States Still Not Recovered Jobs Lost In Recession

Finance Gourmet on June 24, 2015

A researcher published some data showing how the individual states are doing recovering jobs lost during the recession. The highlight is that 15 states have not recovered all of the jobs lost during the recession. The interesting part is what that might mean.

(Note: this is from total nonfarm employment and counts both part-time and full-time jobs)

state employment recovery map

The 15 states that still haven’t recovered all the jobs lost during the recession are:

  • Alabama
  • Arizona
  • Connecticut
  • Illinois
  • Maine
  • Mississippi
  • Missouri
  • Nevada
  • New Jersey
  • New Mexico
  • Ohio
  • Rhode Island
  • West Virginia
  • Wisconsin
  • Wyoming

If your life is all about politics, I’m sure you’re rushing to count Democrats and Republicans as a way to “prove” that your side is the best side. Sorry, but that shows little understanding of economics. But, if you insist, there are more Republican governors than Democrat governors on the list. Of course, to be fair, a lot of those states are the so-called purple ones.

A more realistic analysis shows some obvious ones.

Nevada and Arizona were the poster children of over-heated housing markets that collapsed, so it’s natural, they are one the list. On the other hand, Florida was hit pretty hard by the housing bubble but is not on the list.

I can’t honestly remember the last time Alabama or Mississippi had job growth, and part of the issue in Ohio and Illinois is still the fact that manufacturing isn’t what it once was and those states still have a long way to go toward overcoming that.

Another interesting looks shows that none of the states with higher minimum wage laws are on the list either. Maybe raising the minimum wage doesn’t wreck the economy of a state, or maybe it just takes longer.

North Dakota is still a high job growth state overall, despite the fact that the employment picture there is worsening, proving that when it comes to an economy highly dependent upon oil jobs, it isn’t local government, so much as global oil markets that determines how well the job picture looks.

Wisconsin, where Democrats bemoaned Governor Scott Walker’s dismantling of union power, is on the list, but in all fairness is so close to net zero that it actually shows up on the graph in the zero to 2.50% category.

Colorado, Utah, and Texas are all doing very well. None of those states participated much in the housing bubble that smashed the economy, so that probably helped as much as any policy decisions, although neither did Wyoming and it’s very negative.

Of course, the major factor missing from this whole exercise is that there is no data about the KINDS of jobs we are talking about here. For these purposes, a job is a job, so a minimum wage job counts the same for recovery purposes as a high-paying job. Also, part-time jobs count the same as full-time jobs in this analysis.

Also, a deeper look at the trends, shows that every state except West Virginia has added jobs since May of 2014. That means, even where the full recovery isn’t complete, things are still moving in the right direction, and Nevada had one of the largest percentage gains. Maybe that housing bubble burst is finally working its way through.

The reality is that the U.S. economy is too big to be shrugged off by individual states. If America is doing well, most of the states will be too, and vice versa. Still, it’s always interesting to get a look at data.

If construction is any indicator, things in Colorado are going to be booming for a while.


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Finance Gourmet on June 15, 2015

Recently, I did a review of the Acorns app. If you are not already familiar with the Acorns savings and investing app, you should read that for an introduction to using Acorns first.

Are Acorns Investments Good Portfolios?

The idea of the Acorns automatic money savings app is that it rounds up all of your transactions and automatically invests that money for you. There are some nuances about how Acorns works you should understand first. Money is only transferred once the amount of the round-ups is at least $5, and only happens once per day.

Before we get too in-depth here, it is important to remember a few things. First, when you get started with Acorns, we are talking about a very small amount of money. That means that as far as real dollar amounts go, the difference in percentages won’t be big. For example, if you have $100 in your Acorns account the difference between 10 percent and 8 percent (whether up or down) is just $2. In other words, this not something to wring your hands over, especially in the beginning.

Where Does Acorns Invest Money?

Of course, the whole point is for your automatic savings to add up and grow over time, so it is necessary to understand where Acorns is investing our money. So, let’s take a look.

