New tax law may mean more cash in your pocket

This blog post I wrote for my client SelectQuote details what the new tax law means to Americans. Will you see more take-home pay starting this month?

If you normally start thinking about taxes in early April, you may want to accelerate your thinking this year. The tax law approved by Congress in late December will change withholdings for about 90 percent of American employees, meaning more take-home pay. 

You should see a boost this month, if you haven’t already. Congress set Feb. 15 as the date for employers to comply with the guidelines. Before you start madcap spending, however, exercise a little caution.

The new tax withholding tables factor in your annual income, paycheck frequency, your tax-filing status, your tax bracket and the number of dependents you claim. These components determine the appropriate amount your employer withholds from your pay for federal income taxes. 

What’s the Bottom Line?

You can always check your first pay stub that reflects the changes and compare it to your previous take-home pay. Or, here’s a formula for determining how much your pay may change under the new law.

• Find a recent pay stub and note how much was withheld from your pay for federal taxes.
• Look at the Notice 1036 IRS form to find the new withholding amount for each deduction. The formula is based on your pay frequency (weekly, biweekly, monthly, etc.). Calculate your total withholding by multiplying the withholding amount times the number of dependents you claim.
• Subtract this number from your current withholding amount per pay period. This is how much your paycheck could increase. 

What Else Is New?

• The right amount: The new withholding tables may result in not enough money withheld from your pay to cover taxes owed, meaning you’ll need to write a check to the government when the April 15, 2019, tax deadline looms. That’s never fun. But the changes could result in too much withheld from your paycheck, meaning you’re shorting yourself on your take-home pay. If the government withholds too much, you’ll get a refund. But you’ll be giving Uncle Sam an interest-free loan, which may not be the best money management strategy. Your employer probably won’t advise you what to do, but you can use the IRS tax calculator to get a good estimate of the taxes you’ll owe. Then update your W-4 form on file with your employer to change your withholdings, if you see the need.
• Tax calculator: The IRS is revising the tax withholding calculator on IRS.gov. This tool also should be available by the end of February. When it’s ready, you can use the new calculator to better determine your correct withholding.
• The W-4 form: The form that employers use to determine your tax withholdings has not yet changed because of Congress’ rush to implement the new tax law. A new W-4 is expected to be ready by the end of February. 
• Other changes for 2018: The only difference for now is that tax withholdings change, starting at least by mid-February, which most likely means more take-home pay. Other tax changes approved by Congress take effect in 2018, but you won’t need to make those calculations until tax time in 2019. So for the 2017 tax filing period with a deadline of April 15, 2018, it’s pretty much business as usual.
•  Standard deductions: The new tax law changes standard deductions starting in 2018. For singles, the deduction nearly doubles to $12,000; and for married couples who file jointly, the standard deduction increases to $24,000. So you may not be eligible to itemize deductions in future years. 
•  Child tax credit: The new tax bill doubles the credit from $1,000 to $2,000 for children under age 17 starting in 2018. If your children are 17 or older, or if you take care of elderly relatives, you can claim a $500 credit starting this year. 
• Education tax breaks: If you have funds saved in a 529 college savings plan, you can use them for levels of education other than college starting this year. The money in this account can also cover private school tuition or tutoring for your child in grades K-12. 
• Enjoy it while you can: Nearly all of the tax cuts for households expire after 2025, while the tax cuts for corporations are permanent.

What Should You Do Now?

• Save it: Solid advice from tax experts is to save any extra take-home pay until you’re sure the government is withholding enough to cover your taxes, to avoid an unpleasant surprise at tax time in 2019. 
• Do the math: Mark your calendar for a status check in June or July 2018 to estimate the amount of taxes you’ll owe for the entire year, using the IRS tax calculator. Then adjust your withholding, spending or saving accordingly. 
• A final note: We’re not done yet. Watch for more tax law changes promised by Congress in 2019.

How to Teach Kids About Money

This blog post I wrote for my client SelectQuote highlights some fun lessons you can teach kids of any age about the value – and limitations – of money. 

A basic financial life skill is knowing how to live within your means – something that schools don't teach. The live-now-pay-later lifestyle is alluring, with credit card companies targeting adults of all ages, starting with college students. 

It’s all too easy for young adults to max out several cards and paying the minimum each month until they’re in so deep they have no choice but to file for bankruptcy. Perhaps if parents can teach their children, starting at a young age, how to successfully manage money, the danger of living beyond their means could be prevented.

