Affordable Care Act – the Subsidies

Due to the 2016 presidential election, parts of the Affordable Care Act described below may change. The current rules will likely stay in place through 2017. We’ll provide updates as they occur.

When an employer provides health insurance, you receive tax advantages that you don’t get when purchasing health insurance on your own. All the premium costs – whether paid by the employer or employee – are excluded from taxable income (both income tax and FICA taxes).

By contrast, individual health insurance you purchase on your own is paid for with after-tax dollars. These payments don’t receive the same tax advantages, so purchasing $1 of health insurance on your own is more expensive than purchasing $1 of health insurance through your employer plan

To address this, the Affordable Care Act (ACA) created a tax credit for individuals who purchase health insurance through the ACA marketplace. The credit is available to taxpayers earning up to 400% of the poverty level in the current year. For a household of two, that limit is $64,080 in 2017. A taxpayer’s income for this calculation is adjusted gross income (AGI), plus tax-exempt interest and any Social Security that was excluded from taxable income. So a married couple with no kids who earn $50,000 in 2017 would qualify for a tax credit if they had to purchase their own health insurance.

Because tax credits aren’t calculated until the end of the year, you have to pay your health insurance premiums all year in order to get money back when you file your taxes after the end of the year. This is where subsidies come in. (more…)

When It Makes Financial Sense to Get a New Car

For some, a car is simply something that gets you from point A to point B, and there’s no reason to get the newest or most luxurious car. The challenge of holding onto a car for 10 plus years, though, is that you reach a point where you need to either continue putting money into the car for repairs, or look to buy a new car. Today’s cars are built to run 150,000 to 200,000 miles or more, but repairs and maintenance start to creep up when you pass the 100,000-mile mark. Considering that the average age of cars on the road now is about 11.4 years, many car owners are in this situation.

According to Edmunds, if the cost of repairing the car is greater than either its value, or one year’s worth of new car payments, then it’s time for a new car. If the repair is half the value of your car, though, then it makes sense to do the repair.

To find your car’s value, start by finding your car’s year, make, and model on Kelley Blue Book, Edmunds or NADA Guides. Evaluate how long the repair can extend the life of your car. Don’t forget to check for recalls on your vehicle to avoid paying for repairs that the dealership will repair for free.

Reasons to consider a new car (more…)

Private College 529 Plan Explained

istock_000010843373xsmall_croppedWhen it comes to saving for your family’s college education, a 529 plan is one of the best savings vehicles out there. Its high allowable contributions, tax-free growth and withdrawal for education expenses, as well as the control the owner can exercise over the account without it being included in their estate, make this a unique investment. The more common type of 529 plan is a state sponsored offering that includes a number of different mutual funds to invest in stocks and bonds. With this type of 529 plan, you have the opportunity to receive excess investment returns and growth of principal; however, there’s also the risk of losing money, like with any other stock or bond investment.

With the Private College 529 Plan, families can prepay tuition that can be used up to 30 years later at today’s tuition rates. The tuition certificates can be redeemed at one of the nearly 300 participating private colleges. These include schools like Stanford, Seattle Pacific University and Pacific Lutheran University, and the list keeps growing every year. The difference between the Private College 529 Plan and state prepaid tuition plans like the Washington Guaranteed Education Tuition (GET) program is that it has far more participating schools, and it’s not tied to a state’s budget or operations. The program can spread investment risk across all of the participating schools throughout the country.

How does it work?

Similar to prepaid tuition programs, you’re buying tuition certificates or units that are guaranteed for up to 30 years after the purchase date at all participating private colleges at the time of purchase. You don’t need to select a private school to attend up front, but you can choose five sample colleges to determine your child’s progress toward covering the tuition cost at those schools. Unlike traditional 529 plans that can pay all costs for college, this plan can only be used to pay for tuition and fees and any other required fees for enrollment.