Acorns has five different portfolios that it uses and automatically re-balances for all users. This is a typical robo-advisor setup. The Acorns app helps you pick which portfolio based on various risk tolerance questions, or you pick yourself. The five portfolio types are very traditional, even if what is in them is not. The five Acorns portfolios are Conservative, Moderately Conservative, Moderate, Moderately Aggressive, and Aggressive.

These portfolios are pretty typical as far as the stock to bond ratio is concerned.

  • Aggressive Portfolio – 90% stocks / 10% bonds
  • Moderately Aggressive Portfolio – 75 / 25
  • Moderate Portfolio – 60 / 40
  • Moderately Conservative – 50 /50
  • Conservative 40 / 60

What Investment Does Acorns Use

One of the interesting things about Acorns investment strategies is that all five portfolios use the same six investments. All the investments are index-based Exchange Traded Funds, or ETFs. All six ETFs are regular, publicly traded ETFs. They are not specific to Acorns. In other words, you can look up the prospectus, history, and ticker symbol on any finance website or tool you like.

The six Acorns ETFs are (Name, Ticker Symbol, Discussion):

  • Vanguard S&P 500 ETFVOO – The bread and butter of stock investing, this is an index-based ETF that attempts to replicate the SP500 index by investing in large U.S. companies.
  • Vanguard Small-Cap ETF – VB – This is the small-cap stock ETF for Acorns. It invests in small U.S. companies. Specifically, it is designed to track the CRSP US Small Cap Index.
  • Vanguard FTSE Emerging Markets ETF – VWO – This is the international component of the portfolio. Specifically, this portfolio invests in a “sampling” of companies based in so-called emerging markets. The largest investments are in China, Taiwan, Brazil, India, and South Africa.
  • Vanguard REIT ETF – VNQ – This fund invests in Real Estate Investment Trusts, or REITs, and is designed to track the MSCI US REIT Index. A REIT is a way to invest in the real estate market through stocks. So, assuming everything goes according to plan, REITs would go up when real estate is going up, and vice versa.
  • iShares 1-3 Year Treasury Bond ETF – SHY – This is the low-risk investment in the line-up. Nothing lowers your risk like short-term U.S. Treasuries. There is probably a way to take the riskiest investment in the world, combine it with short-term Treasuries and come up with a Moderately Conservative portfolio. This fund is essentially one-step riskier than a money market fund.
  • PIMCO Investment Grade Corporate Bond Index ETF – CORP – This ETF is the “bonds” part of the Acorns investment portfolios. These are investment-grade bonds (not junk bonds) and is designed to track the BofA Merrill Lynch US Corporate Index.

So are Acorns investment strategies good?

Acorns Investments Review Good, Bad or Ugly?

As I’ve written multiple times before, when it comes to investing, what matters far more than investment selection is the amount of money you invest, and how long you keep it invested. That is true here as well. Remember, compound interest takes a long time to work its magic. The good news is that the whole point of the Acorns app is to keep you investing steadily over time. That is going to be a far bigger component of your long-term investing success.

That being said, the investments are solid, if somewhat unusual.

First, this is all index investing. That means these investments are cheap. Fees won’t be eating into your returns, and you don’t have to worry about “beating the market” since the point of index-based funds and ETFs is not to beat the market, but rather to BE the market. If the market is up 7 percent, so are you. This is good.

Second, the diversification in the Acorns portfolios is good, but not traditional. Again, while we are talking about hundreds or thousands of dollars, it really isn’t material, but if you ever did end up with a lot of money in your Acorns investment account, you would want to ensure that you compensate, if necessary, in other areas of your portfolio.

Typically, a financial advisor or financial planner would divide up your money in stocks and bonds to achieve a portfolio that matches your risk tolerance. At most major brokerages or investment firms, that would entail mutual funds or ETFs just like with Acorns. The difference is in two major areas, and one minor one.

First, most diversified portfolios include some exposure to international stocks, and so does Acorns. However, Acorns only includes emerging markets, that is economies that are still developing. That means your Acorns portfolio does not include any investments in Europe, Japan, or Australia. This isn’t necessarily good or bad, but it is different. Since emerging markets are more volatile this choice means dialing back the international exposure quite a bit for the more conservative settings.

