Common Cents # 35 - Year End

 

Year end

 

As 2020 draws to a close, there are a few things we can do to ease into the new year. I like to make a folder or large envelope labeled “2020 taxes.” In the next few weeks, we will be getting W-2s, 1099-INT, 1099-Misc, 1099-SSA – Social Security statements, charitable giving receipts, and a brand new one this year – 1099-NEC.

1099-NEC stands for “Non-employee compensation.” If you got paid for work where you are not an employee, you will likely get a 1099-NEC. All of these things go into the folder for 2020 tax prep. When we are confident that we have everything, it is time to do the tax returns.

If we are reasonably competent and all of our income is reported on W-2’s, we work and live in the same state, and we have minimal deductions, we can probably do our own taxes online.

If there are complications that add to the complexity of the return, we may want to consult a tax professional. Typical complications are multi-state income, K-1 income, self-employment income, retirement account roll-overs or unusual distributions, and so forth. Don’t fret over taxes. There are H&R Block and other retail taxes services all over the country that do millions of tax returns just like yours every year. Don’t wait until April 13 to begin looking for the papers you will need to complete your return. 

In addition to preparing to do the tax return, my wife and I have our annual planning meeting on January 1 of each year. We bring our dreams and plans, as well as the net worth or balance sheet from this year as well as the past few years to see how they compare one year over another.

We forecast, as best we can, what major expenses we will have. This year we bought a new car, last year it was a furnace, and few years before that, an air conditioner. Mainly we make sure we are still on the same page as far as hopes and dreams are concerned. One of us doesn’t want to be dreaming of a new house while the other is digging in to stay forever.

The January 1^st planning day is when we plan vacations, determine days off, as well as any other major decisions. This year will be different because most of 2020 plans got cancelled or rolled into 2021. Plan, but be flexible is what we learned this year.

If you are a “family of one”, this exercise is still valuable. If there are children in the family, include them in the planning meeting to hear their hopes and dreams for the year ahead.  Vacation planning and family purchases should include everyone involved. Everyone should have a voice and a vote.

Most of us will be glad to see 2020 go, but we should still pack it up neatly and put it away in an orderly manner so we are ready for an exciting new year of life.

 

Common Cents # 34 - Little Things

 

Little Things

In Shawn Kinkade’s blog a few weeks ago he said that “How we do anything is how we do everything.” In other words, our operating mode is consistent through all aspects of our lives. One example he gave is the person who is consistently behind on their personal bills or can’t keep track of their bank balance. If that person starts their own business, their chance of success is limited if they are not able or willing to track their company’s financial health.  If they are not going to immediately change their way of doing things, it would be nearly impossible to retain competent employees and keep the business accounts in order. Small things must be in order before we move on to larger endeavors.

In Luke 16: 10 NIV, Jesus said, “Whoever can be trusted with very little can also be trusted with much, and whoever is dishonest with very little will also be dishonest with much.”

Children learn by being given small chores or a small allowance to gradually increase their experience with responsibility. By the time they reach adulthood they should be capable of handling adult responsibilities. But we can do the same thing with our own disciplines when we realize that we are not handling situations in a way that translate to greater responsibilities that we are preparing to come our way.

As a young person I intentionally bought modest cars because I wanted to test my responsibility and maintenance skills. I learned about car polish and buying tires and all of the other things I needed to know not only to be a responsible car owner but to get to school on time. I worked up to more expensive or sophisticated cars, not just because I could afford them, but because I believed I was ready to be the owner of this kind of car and I was fairly confidant in my ability to make good maintenance decisions for the vehicle.

In our personal finances we can do the same thing. We can buy a few stocks or put a small amount of money in a mutual fund just to see what result is achieved. We would not put all of our savings in the stock market if we have never made those kind of investments before. We start small and build on what works.

If you are longing to start your own business, develop a realistic business plan and seek the best counsel from as many experts as you can find in that field.  Consider the value of starting small to confirm the business plan’s merit. Businesses grown from scratch have a much better chance of being successful in the long-term than those that are started with a bunch of somebody else’s money.  Avoid debt.  Avoid debt. Avoid debt.

I started in the photography business in 1973 with a basic darkroom, a Canon F-1, and $600. I started making money the first month and within a few years it was a very successful business. I never borrowed money for the business. Even though I did not know the verse from Luke at the time, it turned out I was faithful with a little and was given more.

It appears that Shawn Kinkade is right, “How we do anything is how we do everything.”

Common Cents # 33 - Putting Away 2020

 

There are just a few weeks left in 2020, time to start putting it away. Just about everyone is looking forward to getting past the year 2020, but this should actually be something completed every year. I am talking about physically putting stuff in a box.

Sometime around the middle of December when the last bills are paid and into the first of January every year, we start gathering up the assorted pieces of paper representing the previous year. This includes receipts, credit card and utility bills, bank statements and the like. Anything that we will likely not need again goes in a box, or if we are fortunate, a large envelope. If we have moved much of our business online, we may not have many paper documents at all. Hold out anything that is multiyear, or that we may need for tax purposes. Items like receipts for things that may have a long-term warranty like a furnace or appliance should be stored another place for future access. Put auto maintenance receipts in a separate file labeled for that automobile for the day you need to know how old the battery is or when the brakes were changed last.

Gas receipts and everything that is basically done, can go in a box that we can seal up and reasonably expect to never need again. We then label the box “2020 Receipts – Shred in 2025.” It is always possible to keep these documents sorted in this way through the year, but it feels great one day in January to complete the task.

Tax returns are “live” or considered active for three years. If you are audited or need to produce a receipt for a claimed deduction, like a charitable donation or medical expense, it will be within three years. The IRS is now sending out letters requesting further information for 2018 tax returns, the ones we filed 18 months ago. 2016 tax returns are history unless a criminal investigation is ongoing and we’d likely know what that would be about already.

With that in mind, five years is plenty long enough to keep any receipts that don’t involve long-term consequences. Some business expenses such as major equipment that is being depreciated or the roof on your home or a rental house, you can decide to keep the paperwork longer or file them differently to make these easier to access.

With the old receipts safely in a sealed box, we can put them in long-term storage such as on a shelf in the basement. Then pull out the oldest box, the one that says, “Shred in 2020 or 2021.” These are the ones from 2015. Take the oldest box to a commercial shredder if you do not own a cross-cut shredder. UPS stores, Staples, and many other places will shred your documents for about $1 per pound. If you have not needed to see these receipts or statements in five years, you won’t.

Don’t just pitch the old records in the trash because they likely contain account numbers, bank information or other personal information that you don’t want to fall into the wrong hands. A large number of scams or frauds are started with thieves just going through someone’s trash. A shredder will dump your documents in a machine and confetti comes out the other side. You are now good to go and get on with your life in the exciting new year!