Archives for February 18, 2019

These days, a large number of workers are opting to do their jobs from home rather than drag themselves into an office day in, day out. There are several benefits to working remotely. First, there’s the savings from not having to pay to commute, not to mention the time saved by avoiding traffic. Working from home can also make for a less distracting environment, and that, in turn, can lead to less stress and better output.

But there’s a downside to working from home, too, and it’s not just the missed opportunity to socialize in person. Research shows that managers continue to value face time, and as such, might favor employees who come to the office regularly over those who do their jobs remotely — even when those work-from-home arrangements don’t impact individual performance in any way.

If you’re pursuing a remote work arrangement, be aware that it might negatively impact your career. At the same time, recognize that there are some things you can do to avoid that fate.

Being present from afar

Let’s be clear: Working from home won’t always hurt your career. But there is something to be said for interacting with your manager and colleagues on a regular basis. Missing out on the chance to develop those relationships could impede your ability to climb the ranks or snag important assignments, even if your boss isn’t excluding you intentionally.

Another thing to realize is that proximity often lends to decision-making. If your manager comes upon a project to give out, it may go to the first person who walks by their office in an effort to get moving. And if you work from home, that person won’t be you.

Still, that doesn’t mean you can’t take steps to better ingrain yourself in office life. First, make a point of attending meetings. Technology makes it easy to do so remotely, so find out what your team is up to and ask to be an active participant.

Next, make a point to touch base with your colleagues and manager every day or at whatever frequency is reasonable for your boss, given his or her schedule. A quick email or instant message will remind the folks you work with that you’re plugging away and available should your help be needed.

At the same time, don’t take working remotely to an extreme. If it’s feasible for you to get into your office once a week, make that effort, even if it means dealing with a packed train or road congestion on the way in. If that’s not possible, show up occasionally and make it an event. Schedule meetings with key people and give plenty of notice so that the folks you work with recognize that you’re going out of your way to connect in person.

In an ideal world, working from home wouldn’t limit your career prospects in any way. But if your manager values in-person communication, your arrangement might hurt you even if you’re the hardest worker on your team. The more of an effort you make to stay involved in workplace happenings and communicate with your manager and peers, the less backlash you’re likely to face from what should be an overwhelmingly beneficial arrangement.

When you’re retired, you need all the income you can get. This income may derive from many sources, including retirement investment accounts, pensions, and Social Security. However, there’s a good chance you’ll lose at least part of your retirement income to the IRS — and potentially to state taxes as well.

The good news is, not all of your retirement income is necessarily subject to taxation. It’s important to understand how tax rules apply to different sources of funds in retirement so you can plan accordingly and be prepared when taxes come due. This guide will help.

How are retirement benefits taxed?

Federal tax rules for retirement income differ depending on the source of the income, as well as on how much you make. Things get even more complicated when it comes to state taxes, because there are big differences from one state to another.

Here’s what you need to know about how the federal government and the state you live in may tax different benefits.

Social Security benefits

The federal government taxes Social Security benefits, but only if your income reaches a certain threshold.

Income is calculated in a special way when determining whether your Social Security benefits are taxable. Your income is determined by adding half your Social Security benefits to all your other taxable income from other sources. Some tax-free income, such as municipal bond interest, is also added to determine your total income.

If your income using this calculation exceeds $25,000 as a single filer or $32,000 when married filing jointly, you could be taxed on up to 50% of your Social Security benefits. If your income exceeds $34,000 as a single filer or $44,000 when filing as married filing jointly, you’ll be taxed on up to 85% of benefits.

As for state taxes, only 13 states tax Social Security benefits: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia. If you live in one of them, you’ll also need to learn your state’s rules for when and how your benefits will be taxed.

Pension income

 If you’re lucky enough to get a pension from your employer, the entire amount you receive is probably taxable income federally. This is the rule if you didn’t contribute any of your own money to your employer’s pension plan. However, if you contributed to your pension with after-tax funds, you don’t have to pay taxes on any part of the pension that’s considered to be a return of these contributions you made. The IRS explains how to determine what portion of your pension isn’t taxed, but the general rule is that you divide the contributed amount by the number of months the IRS estimates as your remaining life expectancy.