Second, the inclusion of a REITs part of the portfolio is non-traditional as well, at least one this big. The Aggressive portfolio, for example, includes 30 percent invested in REITs. The theory is that real estate is a non-correlated asset to the stock market and therefore might do well when stocks are declining (or vice versa). The catch here is that REITs are still stocks, and stocks, even real estate stocks, don’t fully decouple from the correlation of the markets. If there is one area that gives me pause about how good the Acorns portfolios are, it is the large allocation to REITs.

Here is my point. Below, you’ll see the annual performance of the specific REIT ETF that Acorns invests in. While the size of the moves are different, there is a lot in common with the ups and downs of the stock market. Part of that is that good economy is good economy (and in 2008 vice versa).


The next image is a similar chart to the above for an S&P 500 ETF. In this case, this is for the SPY S&P 500 ETF. This is for example purposes because the actual Vanguard SP500 ETF used is not old enough to have the years before 2011 included. So, there are some differences but a lot of the overall direction and magnitude are in the same ballpark.

acorns investments sp500

Here is what we are looking at. The REITs are indeed different, but often move in the same direction, with the very notable exception of 2007 when real estate was falling apart, but the stock market hadn’t figured that out yet. Obviously, there is some value in including REITs in a diversified portfolio, but the 30 percent number seems an odd way to push for more aggressive returns. Let me be clear, this is not wrong or bad, just not traditional.

The final, smaller difference is the lack of a mid-cap investment option. Perhaps this is where that extra REIT allocation is coming from. Mid-cap stocks often end up being the best performers over the 10 year period, partly because they are bigger enough than small-caps to not have such volatile swings (especially in down markets) but smaller enough than large-caps to have plenty of room to grow.

Again, this isn’t wrong, but the typically financial advisor will send you home with a portfolio that has a mid-cap option (maybe split into mid-cap growth and mid-cap value) and with a smaller amount allocated to REITs. In some ways, this difference in portfolios offers even more diversification for your overall assets.

In the end, the Acorns investments are solid portfolios. They are built using low-cost ETFs which is important both for you the investors, and for the company. For you, the anchor of higher fees isn’t weighing down your returns. For Acorns, the ability to get into and out of ETFs cheaply is important to its low-cost, no minimums fee structure.

Finally, Acorns automatically rebalances your portfolio for you. This is huge, and maybe more important to your long-term success than getting the particular investments or percentages just right. The reality is that if you look at a chart of which asset class performed best each year, you’ll see that it varies greatly. Sometimes, small cap stocks are the big winners, and then the big losers in the next year or two. If you don’t rebalance your portfolio, you end up just riding the wave up and down. However, with rebalancing, you pull money out at the top, and put it in at the bottom. This is how to buy low and sell high without ever knowing anything about stocks, and like everything with Acorns, it’s automatic.

Acorns rebalances your funds by taking your incoming contributions and investing them where you are low. More importantly, it will actually transfer funds between investments quarterly if things get more than 5 percent out of balance. That means that Acorns will be selling after that 30 percent run up to lock in some gains.

If you like the idea of automatically investing over the long-term to build up a nice portfolio, then the Acorns portfolios are going to be just fine for achieving that.




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Finance Gourmet on June 9, 2015

The U.S. national deficit marked up some interesting news coverage these last few months. First up, was news at the total national debt hit $18 trillion earlier this year. Then, seemingly different news when a May report showed that the U.S. ran its largest budget surplus in seven years during April. What does all of this deficit stuff mean, and does the national debt really matter? (The government often runs a surplus in April; it’s when the majority of U.S. taxes are collected, so it is a larger than normal inflow of funds.)

The Deficit vs The National Debt

us deficitsIt is important to understand some terminology. First, the national debt, is the total amount owed by the United States government. Contrary to popular belief this debt is not owed “to China” or to any other government. Rather, the debt exists in the form of Treasury Bills, Notes, and Bonds (including those U.S. Savings Bonds your grandmother gave you). These all trade as securities on the open market. The Chinese government is free to buy them if it wants, and so are you, and anyone else. Owning these securities entitles you to an interest payment and the repayment of principal on a predetermined schedule. Neither you, nor China, gets any additional rights, no matter how much you own.

