July Newsletter

Happy Independence Day! While we look forward to the fireworks that mark the month, there could be fireworks for millions when they see the higher levels of the “Shared Responsibility Payment” penalty in 2015. The new, higher penalties are outlined in this month’s issue. There are also articles on the Rule of 72, a possible tax break for summer child-care, and a number of money saving summer vacation ideas.

As always, should you know of someone who may benefit from this information please feel free to forward this newsletter to them.

The Rule of 72

A tool you can use
The “Rule of 72” is an approximation technique for how long it will take an investment value to double using compound interest.
Example: If you have $50,000 saved for your daughter’s college education and you place the money in an investment that yields 7%. How long will it take for the investment to become $100,000?
Answer: Approximately 10.286 years. (72 divided by 7).

Who came up with the rule?

The Rule of 72 has been around for some time. Its origins are traced back to a 1494 published account in Venice, Italy by the Franciscan monk Luca Pacioli. While most historians believe the rule existed prior to this publication, it is one of the first written accounts of the rule. Coincidentally, this is the same publication that introduces the dual entry accounting system that is widely used by all businesses today.

Power of 72
Is it accurate?

The system is most accurate using interest rates from 6% to 12%. For lower interest rates, dividing by 70 will give you slightly more accurate results.

Here is a table showing the actual doubling, the doubling result using the Rule of 72, and using 70.

Rate Actual Years Rule of 72 Rule of 70
0.25% 277.605 288.000 280.000
0.5% 138.976 144.000 140.000
1% 69.661 72.000 70.000
2% 35.003 36.000 35.000
3% 23.450 24.000 23.333
4% 17.673 18.000 17.500
5% 14.207 14.400 14.000
6% 11.896 12.000 11.667
7% 10.245 10.286 10.000
8% 9.006 9.000 8.750
9% 8.043 8.000 7.778
10% 7.273 7.200 7.000
11% 6.642 6.545 6.364
12% 6.116 6.000 5.833
15% 4.959 4.800 4.667
18% 4.188 4.000 3.889
20% 3.802 3.600 3.500
25% 3.106 2.880 2.800
How to use

While most use this tool to calculate the approximate length of time it takes an investment to double, you can also use it to determine the necessary interest rate to double an investment in a set amount of time.

Example: You need to double your money to fund your daughter’s college starting in 11 years and you currently have $50,000. What compound rate of return is required to reach your goal? Answer: 6.55% (72 / 11 years).

The rule can also be used to determine approximately how long it will take to triple your money (use 115) or to quadruple your money (use 144).

Remember, this handy mental tool should not be used to replace actual calculations. Investments rarely behave in a consistent manner, which is an underlying assumption of this doubling technique.

New Level of Shared Responsibility Penalty

Don’t let this one get out of hand
A part of the Affordable Care Act is the enactment of a tax penalty if you or your family does not have qualified health insurance coverage for the entire year. The new tax penalty, called the “shared responsibility payment” impacts taxpayers beginning in 2014. While the payment may have been manageable in 2014, it is going up quite a bit in 2015. Here is what you need to know. Uninsured
Shared Responsibility Payment Calculation
(greater of) 2014 NEW! 2015 Change
Flat Fee
$95.00 per adult
$47.50 per child
$285 maximum flat fee
$325.00 per adult
$162.50 per child
$975 maximum flat fee
+$230 per adult
+$115 per child
+$690 maximum flat fee
Cap Fee 1% of your yearly household income capped at the cost of the national average premium of the bronze level health plans available through the marketplace.* 2% of your yearly household income capped at the cost of the national average premium of the bronze level health plans available through the marketplace.* * Average premiums vary by state. No one knows what the new average will be, but it is expected to go up a minimum of 6%.
Note: If premiums are more than 8% of household income or the gap in coverage is less than three consecutive months or there is an approved hardship then the shared responsibility payment could be reduced.
Action to take

Arrow Get coverage. If you are currently uninsured, each month you delay in getting coverage increases the amount of the penalty you will be required to pay.
Arrow Plan for the penalty. If you know the penalty is coming, save money to make this payment when you file your tax return.
Arrow Shop around. Check with your employer and/or state agencies to see about available coverage. There are often programs and assistance available to make getting health care more affordable for most of us.

