Tag Archives: 401k

Where Does All Our Money Go?

This weekend, I had two things to accomplish; get my tax return in order and begin to shop for a new truck. Given that this is a very busy time of the year for me, I decided to quietly shop on-line for that new pickup while she got all of her tax documents together.

Since I am the financial professional of the household, I decided to make preparing our return and buying a new truck a simple two-step process.

Step one: Review our gross income to begin tax preparation while getting a better handle on our finances. Step two: Convince my wife that there was still time this afternoon to go kick a few tires. Surely, given our income level, a new truck is affordable.

Step one started on a high note, both of our W-2 forms showed that we earned more money than we had in 2016. Should I get the white or the black, 5.7L 4×4 Toyota Tundra?

Step two was about to begin when my wife, who is not an accountant, asked a very simple question, “Why doesn’t it feel like we make this much money?” Followed by the second more difficult question, “Where does all of our money go?”

Being an accountant, I thought I would summarize our gross income, reduce it by our taxes withheld and then detail our household expenses to best illustrate how we spend our money.

My project got cut short when we began reviewing the difference between gross and net pay. I felt the purse strings start to tighten, and rationalized that a gently treated preowned Tundra might be just as good. Thanks to the Current Tax Payment Act of 1943, this upper-middle income family had 47% of our income taken off the top for Federal, State, Social Security and Medicare taxes. Tax withholdings aside, that still left us with plenty for a used truck, right?

Slowly my wife crossed her arms and asked about our 401(k) deductions. I reviewed with her the benefits that I was sure that she already knew about and explained that that too can directly off the top. Given the dollars that come directly from our gross pay, she suggested that it might be wise if we budget our expenses for the new year.

I am a CPA; I could surely whip up a budget before the dealership closed. We proceeded to draft our 2018 budget, while I closely monitored the time.

With 53% of our after tax and retirement savings left to budget, the numbers quickly unfolded; deduct 18% for housing, 8% for auto, 7% for food, 6% for healthcare, 5% to charity, 5% to savings, that left 4% for everything else. I thought we were done; I’ll take the 2014 black 4×4 Tundra please. “Did you budget for our after tax season trip to the Bahamas?” she asked.

It was then that I realized, my 2007 Toyota worked just fine.

Jamie Boulette, CPA has 30 years of tax experience and is managing director of Perry, Fitts, Boulette & Fitton CPAs with offices in Bath and Oakland. He can be reached at jboulette@pfbf.com or 371-8002.

How Can Life or Career Changes Affect Your Tax Return?

Have you recently changed jobs? Started your own business? Maybe welcomed a child to your family? Well, all of these situations could have tax consequences or benefits, requiring some financial planning.

When changing jobs, there are several things to consider. Did you have a 401(k), 403(b) or another form of retirement plan at your old job? If so, rolling over your retirement plan to your new employer or to an individual retirement account, may provide you with more control over your retirement savings. Also, if you recently relocated for a new job, you may be eligible to deduct moving expenses. In order to qualify, the following three requirements have to be met: your move is closely related to the start date of your new employment, your new job is at least 50 miles from your prior home, and you must have worked full-time, for at least 39 weeks during the first 12 months, in the new area where your job is located. If your job relocation satisfies these requirements, you are entitled to deduct reasonable and qualifying moving expenses. Along with considering these additional items and benefits when changing jobs, make sure you receive your W-2 from your previous employer.

Have you recently started a new business or hobby and are trying to figure out how to report the income on your tax return? The first step is to consider whether the activity is in fact a business or a hobby. The key way to differentiate between a hobby and a small business hinges on your profit motive, or lack thereof. If you have a profit motive, and spend a considerable amount of time participating in your new venture, you are likely operating a small business. Unincorporated small businesses generally report income and expense on a Schedule C of form 1040. If your new adventure is really a hobby, income is reported on line 21 “Other income”. Expenses are deductible only if you itemize deductions, and are subject the 2% limitation. In either case, it is important to keep detailed records of your income and expenses.

Finally, and most exciting to me is how a new child can affect your tax situation. If you added a child to your family at any time during the year you qualify for an additional dependency exemption, which phase out for higher income families, for 2017 are $4,050. The addition to the family may also allow you to become eligible for the child tax credit, and credit for child and dependent care expenses. These credits have income limitations, but are helpful when trying to combat the expenses of a new child.

There is a lot to consider during life and career changes, but our experienced accountants at Perry, Fitts, Boulette & Fitton CPAs are happy to assist you through these tax and financial changes. We want you to be well prepared for the 2017 tax filing season. If we can further assist, please don’t be afraid to stop in at either our Oakland or Bath offices.

Nick Deblois is a Staff Accountant at Perry, Fitts, Boulette & Fitton CPAs. He works closely with other senior staff members of the firm, honing his talents regarding tax and accounting matters. He can be reached at nick@pfbf.com or 207-873-1603.