We’re entering a busy time of year for charitable donations, perhaps because the winter holiday season brings a sense of gratitude followed by a desire to share our abundance. The availability of tax deductions for charitable giving may also contribute to the concentration of donations near year-end.
According to Giving USA, Americans donated a record $410 billion to charities in 2017. What’s more, over 70% of that giving came from individuals, rather than foundations, corporations, or bequests. However, tax law changes this year mean that for many people there will no longer be an advantage in itemizing deductions; many taxpayers will get better results using a standard deduction. For those households, the tax benefit of charitable donations will be reduced or eliminated.
Will Americans still give? I have always hoped that the main reason most Americans give is that they care about the organizations they are giving to, and that the tax benefits are just an incidental benefit.
If you are wondering whether you should continue making charitable donations even without the tax deductions, I offer two thoughts:
- If your standard deduction under the new tax law is larger than your itemized deductions would have been, then you are still coming out ahead. You can give, and still have more available funds than you would have had under the old tax law.
- There are other strategies that can enable some taxpayers to get tax advantages for charitable donations.
Clustering donations. Some taxpayers may be able to hold back all their 2018 donations until the beginning of 2019; if they then donate a “normal” amount throughout 2019, they will have twice as many donations as usual to report for the 2019 tax year, which may make itemizing worthwhile in 2019. Following this pattern of no contributions one year and double-contributions the next may enable you to donate the same total amounts as normal, and gain tax benefits by alternating years between itemized and standard deductions.
Qualified Charitable Distributions (QCD) from an IRA. If you are at least 70-1/2, you can transfer funds directly from your traditional IRA to a charitable organization; the distribution will not be taxable income to you, AND it can satisfy your required minimum distribution. If your RMD for the year is $5,000, and you are interested in donating $5,000 to a particular organization, then making the contribution through a QCD has the same ultimate impact on your taxes as a tax deduction would have had. IRS Publication 590-B provides details.
Donating as a business expense. If you are self-employed or own a business, you may be able to make charitable contributions as a business expense. For example, farmers can give commodities (e.g. 500 bushels of corn) to a charity. This reduces your business income, and therefore has impact similar to the impact of a tax deduction. Consult with your tax adviser for details.
As always, the best decisions about how to use your money are based on your personal goals and priorities. As you consider your charitable giving decisions, focus on why you want to give when deciding whether and where to make donations. Giving to organizations you know (often local organizations) can ensure that your gifts are used well; when considering larger national charities, check them out with organizations that evaluate charities, such as www.give.org, www.charitywatch.org, www.charitynavigator.org, or www.givewell.org.
Most of us have dozens of ways we “save money:”
- We “save” by using coupons and shopping sales.
- We “save” by saying NO to ourselves and others when temptation arises.
- We “save” by cooking at home instead of eating out.
Are you wondering why I put the word “save” in quotation marks in all those examples? Here’s why: even if we did all those things every single week, there is no certainty that our savings account balance will increase.
All those steps are ways we reduce costs, but do they automatically lead to deposits to savings accounts? No. Take me, for example: I have never once taken the money I did not spend at a restaurant or grocery store and deposited it into a savings account as a direct result of the decision not to spend. Instead, the money I “saved” would usually just get spent on something else!
A decision not to spend is a key step in saving. But by itself, that decision is not enough; it only turns into saving when we actually move the money into a savings account (or to a dedicated savings location such as a piggy bank). When I come to a coffee shop or an ice cream store and I go on by without stopping because I want to save that money, I should probably just stop right there and transfer money from one account to another. Or I could carry a “saving” envelope in my purse and move cash into the envelope every time I resist temptation. That would be the way to make sure the actual saving occurred.
Saving is a two-step process. It involves deciding not to spend and putting money in a designated location. Either step can come first. I can decide not to buy something and then save the money; OR I can put the money away first and then (out of necessity) spend less than I otherwise would have spent.
Note: many of us do better if we put the money in savings first!.When there’s no money in your billfold or your account, it’s easier to resist temptation to spend!
Do you sometimes wonder why you aren’t getting ahead, despite your efforts? It may be because you’re skipping one of the steps. How can you turn your cost-cutting into true savings progress?
