The Second Best Time is Now

Or, investing for retirement, even when you’re not perfect

You’re having drinks with a friend after an opening, and the topic turns to money. Life is expensive, the city is expensive, and the distant menace of retirement? Forget it. You turn back to your $14 cocktail and feel depressed.

But wait. Aren’t you the same person who is taking charge of her career? Aren’t you setting new goals, prioritizing your studio time, building your network, learning how to market yourself? You’re smart, and you’re tackling the other hard stuff. So why are you cheating yourself on the bigger picture? You can do this. No need to let the perfect be the enemy of the good here. There is an apt proverb about planting trees: The best time to plant a tree was twenty years ago. The second-best time is now.

But first, a little digression about beauty. And compound interest.

Sara Jones, drawing on paper, 2016.

This is a drawing by Sara Jones. Beautiful, right? It has a lovely feeling of calm about it. Remember this feeling as you read on about saving.

I think saving for the long term can be intimidating, because it seems that we’ll need so much money that we just get overwhelmed. It’s easy to focus on the short term (My rent is so high! Childcare costs are ridiculous! How can I really cut any of my spending? How is $100 a week going to make a dent?). It’s easy to think “I’ll do that later, when I have more money.” But the difference between starting now or ten years from now is bigger than you think.

Now look back at Sara’s drawing. See the curve? That’s the image that should be in your mind as you think about saving. That’s what happens to your money. Why? Because of your friend, Compound Interest.  

There’s a lot of great explanation out there about the benefits of compound interest. But if you’re a visual person, like me, it’s really in the picture. So here’s another one, this time with numbers:

This is a chart showing what compound interest does to a one-time $5,000 initial investment. Don’t let the details throw you - the curve is the important part. The light orange part shows the money you put in. The dark orange part is all growth. When you put money in a savings vehicle (like an Individual Retirement Account (IRA), invested in index funds, which have a historic average growth rate of 8% - more on this in a future post), compound interest works to multiply your initial investment over time.

Here’s how it works: Your 5,000 earns 8% interest, so at the end of year 1, you have $5,400. The next year, you make 8% not on 5,000, but on $5,400, yielding $5,842. It doesn’t seem like much yet, but the magic happens near the end. So this little bit of money, after 40 years of compounding, turns into $108,622.61. Now we’re talking.

Now what happens if you make your $5,000 investment an annual habit? Basically, this curve gets steeper. That means you grow real wealth. Check it out:

It’s important to notice the numbers here. The chart reaches into the millions now, not hundreds of thousands. And the light orange part, which represents money you put in, is growing each year, as you make your annual contribution. So in forty years, you now have $1,507,527.81.

Compound interest is your friend. It means you don’t need to save as much as you might fear you do in order to retire.

But what if you wait ten years to start? On the first chart, your $5,000 is worth over $180,000 after 45 years. But after 35 years, ie, ten fewer years of growth, it’s worth about $90,000. That ten years cuts the money in half. Now you see why the first principle of retirement saving is “start early.”

And as a tax professional, I will tell you that your annual contribution limit to a tax-sheltered IRA is even a little higher than in my example. The 2022 limit is $6,000 (and if you’re over 50, it’s $7,000). And you have until April 15, 2023 to contribute for 2022 (yes, it’s retroactive). Opening one is as easy as opening a bank account. I recommend Fidelity or Vanguard.

So don’t let perfection stand in the way of action. Maybe you can’t put aside as much as you’d like, but you can put aside something. But don’t wait for some elusive “better time.” Remember the proverb about the trees? The best time to save was twenty years ago. But the second best time is now.

Disclaimer: True tax advice is a two-way conversation, and your accountant needs to hear your full situation to apply the rules correctly in your case. This post is meant for general information only. Please don’t act on this alone.

Startist Interview: Profit Motive, Marketing, and Tax Tips for Artists

Is your art a business or a hobby?

Hannah talks with Laura Griffin and Nikki May of Startist Society about her roots as an artist and about establishing a profit motive for your art business. She chats about empowerment for artists and how she got started in accounting after some bad experiences she had as an artist.

What should you use to track expenses? How and what expenses are deductible? Can donated artwork be deducted? Do I need to collect sales tax? Find out the answers in this podcast interview relevant to creative freelancers in the US.

Hannah discusses what things in nature and the outside world inspire her as an artist and how to slow down to look at things that most people don’t notice. How does she choose what she paints in her art practice?

They talk about using your left brain vs. right brain and balancing art and your business practice. Hannah goes into depth about how to show the IRS that your art is a business and not a hobby. They discuss how to show a profit motive through your activities and record-keeping—even if your business is not yet generating a profit.

Hannah gives specific information about tracking business expenses and receipts with examples that pertain to creative people. She also discusses how LLCs are legal and not a tax entities. They explore how to prevent tax audits and common deductible expenses, including details about mileage, business meals, donations, etc.

Money Bootcamp is an annual membership for creators to get you set up right and tracking all the right things without wasting your time. You'll have more time for creative pursuits when you stop worrying about your finances and money.

What’s in the $1.9 Trillion stimulus plan?

The American Rescue Plan, Biden’s $1.9 Stimulus Bill, will be an enormous boost to the US economy. Here’s a brief rundown of the items most likely to affect freelancers.

Stimulus payments:

New $1400 stimulus payments will go out per person on the return. This means that children and other dependents will get the full $1400 each, in addition to the taxpayers. Households with income under $150,000 (married filing jointly) and individuals with income under $75,000 will receive the full benefit. Households with income between 160,000 and 150,000 will get a reduced payment, as will individuals with income between $75,000 and $80,000. 

