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Financial Word of the Week: Tax Bracket

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Earlier this month, we discussed tax deductions and charitable deductions. This week, we want to talk about tax brackets.

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The United States has a progressive tax system, which means your marginal tax rate increases as your taxable income increases. Tax brackets indicate the marginal tax rate that applies to you based on whether your taxable income falls within a certain range or “bracket.” There are seven tax brackets in the United States, with marginal tax rates ranging from 10 percent to 39.6 percent.

A marginal tax rate is the tax rate you pay on each additional dollar of income. In other words, the first dollar of taxable income is taxed at the lowest rate. As your taxable income increases into the next bracket, only those dollars within that bracket are taxed at the new marginal tax rate.  The actual percent of your taxable income that you pay to the IRS is called your Effective Tax Rate.

Remember that your taxable income is the income left over after subtracting all allowable deductions and exemptions. We’ll discuss exemptions in our next tax-related financial word of the week.

To see which tax bracket might be applicable to you, please refer to the IRS website or see the below example.

Income-Tax-Rates-table

*This post is not meant to replace the advice of a tax professional.

When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.


UMB Financial Corporation (Nasdaq: UMBF) is a financial services holding company headquartered in Kansas City, Mo., offering complete banking, payment solutions, asset servicing and institutional investment management to customers. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska and Arizona. It also has a loan production office in Texas. Subsidiaries of the holding company include mutual fund and alternative investment services groups, single-purpose companies that deal with brokerage services and insurance, and a registered investment advisor that manages the company's proprietary mutual funds and investment advisory accounts for institutional customers.



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Financial Word of the Week: Charitable Deductions

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FWOTW

Last week we went over what a tax deduction is. This week we’ll focus specifically on the deduction for making charitable donations.

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If there are specific charities that you’re passionate about and want to help, the first step is to confirm that they are qualified to receive tax-deductible contributions before you give them anything.  Ask them to send you their IRS letter recognizing their tax-exempt status.  You can also call the IRS directly (toll-free) at 1-877-829-5500 or visit the IRS website to confirm an organization’s status.

Once you have confirmed their status, you need to keep track of all your donations to that organization.  The best way is to ask for a receipt every time you donate cash or property.

Some things to keep in mind:

  1. You cannot deduct contributions to specific individuals or families. Even if you give money to a qualified charity, you may not specify someone to receive the benefit.
  2. There are limits to how much you can deduct. Generally, you may not deduct more than 50% of your Adjusted Gross Income (AGI).  For example, if your AGI is $30,000 and you contribute $20,000 in cash to a qualified charity, your deduction will be limited to $15,000.  If your income is above a certain threshold, the amount you can deduct may be reduced.
  3. If you volunteer for a qualified organization, some unreimbursed, out-of-pocket expenses may be deductible as well. A deduction of this type might include mileage for driving to and from the volunteer location.  However you may not deduct the value of your time, such as income you lost because you were volunteering instead of working.

For more information on Charitable Contributions, see IRS Publication 526.

 

*This post is not meant to replace the advice of a tax professional.

When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.


UMB Financial Corporation (Nasdaq: UMBF) is a financial services holding company headquartered in Kansas City, Mo., offering complete banking, payment solutions, asset servicing and institutional investment management to customers. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska and Arizona. It also has a loan production office in Texas. Subsidiaries of the holding company include mutual fund and alternative investment services groups, single-purpose companies that deal with brokerage services and insurance, and a registered investment advisor that manages the company's proprietary mutual funds and investment advisory accounts for institutional customers.



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Financial Word of the Week: Tax Deductions

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FWOTW

Tax season is upon us. Have you filed your taxes yet? Our April series on tax terms will help you navigate the filing process, even if it’s for next year. Let’s start with tax deductions.

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There are several types of tax deductions.  A deduction is an expense or other amount that the IRS allows you to use to offset against your income to ultimately reduce the amount of income tax that you owe.  Certain expenses are considered “above-the-line deductions” and are deducted from your gross income.  These might include certain business expenses, alimony paid, or if you make contributions to a Traditional IRA, among others.  The income remaining is called your Adjusted Gross Income.  You can now look at another set of possible deductions, sometimes called “below-the-line deductions”.