Vacations on a Budget

Some creative ideas

Summer is upon us. The kids are out of school. Everyone is looking forward to a summer holiday, but your budget is not cooperating. Here are some ideas to save a little money while still creating some wonderful memories. Because of the power of the internet, many of these money saving ideas can be accomplished while in the comfort of your own home.

icon Local tourist. Become a local tourist. It is easy to overlook all the fun activities, places to visit, and local restaurants that are right in your backyard. Consider creating a week-long plan of activities as if you are visiting for the first time. Plan your vacation around the dates a festival is in town. For a change of scenery, spend one or two nights at a local hotel.
icon Regionalize. This can help you get away from home, without all the added expense. Every region in the country has popular activities and events. It might be a state-wide garage sale, or visiting county fairs, or making a trek to the blueberry festival. Try your hand at a geo-caching adventure with your kids while you are exploring. This GPS adventure can keep the kids going for hours.
icon Camping anyone? A great way to visit parks and landmarks is to try your hand at camping. Even if you do not own equipment, there are outfits that can cost effectively provide you with rental gear for your camping adventure. Not sure if you are the outdoors type? Try a test run in the backyard or over a weekend.
icon Volunteer. A great way to supplement the cost of a vacation is to volunteer at a park, camp site, or at an event. By being a volunteer you can often save the cost of admission and get reduced or no-cost housing all while experiencing a new location. Many national and regional parks have volunteers managing areas for them.
icon House sit. An idea to save money while getting out of the house is to house sit for someone who is out of town. The change of scenery and location can be a great get away from your normal routine without spending much.
icon Book last minute. Often times tour packages and cruises will discount their fees for those ready to sign on at the last minute. These vacation firms prefer to fill their empty seats and cabins with someone versus losing the revenue.
icon Do this; not that. There are many popular books around the topic “this, not that”. Eat this, not that. Do this exercise, not that. Why not use the same idea when choosing a vacation destination. A popular seaside resort may be real expensive, but a similar quality resort a block from the beach may be 1/2 the price. If you are going to be out and about most days, do you need a balcony with a view? Even foreign destinations can vary dramatically in price, while providing a similar vacation experience.
icon The rent direct idea. With the advent of the internet, there are many more options to rent directly from owners versus staying in an expensive hotel. While there are more uncertainties going this route, there are many reputable rent-by-owner web sites that have a strong history.

Summer Child-Care Tax Opportunity

For millions of working parents the summer comes with the added challenge of finding care for their summer vacation bound kids. School hours need to be replaced with child-care hours.

With summer underway, you probably now have the child-care summer gap covered. There is a good chance this care could be tax deductible using the Child & Dependent Care Credit.

Summer Childcare
Qualifications for the credit

To take advantage of this tax savings opportunity you must meet the following qualifications.

Check You have: one or more dependent children under the age of 13
Check You have: earned income (wages, salary, tips or business income)
Check You are: single or married filing a joint tax return
Check You have: qualified day care expenses
Check You are: financially supporting and maintaining a home for your dependent child
What you should know

Most taxpayers that use this tax credit each year have their tax moves down. Those who use day care to bridge the summer gap could have a $3,000 to $6,000 tax credit if you organize now. To receive the credit:

Arrow The care must be provided so you can work. The care can also qualify if you are looking for work.
Arrow The care does not have to be at a facility. This means day camps, day care, and nanny care qualify. However, overnight camps or summer school costs do not qualify.
Arrow If married, both spouses need to work. There is some leeway if one spouse is a full-time student or is disabled.
Arrow You need to keep records. You need to have receipts for the care expense and you will have to report the caregiver’s tax information (name, address, and tax id/Social Security number) to receive the credit.
Arrow The care payment needs to qualify. You may not pay a dependent or your spouse to care for your children. But beyond this, who you pay is flexible.
The Child & Dependent Care Credit can allow you to deduct 20 – 35% of your summer child-care expense if you plan accordingly. Other details may apply so please call if you wish to discuss how this tax opportunity may work for you.

As always, should you have any questions or concerns regarding your situation please feel free to call.

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