2021 Financial Planning: College, Promotion and Taxes

I've been running lots of numbers over the last couple weeks to help us plan for college and to adjust for my husband's promotion which should be effective on December 1. It remains to be seen how long it will take to get the correct pay. 

Just a little update, slightly unrelated, our oldest daughter graduated college in May with about $5,500 in student loans. She starts her first full time job on November 30. She has been preparing a budget and asking about things we pay for that she will take over, which is primarily auto insurance. Her paycheck in comparison to ours which has grown over time is stressing me out and giving me flashbacks to our early married years! I'm proud that she is thinking ahead and trying to figure it all out. I reminded her that some of what she has saved was a housing refund from the spring and should be applied to her loan. While I don't think she wants to see her savings go down, she seemed to be relieved about a much lower balance to work on! 

Our youngest daughter just took her last final of the semester. A few weeks ago she signed up for spring classes and determined that she can't keep up the 18 credit hours per semester as an engineering major. This means she will be extending her time at the university by one semester. For us that means four full semesters of tuition and housing left to pay. She has just under $12K in an Educational Savings Account (ESA), around $4K in a UTMA and 8 months of Post 9/11 GI Bill benefits to use. We also save $500 a month for college expenses to cover at least $4000 in eligible expenses so we can take advantage of the American Opportunity Tax Credit(AOTC). We do seem to find a way to spend the full $6000 we save each year towards her expenses. 

The current plan is to pay out of pocket for tuition in January, using her ESA to pay for housing. We will begin using the Post 9/11 GI Bill benefits in August 2021. It will cover all of January 2022 and possibly a small portion of her final semester in August 2022. The final semester will be a larger bill as her scholarship will have run out, but we have figured out that we will have the money on hand to pay it as we continue to save the $500/month. We might have extra funds that we won't use, but that will be determined by how much tuition rises over the next two years. I started the process to start using the GI Bill benefits this spring, but when we realized she was going to need an extra semester it made sense to wait, primarily so we could also get benefit of the AOTC in 2021, very helpful as we adjust to the raise my husband is getting. In 2022, we will no longer be eligible to use the AOTC, but the Lifetime Learning Credit is an option and also provides some tax relief. 

In reviewing our taxes for this year and next, I had to calculate my husband's future pay and how taxes would affect the increase which is significant as he is being promoted to the next rank. We have maxed out our Roth IRA for quite a few years now, including the catch up amount for my husband because he is over 50. We have been in the lowest two (I think) tax brackets and it made sense to pay the taxes now knowing we aren't likely to be in even lower tax brackets at retirement. Without any deferred retirement we most definitely hit the 22% tax bracket. However, I am considering putting the amount he puts into his Roth IRA all into a Traditional IRA or adding it to his TSP (Thrift Savings Plan). We save on taxes now and will likely be in a lower tax bracket when these funds are withdrawn on these funds and their earnings. I think that is the plan anyway. I may go back and see if I can figure out a smaller amount to add to the TSP to keep the taxes low, but also put some into the Roth. Just takes time to figure out and I do feel good that I have a plan for now at least! 

The next step is to determine what we do with the extra income. Do we just save it? Should we save it in a mutual fund or look for a great CD rate (do those exist?!)? I feel like we are in a new place with our income, so it's time to start dreaming what this extra money could do!

Have you made any adjustments to your finances as you look ahead to 2021?

Estimating 2020 Taxes

I'm watching some college football on television this Saturday and decided to do some preliminary estimates on our taxes this year. I'm not sure if I ever did any estimates around the time 2019 taxes were due or not. I know that things have been in limbo not knowing when my husband would get his promotion. He is on the promotion list as of late May. Now we wait for the military to get to his sequence number for actual orders to promote. It will not be October, so at most he will have two months of increased pay. 

We do qualify to take the American Opportunity Tax Credit for our youngest daughter in 2020. Our credits are a $500 dependent credit, a $1500 non refundable credit (AOTC) and a $1000 refundable credit (AOTC). 

Without the raise we will owe approximately $228. With two months of increased pay we will owe $270. I'm assuming the withholding will increase, otherwise the amount we owe will be more. 

I did all the math by hand looking at last year's return and finding all the numbers and tax charts for 2020 to make it all come together. My notebook is full of all sorts of numbers. I could have looked for a potential calculator. This way, I feel like I know it was done correctly, using our real situation and numbers. It is still an estimate, but I can definitely handle owing less than $300 next spring. 

My next task is to do some tax planning for 2021. The raise is significant enough to put us into a higher tax bracket. Withholding will have to be adjusted, so we don't owe a significant amount. I need to consider what tax education tax credits we may take, maybe none if we use Post 911 GI Bill funds. This means I need to figure out our plan for paying tuition next year, which is only a few months away. I also need to decide if we put more into retirement to offset taxes. I'm leaning towards a yes on this one!

Payroll Tax Holiday

My husband's paycheck next week is slated to have the reprieve from the payroll tax deductions. This reprieve is temporary through the end of the year. At this point anyway. We know that things can change. The unfortunate part for this holiday reprieve is that this is money that we don't need to use or spend and it will need to be paid back during the first half of 2021 with double the amount of payroll tax. 

Because we don't need the funds, we will simply save them in our savings account, earning a little interest, and plan to pull from the savings in the early months of next year if we are short. In the best case scenario, these funds will not have to be repaid and it will have been some forced savings! I would like that since we are diligently adding funds to our Pot of Possibilities. 

One help for us may be that my husband will finally get his promotion orders this fall which would put him above the income where the payroll tax holiday kicks in. That would mean less payroll tax to repay ultimately. I feel for people who really need this money and will likely use it, but may not do well when the taxes have to be repaid in early 2021.

Is your job participating in the payroll tax holiday? Do you have plans on how you will handle the lower income during the repayment period?

Here's an article from Forbes that explains the Payroll Tax Holiday if you need more information. Also might be wise to check with your human resource representative on how your employer is handling this payroll tax holiday.