First Time Home Buyers

Home Office Deduction: Can You Claim This Tax Break If You Worked from Home Last Year?

Like millions of other Americans, you may have worked from home a lot last year because Covid forced your office to close. Sure, you saved money on commuting costs, work clothes and lunches, but there are other unreimbursed expenses that drained your wallet. For instance, you probably had to pay for printer paper and ink, note pads, and other office supplies. Plus, your electric and other utility bills were likely higher since you were at home all day. And maybe you had to upgrade your Wi-Fi, too. Wouldn’t it be nice if you could claim a tax deduction for your home office expenses on your 2021 tax return?

  • SEE MORE 2021 Tax Returns: What’s New on the 1040 Form This Year

Well, maybe you can. Some people can deduct their business-related expenses, and there’s something called the “home office deduction” that lets you write off expenses for the business use of your home. Whether or not you can claim these tax breaks depends on your employment status.

Employees Are Out of Luck

If you’re an employee working from home last year, I’m sorry to say that you can’t deduct any of your related expenses on the tax return you must file this year.

  • SEE MORE Tax Day 2022: When’s the Last Day to File Taxes?

Before 2018, you could claim an itemized deduction for unreimbursed business expenses, including expenses for the business use of part of your home if they exceeded 2% of your adjusted gross income. However, this deduction was eliminated by the 2017 tax reform law.

Self-Employed People Cash In (Maybe)

If you were self-employed last year, you may be in luck. Self-employed people can deduct office expenses on Schedule C (Form 1040) whether they work from home or not. This write-off covers office supplies, postage, computers, printers, and all the other ordinary and necessary stuff you need to run an office.

  • SEE MORE What Are the Income Tax Brackets for 2021 vs. 2022?

Plus, the home office deduction may also be available if you were self-employed in 2021 — if you can satisfy all the requirements. This tax break covers expenses for the business use of your home, including mortgage interest, rent, insurance, utilities, repairs, and depreciation. It doesn’t matter what type of home you have, either — single family, townhouse, apartment, condo, mobile home, or even a boat. You can also claim the deduction if you worked in an outbuilding on your property, such as an unattached garage, studio, barn, or greenhouse.

The key to the home office deduction is to use part of your home “regularly and exclusively” as your principal place of business. If you only worked from home for part of the year, you can only claim the deduction for the period that you can satisfy the “regularly and exclusively” requirements.

“Regular use” means you use a specific area of your home (e.g., a room or other separately identifiable space) for business on a regular basis. Incidental or occasional use of the space for business doesn’t count.

“Exclusive use” means you use a specific area of your home only for your trade or business. The space doesn’t have to be marked off by a permanent partition. You can’t claim the home office deduction if you use the space for both business and personal purposes. However, the exclusive use requirement doesn’t apply if you use part of your home:

  • For the storage of inventory or product samples; or
  • As a daycare facility.

The space must also be used:

  • As your principal place of business for your trade or business;
  • To meet or deal with your patients, clients, or customers in the normal course of your trade or business; or
  • In connection with your trade or business if it’s a separate structure that’s not attached to your home.

(See IRS Publication 587 for more information about these and other requirements for the home office deduction.)

  • SEE MORE How to Cut Your 2021 Tax Bill

If you qualify, there are two ways to calculate the home office deduction for your 2021 tax return. Under the “actual expense” method, you essentially multiply the expenses of operating your home by the percentage of your home devoted to business use. If you worked from home for part of the year, only include expenses incurred during that time. Under the “simplified” method, you deduct $5 for every square foot of space in your home used for a qualified business purpose. Again, you can only claim the deduction for the time you worked from home. For example, if you have a 300-square-foot home office (the maximum size allowed for this method), and you worked from home last year for three months (25% of the year), your deduction is $375 ((300 x $5) x 0.25).

The deduction is claimed on Line 30 of Schedule C (Form 1040). If you used your home for more than one business, file a separate Schedule C for each business. Don’t combine your deductions for each business on a single Schedule C.

If you use the actual expense method to calculate the tax break, also complete Form 8829 and file it with the rest of your 2021 tax return. If you used more than one home for business last year, you can file a Form 8829 for each home or use the simplified method for one home and Form 8829 others. Combine all amounts calculated using the simplified method and amounts calculated using Form 8829, and then enter the total on Line 30 of the Schedule C you’re filing for the business.

Employees with a Side Gig?

If you were an employee at a “regular” job last year, but you also had your own side hustle, you can claim deductions for business expenses and the home office deduction for your own business — if you meet all the requirements. Being an employee doesn’t mean you can’t also claim the deductions you’re entitled to as a self-employed person.

  • SEE MORE Most-Overlooked Tax Deductions and Credits for the Self-Employed

Stock Market Today: Stocks Enjoy Stellar End to Woeful January

January 2022 will still go down as a turbulent and loss-ridden month for stocks, but at least it ended on a high note.

A relatively quiet news weekend followed by little in the way of fresh economic data gave investors little to go on Monday, but the session was peppered with a host of individual relief rallies.