I heard a speaker yesterday refer to “confirmation bias.” It’s an idea I know well, but it had been a while since I heard the actual phrase, so it caused me to think. The idea behind confirmation bias is that if you believe something to be true (or if you even want something to be true), you will be able to find facts you can interpret in such a way that they will seem to support the belief you want to be true.
For consumers, confirmation bias can be a dangerous thing. Here are some hypothetical (but realistic) examples of how that could work.
- Several friends have purchased a very-expensive brand of Widgets, and they all swear by the benefits of the brand. Undoubtedly, a search will lead to other positive reviews of the widget that persuade you that your friends are right; this may leave you feeling justified in spending much more money than planned on your new widget.
- You hear a rumor that now is a great time to invest in Company X. You do an on-line search and you find several articles that support your desire to jump into the investment, so you move forward with the idea.
In both of these examples, the fact that you knew in advance what answer you wanted to find made you much more likely to find it.
There has been much discussion in recent months about facts and what to believe. Sadly, the abundance of information available on the internet includes “sources” that claim opposing facts: one source shows how “Fact A” is definitely true, while another source cites information which “prove” the false-ness of “Fact A.”
This simply reminds me how critical it is for consumers to protect against confirmation bias, as well as against unreliable information in any situation. The best decisions are based on research conducted by well-respected scientists. Three tips to protect yourself:
- Always shop around (at least 3 sellers) before making any significant purchase or consumer decision.
- Always seek information from multiple sources; ideally, those multiple sources would not be connected to each other. (For example, if you read an article in 3 different publications, but all those publications are operated by the same umbrella company, it’s really not equal to three different sources).
- The most reliable on-line sources on most topics are sites whose URLs carry a “.gov” or a “.edu” extension. Some “.org” sites are reliable, but use caution because they may have an agenda. Two reliable “.org” sites are www.consumerreports.org and www.nefe.org.
Prescription drug costs are getting a lot of media attention these days, sometimes leaving consumers unsure who to trust. One question raised by news coverage is the question of how much we should trust our insurance plans to get us the best deal. According to a recent study, nearly one-fourth of all prescription purchases would be less costly to consumers if they paid cash rather than having their insurance cover the purchase. In other words, their co-payments were more than the actual cash cost of the medication.
The report said it is common for this overpayment to occur with generics. A news report gave an example where the difference was dramatic — a $285 copay compared to a $40 cash price. It seems unthinkable, yet it happens!
Consumers have told stories about this problem for years, but the recent paper from the Schaeffer Health Policy Center at USC was the first known systematic study, so only now are we learning how widespread the problem was; the study, which examined 2013 data, indicated that 23% of all prescriptions involved this kind of overpayment. A few states (not yet Iowa) have passed laws against this practice, but anecdotal reports suggest that it is still widespread.
I’m reminded of the classic consumer advice: “Let the buyer beware;” when in doubt, we need to check things out carefully, gathering information on our own rather than trusting an outsider’s guidance. In fact, the report mentioned that pharmacists’ contracts often include gag rules which prevent them from telling patients about this, unless they ask.
SO – next time I fill a prescription, I’m going to ask: how much would this cost if I just paid cash? If it’s cheaper to pay for it outright, then I’m happy to leave my insurance out of the equation.
In Iowa, this coming Friday and Saturday (Aug 3-4 2018) offers a chance to buy qualifying clothing items without paying any sales tax. For most Iowans, (depending on local sales tax), that’s a savings of 7% — not a huge windfall, but still an advantage. That savings is magnified by the many retailers who offer clothing sales on the same weekend.
Sounds like a winning proposition, right? It can be. But like anything else, it requires consumers to use good judgment! Why?
Well, if you’re like me, you’ve had experience with the risks involved in shopping simply because there’s a sale. Who among us hasn’t made a purchase because it was such a “great deal” and then never (or rarely) used it? Hopefully we learn from those experiences, but it always pays to exercise caution when shopping sales. Here are some ideas to help us avoid regrets:
- Have a list and prioritize.
- Plan a dollar limit that lets you fit your purchases into your budget without borrowing. When purchases are paid off over months of credit card payments, the benefit of the sale price quickly disappears.
- Know what the “regular” prices are, and consider whether items will be on a bigger sale later in the fall. In other words, ask yourself “Are they just giving a small discount to tempt me to buy now rather than waiting for later when bigger discounts will be offered?”
