3 Things 2-17-25

 Thing One

A Tale Of Three Savings Plans

Once upon a time, there was a person who earned $12 per hour, working diligently at their job for 40 hours a week. They harbored a dream of saving up to a million dollars through careful savings and investments. Here are three tales of how this dream could unfold, all with an assumed 7% annual return on investment:

The Moderate Saver's Tale:

Our protagonist chose to save 20% of their net income after taxes, which came to $3,840 each year. With a steady and prudent investment strategy, they watched their savings grow like a tree in a well-tended garden. It would take them approximately 42 years to see their million-dollar vision come to life, a journey of patience and consistency.

The Aggressive Saver's Tale:

In another narrative, our character decided to save 30% of their income, setting aside $5,760 annually. This was a tale of sacrifice, where they pushed their budget to its limits to save more. With the same 7% return, it would take around 37 years for their savings to blossom into a million dollars, showing that with greater sacrifice comes a slightly shorter path to wealth.

Note:  In the scenarios above, our saver makes about $25,000/year pre-tax.  If we doubled that to $50,000/year, the number of years to one million would be cut in half.  So, a twenty-five-year-old earning $12/hr and saving twenty percent of it annually could accumulate one million dollars by the time he reached full retirement age (67) or, if he earned $24/hr, he could accumulate that amount by age 46.  Please share this with at least one person you think might benefit from it.  The younger, the better in terms of taking advantage of it.

Thing Two

Some Tax Credit Tips For The FIling Season

April 15th will be upon us before we know it. With that in mind, here are a few ideas that might help.

Self-Employment Health Insurance Deduction:

Self-employed individuals can deduct 100% of their health insurance premiums for themselves, their spouse, and dependents, directly from their income before calculating the Adjusted Gross Income (AGI). This deduction is not subject to the standard 7.5% of AGI floor that applies to other medical expenses, and it can significantly reduce taxable income for those running their own businesses or freelancing, effectively making health insurance less expensive. Remember, this applies to premiums for Medicare Part B and D as well, if you're eligible.

Educator Expense Deduction:

Educators who work at least 900 hours in a school year at a school that provides elementary or secondary education can deduct up to $300 ($600 if married filing jointly and both are eligible educators) of out-of-pocket classroom expenses. Books, supplies, computer equipment, and other materials used in the classroom are included. This is an above-the-line deduction, meaning you can claim it even if you don't itemize. It's particularly helpful for teachers who often spend their own money on classroom materials.

Foreign Tax Credit:

If you've paid taxes to a foreign country on income that's also subject to U.S. tax, you might be eligible for the Foreign Tax Credit. This credit allows you to offset your U.S. tax liability dollar for dollar with the foreign taxes paid, preventing double taxation. It’s particularly useful for expatriates, investors in foreign securities, or anyone earning income abroad. It's more beneficial than a deduction because it reduces your tax liability directly. Remember, you can't claim this credit if you're using the Foreign Earned Income Exclusion for the same income.

Qualified Charitable Distributions (QCDs) for IRA Owners:

If you're 70½ or older, you can make a QCD directly from your IRA to a qualified charity. This distribution counts towards your required minimum distribution (RMD) but isn't included in your taxable income, potentially reducing your taxable income and the amount of Social Security subject to tax.  This is especially valuable for those who don't itemize deductions, as it provides a tax benefit without needing to itemize. Additionally, since it's not counted as income, it doesn't increase your adjusted gross income, which could help in keeping Medicare premiums lower.

Adoption Credit:

The adoption credit can help offset the costs associated with adopting a child, including adoption fees, court costs, attorney fees, and travel expenses. For 2025, the credit is subject to inflation adjustments, so check the current year's limits, but it has historically been significant, often over $14,000 per child credit.  It’s non-refundable, meaning it can reduce your tax liability to zero but won't result in a refund if it exceeds your tax due. However, any unused portion can be carried forward for up to five years. Please note it’s available for both domestic and international adoptions, but the child must not be a stepchild and must be under 18 or disabled.

Section 1202 Exclusion for Small Business Stock:

If you've invested in a qualified small business and held that stock for more than five years, you might be eligible for the Section 1202 exclusion. This allows you to exclude from your income up to 100% of the gain on the sale or exchange of qualified small business stock, with a cap of $10 million or ten times your basis in the stock, whichever is greater.  The tax savings could be significant tax savings if you've invested in startups or small companies that have appreciated over time. Keep in mind, the company must have been a C corporation when the stock was issued, and it must meet specific criteria regarding asset size and business type.

Thing Three

Just A Thought 

"I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them." - Thomas Jefferson