  • SEE MORE The 15 Best Growth Stocks to Buy for 2022

Most notable was the S&P 500’s seventh-largest holding, Tesla (TSLA), which popped 10.7% thanks to Credit Suisse analysts, who upgraded the stock to Outperform after it lost 20% in January.

“With the market disproportionately punishing growth stocks in the past month, we believe an attractive entry point has emerged for Tesla,” said CS analysts, adding that Tesla checks off a number of boxes: attractive growth story, disruption, decarbonization and more.

Netflix (NFLX, +11.1%), Moderna (MRNA, +6.2%), PayPal (PYPL, +5.2%) and Nvidia (NVDA, +7.2%) were among other recently beat-up stocks that closed the month with a rebound.

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The S&P 500 gained 1.9% Monday to 4,515, leaving it down 5.3% for the month. That marks the index’s worst January since 2009, and the worst month for stocks overall since March 2020. The Dow Jones Industrial Average (+1.2% to 35,131) finished January off 3.3%, and the Nasdaq Composite (+3.4% to 14,239) trimmed its full-month losses to 9.0%.

YCharts

Other news in the stock market today:

  • The small-cap Russell 2000 also roared back Monday, jumping 3.1% to 2,028.
  • U.S. crude oil futures surged 1.5% to settle at $88.15 per barrel.
  • Gold futures gained nearly 0.6% to end at $1,796.40 an ounce.
  • Bitcoin recovered some ground over the weekend and into Monday, improving by 1.9% to $38,484.05. (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m.) 
  • Spotify (SPOT) jumped 13.5% after the audio streaming service over the weekend said it would start adding content advisories to podcasts that contain information about COVID-19. This comes after several musicians, including Neil Young, pulled their music from Spotify to protest podcaster Joe Rogan from spreading misinformation about COVID-19 on his show “The Joe Rogan Experience.” SPOT was also upgraded to Buy from Neutral by Citigroup analysts.
  • Barclays analyst Benjamin Theurer issued a double uptrade on Beyond Meat (BYND, +15.2%) stock today, raising his outlook on the plant-based protein maker to Overweight from Underweight (the equivalents of Buy and Sell, respectively), saying there are “more positives than negatives” in the U.S. alternative meat product market. BYND already has several high-profile partnerships, including with drinkmaker PepsiCo (PEP) and Taco Bell parent Yum! Brands (YUM). And earlier this month, McDonald’s (MCD) said in February it will boost its test market for BYND’s plant-based burger by another 600 locations.

A Weak Environment for IPOs, But …

Market pundits generally predict more volatility ahead, but that doesn’t mean investors should write off 2022.

  • SEE MORE 15 Bitcoin ETFs and Cryptocurrency Funds You Should Know

“Market corrections are a normal part of investing and may present opportunities for value-conscious investors,” say Jason Pride and Michael Reynolds, CIO of private wealth and vice president of investment strategy, respectively, at investment firm Glenmede. “Growth should continue in 2022, albeit at a slower yet still acceptable pace consistent with an ongoing expansion.”

One area of the market desperately looking for signs of normalization and stability is initial public offerings (IPOs). Last year marked a banner year for IPOs, with more than a thousand companies raising roughly $316 billion, according to financial markets platform Dealogic. However, increased volatility slowed IPOs to a crawl in the latter part of 2021, and the slowdown extended into January.

Nevertheless, once the IPO gears start moving again, investors should be able to gain access to several exciting, well-known names. Here, we outline 11 companies widely expected to launch IPOs in the year ahead.

  • SEE MORE 2022’s Best Mutual Funds in 401(k) Retirement Plans

Will Travel Insurance Pay for a Trip Cancelled Because of COVID-19?

COVID-19 has made planning ahead a gamble, especially when it comes to travel. It seems every time the virus seems to be on the wane, a new variant and maybe even a sub-variant emerges to launch a renewed attack. News and even rumors can rattle nerves and scuttle travel plans.

How do you plan to travel in this environment? Would you lose your money if you’re forced to cancel a trip?

  • SEE MORE 22 Secrets to Save Money on Travel

For more and more people, the solution is to buy travel insurance for their trips in the hopes of being reimbursed should they have to change or cancel. But not all travel insurance covers all pandemic-related cancellations.

Knowing possible pitfalls can help you decide what’s best for your wallet, your ability to plan a trip and whether you should buy travel insurance.

Sometimes, travel insurance is mandatory

In some instances, it’s not even a choice. Several countries, including Costa Rica and Egypt, as well as some travel providers, like cruise lines, are requiring travel insurance in one form or another. This can be especially true for unvaccinated travelers. This ensures you won’t become stranded, unable to pay for your medical care, extended stay or evacuation should you contract or be exposed to COVID.

The limitations of standard travel insurance have expanded the appeal of a previously obscure upgrade to standard travel insurance known as “cancel for any reason” (CFAR). This option, while significantly more expensive, is more likely to cover the sort of cancellations that COVID has made commonplace. 

According to travel insurance aggregator Squaremouth, Inc., travel insurance policies with a CFAR add-on typically must be purchased within two to three weeks of the first payment towards the covered trip. An exception is that certain policies that cover only cruises offer CFAR at any time before a final payment is made for a trip. 