The IRS treats pension income you’re taxed on as ordinary income, so you’re taxed on the entire amount at your normal tax rate. Because we have a pay-as-you-go system in the U.S., either taxes will need to be withheld from your pension checks or you’ll need to pay estimated taxes to avoid penalties.

As far as state taxes go, if you live in Alaska, Florida, Illinois, Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington, or Wyoming, your pension income won’t be taxed. If you live in any other state, you’ll need to find out your local rules. Many other locales also exempt some types of pension income from taxation, including Alabama, Arkansas, Colorado, Delaware, Georgia, Hawaii, Iowa, Kentucky, Louisiana, Maine, Maryland, Michigan, Missouri, Montana, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, South Carolina, Utah, Virginia, and Wisconsin.

Retirement account distributions

When you make withdrawals from traditional retirement accounts, including IRAs, 403(b)s, 401(k)s, 457s, and thrift savings plans, the federal government will tax you on those distributions as ordinary income. That means you’ll pay taxes based on whatever your tax rate is. If you have Roth accounts, on the other hand, you aren’t subject to any federal taxes on withdrawals as long as you’ve complied with requirements related to your age and how long you’ve had your accounts open.

State tax rules also differ on how retirement account distributions are taxed. In Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming, there is no state income tax, so you don’t have to worry about being taxed on your account distributions. In other states, including Colorado, Georgia, Kentucky, Illinois, Michigan, Mississippi, Oklahoma, Pennsylvania, South Carolina, Virginia, and West Virginia, at least some retirement account distributions are tax exempt. You can check with the Department of Revenue where you live to find out the specific rules.

Plan ahead and be prepared for taxes

It’s important to be prepared for the reality that taxes will take a bite out of your retirement income. When you’re figuring out what your retirement income will be, don’t forget to consider the taxes you’ll need to pay — and if you want to limit the amount the government gets, consider investing in Roth accounts so you can make withdrawals tax free.

Countless television shows glamorize the concept of flipping a house. They make it appear relatively easy to find a property that’s priced well below its market value due to it needing extensive repairs. If you’re handy and can paint, it seems like profits are just there for the taking.

There are even seminars on house flipping (sometimes offered by the stars of the above-mentioned shows), all designed to sell you on the idea that house flipping requires hard work but could be a path to getting rich. It can be, of course, but the reality is that house flipping comes with a lot of risks.

You only make money on a flip when purchase price plus renovation costs comes out to less than you sell the house for. It’s possible to do that in some cases, but unexpected costs, changing markets, or an inability to find a buyer can turn profits into losses.

Flipping usually involves extensive repairs and renovation.

How flipping works

Before you can flip a house, you need to purchase one. That requires capital. 41.6% of flippers use savings from their primary source of income as their funding source according to data from a new Porch.com survey, followed by 30% who take out bank loans, 8.6% who use an inheritance or one-time windfall, 6.2% who borrow from family, and another 6.2% who borrow from a private lender.

In most cases, that means that flippers are putting their financial health on the line, risking either their savings or their credit. That’s a bigger risk than it used to be when flipping was largely an activity conducted by professionals with considerable building experience. Today the prevalence of side hustle flippers — people who are not professional housing contractors — has increased risk. The presence of more flippers in a market can drive up the price of homes that can be flipped, lowering profit margins and removing margin for error.

As you can see from the chart above, underestimating the cost was cited more than any other flipping mistake at 63.5%. That’s something that’s actually shown quite often on the various flipping shows.

In general, people underestimate the cost or don’t budget enough for repairs because there’s something wrong that can’t be seen until work begins. It might be a huge plumbing problem, asbestos, structural defects, or a host of other things. Flippers can also lose money if the market does not support the price they intend to sell at, or if a renovated home takes too long to sell.

“With extra costs hiding in renovations, these monetary mistakes are likely rooted in construction and design,” according to the Porch.com report. “By location, most mistakes were made in the kitchen, which also happens to be the most common room to remodel. Ordering or installing the wrong countertops or cabinets was the biggest mishap for that room, followed by getting the wrong fixtures or materials for the bathroom.”

Not for everyone

Just because it’s possible to make money flipping houses does not mean everyone, or even most people, should try it. In reality, flipping is dangerous: In many cases, houses are bought without inspections, and sometimes without the buyer even being able to see the interior. Even if you can fully inspect the home, a lot can still go wrong. This isn’t a space where amateurs should expect to make money as a sideline.