Here are financial lessons you can teach your children to help them form sound money management skills they can carry into adulthood:

Preschool, Ages 3 to 5: Sometimes You Have to Wait

Desires of preschool kids are often easily granted and parents don’t think twice about grabbing that coveted toy as they wheel their carts and kids around the discount store. The lesson the child may be learning, however, is that you can always get what you want – no problem.

Try this, instead, to teach them the value of learning to save for what they want: Create three jars, each labeled Saving, Spending or Sharing. Each time the child gets money – as a gift, from doing chores or from a weekly allowance – help them divide the money equally among the jars.

The spending jar is for small purchases like stickers, an inexpensive book or a small toy. The sharing jar is for teaching the reward of donating to a worthy cause, like a favorite charity, or to a friend in need. The saving jar is for purchases that cost more and that are worth saving toward, like an electronic toy.

Each time the child adds money, count how much is in the jars and talk about how close they are to reaching a savings goal. This easy routine helps teach the value of patience, the reward of reaching a financial goal and the joy of sharing. Great lessons to learn at this young age.

Grade School, Ages 6 to 10: Understanding Spending Limits

Kids this age are closely tuned into their parents’ spending habits. Maybe your family is prone to splurging on luxuries like a big vacation every summer or buying a new car every couple of years while you go into deep debt. It is a highly visible lesson to kids this age that living large is more important than being financially responsible.

It’s far better to level with kids than to give them the signal that they’re entitled to the very best of everything that money can buy. Even when the desired purchase has an attainable price tag, if it doesn’t fit into your budget, tell your child they have to save for it or give up another item on their wish list.

Pre-teen, Ages 11 to 13: The Pleasure of Earning

At this age, kids can take on more responsibility around the house. Chores such mowing the lawn, vacuuming, taking out the trash, doing their own laundry, loading and emptying the dishwasher, washing the car are a great way to get kids to help around the house. Rather than giving them a set allowance just because they’re a member of your family, give commissions based on chores they accomplish. Negotiate reasonable rates for various tasks, have them keep business-like records that you sign off on and pay weekly.

Allow them to spend a portion of their earnings, save some and share a percentage with a charity. Help them monitor their decisions about what to buy. Remind them purchasing a pricey piece of sports equipment now may mean they won’t be able to afford that new jacket until they can save for it.

High school, Ages 14 to 18: Transitioning into the Real World

Kids ages 14 and 15 can earn money by working for people outside the family – mowing, babysitting, raking leaves, clearing snow. Once they start earning money on their own, it’s time to help them open their own bank account, raising their money management skills to a higher level. Guide them through the process of promptly balancing a checkbook. Help them start a savings account for college and other future financial needs.

Kids 16-18 are in high demand for jobs in food service, retail and other service industries. They can work some limited evenings after school, weekends and during all of those long school vacations. Help them monitor their spending and saving habits as they learn to manage money on their own.

Older teens are targets for credit card offers, with several arriving in the mailbox weekly. Make it clear you will not cover any of their credit card payments if they choose to accept a card. Caution them about the extreme danger of running up credit card debt while they are still students. Advise them to ignore those unsolicited offers. Small actions will form a strong habit of living within their means.

Young Adult, Ages 18+: Managing Money and Life on their Own

Before your young adult child strikes out on their own for college or to start a career, make sure to review all of the money lessons you’ve been working on during their growing-up years:

How much money they have and how to access it.
How to read a bank statement and balance their account.
How to set and maintain a budget, so they can cover monthly expenses.
How to separate wants from needs – cover the essentials of living first; save some money for an emergency; then use discretionary income wisely.
How to read the fine print and between the lines to understand offers for credit cards, debit cards and loans, so they know what the true costs will be.
How to build a positive credit history by paying bills on time and keeping the number of credit and debit cards to a bare minimum.
How to save money for an emergency – car or home repair, period of unemployment, needing to move, etc.
How to take nothing for granted. A degree from the right school does not guarantee a great, high-paying job. A great high-paying job may not last due to circumstances they can’t control or change.
How to ask for help when life hands them an unexpected turn for the worse and they need a temporary safety net.

We can’t teach our kids everything they need to know about money to be successful, productive adults. Some lessons can be learned only through experience and most likely by making a few gut-wrenching mistakes. But by giving them basic financial tools before they reach adulthood, they’re more likely to make smart choices and to quickly recover if things get a little out of control.