Standard travel insurance limits pandemic claims

Megan Moncrief, chief marketing officer for Squaremouth, said CFAR has become the go-to plan for more travelers, “When the pandemic hit, it became really the main piece that could offer any coverage.”

Traditional travel insurance, she explained, doesn’t cover the majority of pandemic-related claims. Moncrief said in a review done by Squaremouth, only 30% of such claims were made by people who actually contracted COVID-19 and had to cancel their trips. This is the only type of pandemic claim that would be covered by most standard travel insurance policies. The remaining 70% of claims were for other reasons, including border closures and quarantines, and thus excluded — though generally would be covered by CFAR. 

And COVID-19 continues to be a primary reason for travel insurance purchases. According to Squaremouth data, nearly 37% of all searches on its site for travel insurance cited the pandemic as reasons for coverage as recently as Jan. 28, 2022. The second most-popular search filter used on the site: Cancel for any reason at nearly 15%. In contrast, hurricane and weather were searched less than 3% of the time.

Overall demand for travel insurance has increased during the pandemic, according to AAA, which says a recent survey found that 31% of U.S. travelers saying they’re more likely to purchase it for their trips planned between now and the end of 2022. A standard travel insurance policy typically adds 5% to 10% to the cost of the trip, according to Mark Friedlander, director of corporate communications for the Insurance Information Institute. Adding CFAR on top of that will raise the cost 40% to 60%. And, depending on the policy, the payout for a CFAR claim can be as low as 50% of the loss, experts said. This marks a decrease from policies before the pandemic, which could reimburse 75% to 90% of the loss.

  • SEE MORE Once the Pandemic Recedes, Where Will the Real Estate Investment Opportunities Be?

Moncrief said that prior to the pandemic, her company was “slow to recommend” cancel for any reason because of the expense. Then, it accounted for less than 4% of sales, she said. Now, it’s about 12% of sales, down from a high of 17% in January. AAA advises travelers to consider policies that include a CFAR component.

“Any reason” is not always “any reason”

“As a purchaser of travel insurance, make sure you understand what you are buying and what the policy covers and what the policy does not cover,” Friedlander cautioned. “No policy has 100% of everything.”
Travel insurers have made a number of adjustments in response to the pandemic. At the beginning, Moncrief said, travel policies didn’t cover medical care for pandemic illnesses. But that quickly changed, and now, if a traveler becomes ill with COVID, it’s covered.

By contrast, insurers now demand their customers first seek reimbursement from the travel service provider, such as an airline or cruise company, that cancelled before filing an insurance claim.
Sometimes, she said, an airline might want to give credit rather than reimbursement. She said insurers will encourage travelers to seek reimbursement before considering whether to provide coverage for such an event.

  • SEE MORE 5 Travel Stocks to Buy in a Tricky Environment

Friedlander noted that different insurance policies will contain different provisions, and “cancel for any reason,” doesn’t necessarily mean “any reason.” He stressed the importance of reading and understanding the provisions of a policy before purchasing it.
Moncrief gave examples of some insurers’ exclusions on CFAR policies:
iTravelInsured Travel LX, TravelSafe Classic and Seven Corners RoundTrip Choice and RoundTrip Basic all have the following language: “This Cancel for Any Reason benefit does not cover the failure of the travel supplier to provide the bargained-for travel arrangements due to cessation of operations for any reason.”

  • Travel Insured International: WorldWide Trip Protector: “This Cancel for Any Reason benefit does not cover penalties associated with any travel arrangements not provided by retail travel supplier or the failure of retail travel supplier to provide the bargained-for travel arrangements due to cessation of operations for any reason.”

An alternative: travel medical insurance

Charlie Leocha, president and cofounder of Travelers United, an advocacy group, said he typically doesn’t buy standard travel insurance unless he’s planning a particularly expensive, all-inclusive trip. “If you’ve got an expensive product, it can be a good deal,” Leocha said. “All insurance is a great deal if you get sick and can’t go on the trip and that’s why you buy it.”

Leocha said he buys travel medical insurance policies each year, which cover up to six trips and up to six weeks per trip. He said his annual policies cost about $260.

These policies cover his medical needs when he is overseas and also cover his return home. For the rest of his travel, he says he self-insures. What that means is he makes arrangements that are reversible. In other words, he mostly buys refundable airline tickets or hotel reservations that can be canceled at the last minute for any reason without paying a penalty.
This can be difficult, he said, because every airline has different rules, particularly when it comes to travel credits. Some airlines require they be used in 90 days, others might give you a year or six months.

Leocha said his organization is working with the Federal Department of Transportation to implement a pandemic rule requiring airlines to all have the same rule so it won’t be so confusing for travelers. “I’ve been pusing like mad to have all the flight credits have the same expiration dates,” he said. “The airlines have been fighting us tooth and nail.”
This paid off for him recently when he was scheduled to go to Spain. A few weeks before the trip, he took a COVID test in preparation for a get-together with friends. When the test came back positive, he needed to postpone his Spain trip.

Because he wasn’t locked in by any of his arrangements, Leocha said, he was able to make the necessary changes and was only out about $50 when everything was said and done.

