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Wall Street feeds the fantasy that we can beat the market, because the fantasy is a great moneymaker—for Wall Street.

Newsletter No. 34

HOW CAN WE GET the most out of our income and savings? Two years ago, in a slim volume called How to Think About Money, I offered my answer. Earlier this month, a new edition of the book came out, geared toward a global audience. To mark the new edition’s publication, I’ve devoted HumbleDollar’s latest newsletter to How to Think About Money’s 12 key recommendations.
The newsletter also includes a promo code that can save you money,

Read more »

Slow Going

HAS THE PERCENTAGE of individuals across the world living in extreme poverty remained the same, doubled or halved over the past 20 years? If you answered halved, give yourself a pat on the back. According to Gapminder.org, you’re among just 9% of respondents who answered the question correctly. Despite what you hear on the news, the world is gradually becoming a better place.
It’s difficult to recognize progress, including our own financial progress, when it happens slowly over long periods of time.

Read more »

Won in Translation

RETIREMENT IN America can be like plodding through a long, dark tunnel, with seemingly no light at the other end. I found, however, that if one looks sideways, there’s an escape hatch: retiring abroad.
For my husband and me, our search led us to Spain, having heard it had a low cost of living, excellent health care and a good climate. We visited a few times and fell in love, particularly with the city of Granada.

Read more »

Latest Blogs

Newsletter No. 34

HOW CAN WE GET the most out of our income and savings? Two years ago, in a slim volume called How to Think About Money, I offered my answer. Earlier this month, a new edition of the book came out, geared toward a global audience. To mark the new edition’s publication, I’ve devoted HumbleDollar’s latest newsletter to How to Think About Money’s 12 key recommendations.
The newsletter also includes a promo code that can save you money,

Read more »

Slow Going

HAS THE PERCENTAGE of individuals across the world living in extreme poverty remained the same, doubled or halved over the past 20 years? If you answered halved, give yourself a pat on the back. According to Gapminder.org, you’re among just 9% of respondents who answered the question correctly. Despite what you hear on the news, the world is gradually becoming a better place.
It’s difficult to recognize progress, including our own financial progress, when it happens slowly over long periods of time.

Read more »

Won in Translation

RETIREMENT IN America can be like plodding through a long, dark tunnel, with seemingly no light at the other end. I found, however, that if one looks sideways, there’s an escape hatch: retiring abroad.
For my husband and me, our search led us to Spain, having heard it had a low cost of living, excellent health care and a good climate. We visited a few times and fell in love, particularly with the city of Granada.

Read more »

Blog archive

Numbers

A BLAST FROM THE PAST: Between 2000 and 2009, emerging markets clocked 10.1% a year, high-quality U.S. bonds 6.3% and developed foreign markets 1.6%. What about the S&P 500? It lost 1% a year.

Truths

NO. 43: IT’S TOUGH TO TIME the market. If you trade in and out of stocks, trying to capture bull markets and sidestep market declines, you could easily miss out on big gains. The problem: Stock market gains and losses often come in quick bursts, making timing difficult, plus you could generate hefty trading costs and tax bills.

Truths

NO. 43: IT’S TOUGH TO TIME the market. If you trade in and out of stocks, trying to capture bull markets and sidestep market declines, you could easily miss out on big gains. The problem: Stock market gains and losses often come in quick bursts, making timing difficult, plus you could generate hefty trading costs and tax bills.

Act

GET SPENDING MONEY OUT OF STOCKS. Calculate how much cash you’ll need from your portfolio over the next five years. That money should be out of stocks and invested in nothing more volatile than high-quality short-term bonds. You don’t want to be forced to sell stocks at depressed prices—and that could happen if your time horizon is less than five years.

Think

DISPOSITION EFFECT. Investors tend to sell their winners too quickly and hang on to losers for too long, often hurting their returns and generating unnecessarily large tax bills. Blame all this on our loss aversion: We’re anxious to turn paper gains into cash profits, before they slip away. Meanwhile, with losing investments, we hope to “get even, then get out.”

