What it Costs You to Wait: Money School

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In today’s final episode of the Money School Bonus Series, I’m sharing why waiting costs you money when it comes to building financial security and how you can start investing to grow your wealth today. 

Join me to learn how you can push past your perfectionism, take action and start growing your money to gain financial freedom. 

Also mentioned in today’s episode: 

• Why waiting costs you money 2:15

• Why perfectionism is holding you back 2:40

• Why financial security is so important 6:25

• What is a cost curve? 7:47

• Why investing is a long term game 9:25

• The power of compounding 12:03

If you enjoyed this episode, please rate, review and share it! 

Links:

https://www.sunlighttax.com/deductionsguide

https://go.sunlighttax.com/free

Don't Hustle, Don't compromise, Just Maximize: Money School Bonus Series

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Today, I’m rounding out the Money School Bonus Series by sharing how you can maximize the money you already have and get your money to work for you. 

Join me in this episode to learn a 5 minute rundown of exactly what money buckets you need and what order to fund them, plus what I call the “Power Triangle.” It’s the secret sauce behind making your money work for you. I teach you the 3 parts of the Power Triangle, plus action steps, so you can build generational wealth for your family and your future.

Also mentioned in today’s episode: 

• Why you should have a plan for your money 2:14

• The magic benefits of capitalism 6:45

• The major buckets of money you should be funding, and in what order 11:05

• The Power Triangle of maximizing your money 22:35

If you enjoyed this episode, please rate, review and share it.

Links:

Register for the Free Class
Visual Guide to Your Tax Deductions

Roth vs Traditional IRA: Does it Even Matter?

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Today, I discuss something I’m asked about a lot as a tax professional- which is better for a creative entrepreneur–a Roth or a traditional IRA? Which one you should focus on to get the most out of your retirement account?

My controversial opinion? This question can put folks into a state of Tiny Detail Exaggeration Syndrome (credit to Mister Money Mustache for that great phrase): I think it actually can distract you from the real issue. 

I’m diving into the core differences between these two IRA accounts, important issues to be aware of, and what you really need to stay focused on to get your retirement fully funded. 

Also mentioned in today’s episode: 

• What is an IRA 2:31

• Why you should prioritize your workplace 401k first 3:08

• Roth IRA vs Traditional IRA as a self-employed creative entrepreneur 5:48

• Tax shelter- what is it and how does it work? 6:10

• The importance of investing your money 7:30

• Does it matter which one you choose? 17:30

If you enjoyed this episode, please rate, review and share it.

Links:

https://go.sunlighttax.com/register

https://www.sunlighttax.com/deductionsguide

Summer Camp and the Child Tax Credit

This article has been edited and updated as of 8/5/22, which is important, because this credit changed between 2021 and 2022. It originally appeared in ArtFCity

http://artfcity.com/2017/07/25/summer-camp-a-break-for-taxes-and-parental-sanity/

I’m taking a summertime break from my normal Sunlight Tax duties in order to research and write new tax articles for you, and to direct the summer programming at “camp mom.” I will be showing up throughout the summer with more tips and advice on taxes and personal finance for creative economy workers. In the meantime, in honor of all the working artist parents out there, here’s a post on the tax credit that applies to summer camp.

As any parent of young kids knows, juggling work and childcare is hard. And paid childcare is impossibly expensive. Many budget-conscious artist parents who manage to fit their work into school time hours – and avoid babysitters and after school care – simply don’t have that option come summer. Here’s some good news. If you pay to send your child to summer camp so that you can go to work, that camp expense qualifies for the Child and Dependent Care Tax Credit.

In March 2021, the Child and Dependent Care Tax Credit was expanded. It allowed bigger dependent-care expenses, a higher percentage of them, and more taxpayers qualify to take the credit. While there was an attempt to extend this legislation to 2022 and beyond, the expansion did not pass, so the law has now reverted back to pre-2021 levels.

What is the Child and Dependent Care Tax Credit? It’s a credit meant to help working parents with the cost of childcare. Depending on your income and how much you spend on childcare, the Child Tax Care Credit allows you to take up to 35 percent of your childcare expenses up to $3000 for one child or up to $6000 for 2 or more children as a tax credit. It applies to a host of scenarios and is relatively generous.