Unemployment:

Unemployment benefits have been expanded by an extra $300/week, and extended to September 6. In addition, unemployment benefits from 2020 will not be taxable up to $10,200 per person ($20,400 in a married filing joint couple). This benefit is retroactive, meaning that it will take effect on your 2020 tax return. If you have already filed your 2020 return, the IRS will do the calculation for you and send you a refund of the taxes you paid on your 2020 unemployment. Do NOT file an amended return. 

Money for families with children:

The American Rescue Plan will help families enormously. For 2021, the Child Tax Credit will be expanded from $2000 per child to $3600 per child under 6, and $3000 per child age 6-17. Notably, taxpayers will not need to wait until tax time to claim the credit. Payments will be sent directly to families in monthly installments starting in July 2021. These payments will go to married-filing-joint families earning under $150,000, heads of household earning under $112,500, and married-filing-separate families earning under $75,000. You may calculate your credit using a choice of either your 2019 or your 2020 income - whichever gets you the bigger credit.

The dependent care credit is enhanced for 2021. It will increase to $8,000 for 1 child or $16,000 for 2 or more children. The credit is for 50% of the costs of childcare, which include (as always) babysitters and summer camps so that the parent(s) can work. This means that the maximum credit will be $4000 for one child or $8000 for 2 or more (that is 50% x the cost of care up to $8000 for one child or $16,000 for two). The credit phases out starting at household income of $125,000 (married filing joint), to a reduced benefit of 20% of costs, but a reduced credit amount is still available for families with income up to $400,000.

The Supplemental Nutrition Assistance Program (SNAP) benefit will be increased 15% through September. And K-12 schools will receive over $120 billion in additional funding.

Earned income tax credit (EITC) expansion:

The Earned income tax credit is expanded. It will now include several groups who were not previously eligible:

• Age 19 if not a student

• Age 24 if a student

• Age 18 if an eligible foster child

• The age 65 upper limit for the EITC is repealed

Whereas the EITC in its original form was targeted primarily at working families with children, the EITC formula is now enhanced for single people with no children.  As with the child tax credit, you may calculate your credit based on 2019 or 2020 income; whichever provides you the bigger credit.

Teacher deduction:

The $250 deduction that K-12 teachers currently receive for classroom supplies paid for out of pocket has been expanded to include the purchase of PPE/sanitizer. The deduction amount remains $250.

Student Loans: 

The bill does not provide forgiveness for student loans, as many had hoped. However, any student loans forgiven between 2021-2025 will be tax free. This is a benefit, because forgiveness of debt would normally be considered taxable income.

Healthcare:

For those who have lost a job or had hours cut, the government will cover the full cost of COBRA health coverage through the former employer from April 1 through September 30th.

If you bought health insurance through a government exchange, the cost has been lowered to no more than 8.5% of your total income. This will be automatically applied--so there is no need to take additional action. 

For those who would consider buying marketplace health insurance if the prices were more affordable, the open enrollment date has been extended through May 15. You may also use the open enrollment period to switch from your current plan to a lower-priced plan.

Premium tax credits--the advanced payments made to taxpayers that subsidize the cost of their marketplace health insurance--are affected by the law, too. Normally, taxpayers are only eligible for premium tax credits if they have income between 100% and 400% of the Federal poverty level. For 2021, that cap is removed, making more people eligible for premium tax credits. Additionally, under normal circumstances, a taxpayer whose income rises above 400% of the poverty level has to pay back some or all of their advanced credits. For 2020 taxes, this payback will be forgiven altogether. And lastly, if unemployment income raised your income level above the threshold to qualify for premium tax credit health care subsidies, it will not be counted as income in consideration of the premium tax credit. 

Grants for Restaurants:

There is a new $30 Billion grant program called the Restaurant Revitalization Grant program. This will give money to struggling restaurant and food service businesses, with $5 Billion earmarked for businesses with gross receipts under $500,000. To check your eligibility and application requirements, see the Small Business Administration website for details and the latest updates.

All in all, the Biden stimulus bill, the American Rescue Plan, will put money in the pockets of the people in the US who need it most. It takes a big step toward a guaranteed income for families with children, lowers healthcare costs, and knits up some of the holes in our social safety net.

Unemployment Tax Savings from the 2021 Stimulus Bill

If you or your spouse collected unemployment in 2020, you need to watch this video!

President Biden recently signed the American Rescue Plan into law, and it has some very exciting provisions for people who collected unemployment during 2020. Hannah Cole of Sunlight Tax created the following short video to give you the latest information about how the new law will apply to unemployment income.

Hannah goes through specific information about the unemployment taxes affected by this retroactive legislation. Hannah covers what you need to know about filing, whether you have already filed your 2020 taxes or whether you have not filed yet. She goes through a few scenarios to show how much you can save depending on your current tax rate and whether more than one person in your household was collecting unemployment last year.

Here’s what Hannah has to say:

What the tax savings is on $10,200 of unemployment income (thanks Democrats!), and a shoutout to those of you who called, texted & knocked to get out the vote--you had a hand in this tax bill that will lift 50% of American children out of poverty and take a meaningful step towards guaranteed income for families with children. You made a difference. Americans (of all parties) will benefit from your work! Thank you!!!❤️🇺🇸

Watch the blog for a longer post about the entire stimulus bill coming soon!

How Can Freelancers Benefit from New Tax Laws?

Hannah’s short interview on BPR Radio

Hannah Cole had an interview with Matt Peiken of Blue Ridge Public Radio in North Carolina last week. She discussed the new tax laws and some of the areas where artists and other freelancers can benefit from them, like sick and family leave credits.

Although she talked to Matt for about an hour, the broadcast only contained a short clip. You can listen to Hannah and read about the tax law changes in her discussion with Matt in the article on the BPR website.

If you missed the live Shuttered Venue Operators Grants webinar mentioned in the article, click here to sign up to get the replay video.