments. Mortgage prepayments not only decrease the future payments but also increase the amount of equity in the home. Some investors even view prepayments as a top retirement strategy.

7)     Invest In Yourself

I cannot stress enough the importance of personal development. If you don’t sow into your life and bet on yourself, then how can you expect others to bet on you. We’re on the pursuit of good to great. Purchase some new books, enroll in a course, invest in a lifecoach.

8)     Start A Business

The average millionaire has approximately seven streams of income. What are you waiting on?? Let’s go get it!!

 

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