“Self insurance is one way to do it,” Leocha said. “Probably the most expensive way to do it is get ‘cancel for any reason’ insurance.”

 

After a Fire Loss, Dealing with Your Insurance Company

The proper smoke and carbon monoxide (CO) alarms can mean the difference between having a home to live in – or even having a life to live at all, considering  80% of deaths from home fires that occur between 11 p.m. and 7 a.m.

Luckily, “Anna” and “Danny” were not one of those statistics, because they had a CO detector that went off early in the morning of Dec. 28, 2021.

  • SEE MORE How to Get Property Insurance in High-Risk Areas

“It was a smoldering ceiling fire in our attic with little smoke, but which created carbon monoxide. Our Kidde CO detector woke us from a deep sleep, giving us time to call 911. Only a small bathroom and laundry area off of the kitchen were damaged,” Danny said.

“We would appreciate any guidance you can offer so we don’t do the wrong things with our insurance claim.”

Fire? Here’s What NOT to Do

I ran Danny’s important question by friends of this column, Los Angeles-based retired homeowners claims adjuster Rachel Greenberg and Karl Susman, an insurance broker and expert witness in insurance coverage issues.

Rachel: Don’t delay in calling 911 when you smell smoke or suspect there is a fire.

Consequences: This raises a suspicion of arson. Policyholders have a duty to mitigate (reduce) damages under the terms of the policy.

Karl: In addition to phoning 911, immediately report the claim to your insurance carrier.  Delay in both instances makes the entire claim suspect and may affect payment, even if  legitimate.

Rachel: Don’t fail to promptly begin making an inventory of what was destroyed or damaged. And don’t be a hero and start do-it-yourself repairs.

Consequences: Homeowners policies generally provide replacement coverage, but you’ve got to know what was lost. Unless you have date-stamped photos – showing the structure and contents of closets and drawers – the further away from the incident, your memory will suffer and you will not be paid for what you can’t prove was in your home.

  • SEE MORE Is Your Home as Protected as You Think? It’s Time for a Policy Review

Karl: By starting to fix things yourself, you might not realize that the damage is far more extensive. If you do it on your own without approval of the claims rep, chances are that you may not be properly reimbursed.

These Things Are Giant Red Flags to Avoid

Rachel: Having a bad attitude towards the claims adjusters.

Consequences: They might drag their feet instead of moving things along quicker. This is a time to be patient and cooperative.  Their job is to help you. They aren’t your enemy!

Being a jerk, overly anxious and pushy will slow thing down.  If you insist that you need that money and you need it NOW, there is usually a problem.   Adjusters think, “Someone is in a lot of debt and sees the insurance claim as a quick way to get some cash to pay it off.”

Karl: How you react at the scene is important. Carriers receive copies of first responders’ reports. All of that information is passed on to the adjuster. They are trained to sniff out fraud, especially inflating what was lost. If a homeowner is pushy, this will make the adjuster suspicious – and a credit check will be done.

Don’t do it. Don’t pad the list of items destroyed. If caught, in some states, the insurance company can deny the entire claim.

Rachel: Abusing the “Temporary Living Expenses” section of your insurance policy by checking into the presidential suite at the Ritz-Carlton and having room service bring caviar each day for breakfast.

Consequences: “Can I stay wherever I want?” is a frequently asked question. You need to stay somewhere that is similar to where you were living before.  This does not mean a million-dollar mansion at Malibu, unless that’s where you were living before the loss.  

Approval from your adjuster – before renting an apartment or checking into a very expensive hotel – is required, or you could face a denial of payments under that section of your policy. Often insurance companies have pre-negotiated room rates with very nice properties, so it is always important to give your adjuster a chance to find lodgings for you.

Karl: You will not be rewarded for extravagant expenses. If you did not order the most expensive item on the menu every day before the fire, you are not going to be reimbursed for doing so after it.  “Is this how you and your family normally eat?” an adjuster will ask if presented with a mind-numbing bill for dining at fancy restaurants.

Thinking: “I have been paying my premiums for 20 years and you guys owe this to me!  Now is my chance to get my money’s worth,” is not the way insurance works.

It is so important to use common sense before a fire or other loss. With expensive items of jewelry, clothing, anything of unusual value, let your agent know about it, and obtain an appraisal and possibly a rider for it. 

Concluding our discussion, both Rachel and Karl stressed this final point:

“Don’t embellish, lie, rush, assume or guess.  Do not create an adversarial relationship with your adjuster. They are not your enemy!”

Dennis Beaver Practices law in Bakersfield and welcomes comments and questions from readers, which may be faxed to 661-323-7993, or e-mailed to [email protected]. And be sure to visit dennisbeaver.com.

  • SEE MORE When Mother Nature Hands You a Catastrophic Insurance Claim

Who Should Consider an Annuity (and Who Shouldn’t)

You can make your best effort for planning your retirement, but how much of what you are thinking or planning can you actually control? 

You can’t control the market, how long you’re going to live, inflation, health care costs, your health care needs, tax law changes, pension or Social Security solvency, economic shifts, government intervention, the list goes on.

There is so much uncertainty in life. Besides a weather forecast, we don’t know what tomorrow brings for any of us (and even the weather forecast is not always reliable). 