Home Call to Action

Free Newsletter

Thinking About Money

I HAVE SPENT 33 YEARS writing and thinking about money. I’m not sure it’s the most uplifting way to spend one’s life, but it’s kept me busy and—for the most part—out of trouble.
Two years ago, I took some of the financial ideas that have especially intrigued me over the past three decades, and I brought them together in a slim volume called How to Think About Money. The book proved surprisingly popular,

Read More »
Jonathan Clements

About Jonathan

Jonathan Clements is the founder and editor of HumbleDollar. He spent almost two decades at The Wall Street Journal, where he was the personal finance columnist. His latest book: From Here to Financial Happiness.

Money Guide

Start Here

Inflation-Indexed Treasurys

INFLATION-INDEXED TREASURY bonds, formally known as Treasury Inflation Protected Securities, or TIPS, were first sold in January 1997, with the 10-year note initially yielding 3.45 percentage points more than inflation. Unfortunately, yields have been trending lower ever since. They did briefly spike above 3% in late 2008. But that rich yield didn’t last long, and 10-year TIPS were yielding 0.96% more than inflation at the end of 2018's third quarter. While the yield on regular 10-year Treasury notes is often depicted as the risk-free rate, arguably that distinction belongs to 10-year TIPS. Not only are you protected against defaults, but also you’re protected against inflation. The principal value of an inflation-indexed Treasury bond is stepped up along with the inflation rate. The semiannual interest payment is then calculated by applying the bond’s rate to this increased principal value. For instance, if inflation runs at 3% and you buy bonds yielding 1%, your annual total return would be 4%. One warning: If you own TIPS in a regular taxable account, you will owe federal income taxes each year on both the interest payments and the step-up in principal value. Want to get a handle on expected inflation for the next 10 years? Take the yield on regular 10-year Treasurys, which was 3.06% at the end of 2018's third quarter, and subtract the 0.96% offered by 10-year TIPS. The 2.1% difference is the annual inflation rate expected by investors over the next 10 years. TIPS can be purchased directly from the government. But you might also check out low-cost mutual funds, such as Fidelity Spartan Inflation-Protected Bond Index Fund and Vanguard Inflation-Protected Securities Fund. There are also low-expense ETFs available, including iShares TIPS Bond ETF and SPDR Barclays TIPS ETF. Next: Floating Rate Treasury Notes Previous: Ten-Year Treasurys
Read more »

Archive

Unending Pain

SOME OF MY CLIENTS are political junkies; others don’t follow politics. Either way, they’re mostly aware that the Affordable Care Act, a.k.a. Obamacare, overhauled the rules for medical insurance. But lots of them are unaware that ACA’s overhaul also significantly changed some tax laws—and those changes adversely affected their pocketbooks.

I remind my clients that ACA included a provision that increased Medicare taxes for employees with high incomes. Similarly, it increased self-employment taxes for freelancers with high incomes.

The ACA introduced an additional Medicare tax of 0.9%. Who gets dinged for this surtax? It hits joint filers with wages above $250,000 ($125,000 for married couples filing separate returns) and single filers over $200,000. It also hits individuals with self-employment income above these thresholds. Moreover, once your modified adjusted gross income (same as adjusted gross income for most individuals, except expatriates) reaches these levels, a 3.8% surtax applies to some of your investment income.

Yesterday, Senate Republicans abandoned their latest effort to replace Obamacare. But what if the ACA was repealed and the 0.9% and 3.8% surtaxes went away? While high-income individuals would pay less in income taxes on their earnings and investment income, they’d find that Medicare taxes, unlike Social Security payroll taxes, would still take a piece of every $1 they earn.

ACA left unchanged employees’ existing liability for payroll taxes, officially known as FICA taxes. (FICA is short for Federal Insurance Contribution Act.) Longstanding rules require employers to withhold FICA taxes from amounts paid to their employees as wages, salaries and other forms of compensation. ACA made no change in the requirement that employers, too, must ante up. They have to match the payroll taxes that they subtract from their employees’ compensation.

Different rules, which have been on the books for eons, remain applicable when individuals are their own bosses and operate as sole proprietors, in partnership with others or as independent contractors. While freelancers sidestep FICA taxes, they’re liable for self-employment taxes. Think of them as FICA taxes for the self-employed.