- Keep all receipts. If you pick something up and later decide it wasn’t that important or that great of a bargain, you’ll simply be able to return it! Be sure to have the self-discipline to follow through on that… it may be “only” $10 or $20, but that adds up over time.
- If you are buying for people other than yourself (especially growing children) check out their current clothing stock before you make your list — find out what fits and what doesn’t. This will help you make sure that the items on your list are the most important items.
Iowa’s Sales Tax Holiday applies to most clothing and footwear items priced below $100. Most accessories are not exempt (such as jewelry or watches), but some items do qualify for the exemption (such as scarves). Certain specialty clothing items, such as clothing specific to a particular sport, are excluded as well. For a full list of items that are taxable vs. exempt, go to https://tax.iowa.gov/iowas-annual-sales-tax-holiday.
Happy shopping! Good planning means no regrets!
I read an article last week in the popular press (based on a legitimate research brief) that offered encouragement for those who are worried they haven’t saved enough for retirement. The research project demonstrated that if you delay retirement 3-6 months, it provides the same benefit as if you had saved an additional 1% of your income for 30 years.
If you are: a) wishing you could save more, but really can’t; or b) wishing you could go back in time and start saving more, sooner, this research is encouraging because it says you can partly make up for a savings shortfall by delaying your retirement date. To be clear, delaying a few months doesn’t “magically” double the balance in your 401(k) or IRA account. The delay affects your retirement income security in several ways:
- It means additional months of contributions to your retirement account.
- It gives your money more time to grow.
- It reduces the number of months you’ll need to support yourself in retirement.
- Delaying Social Security benefits beyond full retirement age results in a larger monthly benefit. (under current law).
The fourth benefit accounts for most of the mathematical advantage of delaying retirement, but all four factors contribute. The first two actually DO increase the size of your nest egg; the third one means your money doesn’t need to be stretched so thin.
Wherever you are in your pre-retirement saving journey, it always pays to save more starting now if you can. But even a modest delay of retirement can provide a retirement lifestyle as if you’d saved more all along.
Several years ago I wrote a MoneyTip$ post extolling the virtues of dry milk. Since June is Dairy Month, it occurred to me that now would be a good time to revisit that topic, because things have changed. Dry milk is no longer the same bargain that it used to be. I’m sure this varies regionally, but where I live I can no longer buy the bargain-sized (20-quart) box of dry milk, and the store-brand liquid milk is so inexpensive that it’s usually a cheaper product per quart compared to dry milk.
Why is this blog-worthy? Two reasons:
- It’s a valuable reminder to re-examine your consumer habits periodically. I resisted giving up dry milk — it was a habit ingrained from childhood, built in to how I work in the kitchen. I kept buying it for a while even after I realized it was no longer the cheapest deal.
- It’s also a reminder that cost is not the only consideration when shopping. After being without dry milk for several weeks, I realized it was a product I still wanted in my pantry, for several reasons.
I’m back to using dry milk, though not as much as before; these days, if I’m making pudding or pancakes I’ll probably use liquid milk, unless my supply is running low. I still use dry milk though, for more reasons than I could possibly include here; I’ll list a few to give you a general idea:
- I can add milk nutrients without adding liquid. By adding extra dry milk to casseroles, meat loaf, soups, baked goods, and mashed potatoes, I can boost my intake of calcium and other key nutrients without making my product too runny.
- It doesn’t need to be stored in the refrigerator. At holidays or with company, frig space is at a premium; by using dry milk for cooking, I can make extra space for refrigerated foods – after all, an extra gallon of milk takes a lot of space!
- If you make yeast bread (I know not many people do), using dry milk means you don’t need to “scald” milk before adding it to the bread dough. (Scalding deactivates an enzyme that interferes with yeast action – with dry milk that enzyme is already gone).
The main reason for this post is not to let you in on all my kitchen habits, even though that is fun to talk about. The main reason was to share one story of how things that are true at one time may not stay true indefinitely. This applies to specific products we buy, and it also applies to questions like how high should an insurance deductible be, or how much to keep in a savings account.
What habits, beliefs or assumptions affect your consumer decisions? When is the last time you revisited them to make sure they were still on target?
As a financial educator and as a volunteer income tax preparer I sometimes hear from people who wish they had been better informed before making decisions. During this past tax season I talked to an unusually large number of people who face really big tax bills that could have been prevented if they had been better informed ahead of time.