Because it’s a tax credit (rather than a deduction), it saves you a lot more money. Let’s review the basics of why a tax credit is better than a deduction: 

A tax deduction means that you may subtract the expense from your taxable income. So if you had $50,000 of income, and had a $1000 tax deduction, you would now have a taxable income of $49,000 ($50,000 income – $1000 deduction).  If you were taxed at the 25% rate, that means that your tax due would drop from $12,500 ($50,000 income x 25% tax rate) to $12,250 ($49,000 income x 25% tax rate). You save $250 ($12,500-$12,250). Deductions lower your taxes.

But compare that to a $1000 tax credit. A tax credit lowers your tax due (not just your taxable income) dollar for dollar. If you make the same $50,000 of taxable income, and are taxed at the same 25% rate, then your tax due is $12,500 ($50,000 income x 25% tax rate). A $1000 tax credit reduces your tax due to $11,500 ($12,500 tax due – $1000 tax credit). So the $1000 tax deduction saves you $250, but the $1000 tax credit saves you $1000. That’s a much bigger impact.

There’s one more wrinkle, which is that some tax credits are “refundable.” When you have a fully refundable tax credit (the Earned Income Tax Credit is one of these), if your tax credit reduces your tax liability past zero, the government will actually send you a refund. In other words, if you owe zero dollars in tax, and you get a $1000 tax credit, you will get $1000 back from the IRS in the form of a refund. A non-refundable tax credit can reduce your tax due down to zero, but if it goes past zero, you lose the rest. The Child Tax Care Credit is a fully refundable tax credit for people who lived in the US for at least half the year (and it is a non-refundable credit otherwise). (There are endless details in tax, no?). 

To take the Child and Dependent Care Tax Credit for your kid’s summer camp expenses (or regular school-year childcare), here’s what you need to know:

• The credit is based on the first $3000 of camp/care expense for your first child, or on your first $6000 for two or more children. If you spend more than that (and if you’re like me and many other working parents, you probably will), you aren’t going to get any additional benefit. This limit is a combined total – so it’s fine to add up multiple camps, or camp plus a school-year afterschool program, babysitter, or regular full- or part-time childcare.

• If your household income is less than $15,000, you qualify for the maximum credit of 35% of your expenses up to $3,000 for one dependent or $6000 for two or more, which is a $1,050 credit for one child or $2,100 for two or more.

• Taxpayers with income between $45,000 and $438,000 can get up to 20% of eligible expenses as a credit for a maximum of $600 for one child or $1,200 for tow or more.

• It is only for children under age 13, or dependents of any age who can’t care for themselves (such as an infirm/disabled parent or adult child under your care)

• Although I’m writing about this credit in the context of summer camp, you should know that all of these kinds of care qualify for the credit:

  • Day care

  • After school care

  • Babysitters (provided the babysitter isn’t your spouse or your child/stepchild or anyone that you claim as a dependent on your tax return). Note that this is only for babysitting that allows you to go to work or look for work – date night doesn’t qualify.

  • In-home assistance for a member of your family unable to care for himself, including a spouse.

These kinds of expense don’t qualify:

• Tutoring

• Private kindergarten or private grade school

• Overnight camp

And this is what you will need to get the credit:

• You need to record the name, address, and taxpayer ID number (a social security number or TIN for an individual or an employer ID number [EIN] for a business) of the care provider on your tax forms. You will need to ask the camp (or babysitter) for this info.

• You must be paying for the summer camp (or other care) so that you can work, or look for work. You also qualify for the credit if you are a full-time student for 5 months or more of the tax year. Both spouses must earn income (or be a full time student or looking for work) in order to take the credit. Unemployment income does not count as earned income for the purposes of this credit.

• If you’re married, you must file a joint tax return (unless you’re legally separated). This credit is not available for people married filing separately.

• Income under $438,000 if you are married filing jointly.

The Child and Dependent Care Tax Credit is a comprehensive and helpful tax credit. Take advantage of it. And enjoy your summer.