  • SEE MORE How to Know When You Can Retire

The reality of what could happen can hit you like a freight train when you begin to think about what you can and can’t control.  All this uncertainty surrounding retirement is why annuities are so popular.  They are a way to transfer risk over to an insurance company and provide some sense of safety for the future. 
This concept is nothing new.  We transfer risk to insurance companies for all sorts of things and rely on them to cover losses when things outside of our control occur.  Retirement is no different.  In fact, retirement income can be a much greater risk than any of these other things we deem worthy of insuring when you think of the amount of money that is at stake. 

The risk of running out of money is a real concern for many retirees and is why there is an estimated $2.53 trillion of retirement assets are held inside of annuities, according to Statista.

What is an annuity? 

Annuities are issued by insurance companies as a form of insurance, allowing retirees to transfer the risk of running out of money for retirement income or losing money in the stock market away from themselves and onto the insurance company. 

There are essentially three types of annuities:  variable, fixed index and fixed rate.  The variable allows for stock market investing, the fixed rate has a set rate of interest and the index has a proprietary crediting method that is tied to an index.

The fixed rate and index have guarantees against loss of principal, while the variable has a degree of downside risk similar to any other investment.  The index and variable have benefits that can be added for a fee that provide the annuity holder a guarantee for income in their retirement.

The income benefits vary from contract to contract and are typically associated with your age.  The older you are, the higher the payout percentage can be and it is determined by the proprietary calculations of the insurance company.

One of the misconceptions about income benefits is that the use of this feature is an exchange of the principal for income.  That is not true. The income benefits are separate from the account value.  However, the income taken through the benefits and any fees applied to the account are deducted from the account value and can deplete the account over time.  This is where the insurance kicks in and continues the income beyond the assets in the account.  Of course, guarantees of an annuity are based on the financial strength and claims paying ability of the issuer.

Comparatively speaking, if you use the 4% rule as a distribution strategy from your investments, that assumption assumes that based on past performance that your money should last for 30 years.  So, even while using an investment, you are still facing the risk of depleting your assets but without the insurance for income.  I explain this more in a previous article, My 5-Minute Retirement Plan.

Often there is some confusion between what was just described and the fixed annuity version of this income benefit, called an annuitization.  When an immediate fixed annuity is purchased, the amount deposited is essentially a purchase of a pension-like payment for a specified period.  However, these two income benefits are not the same and shouldn’t be confused.

As you can see, annuities are complex, and it would take an entire book to outline and compare all of the annuity types.  So, while I believe that annuities should be considered for certain situations, you want to make sure you know what you’re getting into and avoid being sold a program that you don’t understand.  This shouldn’t be a problem if you work with a fiduciary financial adviser who doesn’t just sell annuities. 

Is an Annuity Right for You? How to Tell

I am a strong believer that whether or not you should use an annuity depends on your situation. That is not a popular stance to have, since those who sells annuities suggest that everyone should own an annuity, while those who sell investments tend to badmouth annuities. 

These are the fringe of opinions, and there rooted more in a business model than what is necessarily best for the client.  My take on this is a little different and more geared toward what someone needs or wants. 

Here is how I see it, when it comes to who may be a candidate for annuities:

  • Consider saying yes to annuities: If you are someone approaching retirement who wants to grow and protect your retirement income or simply wants to keep some of your money out of the market, protected from downside risk, then look into annuities. 
  • Consider saying no to annuities: If you don’t fall into one of these two camps, then it is likely that an annuity isn’t the best option for you.  There are a few other special uses but that is for another discussion.

Annuities vs. Investments

I believe the best way to accumulate wealth is through capital appreciation over time.  The market has more upside potential than most other possibilities outside of owning a business or real estate, which makes it the best option for long-term growth. 

As a diversification tool, using income-oriented investments specifically within private markets is a way to not only diversify asset classes but also investment types, which further spreads out your risk and also lessens correlation.

  • SEE MORE As You Approach Retirement, C.A.N. You Handle a Market Downturn?

Another addition would be the use of specially designed life insurance contracts.  Not only do these designs substitute and replace the need for bonds, they also build tax-free assets without the restrictions of a retirement account.  I explain this in more detail in this article: What to Do with Cash in a Low Interest Rate Environment. 

With all of this said, I feel insurance agents and investment advisers have not clearly communicated these facts and have confused people about whether buying an annuity is appropriate for them. 

The fact is that annuities are not in competition with investments at all, since they are totally different products with different purposes.  Both have a place at different times in someone’s life depending on their needs. It is never a one-size-fits all situation, and there are no absolutes one way or another.  

Common Myths About Annuities

The four most common myths talked about from listeners to my podcast and followers of my writing about annuities are: 

Annuities have lower growth potential.  The truth is that some annuities can grow just as competitively as a regularly managed portfolio.

An income annuity will run out of money. The truth is that while, yes, an annuity can run out of money, an investment portfolio carries the same risk of running out of money … only without the insurance.

Annuities are too expensive.  The truth is that some annuities can be pretty expensive when you add together all the rider options and contract fees, but what is often not mentioned is that some annuities have no fees at all.