You have two options when it comes to below-the-line deductions.  These deductions are subtracted from your Adjusted Gross Income to arrive at Taxable Income.  You simply choose the option that will reduce your Taxable Income the most:

  • Standard deduction – the standard deduction was created to simplify the life of the “average” taxpayer. Instead of making everyone responsible for documenting their deductible expenses, the IRS allows taxpayers to deduct a fixed amount as a standard deduction.  The amount of the standard deduction will depend on your filing status (single, married filing joint, etc), whether you are 65 or older, or blind. The amount might change each year.  The standard deduction would likely apply to you if your tax situation is relatively simple.
  • Itemized deduction – there are certain expenses that the IRS allows you to deduct from your Adjusted Gross Income such as mortgage interest, charitable contributions, and uninsured medical expenses to name a few. When you add up all these itemized deductions and the amount is greater than the standard deduction amount, you should use the itemized deduction amount to reduce your Adjusted Gross Income.  Just make sure you have proper documentation of these expenses or the IRS might disallow them, causing you to pay more in taxes than you otherwise would have to.

The Internal Revenue Service website has a list of potential deductions. This list details what can be deducted and the limits that apply to certain deductions.

For more advice on taking advantage of your tax credits, check out our recent blog post.

 

*This post is not meant to replace the advice of a tax professional.

When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.


UMB Financial Corporation (Nasdaq: UMBF) is a financial services holding company headquartered in Kansas City, Mo., offering complete banking, payment solutions, asset servicing and institutional investment management to customers. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska and Arizona. It also has a loan production office in Texas. Subsidiaries of the holding company include mutual fund and alternative investment services groups, single-purpose companies that deal with brokerage services and insurance, and a registered investment advisor that manages the company's proprietary mutual funds and investment advisory accounts for institutional customers.



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Financial Word of the Week: FDIC

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You’ve seen “FDIC” logos at your bank (we hope!) and heard commercials that end with the quick disclosure “member FDIC.” But what does that mean for you? The Federal Deposit Insurance Corporation (FDIC) insures the money in your checking and savings accounts up to $250,000. If you use more than one bank, you’re also guaranteed up to $250,000 at each insured institution. That’s why financial experts advise spreading out your wealth after you reach that maximum.

The FDIC is a government agency (created in 1933 after thousands of bank failures) that manages bank insurance funds. FDIC insurance is mandatory for all U.S. chartered banks and banks that are Federal Reserve System members.

 

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When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.


UMB Financial Corporation (Nasdaq: UMBF) is a financial services holding company headquartered in Kansas City, Mo., offering complete banking, payment solutions, asset servicing and institutional investment management to customers. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska and Arizona. It also has a loan production office in Texas. Subsidiaries of the holding company include mutual fund and alternative investment services groups, single-purpose companies that deal with brokerage services and insurance, and a registered investment advisor that manages the company's proprietary mutual funds and investment advisory accounts for institutional customers.



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Financial Word of the Week: Laddering

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Last week, we explained how Certificates of Deposit (CDs) can be a wise option due to their higher interest rates compared to other types of bank accounts. One way to avoid early withdrawal penalties if emergencies arise is to “ladder” your CDs.

Laddering CDs involves investing your money at different maturity terms so they become available at different periods. To create a CD ladder you should research various financial institutions for the best rate. Once you identify where to invest your money, decide how much you want to invest over each term—divided evenly or unevenly. Invest the determined amount in each CD, choosing different terms.  For example if you have $30,000, invest $5,000 in each a 6, 12, 18, 24, 30 and 36 month term CD. When each CD reaches maturity you can either reinvest or take out any money that you may need.

Laddering CDs is popular during an economy where rates change frequently. Remember to ask financial institutions what their pre-payment penalties are on CDs.  Many people favor investing in a longer term CD to get the best rate and take the risk of paying an early withdrawal penalty due to the low penalties.

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UMB Financial Corporation (Nasdaq: UMBF) is a financial services holding company headquartered in Kansas City, Mo., offering complete banking, payment solutions, asset servicing and institutional investment management to customers. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska and Arizona. It also has a loan production office in Texas. Subsidiaries of the holding company include mutual fund and alternative investment services groups, single-purpose companies that deal with brokerage services and insurance, and a registered investment advisor that manages the company's proprietary mutual funds and investment advisory accounts for institutional customers.