DISCLAIMER: True tax advice is a two-way conversation, and your accountant needs to hear your full situation to apply the rules correctly in your case. This post is meant for general information only. Please don’t act on this alone.

Bio: Hannah Cole is an artist and Enrolled Agent. She is the founder of Sunlight Tax.

The Second Best Time is Now

Or, investing for retirement, even when you’re not perfect

You’re having drinks with a friend after an opening, and the topic turns to money. Life is expensive, the city is expensive, and the distant menace of retirement? Forget it. You turn back to your $14 cocktail and feel depressed.

But wait. Aren’t you the same person who is taking charge of her career? Aren’t you setting new goals, prioritizing your studio time, building your network, learning how to market yourself? You’re smart, and you’re tackling the other hard stuff. So why are you cheating yourself on the bigger picture? You can do this. No need to let the perfect be the enemy of the good here. There is an apt proverb about planting trees: The best time to plant a tree was twenty years ago. The second-best time is now.

But first, a little digression about beauty. And compound interest.

Sara Jones, drawing on paper, 2016.

This is a drawing by Sara Jones. Beautiful, right? It has a lovely feeling of calm about it. Remember this feeling as you read on about saving.

I think saving for the long term can be intimidating, because it seems that we’ll need so much money that we just get overwhelmed. It’s easy to focus on the short term (My rent is so high! Childcare costs are ridiculous! How can I really cut any of my spending? How is $100 a week going to make a dent?). It’s easy to think “I’ll do that later, when I have more money.” But the difference between starting now or ten years from now is bigger than you think.

Now look back at Sara’s drawing. See the curve? That’s the image that should be in your mind as you think about saving. That’s what happens to your money. Why? Because of your friend, Compound Interest.  

There’s a lot of great explanation out there about the benefits of compound interest. But if you’re a visual person, like me, it’s really in the picture. So here’s another one, this time with numbers:

This is a chart showing what compound interest does to a one-time $5,000 initial investment. Don’t let the details throw you - the curve is the important part. The light orange part shows the money you put in. The dark orange part is all growth. When you put money in a savings vehicle (like an Individual Retirement Account (IRA), invested in index funds, which have a historic average growth rate of 8% - more on this in a future post), compound interest works to multiply your initial investment over time.

Here’s how it works: Your 5,000 earns 8% interest, so at the end of year 1, you have $5,400. The next year, you make 8% not on 5,000, but on $5,400, yielding $5,842. It doesn’t seem like much yet, but the magic happens near the end. So this little bit of money, after 40 years of compounding, turns into $108,622.61. Now we’re talking.

Now what happens if you make your $5,000 investment an annual habit? Basically, this curve gets steeper. That means you grow real wealth. Check it out:

It’s important to notice the numbers here. The chart reaches into the millions now, not hundreds of thousands. And the light orange part, which represents money you put in, is growing each year, as you make your annual contribution. So in forty years, you now have $1,507,527.81.

Compound interest is your friend. It means you don’t need to save as much as you might fear you do in order to retire.

But what if you wait ten years to start? On the first chart, your $5,000 is worth over $180,000 after 45 years. But after 35 years, ie, ten fewer years of growth, it’s worth about $90,000. That ten years cuts the money in half. Now you see why the first principle of retirement saving is “start early.”

And as a tax professional, I will tell you that your annual contribution limit to a tax-sheltered IRA is even a little higher than in my example. The 2022 limit is $6,000 (and if you’re over 50, it’s $7,000). And you have until April 15, 2023 to contribute for 2022 (yes, it’s retroactive). Opening one is as easy as opening a bank account. I recommend Fidelity or Vanguard.

So don’t let perfection stand in the way of action. Maybe you can’t put aside as much as you’d like, but you can put aside something. But don’t wait for some elusive “better time.” Remember the proverb about the trees? The best time to save was twenty years ago. But the second best time is now.

Disclaimer: True tax advice is a two-way conversation, and your accountant needs to hear your full situation to apply the rules correctly in your case. This post is meant for general information only. Please don’t act on this alone.