The stock market has historically performed well enough that there is no need for the guarantees of an annuity.  The truth is that we don’t know for sure what the future holds, but when people discuss historical performance, I find that their references are often too short-sighted to understand the reality over time.  This is where sequence of return risk to a portfolio over a reasonable time frame can help provide perspective.

For example, if you were to retire in 1989 and enjoyed the bull run of the 1990s then experienced the reversal of good fortune in the 2000s, you would have seen the best and the worst of the market.  It illustrates that markets will move with earnings and headlines, but economic and political cycles are the real drivers of the market and the long-tailed effects are what can propel you or sink you.

Courtesy of Brian Skrobonja

Above is an example of a 20-year time frame side by side with the returns reversed to illustrate the significance of what I am explaining. The example assumes a $1 million balance at the beginning with a $50,000 annual withdrawal rate and a 3% inflation factor.

As you can see, the left side grows while the right side runs out of money with the exact same average return.  This is sequence of return risk, and it adds to the complexities of retirement income planning while relying on the stock market.  It is not the returns that matter as much as the sequence of those returns.

If you consider that we are on the back side of what many experts believe is the end of a long bull run, the question to ask is whether you are on the left side or the right side of this chart? 

My purpose behind writing this article is to shed light on the problem of relying on things outside of your control and basing that decision on bad information. Whether you use an annuity or not is less important than you understanding why you’re making the decision.

I will conclude by saying that just like anything you insure, no one loves insurance unless they find themselves using it to replace something valuable that they lost.  At that point they are thankful they have it.

If you would like to evaluate the use of an annuity for your retirement planning, you can request a consultation at https://calendly.com/brianskrobonja/initialfuture.  Just mention “Kiplinger Annuity Evaluation” for a free report when you schedule.

Securities offered through Kalos Capital Inc., Member FINRA/SIPC/MSRB and investment advisory services offered through Kalos Management Inc., an SEC registered Investment Adviser, both located at11525 Park Wood Circle, Alpharetta, GA 30005. Kalos Capital Inc. and Kalos Management Inc. do not provide tax or legal advice. Skrobonja Financial Group LLC and Skrobonja Insurance Services LLC are not an affiliate or subsidiary of Kalos Capita  Inc. or Kalos Management Inc.
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How to Handle an IRS Audit of Your Tax Return

Regardless of why you’re chosen, it’s quite a shock to learn that the IRS wants to examine your return. Even if you have no reason to think you did anything wrong, you can’t escape the anxiety that accompanies an audit notice. For one thing, the return being audited is unlikely to be the one you just filed. The IRS generally has three years from the due date of your return to initiate an audit. So, for example, the IRS generally has until April 18, 2022, to flag your timely filed 2018 return for an examination.

  • SEE MORE 23 IRS Audit Red Flags

But, whatever you do, don’t panic! Here’s what to expect and some tips on how to proceed. Hopefully, we can lower your stress level a notch or two.

How an Audit Begins

If you’re selected for an audit, you’ll get a letter announcing your fate. The simplest audit—a correspondence audit—requires only that you mail in the records needed to verify a specified claim on your return. Over the past few years, the IRS has been doing more of these types of audits. For a field audit, an IRS agent comes to your home or place of business to go over your records. Most common face-to-face meetings, though, come during office audits, which typically take place at a local IRS office.

You’ll probably have at least a couple of weeks to prepare. If the appointment is set for an inconvenient time or you find that you’ll need extra time to pull your records together, call the IRS as soon as possible and ask for the audit to be rescheduled.

  • SEE MORE 20 Most-Overlooked Tax Deductions, Credits and Exemptions

The written notice will note the items on your return that are being questioned—usually such broad categories as employee business expenses or casualty losses—and outline the types of records you’ll need to clear up the matter. Office audits are usually limited to two or three issues, so you won’t be expected to haul in all your records.

What kind of evidence do you need? Here’s what a retired IRS official with 30 years of auditing experience said when we asked him that question: “I expect to see the records you used when you prepared the tax return. You must have had some. Otherwise, how did you know you gave $5,000 to charity?”

Also, be aware that auditors are sometimes looking for more than proof of what’s on your return. They’re also interested in whether income that should have been reported on your return was left off. That could mean a review of your bank records, for instance, in search of deposits that might represent unreported income.

Audit Yourself

The best way to begin preparing for your meeting is to pull out your copy of the return being audited. Before the IRS puts your forms to the test, do the deed yourself. And to get an idea of the IRS’s methods, check to see if there’s an IRS audit technique guide for your business or industry. These manuals are designed to help IRS agents understand how various kinds of businesses work and what to look for when going over a return. That guidance can be helpful for the taxpayer on the receiving end of the audit, too.

Pore over the items being questioned and pull together the documents that support your entries. Of course, there will be gaps, but don’t automatically concede defeat. Try to reconstruct missing records:

  • If, as luck would have it, you can’t find the return, call the IRS office that contacted you and ask how to get a copy.
  • Get copies of canceled checks from the bank or duplicates of receipts or written statements from individuals who can back up your claims.
  • If you can’t come up with written evidence for certain entries, prepare an oral explanation.