Tuition certificates must be held for at least 36 months before they can be redeemed to pay for tuition. So if you buy a certificate when your child is a high school senior and they’ll be attending a private college the following fall, they’ll have to wait until their senior year of college to redeem the certificate for a full academic year. (more…)

Your Credit Score Explained

You might want to open a new credit card to receive a bonus for signing up, or reduce the number of credit cards in your wallet with an annual fee, but opening and closing credit card accounts can impact your credit score. The question is, just how much does it impact your credit score, and is it worth sweating?

Most banks and credit lenders use FICO, which is the most common type of credit score. FICO scores range from 300 to 850. The score is based on the credit files of the three national bureaus – Experian, Equifax and TransUnion – with the following breakdown:

  • Payment history 35%
  • Amounts owed 30%
  • Length of credit history 15%
  • New credit 10%
  • Types of credit used 10%

Payment history (35%)

This makes up the largest component of your score, which makes sense because your payment history demonstrates your ability to make payments on time. Even if you cancel a credit card, the payment history on that card will stay on your credit report for 10 years after the day it was closed. Positive credit data, created by otherwise using the card for purchases and making payments, stays on your account indefinitely.

If you’re just making minimum payments, it still counts as paying your credit card as contractually agreed, so that alone doesn’t hurt your credit score. If you find yourself forgetting to make payments, though, consider adding calendar reminders.

Amounts owed (30%)

Also known as debt burden, this category measures how much you’ve charged in relation to your overall available credit. This can be called your credit utilization rate, and it’s best to keep it lower than 20% of overall limit. Credit bureaus use three other metrics in addition to the credit utilization rate, including the number of accounts with balances, the amount owed across different types of accounts and the amount paid down on installment loans.

Canceling a credit card that has a high limit can hurt your credit score because it impacts your utilization rate. One way to remedy this is to ask for a higher credit limit to make up for the overall decrease on a remaining credit card. Be careful not to close credit cards before a big purchase like a home or a car, because you want your credit score to be as high as possible to get the most favorable interest rate and terms available.

Having a credit utilization rate of over 30% can hurt your credit score. If you’re just making minimum required payments, it’s likely that you’re also using more than 30% of your available credit, and the balance keeps increasing due to interest building up rather than being paid down.

Length of history (15%)

As your credit history ages, it can have a positive impact on your credit score. The two metrics tracked include average age of accounts and the age of your oldest account. It can be said that the oldest credit cards are the best credit cards for your credit score. This also takes into account how long other types of credit (auto, student, mortgage, etc.) have been established.

Closing a credit card may reduce the average age of accounts. Opening a new credit card will also reduce your average age of accounts, which hurts your score. The ideal age of credit card accounts is eight years or older.

New credit (10%)

Recent searches (also called hard inquiries) into your credit history, such as when you apply for a new credit card, can hurt your credit score. Hard inquiries also occur when a lender is evaluating whether to extend credit to you for an auto loan, student loan, business loan, personal loan or mortgage. Keep these inquiries to a minimum.

A soft inquiry, which occurs when opening a new brokerage account or part of a new employer’s background check, does not impact your credit score.

Types of credit used (10%)

This includes installment (auto loan), revolving (credit card), consumer finance (high interest rate, short-term loans like from Payday loans) and mortgages. Having a mix of different types of credit helps your score. This is based on the number and mix of accounts. If a loan is paid off recently, it will eventually be removed from your history.

The creators of the FICO score have an online credit score estimator you can use. Lastly, if you’re looking for a new credit card or you want to better understand the benefits of your existing credit cards, visit NerdWallet for comparison information.

