Many U.S. citizens live abroad for a period during their schooling, career or retirement. Foreign countries, even ones sharing borders with the United States, have different currencies than the U.S. dollar. When you exchange or otherwise convert U.S. dollars into a foreign currency, you may be able to buy more or fewer dollars in the local currency, depending on that day’s exchange rate movements. These currency fluctuations in relation to the U.S. dollar can be substantial. As a result, it’s important that you develop a plan when converting large sums of money from one currency to another to reduce your chances of losing a lot of value. (more…)
In this article, we discuss the Smiths’ and the Jones’ different lifestyle spending needs, and the annual savings necessary to maintain their lifestyle in retirement. Let’s walk through the steps these families should take each year to help them stay on track to achieve their goals.
1. Determine the cost of your annual lifestyle spending needs, and how much of that will continue into retirement.
- Smiths – They currently earn $150,000 a year. After excluding retirement savings and expenses that wouldn’t continue into retirement, such as the cost of commuting to work, they determine that their annual spending is $90,000.
- Joneses – They currently earn $500,000 a year. After backing out retirement savings and expenses that wouldn’t continue into retirement, this couple finds their annual spending is $250,000. This higher spending need is in part due to living in an expensive city and having a mortgage on their home and vacation property. About 10 years ago, this couple’s income was $175,000, with spending needs of $115,000.
Take-away: To determine your lifestyle spending needs, you need to exclude retirement savings and expenses that wouldn’t continue into retirement. Expenses that remain include utilities, taxes, food, entertainment, travel, etc. Many households carry a mortgage for the first 10-15 years into retirement. If you don’t think you’ll pay off your mortgage by the time you retire, make sure to include this housing cost in your spending estimate. You need to be aware of how much your lifestyle spending changes over time to make sure it’s sustainable in retirement. It’s far easier to spend more money than to cut back on your lifestyle. (more…)
Do you wish you could have done more to lower your tax bill or increase your refund for 2017? The Tax Cuts and Jobs Act of 2017 will have a major impact on many families, so it’s especially important to re-evaluate your tax strategies this year.
Check out our latest eBook for things you can do now to save on your tax bill in 2018. Topics include:
Highlights from tax reform
Itemized deductions – what’s left?
New strategies to consider
Classic strategies that still work
With all the recent changes to the U.S. tax code, it’s a good time to revisit different tax planning strategies. One strategy I’m often asked about is whether a Roth conversion is a good idea. The universal answer to that question is “maybe.” Unfortunately, there isn’t a simple rule of thumb that applies to everyone. There are many factors that need to be examined, and my goal is to tell you the most common reasons you might want to do a Roth conversion.
Before I do that, it’s important to note a particular change in our tax code with the passage of the Tax Cuts and Jobs Act (TCJA) of 2017. In the past, a recharacterization was done if you needed to “undo” the Roth conversion. You can still recharacterize any Roth conversions done in 2017, but starting in 2018 and beyond, this is no longer allowed for Roth conversions. An exception is if you make a Roth contribution, and then learn that you earned too much income during that year. A recharacterization will still be allowed in this case so that you’re not subject to the excess contribution penalty tax. (more…)
When I got married in 2016, my wife and I updated our paycheck withholding status to “married” and kept our previous withholding allowances the same as part of the flurry of changes that followed. In the past, we generally received a tax refund when filing as single with two allowances. We could now itemize our deductions since we bought a house and had mortgage interest, real estate taxes, sales tax and a small amount of charitable giving. Even with several thousand dollars of deductions above the standard deduction, we’re still going to owe Uncle Sam a meaningful amount. To avoid underwithholding taxes in the future, as well as a penalty, we took the W-4 tables for two earners seriously and chose the proper amount of extra tax withholding from each paycheck going forward. (more…)
With the doubling of the standard deduction and elimination or reduction of several itemized deductions, you might think there aren’t many opportunities left to itemize. That isn’t the case at all, depending on your circumstances. With the recent tax reform, it’s never been a better time to figure out what you can still itemize in 2018 and in future tax years. To keep track of these deductible expenses, it’s important to be organized and maintain a box or folder to store your receipts throughout the year. This level of organization is necessary whether you work with a tax professional or prepare your own taxes.
Deductions fall into these categories:
- Medical and dental expenses
- Taxes you paid
- Interest you paid
- Gifts to charity
- Casualty and theft losses
- Other miscellaneous deductions
Certain categories, including medical and dental expenses, casualty and theft losses, are subject to a floor that only permits you to deduct expenses above certain thresholds, such as 7.5% of your adjusted gross income (AGI – IRS Form 1040, line 38). Your AGI is your total amount of income from all sources after subtracting certain deductions, such as alimony paid, HSA contributions, the deductible part of self-employment taxes, etc. For example, if your AGI is $100,000 and the threshold for medical expenses is 7.5%, then any qualifying expenses above $7,500 can be included and deducted. (more…)