The deficit is the amount of money the government takes in, minus the amount of money it pays out. You can measure this over any number of time frames. It is popular to report an annual deficit number. So, the 2015 deficit would be all the money received by the federal government during 2015, minus all of the money paid out.

This number is always negative, unless the U.S. economy is growing strongly and tax revenues are up. This is what happened during part of the Clinton Presidency when the U.S. ran an annual budget surplus, fueled, ironically, by the Internet Bubble of the late 1990s.

So, does the deficit and national debt actually matter?

The answer, is not really, kind of, sort of, and it depends.

First, if you are thinking that someone proved that higher deficits impact the economy negatively, you are kind of correct. However, that paper has since been disproved as it turns out the math relied on for the conclusion was incorrect. In other words, there is no yes, or no on how a large deficit affects the economy.

If you are thinking of comparing the U.S. to Greece, that isn’t accurate either. The problem with Greece is that its economy is separate from Europe’s, but its currency is not. This is not an issue for the United States.

So, what is the actual problem for U.S. deficits?

The real issues come in the form of interest rates and inflation. Assuming the government ran out of people and investors willing to buy Treasury Bonds, it would have to pay higher interest rates. In fact, whenever the government needs to borrow more money, it holds an auction to sell bonds. This sets the interest rates.

However, even though the debt is higher than it has ever been, interest rates are very low. The reason, is the U.S. economy.

Ironically, inflation is low for the same reason. The U.S. economy is not generating higher wages, or greater employment, so inflation is not rising either.

In other words, the economy has much more of an affect on the deficit than the deficit has on the economy.

Theoretically, there would come a point where this would no longer be the case. The catch here, is inflation. As low as inflation is right now, it does exist, and 30 years from now, 18 trillion won’t be worth what 18 trillion is today. In other words, a lot of the debt we have now is getting smaller just by existing longer. As long as the national debt doesn’t outpace actual inflation, nothing really happens except politicians get to excitedly proclaim that they can “fix” the debt.

For long-term investors, and for your own personal financial planning purposes, the debt is a non-issue.

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Finance Gourmet on June 4, 2015

As most regular readers of this financial planning blog know, I used to be a professional Certified Financial Planner for several years. That gave me a lot of insight into just what a financial advisor does and does not do for his or her clients, and how much that is worth.

Susie Orman is a former financial planner who decided that the whole profession was basically rubbish. Other former financial advisors are now out there saying that these professionals are indispensable. The truth, as with most things lies somewhere in between. So, how does a robo-advisor stand up to a real financial advisor?

Robo-Advisor vs Financial Planner

Let’s start with getting some facts straight. First, robo-advisor is a fancy, sensational term for bold headlines. The reality is that the so-called robo-advisors are actually computer programs that build and investment portfolio, usually out of mutual funds and ETFs, for you. There are no robots sitting behind desks anywhere (although that would be cool.) Second, a robo-advisor really isn’t an advisor or financial planners so much as an investment manager.

The reason these things matter, is because, unlike most people’s perceptions, investing your money is actually not the most important thing a typical financial advisor does. The days of a fast-talking New York broker calling you and screaming, “Buy!” or “Sell!” into the phone are pretty much over. For almost everyone without a million dollar portfolio, the only thing your human financial planner will ever do with your money is put it in mutual funds or exchange traded funds (ETFs) which will actually handling the buying and selling of stocks for you.


Believe it or not, many advisors don’t have that much variety in their investments between customers. Most advisors working with clients that have less than $1 million dollars of investable assets, aren’t out there determining which mutual funds are best for you specifically. Instead, they determine which mutual funds are the best to use for their customers overall, and then slot each individual into those funds using individual percentages. If you and a friend have the same advisor, compare your portfolios some day. You’ll see a lot of the same investments, even if the percentage amounts in each investment are different.

Check this out to see if Credit Karma is legit.

A robo-advisor does essentially the same thing. The company, using whatever method they think works best, selects a portfolio of investments to be used by the robo-advisor. This field of investments is the same for all clients. What changes is what percentages of your money goes into each investment. Then, certain investments are added, or removed, for more or less risk tolerance.