How does a kinder and gentler IRS deal with individuals who are both employees and moonlight as freelancers? The agency will nick them for both FICA and self-employment taxes.

FICA taxes consist of two components with different rates. First, the rate is 6.2% for the Social Security benefits portion, up to a limit of $127,200 for 2017. Once you hit $127,200 in earnings for the year, withholding from your paycheck for Social Security payroll taxes ends. Spoiler alert: The annual cap is indexed, meaning it’s adjusted for inflation and will increase for 2018.

The other FICA rate is 1.45% for the Medicare fund, the federal medical insurance program for the elderly. There’s no ceiling on the amount of wages subject to the 1.45% rate, meaning employees with earnings above $127,200 must pay Medicare taxes on every dollar of their salaries, wages, bonuses, commissions, vacation pay and the like. Workers surrender $14.50 to Medicare taxes for each $1,000 of compensation.

As with FICA taxes, ACA left intact the key rules for self-employment taxes. They’re still imposed at a rate of 15.3% on net earnings (receipts minus expenses). This is twice the 7.65% usually paid by employees, because self-employed persons pay both the employer and employee halves.

Like FICA taxes, self-employment taxes consist of two components with different rates. The rate is 12.4% for the Social Security benefits portion, up to a limit of $127,200 for 2017.

The other self-employment rate is 2.9% for the Medicare fund. There’s no ceiling on the amount of net earnings subject to the 2.9% rate, meaning self-employed persons with earnings above $127,200 pay Medicare taxes on every dollar of their earnings. They forfeit $29 to Medicare taxes for each $1,000 they earn.

Julian Block writes and practices law in Larchmont, NY, and was formerly with the IRS as a special agent (criminal investigator). His previous blogs include Moving On and Late? That'll Cost You 50%. This article is excerpted from Julian Block’s Easy Tax Guide for Writers, Photographers, and Other Freelancers, available at JulianBlockTaxExpert.com. Follow Julian on Twitter @BlockJulian.

Read more »

Money Guide

Start Here

Inflation-Indexed Treasurys

INFLATION-INDEXED TREASURY bonds, formally known as Treasury Inflation Protected Securities, or TIPS, were first sold in January 1997, with the 10-year note initially yielding 3.45 percentage points more than inflation. Unfortunately, yields have been trending lower ever since. They did briefly spike above 3% in late 2008. But that rich yield didn’t last long, and 10-year TIPS were yielding 0.96% more than inflation at the end of 2018's third quarter. While the yield on regular 10-year Treasury notes is often depicted as the risk-free rate, arguably that distinction belongs to 10-year TIPS. Not only are you protected against defaults, but also you’re protected against inflation. The principal value of an inflation-indexed Treasury bond is stepped up along with the inflation rate. The semiannual interest payment is then calculated by applying the bond’s rate to this increased principal value. For instance, if inflation runs at 3% and you buy bonds yielding 1%, your annual total return would be 4%. One warning: If you own TIPS in a regular taxable account, you will owe federal income taxes each year on both the interest payments and the step-up in principal value. Want to get a handle on expected inflation for the next 10 years? Take the yield on regular 10-year Treasurys, which was 3.06% at the end of 2018's third quarter, and subtract the 0.96% offered by 10-year TIPS. The 2.1% difference is the annual inflation rate expected by investors over the next 10 years. TIPS can be purchased directly from the government. But you might also check out low-cost mutual funds, such as Fidelity Spartan Inflation-Protected Bond Index Fund and Vanguard Inflation-Protected Securities Fund. There are also low-expense ETFs available, including iShares TIPS Bond ETF and SPDR Barclays TIPS ETF. Next: Floating Rate Treasury Notes Previous: Ten-Year Treasurys
Read more »
Home Call to Action
Jonathan Clements

About Jonathan

Jonathan Clements is the founder and editor of HumbleDollar. He spent almost two decades at The Wall Street Journal, where he was the personal finance columnist. His latest book: From Here to Financial Happiness.

