Do you have enough emergency savings?

A December 2015 survey by a consumer financial services company showed that 36% of the people who participated said they dealt with their most recent unexpected expense by using savings. Would you be part of that group? Here are tips for starting your “rainy day” fund.

Define how much emergency savings is enough. A good starting point is to plan for your emergency fund to cover three to six months of expenses. Another good starting point: Ask yourself how much you’ll need to cover minimum monthly expenses without resorting to credit cards or lines of credit. Your assessment of an adequate balance will vary based on your financial situation, including the vulnerability of your income. For example, a one-earner household is more vulnerable than a two-earner household when it comes to paychecks, so the one-earner family generally will need to set aside more for emergencies.

Track how much you already have set aside. Include all sources in your accounting. For instance, some companies provide payment for accrued vacation and/or sick leave to laid-off employees. If your company provides this benefit and you maintain significant balances, you may not need as much in an emergency fund to help you weather an unexpected layoff.

Decide whether to pay off bills first. Putting excess cash toward high interest credit card balances might make more sense than funding a savings account that earns a much lower rate of interest.

Keep your funds liquid. Emergency money should be easy to get at. You don’t want to have to sell investments at a potential loss or pay withdrawal penalties in order to cover an unexpected hit to your finances. Look into savings or money market accounts as places to accumulate cash.

We can help you estimate how much to stash away in your emergency fund. Give us a call for help establishing a savings goal for those stormy days.

No need to itemize to claim these deductions

Are you part of the approximately 68% of taxpayers who IRS statistics say claim the standard deduction instead of itemizing? If so, you can still deduct some expenses on your 2015 federal income tax return.

  • Individual retirement account (IRA) contributions – For 2015, you may qualify to deduct up to $5,500 in contributions to a traditional IRA. That increases to $6,500 if you’re age 50 or older. Income limitations may apply in some cases. The same limits apply to Roth IRA contributions, which are not deductible.
  • Health Savings Account (HSA) contributions – HSAs are IRA-like accounts set up in conjunction with a high-deductible health insurance policy. The annual contributions you make to your HSA are deductible. Contributions are invested and grow tax-free, and you withdraw the money tax-free to pay unreimbursed medical expenses. The HSA contribution limit for 2015 is $3,350 for individuals and $6,650 for families. You can contribute an additional $1,000 when you’re age 55 and older.
  • Student loan interest and tuition fees – Deduct up to $2,500 of interest on student loans for yourself, your spouse, and your dependents. For 2015, you can also deduct up to $4,000 of tuition and fees for qualified higher education courses. Income limitations apply, and you must coordinate these deductions with other education tax breaks.
  • Self-employment deductions – If you’re self-employed, you can generally deduct the cost of health insurance premiums, retirement plan contributions, and one-half of self-employment taxes.
  • Other deductions – Don’t overlook deductions for alimony you pay, certain moving expenses, and early savings withdrawal penalties. Educators can deduct up to $250 for classroom supplies purchased in 2015.

Contact our office for more information on these and other deductions you may be entitled to claim on your 2015 return.

Depreciation breaks boost tax deductions

Did you buy equipment or other business assets during 2015? Here are the current rules for maximizing your tax deduction.

● Section 179. Under code Section 179, you can expense many types of otherwise depreciable property used in your business. Both new and used assets qualify for Section 179.

For 2015, the maximum amount you can expense is $500,000 of the cost of qualifying property you began to use during the year. The $500,000 is reduced when the cost of the property you purchased during the year exceeds $2,000,000. Your deduction may also be limited by the amount of your business income.

Planning tip: The Section 179 amounts are now permanent. Beginning in 2016, both will be adjusted annually for inflation.

● Bonus depreciation. In addition to Section 179, you can benefit from the 50% bonus depreciation deduction for tangible personal property that you purchased and placed in service during 2015. Bonus depreciation is generally available for new assets that have a useful life of 20 years or less.

Planning tip: The December “extenders” tax law made bonus depreciation available through 2019, though the deductible amount will decrease in 2018 and 2019.

Please contact us about the latest depreciation breaks available to your business.

Who can be your dependent?

You might believe a “dependent” is a minor child who lives with you. While that is essentially correct, dependents can include parents, other relatives and nonrelatives, and even children who don’t live with you. Here’s an overview of the dependency exemption.

Exemptions and your taxable income. Each dependent deduction is worth $4,000 on your 2015 federal income tax return, and reduces your taxable income by this amount. You’ll lose part of the benefit when your adjusted gross income reaches a certain level. For 2015, the phase-out begins at $309,900 when you’re married filing jointly and $258,250 when you’re single.

Definition of a dependent. A dependent is a qualifying child or a qualifying relative. While there are specific rules, very broadly speaking, a dependent is someone who lives with you and who meets several tests, including the support test. For qualifying children, the support test means the child cannot have provided more than half of his or her own support for the year. For qualifying relatives, the support test means you generally must provide more than half of that person’s total support during the year. There are many exceptions. For example, parents don’t have to live with you if they otherwise qualify, but certain other relatives do. If you’re divorced and a noncustodial parent, your child doesn’t necessarily have to live with you for the dependent deduction to apply.

Who can’t be claimed? Your spouse is never your dependent. In addition, you generally may not claim a married person as a dependent if that person files a joint return with a spouse. Also, a dependent must be a U.S. citizen, resident alien, national, or a resident of Canada or Mexico for part of the year.

For a seemingly simple deduction, claiming an exemption for a dependent can be quite complex. You’ll want to get it right, because being able to claim someone as a dependent can lead to other tax benefits, including the child tax credit, education credits, and the dependent care credit.

Contact our office to learn who qualifies as your dependent. We’ll help you make the most of your federal income tax exemptions.