Tyler Bartlett featured in “How to Go from Middle Class to Millionaire”

Our very own Tyler Bartlett was recently featured in an article from Guide Vine: How to Go from Middle Class to Millionaire, about the patience and discipline required to become a millionaire. Here’s a snippet:

Here is the good news: millionaire status is very much within the reach of America’s middle-classes who earn higher-than-average incomes. A typical middle-class family has a combined household income of $97,000, with upper middle class households bringing in incomes above $100,000. Bartlett offers an example of a couple living in Seattle. Like typical upper middle class Americans, both are college-educated professionals with good, steady incomes. The couple, a real estate and a sales executive, together earns $150,000 per year. For 13 years, this couple saved as much as $1,000 per month. They maxed out their 401(k)s. Today, they have more than $1 million in investible assets. “They took hard steps,” said Bartlett. “They worked full-time jobs and had the discipline to do the right thing financially.”

Do you have what it takes? Read the full article at Guide Vine here.

Tax Benefits that Come with Raising Kids

We all know the cost of raising a child is significantly higher than any tax benefit you may receive. Every dollar you save on taxes counts, especially when you have more than one child. Whether it’s through tax deductions, exemptions or special tax-advantaged accounts, taking the necessary steps can help reduce the cost of raising a child.

Dependent exemptions

On a 2016 tax return, your spouse, any dependents and you receive a personal exemption that reduces your taxable income by $4,050 each. Let’s say you’re in the 28% marginal tax bracket and receive four exemptions for your spouse, two kids and you. This leads to a tax savings of $4,356 [($4,050 x 4 exemptions) x 28%]. When you start a family, make sure to adjust the tax withholding from your paychecks to include the correct number of exemptions. This reduces the tax withholding, thereby increasing your paycheck to account for the additional exemptions.

Child tax credits

For each dependent under age 17, you may be eligible to receive up to a $1,000 tax credit for each child. Credits are better than deductions and exemptions as they directly reduce the taxes you owe versus reducing your income that’s subject to tax. The credit amount starts to get phased out at income levels of $110,000 on a joint return, $75,000 for an unmarried individual and $55,000 for married filing separately. The credit is reduced by $50 for each $1,000 your household income exceeds these income levels, so it’s completely phased out at $130,000, $95,000 and $75,000, respectively. This credit is also partially refundable, meaning that in some cases, the credit may give you a refund, even if you do not owe any tax. This is also known as the additional child tax credit.

Consider a married couple with two children under age 10 and a household income of $108,000. This puts them near the start of the 25% marginal tax bracket after subtracting the standard deduction and exemptions. So the $1,000 credit for each child in the 25% marginal tax bracket provides for $8,000 ($2,000 / 25%) of income not to be taxed. Another way of looking at it is that this couple would owe $2,000 more in taxes if their dependents were age 17.

Dependent Care Flexible Spending Account (FSA)

The $5,000 that can be contributed to this special account is not subject to payroll taxes, federal taxes and most state taxes. It’s a reimbursement account for qualified childcare expenses for dependents up until age 13. This FSA can be used to pay for daycare, nanny services, summer day camps and many more. Make sure to spend the money in the account by year end as it’s a use it or lose it situation, where any leftover balance is forfeited. However, your plan may offer a grace period extension that could allow you to use the unused funds within 2 months and 15 days after the plan year ends. Unfortunately, dependent care FSAs are only available through employer benefits plans.

To illustrate the tax savings, consider a couple living in California with taxable income of $250,000. Their marginal tax rate is 33% to federal, 9.3% to California and 7.45% to payroll taxes (Social Security and Medicare), leading to an overall marginal tax rate of 49.75%. The $5,000 contributed to a dependent care FSA effectively saves you $2,488 on taxes for expenses you would be paying normally with after-tax dollars.

Child and dependent care tax credit

If your employer doesn’t offer a dependent care FSA, or you have more than one child, you may still be able to qualify for a tax credit to cover part of the costs for daycare. The maximum amount of expenses you’re allowed to claim is $3,000 for one child or $6,000 for two or more children. You can use 20% to 35% of these expenses to get a tax credit, depending on your income. If your income is $43,000 or more, then you can use 20% of these expenses. There’s no limit on income for claiming this credit. (more…)