Paying off debt is a worthy goal, and it should be near the top of your financial to-do list if you have high-interest loans. But freeing yourself from the burden of debt is rarely easy or straightforward — especially if you owe many different creditors.

There are two important decisions you need to make and they will determine the trajectory of your debt-payoff process. Which debts to pay off early and which debts to repay first? We’ll help you decide, below.

Which debts should you pay off early?

While becoming debt-free is a good goal, it doesn’t necessarily make sense to focus on aggressively paying off every creditor you owe — especially if doing so leaves you little money for other important financial goals, such as investing and saving for retirement.

Typically, if you have any high-interest debt, you should absolutely pay that off first, as soon as you possibly can. Any debt with interest rates in the double-digit realm should be repaid in a timely fashion, including credit card debt, any bills in collections, payday loans, and certain medical debts.

Sometimes it makes sense to pay off your car loan early because your vehicle is depreciating all the time. Paying interest on an asset that’s constantly losing value isn’t ideal, so if you can realistically pay off your car loan and save for a new car in cash, paying off this debt early is even smarter.

When it comes to other kinds of debt, though, an early payoff isn’t always optimal. In particular, paying off mortgage debt and federal student loan debt early is often not a good use of your money. These debts typically have pretty low interest rates, and they payments on your interest may even be tax deductible.

You can deduct up to $2,500 of student loan interest, as long as you don’t exceed the income limit, and even if you don’t itemize. And, if you do itemize on your tax return, you can deduct interest on a mortgage up to $750,000, or up to $1 million if you bought your home before December 2017.

So, how should you decide whether to pay off your particular debts early or not? In general, if the interest you’re paying on your debt is less than what you could likely earn if you made investments in the stock market, paying off the debt early doesn’t make a lot of sense.

Which debts should you pay off first?

Once you decide which debts to pay off ASAP, you must decide the order in which you will tackle your debts.

To be effective with your extra money, you will choose one debt to focus on paying down at a time. Sure, you could make small extra payments spread across all your debt, but that will take forever. It’s much better to devote all the extra money you can toward making extra payments on one particular debt while continuing to pay the minimum payment to all other creditors you owe.

The biggest question to answer is which debt should you put your extra money toward. You have two choices:

The debt snowball: This method is making extra payments to your debt with the lowest balance first, ignoring differences in interest rate. Only after the smallest debt is paid off do you begin making extra payments on your next-largest debt. Simply add the payment you were making on the smallest debt to the next-largest debt, and so on until all debts are paid.

So, if you were making a $200 monthly payment on a credit card with a $1,000 balance, and a $50 minimum payment on a card with a $2,500 balance, you would pay off the $1,000 balance first. You then add the $200 to your monthly minimum on the card with the $2,500 balance, and your new monthly payment for that card would be $250.

The debt avalanche: This method is paying off your debt with the highest interest rate first. You devote all your extra cash to paying off that debt and when the balance is paid in full, you take the money you were paying toward it and start adding it to the minimum payments you were making on the debt with the next-highest interest rate. You continue this approach until all your high-interest debt is paid.

The debt avalanche is the approach that makes the most mathematical sense. If you use the snowball method and focus on repaying debt with a smaller balance and a lower interest rate, you’ll be stuck paying off your higher-interest debt for a longer period of time. The longer your high-interest debt remains, the more interest will rack up, which increases your overall debt load and extends this debt repayment journey.

The benefit of the debt snowball, however, is that you’ll score quicker wins, a mind trick not to be scoffed at. Studies have shown people are more motivated to continue their debt payoff efforts with this approach.

Ultimately, you need to make the choice about whether you can stay motivated enough to use the debt avalanche method. If you can, this is the best approach. But if you have a hard time sticking to financial goals and you need a little psychological boost to stay on track, using the debt snowball method can actually be smarter for you.

Decide on a debt payoff method today

Whatever method you choose, the important thing is to actually start paying off your debt.

The sooner you work out a budget that allows you to pay extra to any debts each month, the more quickly you can free yourself from burdensome interest charges and have the financial freedom to do better things with your money.