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Financial Word of the Week: Certificate of Deposit

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FWOTW

Certificates of Deposit (CDs) are a type of savings account that generally earns you a higher interest rate than other bank accounts because you are restricted from withdrawals or deposits. You are guaranteed to earn a set interest rate throughout the term of the CD.  Most institutions have CDs that range from 30 days to multiple years. If you do withdraw money from the account, you may have to pay early withdrawal penalties.

CDs were authorized in the 1960s and gained popularity during the inflation period of the 1970s because of their attractive rates. They are also insured under the Federal Deposit Insurance Company (FDIC) guidelines. Given today’s low interest rate environment, you may need to weigh the benefits of being locked into a term. If rates go up, you will be stuck in a low interest rate account or pay the penalties for early withdrawal.

Example
The highest average advertised rate on a one-year CD is 1.00% Annual Percentage Yield (APY). With that rate, it would take you 72 years just to double your money with compounding interest. Or more realistically, if you kept $1,000 in a CD for 10 years, you would only earn approximately $100 in interest. However, if you have a specific goal and time period you’re saving for, then a CD investment could make sense for you.

Next week we’ll explain how to ladder CDs and how it can help you.

 

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When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.


UMB Financial Corporation (Nasdaq: UMBF) is a financial services holding company headquartered in Kansas City, Mo., offering complete banking, payment solutions, asset servicing and institutional investment management to customers. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska and Arizona. It also has a loan production office in Texas. Subsidiaries of the holding company include mutual fund and alternative investment services groups, single-purpose companies that deal with brokerage services and insurance, and a registered investment advisor that manages the company's proprietary mutual funds and investment advisory accounts for institutional customers.



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Financial Words of the Week: APY, annual interest rate and compound interest

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Ever notice that sometimes your interest rate has the letters APY next to it and sometimes you just see a percentage? What do those letters mean? More importantly, how does the difference affect the money you earn in savings and pay on a loan?

First of all, you need to know that compound interest comes from the money you earn on the interestyou’ve already earned. This is one of the many reasons you want to get the highest interest rates for your savings/investing and the lowest interest rate for your loans. It differs from simple interest which only earns interest on the principal balance.

Financial institutions should give you two quotes when you are asking about interest rates: the annual interest rate and the Annual Percentage Yield (APY).

The annual interest rate is the yearly rate you earn in an investment or pay on a loan and doesn’t factor in compound interest. The annual interest rate is what the account is currently earning and only involves simple interest.

Example: If your savings account has a balance of $10,000 and an annual interest rate (no compounding) of 1 percent, then here’s how you would calculate your earnings from one year:

                                $10,000 x 1% = $100 (after one year, your account balance would be $10,100)

Annual Percentage Yield (APY) is the similar to annual interest rate, but it does factor in compounding.  This can make a significant difference when it comes to investing and borrowing.  APY is what you’ll use when comparing rates for investment/saving options.

Example: If you put the same amount of money into a savings account that utilizes APY (compounding interest of 1 percent), here’s the formula you’d use assuming the interest is compounded twice a year:

                                           $10,000 x (1 + .01/2)2 = $10,100.25 (balance after one year)

While the above examples show insignificant differences – did we really take the time to explain all this for a 25 cent difference? – the larger your interest rates and deposit  balances are, the more impact APY vs. annual interest rate will make. Remember, compound interest is your friend when you’re saving or investing and your foe when you’re taking out a loan or using a credit card.

 

 

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When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.


UMB Financial Corporation (Nasdaq: UMBF) is a financial services holding company headquartered in Kansas City, Mo., offering complete banking, payment solutions, asset servicing and institutional investment management to customers. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska and Arizona. It also has a loan production office in Texas. Subsidiaries of the holding company include mutual fund and alternative investment services groups, single-purpose companies that deal with brokerage services and insurance, and a registered investment advisor that manages the company's proprietary mutual funds and investment advisory accounts for institutional customers.