For example, if you are young, and profess a high risk tolerance, you might get a specific small cap international fund, or a micro-cap fund. On the other hand, if you are nearing retirement and profess a low risk tolerance, those funds will not be in your portfolio at all. We recently reviewed Acorns, an app that transfers small amounts of money into an investment account run by a robo-advisor. Your funds are all invested in pre-chosen portfolios run by computer, or robo-advisors.

Now, neither the robo-advisor, nor the human advisor, have a single portfolio used by everyone, but you’ll find a small stable of investments in common used among most all of their clients.

Note that this all changes once you have more than approximately $1 million worth of investable assets. At this point in time, certain financial advisors start calling themselves wealth managers, and they will build portfolios for you out of individual stocks. The reason for this is two-fold. First, at about this dollar amount, you can actually buy enough individual stocks to achieve the proper diversification for a smart portfolio. Second, at about this amount, your financial advisor needs become a lot less about financial planning, and a lot more about making the money you already have earn more. (Think about it. If you have a million dollars out there being invested, do you really need a plan to pay for your kid’s college education? Just use some of your money. That’s your plan.)

Which Is Better Robo-Advisor or Human Financial Advisor?

Overall, the robo-advisors are likely to have better investment returns than human advisors over a long period of time. That is because human advisors charge higher fees. As long as you aren’t using bozo-style mutual funds, the difference, over the long-term, in diversified investment portfolios is often relatively small. This is sort of the point of diversification, to take the big volatility out of investing. However, the constant drag of higher expenses should make robo-advisors out-perform over time.

However, that out-performance may be relatively small. Especially, for people without a large investment portfolio, saving the right amount, the right way, is far more important than how much money your investments return. A person starting at zero, earning just 7% but saving 10% into their 401k will have oodles more money upon retirement than someone earning 10% but only saving 7%. Mistakes along the way like borrowing from your 401k or withdrawing early from an IRA will cost you much more that high fees. And these are exactly the kinds of things a human advisor can sit down and help you avoid.

In the end, whichever kind of advisor actually makes you get started saving and investing is the right one for you. If you are the kind of person who will open an account at 2:00 in the morning, but won’t call to schedule an appointment with a human, then go with a robo-advisor. If you’re the kind of person who is afraid to hit submit because you want someone to double check your work, then go with a human advisor.

We’ll break down some of the different robo-advisors here on Finance Gourmet in upcoming articles.

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Finance Gourmet on June 1, 2015

Interesting story this morning. It seems U.S. comsumers increased their savings rate in the month of April even though incomes increased during the same period. Generally, rising incomes, means increased spending, but that didn’t happen in April. This is good news and bad news. The good news is that it means Americans are not increasing the amount of debt they have. The bad news is that they are not spending their money in order to stimulate the economy either. With an economy that is overwhelmingly dependent upon consumer spending, no spending means no growth. Coupled with the Fed ending its stimulus programs, and you have recipe for stagnation.

The upside is that without consumer spending increasing, there is little chance of any real inflation, so as long as the hawks at the Federal Reserve can keep from trying to fight for who is the biggest hawk, there is no reason to raise interest rates either.

In the end, this is even mor confirmation that while the economy is moving in the right direction, it continues to do so very, very, slowly.

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Finance Gourmet on May 28, 2015

This is getting ridiculous.

The IRS was hacked again. This time, hackers were able to circumvent the security protocols used to prevent unauthorized use of the online system to get a tax transcript. For those of you that aren’t familiar with the concept, you can see a tax return transcript example. Basically, a tax transcript is like a school transcript. It shows a summary of all your dealings with the IRS.

irsIt shows how much taxable income you had, what you paid in taxes, what, if anything, you owe, and so on and so forth. It also includes your name, address, and social security number. It also includes all your spouse’s information if you file jointly.

In this particular case, it seems that the hackers did not break into an IRS database, or use phony security logins. Instead, they used the online tax transcript ordering system to just order the transcripts. As the IRS notes, it does take a fair amount of personal information to be able to order a tax transcript in the first place. The gold mine for thieves might be the spousal information. Just because I have a bunch of info on one person, doesn’t necessarily mean I have the same info for their house.