Your records don’t need to be perfect. If you can reasonably explain how you came up with a figure that’s not fully corroborated by the evidence, the IRS may well accept it. The IRS likes to stress how reasonable audit personnel are. However, when you’re pulling together your records, remember this: The more thorough your documentation is in general, the more likely an auditor will cut you some slack on an occasional point.

Do You Need Help?

You can avoid going to the audit by hiring someone to go in your place. However, a representative must have written authorization to act for you. The IRS provides a power-of-attorney form—Form 2848—for this purpose. Whether you go alone or hire a representative to go with you or in your place depends primarily on the issues involved. If they’re relatively simple, cut-and-dried matters, you may be able to settle things without help. However, when matters are more technical or require interpretation of the law, it’s more likely you’ll need assistance. You have to make this judgment, and it will turn in part on how you feel about going head-to-head with the IRS. If you’re scared, by all means get someone to go with you or in your place.

  • SEE MORE 2021 Tax Returns: What’s New on the 1040 Form This Year

If someone else prepared your return, let him or her know about the audit and ask for tips on how to get ready for it. Whether you want this person to go along may depend on how much that would cost. Although the IRS prefers to wrap up cases with one meeting, if you don’t agree with the auditor’s conclusions or need time to round up extra evidence, you can schedule a follow-up meeting. Unless you fear you might capitulate if you go to the audit alone, you may want to try to settle as many issues as you can by yourself. If disagreements remain and the amount of money at stake justifies the expense, you can take an adviser along to the next session. That way you’ll have help when you really need it but won’t have to pay for handholding while you clear up routine matters. And don’t forget that the Taxpayer Bill of Rights gives you the right to stop an audit in its tracks if you decide you want representation. If the audit begins to veer off of the topics you are prepared to discuss, for example, you can call a halt to the proceedings and seek help if you need it.

The Big Day

The key to success is being well prepared. Forget the old slapstick routine of dumping a box of canceled checks and ratty receipts on the auditor’s desk. That suggests your records are sloppy, and that’s the last impression you want to give. Remember, it’s up to you to back up the information on your return. The better organized your records, the more smoothly things will go.

  • SEE MORE What Are the Income Tax Brackets for 2021 vs. 2022?

Establish credibility right from the start. If you do, there’s a better chance a gap later may be overlooked. Say that the audit notice states that your interest deductions, charitable contributions, and travel write-offs will be reviewed. If you’re solid on interest and contributions but shaky on travel, try to steer the audit to your strong suits first.

Don’t go into the session looking for a fight, but don’t equate being cooperative with giving in whenever the auditor raises an eyebrow, either. If the agent tells you your records don’t substantiate a deduction, for example, ask what might suffice. Perhaps you can mail it in later.

Don’t chat your way into a problem. Keep in mind that the agent is trained to zero in on tax issues. A comment you consider totally unrelated to your return might lead you into a thicket. Defending a deduction by saying you’ve taken it in the past, for example, could prompt a review of previously filed returns; discussing the family’s cross-country driving vacation might lead the agent to recalculate the ratio of business/personal miles for your car; or bemoaning the problems that led your child to drop out of college could cost you a tax credit. Fear that taxpayers will talk themselves into trouble is the key reason many advisers recommend sending a representative to the audit rather than showing up in person.

Cutting a Deal—or Not

If you do go, above all, keep your wits about you. Don’t be pressured into settling an issue just to bring the audit to an end. The IRS argues strenuously that it doesn’t judge its agents on how much extra money their audits produce. Even so, the fact is that one of the best guides to an agent’s efficiency is the amount of additional tax he or she generates without going through all the formal assessment procedures or litigation.

  • SEE MORE The 10 Most Tax-Friendly States for Middle-Class Families

Also remember that there may be room for compromise on the issue at hand. It may save time and money all around to agree on some in-between point or even for one side to give up on one disputed item in order to win on another.

Most office audits take a few hours. You’ll spend a lot of that time watching the agent crunch numbers. When it’s over, you’ll get the auditor’s decision—usually that you owe more tax. He or she should explain each proposed change to your return and the reason for it.

If you agree, that’s fine. But remember that the auditor doesn’t have the final say. If you disagree with a finding, tell the auditor so and restate your position. He or she may be willing to compromise to close the case promptly.

You have several options if you choose to fight on. Even if you’ve handled things by yourself so far, at this point you may need professional help. You can ask for another meeting with the auditor to present additional evidence, or you can make an informal appeal to the auditor’s boss. If you’re still unhappy, you can go to the IRS regional appeal level. Or you can take your case to court.

  • SEE MORE The 10 Least Tax-Friendly States for Middle-Class Families

Alpine Skier Takes a Third Run at the Winter Olympics

Who: Jared Goldberg, age 30

What: Olympic alpine skier

Where: Salt Lake City

You’re headed for your third Winter Olympics. In which events will you compete in Beijing?

They had not decided who will be on the teams as of early January, but I’m preparing for the downhill and super-G races.

How did you become a world-class skier?