Free Newsletter

Thinking About Money

I HAVE SPENT 33 YEARS writing and thinking about money. I’m not sure it’s the most uplifting way to spend one’s life, but it’s kept me busy and—for the most part—out of trouble.
Two years ago, I took some of the financial ideas that have especially intrigued me over the past three decades, and I brought them together in a slim volume called How to Think About Money. The book proved surprisingly popular,

Read More »

Archive

Unending Pain

SOME OF MY CLIENTS are political junkies; others don’t follow politics. Either way, they’re mostly aware that the Affordable Care Act, a.k.a. Obamacare, overhauled the rules for medical insurance. But lots of them are unaware that ACA’s overhaul also significantly changed some tax laws—and those changes adversely affected their pocketbooks.

I remind my clients that ACA included a provision that increased Medicare taxes for employees with high incomes. Similarly, it increased self-employment taxes for freelancers with high incomes.

The ACA introduced an additional Medicare tax of 0.9%. Who gets dinged for this surtax? It hits joint filers with wages above $250,000 ($125,000 for married couples filing separate returns) and single filers over $200,000. It also hits individuals with self-employment income above these thresholds. Moreover, once your modified adjusted gross income (same as adjusted gross income for most individuals, except expatriates) reaches these levels, a 3.8% surtax applies to some of your investment income.

Yesterday, Senate Republicans abandoned their latest effort to replace Obamacare. But what if the ACA was repealed and the 0.9% and 3.8% surtaxes went away? While high-income individuals would pay less in income taxes on their earnings and investment income, they’d find that Medicare taxes, unlike Social Security payroll taxes, would still take a piece of every $1 they earn.

ACA left unchanged employees’ existing liability for payroll taxes, officially known as FICA taxes. (FICA is short for Federal Insurance Contribution Act.) Longstanding rules require employers to withhold FICA taxes from amounts paid to their employees as wages, salaries and other forms of compensation. ACA made no change in the requirement that employers, too, must ante up. They have to match the payroll taxes that they subtract from their employees’ compensation.

Different rules, which have been on the books for eons, remain applicable when individuals are their own bosses and operate as sole proprietors, in partnership with others or as independent contractors. While freelancers sidestep FICA taxes, they’re liable for self-employment taxes. Think of them as FICA taxes for the self-employed.

How does a kinder and gentler IRS deal with individuals who are both employees and moonlight as freelancers? The agency will nick them for both FICA and self-employment taxes.

FICA taxes consist of two components with different rates. First, the rate is 6.2% for the Social Security benefits portion, up to a limit of $127,200 for 2017. Once you hit $127,200 in earnings for the year, withholding from your paycheck for Social Security payroll taxes ends. Spoiler alert: The annual cap is indexed, meaning it’s adjusted for inflation and will increase for 2018.

The other FICA rate is 1.45% for the Medicare fund, the federal medical insurance program for the elderly. There’s no ceiling on the amount of wages subject to the 1.45% rate, meaning employees with earnings above $127,200 must pay Medicare taxes on every dollar of their salaries, wages, bonuses, commissions, vacation pay and the like. Workers surrender $14.50 to Medicare taxes for each $1,000 of compensation.

As with FICA taxes, ACA left intact the key rules for self-employment taxes. They’re still imposed at a rate of 15.3% on net earnings (receipts minus expenses). This is twice the 7.65% usually paid by employees, because self-employed persons pay both the employer and employee halves.

Like FICA taxes, self-employment taxes consist of two components with different rates. The rate is 12.4% for the Social Security benefits portion, up to a limit of $127,200 for 2017.

The other self-employment rate is 2.9% for the Medicare fund. There’s no ceiling on the amount of net earnings subject to the 2.9% rate, meaning self-employed persons with earnings above $127,200 pay Medicare taxes on every dollar of their earnings. They forfeit $29 to Medicare taxes for each $1,000 they earn.

Julian Block writes and practices law in Larchmont, NY, and was formerly with the IRS as a special agent (criminal investigator). His previous blogs include Moving On and Late? That'll Cost You 50%. This article is excerpted from Julian Block’s Easy Tax Guide for Writers, Photographers, and Other Freelancers, available at JulianBlockTaxExpert.com. Follow Julian on Twitter @BlockJulian.

Read more »