The IRS has taken the ordering system offline while it tries to figure out what to do next.

The worst part of this data breach is that, unlike all those other big hacks of Home Depot, and the like that you heard about, the IRS is part of the government. As such, it has no need to offer you even the token identity theft monitoring service provided when a private company gets hacked.

People notified by the IRS that their information has been compromised will need to be extra vigilant about monitoring their credit report, which is tricky because you can only get one free credit report from each credit bureau per year. One trick is to use the system to space your credit report orders from each company by every 4 months. That way, you get some form of ongoing monitoring.

It can also be useful to sign up for a free credit monitoring service like the one provided by Credit Karma, or some credit cards or banks. These services don’t necessarily let you see your full credit report any more often, but they will send you an email alert if things start happening on your credit report. That way, you can get notification of accounts being opened in your name.

Until Congress stops being bought and paid for by big banks, and the credit bureaus, this is the best you can do.

And, maybe someday, the IRS and the rest of American business will find it in their best interest to actually use some real security to protect all of our data.

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Finance Gourmet on May 21, 2015

Now, Los Angeles becomes the biggest city to pass a $15 per hour minimum wage law. Note the very big difference between having a law, and having an actual $15 minimum wage, which it does not, and will not until 2020.

Almost exactly one year ago, I wrote about how raising the minimum wage doesn’t really end up hurting businesses or the economy, in large part because minimum wage jobs are already, well… minimum. The idea is that minimum wage jobs pay the minimum, are done by the minimum number of people, and cannot be outsourced to somewhere where you could pay less than the minimum. The only possible downside, then, is a mass closing of minimum wage businesses. This was because Seattle had just become the biggest city to have a $15 minimum wage law.

Various publications and “news” organizations are already trying to claim to see whatever effect their side predicted is happening. The irony is that anyone saying they know, or can already see what the effects of a higher minimum wage are, is probably lying, or misconstruing their data.

What Happens With $15 Minimum Wage

Here comes hard fact number 1. There is no $15 minimum wage yet. In Seattle, the minimum wage in April went to $11 per hour. That’ right, $11. Not $15.

Here comes hard fact number 2. It takes a long time for adjustments to actually effect the economy. The Federal Reserve assumes that when it changes interest rates, the most dramatic possible direct change to the economy, that it takes six to twelve months for the effects to trickle through the economy. There is no way of knowing, after 30 days, what, if anything, the higher minimum wage is doing in Seattle.

The $15 minimum wage gets phased in over several years. It turns out that even higher minimum wage supporters understand that you can’t just drop a huge increase into the middle of an already running economy. Instead, the wage increases in phases, in part to give businesses (and workers) time to adjust.

The only place with an actual, in full effect, minimum wage of $15 per hour right now is SeaTac, the community around the Seattle-Tacoma Airport. The catch is that thanks to rules, and a lawsuit, only a small portion of the employees there are actually affected, around 1,500 or so. None of the businesses around the airport have gone under, and in fact, many of the businesses that predicted doom and gloom, are actually expanding. The city manager says that there has been no change in sales taxes or property taxes meaning that mostly things are unchanged.

The trick to drawing conclusions here is that 1,500 people is a micro economic case, at best. The economy of the surrounding area, and the United States is doing a little bit better, and that would far offset the implications of such a small number of workers.

The first real, non-partisan, non-specific example of one restaurant, comes in about four months, when businesses start reporting data (for tax purposes, not for minimum wage studies) to the State of Washington. Then, we’ll see if there are more or less businesses, employees, and so on. Of course, the 3 month change could be due to anything, so it’s not like that data will be definitive. And, even then, that data will be for a $11 minimum wage, not a $15 minimum.

We won’t find out about a $15 minimum next year either. The minimum wage in Seattle goes to $13 in 2016. Finally, in 2017, the minimum wage actually hits $15.

Will is succeed or fail? The irony is that the answer likely depends a lot more on how the economy is doing than the actual minimum wage. If things are down, expect the minimum wage to get a lot of the blame. If things are doing well, expect people to say, see the minimum wage didn’t hurt anything.