My family and I moved to Salt Lake City from Boston when I was 4 years old. I spent a lot of time skiing at Snowbird Mountain Resort. It was a really cool upbringing because I got to spend my time on a ski team that was like a big family. I went to high school in Salt Lake, and I was able to work it out with my teachers that I would leave for weeks at a time. They fully supported me; I just told them I had a dream that I would go to the Olympics someday. And then when I was 19, I made the U.S. ski team. At 22, I was the youngest member of the Sochi Olympics U.S. men’s alpine team.

What’s life like for a professional skier?

It’s a 6 a.m. to 10 p.m. job with a lot of traveling. We’re on the road about five and a half months of the year, if not more. It’s really cool because we get to see the world and ski on different mountains all over the world. We’re working hard and strength training when we’re on the road. These days, it’s hard to work out in public gyms, so in Europe we’ve been carrying around a whole set of weights and equipment. We have to constantly exercise and do physical therapy. We also watch video when we’re done with training.

What COVID protocols are you following for the Olympics?

Right now, we’re in our downhill team bubble. We’re almost a bubble within a bubble, actually, because we also limit our contact with the other guys on the U.S. ski team. And when we’re out in public, we’re not able to do as many autograph signings, and family members aren’t even allowed to stay with us at the races this year. That has been the protocol for basically the whole year. If we’re around other people, we have to wear a mask—sometimes even within our own meetings with our downhill team.

You need to be vaccinated to go, and on our team, you need to also have a booster. There’s going to be a lot of testing before we fly and when we get there. The workers are going to be wearing hazmat suits on the plane, I’ve been told.

How do you support yourself?

I have sponsorships with Snowbird Mountain resorts, and I have equipment sponsors. My skis, my helmet, my goggles, my Spyder outerwear, those brands are my other source of income. There’s also prize money. You get paid for your position, and you get points for your positions as well. If you’re in the top 30, you get World Cup points—100 points for first place all the way down to one point for 30th place. I make a little bit of money on Cameo, too. I do shoutouts, happy birthdays, give people advice and things like that.

I also dabble with cryptocur­rencies for fun. I started investing in crypto about four years ago. A couple of buddies on the team and I started playing around with it, not with big numbers or anything. It has just been kind of fun fooling around and learning more about it.

What are your thoughts on the political situation with China now?

I think that it’s a good call to not pull the athletes out of the competitions, because we’d give up a lot of medals. We don’t want to make it easy for the other countries.

5 Tips for Growing a Successful Business

Businesses are evolving and there is tough competition among organizations to survive in the market. Startups struggle in their initial stages, and even established businesses have to constantly adopt changes for business growth. More than 40% of the top Fortune 500 companies were not there a decade ago. Understanding the market deeply and determining key performance indicators is crucial for success and growth. Every business goal is connected to profitability and progress, but lack of planning can significantly impact the success of a business. There are a few common themes found in successful businesses. 

Proper planning and structuring

Each step you plan to take to reach business goals should be well-defined in your planning stages. These plans should serve as a blueprint for core business decisions. These initial stages can be complex initially, but well-defined organizational structures help to arrange and allocate finances and human resources accordingly. 

Consistent research

Research shouldn't be restricted to the initial stages of your business. Before starting a new company, market research is crucial – but consistent exploration of industry trends and comparative issues helps find solutions to new glitches that inevitably will arise. Staying informed about what else is happening in the industry will help serve the customer better. 

Opt for ISO accreditations  

Best Practices help businesses get ISO certification. This helps to ensure customer satisfaction, trust, and consistent improvement. Being ISO certified means the company follows strict guidelines to ensure that its products or services are of the highest quality. Your brand image is improved because of your willingness to go through the process to get ISO certification, which also ensures enhanced quality and efficiency of your business.  

With an ISO system, business efficiency and productivity increase, product or service deficiencies are highlighted, product returns are reduced, waste is lowered, and customer complaints decrease. Orders are met consistently according to the correct specification and deliveries are on time. ISO accreditation has been reported for better sales growth in comparison to businesses that are not certified. 

Small business must opt for ISO standard certification to grow successfully – establishing even processes right from the start proves to be beneficial over time, especially for startups. Startups can consistently offer improved products or services and simultaneously create a solid foundation for effective growth and expansion. The key benefits of introducing ISO 9001 certification includes:

  • Structured and effective process management
  • Enhanced quality and customer service
  • Business risk assessment
  • Consistent process
  • High customer satisfaction & retention
  • Enhanced brand awareness and credibility
  • Valuable and accurate data for decision making
  • Increased ROI

Ideal marketing strategy

Determine a marketing strategy based on your business type, niche, budget, target market, and the results from your initial research stage. Choose the appropriate tools to market your business, be it social media channels, an active blog, paid advertising on other websites or similar businesses, or campaigns with a mix of these tools. Marketing is crucial – it can play a large role in the success of your business, but it requires significant attention. 

Financial planning

Running a business without sufficient funds is impossible. Sticking to your budget will ensure easy cash flow, enough resources, and liquidity. In your planning stages you should be determining how to raise business capital – but be aware of interest payments.

Consider capital appreciation and ensure that there is a sufficient contingency reserve to prevent possible losses. 

Make sure to be transparent while sharing product details and remember that the chances of success are high if your business idea is innovative and you have sufficient planning.