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Financial Word of the Week (Small Business Month): Collateral

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Collateral is a company’s assets that are pledged to ensure payment of a financial obligation. Collateral can include business or personal assets such as equity in your home. Business collateral typically includes equipment, inventory, vehicles and accounts receivable. As we explained in our post about the “Five Cs of Credit” (one of which is collateral), you may be required to sign a guarantee with the promise to repay the loan if you cannot repay it with the profits from your business.

Sometimes a Small Business Administration (SBA) loan could be used if there is a collateral short fall within the organization.  An SBA loan has other requirements as well.

A company must understand that the collateral they put up for a loan could be seized if a company defaults on a loan. Also remember that most lending institutions require your collateral value to be more than the loan amount.

 

 

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When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.


UMB Financial Corporation (Nasdaq: UMBF) is a financial services holding company headquartered in Kansas City, Mo., offering complete banking, payment solutions, asset servicing and institutional investment management to customers. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska and Arizona. It also has a loan production office in Texas. Subsidiaries of the holding company include mutual fund and alternative investment services groups, single-purpose companies that deal with brokerage services and insurance, and a registered investment advisor that manages the company's proprietary mutual funds and investment advisory accounts for institutional customers.



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Financial Words of the Week (Small Business Month): Working Capital

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Working capital is a financial measure of cash that is calculated as Current Assets divided by Current Liabilities. Working capital is a common measure of a company’s liquidity. Current assets are your company’s most liquid assets, such as cash and other items that could be quickly turned to cash.  Current liabilities are obligations that are due within a year.  A positive working capital usually indicates that the company is able to pay off its short-term liabilities quickly.

Current assets and current liabilities include four areas that are critical for working capital management:

  • cash
  • inventory management
  • accounts payable – Remember to negotiate discounts with vendors and suppliers for a net 10 or 30-day payment.
  • accounts receivable – With money your clients owe you, consider ways to speed up payment that will impact your working capital.
    • Communication – when do you follow up on past-due items? Could you make a 10-day courtesy call? Do you have standard collection practices based on the size of your clients?
    • Eliminate any manual processes within your organization to prevent delays.
    • Shorten payment terms, and potentially provide a discount for paying promptly.
    • Email invoices and allow for Electronic Funds Transfer (EFT) payment.

Consider these ways to positively impact on your working capital and the strength of your business.

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UMB Financial Corporation (Nasdaq: UMBF) is a financial services holding company headquartered in Kansas City, Mo., offering complete banking, payment solutions, asset servicing and institutional investment management to customers. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska and Arizona. It also has a loan production office in Texas. Subsidiaries of the holding company include mutual fund and alternative investment services groups, single-purpose companies that deal with brokerage services and insurance, and a registered investment advisor that manages the company's proprietary mutual funds and investment advisory accounts for institutional customers.



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Financial Words of the Week (Small Business Month): SWOT Analysis

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Now that we’ve entered Q3, it’s 2015 planning time for small business owners. What better way to plan than by returning to the method you probably learned in business school: a SWOT analysis? SWOT stands for strengths, weaknesses, opportunities and threats. This analysis will lead to better awareness of your organization and insight into areas of growth, especially heading into a new year.

Strengths and Weaknesses

This should be an internal review. What are you doing well that is separating you from your competition (talent, product, process, etc)?  Understanding your company’s weaknesses is just as important and sometimes difficult to discover. Think of objections you might get during the sales process.  Keep your strengths in mind as you review your business as you might be able to leverage them to offset a weakness in your organization.

Opportunities and Threats

Many businesses are great at evaluating internally, but are challenged to look externally. Looking beyond your direct competition is important. How could government, technology, talent allow for an opportunity for growth in your market?

SWOT

Once the analysis is complete, ask for feedback from your senior leaders.  Develop a plan that will allow you to minimize your threats and capitalize on your opportunities.  Assign owners to these projects and take your business to the next level.

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UMB Financial Corporation (Nasdaq: UMBF) is a financial services holding company headquartered in Kansas City, Mo., offering complete banking, payment solutions, asset servicing and institutional investment management to customers. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska and Arizona. It also has a loan production office in Texas. Subsidiaries of the holding company include mutual fund and alternative investment services groups, single-purpose companies that deal with brokerage services and insurance, and a registered investment advisor that manages the company's proprietary mutual funds and investment advisory accounts for institutional customers.



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