In the meantime, there are a lot of places that have different numbers in between. Here in Colorado, the minimum wage is indexed to inflation. That means there are no planned increases coming, but the minimum wage increased to $8.23 from $8.00 in 2014.

Of course, the Good Times Burgers restaurant on Colfax in downtown Denver is advertising a starting pay of $9.25 per hour. So, there is no telling how many Coloradoans are actually getting minimum wage right now.

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Finance Gourmet on May 20, 2015

When filing income taxes, taxpayers can choose to either itemize tax deductions, or take the standard tax deduction amount. The IRS adjusts how much the standard deduction is each year based upon inflation. The 2015 standard tax deduction amount is slightly increased over the 2014 standard deduction.

2015 Standard Tax Deduction Amount

As usual, there are different deduction values depending upon how you file your income taxes.

  • Filing Single: The 2015 standard Deduction is $6,300 compared to $6,200 in 2014.
  • Married Filing JointlyStandard deduction for married filing joint is $12,600, up from $12,400 in 2014.
  • Head of Household: The head of household standard deduction in 2015 is $9,250, up from $9,100.

If taxpayers use the standard deduction when filing taxes, the personal exemption is included in the standard tax deduction amount. However, when itemizing tax deductions the personal exemption amount is important.

taxes on patreonFor 2015, the personal exemption amount is $4,000, which is up a bit from last year’s $3,950. However, taxpayers with incomes above $258,250 (filing single), or $309,900 (married filing jointly) are subject to phase-out of the personal exemption.

Itemize or Use Standard Tax Deduction

To decide whether to itemize deductions, or take the standard deduction, taxpayers should add up their potential itemized tax deductions, and add the personal exemption amount. If that total amount is greater than the applicable standard tax deduction, then itemizing will result in lower taxes.

For most taxpayers whose income comes mainly from salary or other employment, rather than investment income, trust income, or other income, the main determinate of whether itemizing or taking the standard deduction is best is how much mortgage interest is deductible. Typically, without deductible mortgage interest of at least $3,000 or more, the average taxpayer will not have enough deductions to making itemizing better than taking the standard deduction.

All reputable tax software, calculates whether it is better for a tax payer to itemize or not. If doing taxes by hand, then, find the big deductions first, and see if they provide anywhere near the standard deduction number. Itemized deductions are reported to the IRS on Schedule A of the Form 1040.

Other large deductions include medical expenses, but only if they exceed 9 percent of your income, and property taxes.

irs schedule a itemized deductions

Deductions Without Itemizing

Many tax deductions are available without itemizing. To see a complete list, check lines 23 through 35 on IRS Form 1040. On lines 49 through 53 are various tax credits that are available whether the standard deduction or itemized deductions are used.

Common tax deductions without itemizing include: educator expenses, health savings account deduction, moving expenses, IRA deductions, student loan interest, and tuition and fees.

Common tax credits offered with, or without itemizing, include the child tax credit and education credits.

Standard Deduction with Small Business

It is still possible to take the standard deduction if you own a small business. Many small businesses files a Schedule C to report income and expenses related to the business. A Schedule C can be filed with, or without a Schedule A for itemized deductions. The results of the Schedule C are reported on Line 12 of the 1040 Form, not within Schedule A. Various businesses can have large deductions (and income) including the home office deduction.

Other Tax Information

Here is how to get an IRS tax transcript and information on what happens if you don’t file your taxes on time.



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Finance Gourmet on May 15, 2015

Not all tax numbers stay the same over time. Many income limits and other tax numbers are adjusted each year, either for inflation, or by another statutory mandate. These tax numbers include the tax tables and tax brackets for each year, for example. The IRS announces the numbers each fall.

This year is a bit confusing because some of the retirement plan tax numbers were increased by cost of living adjustments. However, other numbers remain unchanged from the previous year because the amount of the change was below the amount legally required to change the figures.

2015 IRA Contribution Limits

irs tax numbers graphicThe 2015 IRA contribution limits were recently published by the IRS. Note that these limits are for contributions made during the 2015 tax year, for use when filing income taxes due by April 2015. If you are looking for older information, you can check the 2014 IRA contribution limits.

