Step 1

Choose which return to file the interest on, the parents’ return or a separate return with the child only. This avoids the need for filing a separate return for your children. The other option is to file a return for the child in addition to your return.

Step 2

Determine the amount of interest earned. This would be the amounts of all 1099 INTs issued in the child’s name. If the amount is more than $1,900, it’s possible that a Form 8615 would be required. This form would be required under the following conditions:

1. that the child would be under age 18 (or age 24 if a full time student).
2. Another condition exists that would require the child to file his or her own tax return.
3. That the child does not file a joint tax return. And, 4. that at least one of the child’s parents be alive at the end of the tax year. The Form 8615 includes calculations for figuring a child’s taxable interest payments. If the amount earned is less than $9,500 the parents can opt to include that amount on their own tax return without needing a separate one for their child.

They may do so on the following conditions:

1. The age requirements are similar in that the child must be under the age of 19 or 24 if a full time student.
2. There was no other income earned outside of interest payments or investments. 3. The child’s gross income can’t exceed a total of $9,500.
4. The child is required to file a return unless this election is made to include it on the parent’s return.
5. The child cannot file a joint return for the year.
6. There can have been no estimated taxes paid throughout the year or federal with-holdings from the earnings. Making this election requires the Form 8814 which must be filed with the 1040 long form.

Step 3

Decide which option to pursue. By far claiming your child’s interest on your return is easier than paying to have one more return prepared. If you are required to file two returns there are a couple of things to remember.

One, your child’s return can be filed and you can still claim the child as an exemption and a dependent by indicating you wish to do so on his return. File both together or e-file yours and mail the child’s return.
Two, this is not a return you can have filed by the simple basic return preparers at a local tax preparation franchise. More than likely, they’ve never seen an 8814 or 8615 in all their years of practice. The disadvantage to this option is that the child’s earnings will get taxed at a typically higher rate, yours.

The other option (filing two returns) may save you on taxes paid out of your child’s earnings, but the requirements are strict and must be followed to the letter. The additional costs to prepare two returns will increase the actual cost of this option as well.

Having a budget is the foundation of managing your money. Making budget is easy when you have a dependable income that’s the same every month. But what do you do when your income varies from one month to the next? This is the case for many contractors and freelancers. Your expenses remain the same, but your income doesn’t. You still need a budget and you can make one. You have to go about it differently.

Total your expenses

When you’re making a variable-income budget, start by totalling your income as you would if your income was fixed. Add up the things you spend money on every month. This includes rent/mortgage, utilities, car note, car insurance, health insurance, life insurance, phone bill, loan payments, credit card payments, and taxes. You should even calculate how much you’ll spend on variable expenses like gas and food.

Average your income

If you had a variable income last year, too, use your last tax return to come up with an average monthly income. Just divide your gross income by 12 to come up with an average monthly income. If you don’t have a year’s worth of income, average the months you have. For example, if you’ve been freelancing or contracting for 7 months, add up the last 7 months of income and divide it by 7. This will give you an average income to base your budget on.

Does your average monthly income exceed your expenses?

Your average monthly income needs to meet or exceed your expenses. If not, you’re going to run into a cash flow problem. Adjust your expenses to fall below your average monthly income. Some examples of places you can cut back are: gas, food, utilities (save on electricity), and entertainment. For more ways to cut your expenses, go through each category and decide whether it’s a need or a want. Wants can be cut out.

Your budget in practice

You’ll need to have at least three accounts – one checking account and two savings accounts.

The checking account will hold your monthly income that you use to cover bills and other expenses.

One savings account will hold your income then be used to “pay” yourself at the end of the month.

The other savings account will be for savings. You will only deposit money into this account. You will never withdraw money from it unless it’s to invest it in a higher interest rate account.

Start your budget at the beginning of the month. Your checking account needs to have enough in it to cover your expenses for the month.

As you get paid throughout the month, put the money into Savings Account #1. You shouldn’t have to touch your savings account during the month. If you do, then you didn’t budget enough for your expenses or you’re overspending (or you ended up getting paid less than average, see below). At the end of the month, around the 28th, transfer $2500 (or what you need to cover your expenses) into your checking account.

Less than average months vs. higher than average months

When your income varies, some months will be less than average and some will be higher than average. Once you’ve been using this variable-income budgeting method for a few months, you won’t notice the ups and downs of your budget as much. The surplus months will build up your savings account to help offset the “famine” months.

However, if you experience a “famine” month in the first 1-2 months of using this variable-income budgeting method, you might have trouble meeting all your financial obligations. In this case, you have a few options. Cut back on some of your expenses (the best option). Pull from your emergency fund (which ideally has 6-12 months of living expenses). Pull from your savings (only when options 1 & 2 don’t work).

Don’t let a famine month discourage you. Like I said earlier, once you have a couple of months where your income is at or above your average income, your savings will build up and the bumps will smooth out. Give it six months and you’ll be happy you did.

When you start to plan for your retirement this process deserves your total attention and should not be done on a rainy afternoon. There are some things you need to keep in mind when you start planning and some of those is what we will discuss later on.

First things first

Every retirement planning should start with an assessment of your life. You can hire a professional to help you out with this part of the planning or you could do it yourself, the main purpose in this first phase, is to find out how much money is coming in and how much is going out each month. The goal in the end would be that you will be able to save an amount for later on in your life.

You shouldn’t think to lightly about this fist step, a large part of the population of this world is spending more money then there is coming in and because of this they are always in debt. We all know that the only way to reverse this is to stop spending so much each month and at least go back to not spending more then there is coming in.

The specifics

Keep paying attention to your plan, even if the task at hand seems simple, stay focused. A very important step in you plan will be your decision for the retirement plan itself. There are several retirement plans that you can choose from but the IRA type of plan are the ones that are most rewarding. There are two IRA types that are the major players at the moment, they are the traditional and the Roth IRA plan. At first glance you might think that these plans are very similar but when you look at them closer you will see that there are big differences, each with their advantages and disadvantages.

IRA the Traditional way

With a traditional IRA retirement plan you enjoy a tax deduction over the contributions you make for your retirement. You are responsible for making the contributions in the plan and for deducting it from you gross income for the year that you made these contributions on your federal tax return.

IRA the Roth way

The Roth IRA retirement plan can be more rewarding in the way that your employer helps you out by making a contribution as well. Others would say that this is a disadvantage because only someone with a normal job and an employer who is willing to work with this kind of plan can benefit from the Roth IRA. A self employed person or contractor can not use this plan.

In the end it is your choice, even if you are employed and your boss helps out with a Roth IRA you can choose not to join that plan but start with a personal and traditional IRA.

There are of course more steps involved in planning your retirement but you can see now that by taking the time and putting some effort in you can plan how you will be spending those golden days in the way that you want to and with the amount of money that you want to.