While taxes have been the recent topic, there are plenty of other situations where people face problems that might have been prevented if they’d had more information. Examples:
- A person who discovered (too late) that her medical providers weren’t in her health insurance network.
- People who retired early, but went back to work when they realized they were not financially prepared to retire.
- A couple who bought a car that proved unreliable, discovering later that Consumer Reports had rated that model’s reliability as poor. (The next time they bought a car, they reviewed the reliability ratings first.)
Stories of financial regrets are endless. I have my own stories, too – no one makes perfectly-informed decisions 100% of the time. Happily, I also frequently talk with people who have success stories, both large and small. Those successes usually result from careful thought and good information!
We never want to get complacent about our money knowledge. Even if you’re already well-informed, it takes on-going attention. Why? Because the financial world changes (new products, new risks, new scams), and our lives and our needs change too.
Staying Informed. As you know, not all information found on the Internet is trustworthy or accurate. Consider the source of the information.
- Sites with a .gov or .edu address are considered trustworthy. These are sites hosted by a government agency or an educational institution. Examples: www.investor.gov; www.consumerfinance.gov; www.extension.iastate.edu
- Many private organizations are identified by a .org address. These sites may or may not provide trustworthy information. It’s important to investigate its mission, and evaluate information carefully. Examples of trustworthy sites include www.extension.org and the National Endowment for Financial Education www.nefe.org, and the additional sites NEFE hosts.
- Commercial sites use .com and commonly promote or sell a product. You will want to evaluate information on these websites carefully.
It’s best to seek information from several sources. Also note that trustworthy websites include information on how to contact them.
I have often talked with people who were excited about turning age 62. Why? So they can claim Social Security retirement benefits. I understand that excitement, especially from people whose jobs are causing them problems.
In those situations, however, I hold an internal debate about whether to put on my “educator” hat and make sure they understand all the factors involved in their decision about when to claim Social Security. Note: sometimes I do provide information, and other times I do not – it depends on the situation!
Claiming Social Security before your full retirement age means a permanent reduction in your monthly benefit. Having the income now will be nice, but if you live to be 90 and use up your other retirement accounts, you might wish you had waited. Here’s an example of how the benefit amount is affected by the age you claim:
- Mike’s full retirement age is 66. At age 66, his monthly benefit would be $1,496.
- At age 62, the earliest age he could claim, his benefit would be $1,060.
- On the other hand if he waits till age 70, his monthly benefit rises to $2,044.
There’s not a “right” age for a Social Security claim. Your choice depends on your situation, your priorities, and what other resources you have available. If you would ask me, I wouldn’t be able to tell you what to do – only you can decide.
What I would tell you, though, is to make sure you understand all the implications of your decision. One resource to inform your planning is an ISU Extension recorded mini-lesson on Social Security Choices (20 minutes). It is one of many retirement planning resources on our “Retirement: Secure Your Future” page.
When you near the actual decision point, the best way to gather complete information about your options is to contact the Social Security Administration.
I often talk with people who don’t have health insurance. Mainly that happens when I’m volunteering at a VITA (Volunteer Income Tax Assistance) site, because people without insurance generally need to pay a “penalty” as part of their tax return. What I hear from many of them is this: “Paying the penalty costs a lot less than paying insurance premiums, and I never go to the doctor anyway, so why bother?”
Well… there’s another way to look at that. I recently had a conversation with an administrator of a large employer health plan. He commented that in any given year about 15% of the plan participants never go to the doctor – never use their (employer-provided) health insurance. However, as he looks at the usage data, he has observed that it is very common that when those folks start using their health insurance, they become big users. In other words, they go to the doctor often.
That bit of information struck me as SO important. People who don’t seek health care on a regular basis are likely to miss opportunities for prevention, early detection or early intervention. As a result, they end up with bigger (and costlier) health problems.
When we do outreach to help folks make informed health insurance choices, one of the major points we explore reflects exactly that reality: having health insurance is good for…
- Your finances (by minimizing the financial impact of major health events), and
- Your health (since people who have insurance are likely to have better long-term health outcomes).
So if we have health insurance, let’s ask ourselves: are we making good use of it?
Down the road, we’ll probably be glad we did!