The maximum IRA contribution for 2015 is $5,500. This is the same as the maximum deduction for 2014. The 2015 IRA catch-up contribution amount remains unchanged at $1,000 as well. Only taxpayers over age 50 are permitted to make a catch-up contribution to an IRA account.

Therefore, taxpayers under age 50 may contribute up to $5,500 to their IRA during the 2015 tax year and those over age 50 may contribute up to $6,500. Remember, however, that IRA contributions may be made through April 15th of the following year. In other words, contributions made anytime between January 1, 2015 and April 15, 2016 may be claimed on the 2015 income taxes. This is provided, of course that none of the amount contributed between January and April 15th, was deducted on your 2014 taxes.

Maximum Income for Deductible IRA Contributions 2015

Traditional IRA contributions are tax deductible for taxpayers with incomes below certain thresholds. These income limits are also adjusted each year for inflation. If you, or your spouse, are covered by an eligible retirement plan at work, then for 2015, the maximum adjusted gross income (AGI) for a full IRA contribution deduction is $98,000 for joint filers, and $61,000 for single filers. Taxpayers with high incomes above these amounts will have to calculate the phase-out for their 2015 IRA contributions. Those with incomes higher than $118,000 for married filing jointly, or $71,000 for those filing single, cannot deduct any part of their contribution to a traditional IRA account.

Taxpayers who do not have an eligible retirement plan offered at work, and whose spouse is also not covered by a work retirement plan may take a full deduction for IRA contributions regardless of how much money they earn.

If a taxpayer is not covered by a retirement plan at work, but their spouse IS COVERED, then the income limit for a fully deductible contribution is $183,000 or less. Deductible IRA contributions are phased out in such cases for incomes between $183,000 and $193,000 during 2015.

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Finance Gourmet on May 12, 2015

As a former financial planner in Denver, I get involved in a lot of interesting personal finance discussions. Recently, a writing colleague was remarking on the difference between getting money one time, and having a new stream of money. In particular, he noticed that while the latter should be better, the former is actually the more fun of the two.

Psychology of Money

One of the interesting things about money is that it is so concrete a mathematical concept, and yet, so nebulous as an actual artifact in our lives. On the first hand, money is easily understood as an exact match of mathematical numbers. For any decision, a spreadsheet-type answer is easily obtained. Higher interest rates are better for savings, worse for borrowing. Saving more is better than spending more, and so on. However, the reality is that the higher interest rate from an online bank that is less convenient and useful might not actually be better. And, is having an extra $5,000 in the bank really better than having spent a week seeing the great museums in Italy?

extra money

Which brings us to the freelance writer‘s incongruous concept of steady income versus unreliable, extra income.

Most people have a steady income. Even freelancers often have a stable, or “usual,” component of income. Human beings naturally adjust to this amount of income over time. So, for example, if our friend typically earns $5,000 per month, then his lifestyle will inevitably adjust to this amount of income.

This is what makes automatic savings like 401k plans, or IRA plans, so important. When the money is not there to get used to, the lifestyle does not adjust to use that money. Many people use this same concept by having extra money withheld from their paychecks by the IRS in the form of over-withholding for income taxes by claiming too few things on their W4 Form. Even though they know this is an interest free loan to the government, it also means that their lifestyle does not expand to take up that part of the income that they never see becomes it comes directly from their paycheck.

For people with variable income, like freelancers, the same thing occurs when new clients come on board.

If our freelancer above gets a new client that brings in an extra $300 per month, then, eventually, his spending and savings habits will encompass that additional $300 until it isn’t actually “additional” any more at all, but just part of normal. This happens even if the money is responsibly earmarked as additional savings.

If, on the other hand, our freelancer gets a client that only has sporadic work offering $300 during some months, that money cannot be counted upon. So, the lifestyle never adjusts. That means every time that extra $300 shows up, it really is extra. It’s a guilt free way to have an extra night out, or to buy a nice gift for a spouse, or whatever. But, in the former case, doing the same thing with that same $300 is not using an extra windfall playfully, but instead taking away $300 that should be going to savings. That’s a very different mentality.

In the end, the steady stream of income is indeed better, but psychologically, a little variability will generally allow for a less rigid, and more fun, few of money, even if the amounts are the same.


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