Q: My salary was reduced recently after my job was reviewed by the compensation office at the university where I work. To try to compensate for the drop in my take-home pay, I would like to reduce my pay-in to my retirement plan, from 10 percent of my wage to 5 percent. But the retirement system for Washington State workers doesn't let you change your contribution amount. Any advice on handling this negative impact on my cash flow?
A: You have a couple of situations to deal with here, says Darin Pope, a member of the Financial Planning Association of New Jersey.
First, your lowered salary suggests that you sit down with your bills and your checkbook and create a basic cash-flow statement and a budget. In other words, determine what you're spending your income on and what your required fixed monthly expenses are, he says.
Given your lower income, you may need to track every expense and begin to spend only what is actually necessary, in order to break your current spending habits.
It's natural for us to spend at our level of income, acclimating to a higher salary by modifying our spending accordingly, so this tracking and budgeting won't be easy, Mr. Pope says.
You may need to pay yourself a small allowance in cash, while swearing off paying by credit and borrowing. "The key is breaking old spending habits and creating new ones," says Pope.
The next step concerns your job. The demotion may be a red flag that your employer is unhappy with your performance. Given this situation, Pope advises putting aside about six months' worth of expenses into what he calls a transition account. This should be a reasonably liquid account that would allow you to have money to live on if you or the university decides to terminate your employment.
If things work out in this job, or another one, don't stop doing these things, Pope says. Keep that transition account open, and keep budgeting and monitoring your cash flow.
Q: My wife and I want to give a considerable amount of money to a cousin to enable him to purchase a home. Are we liable for any taxes for this gift?
J.B., via e-mail
A: As long as you don't give anyone in excess of $11,000 per year, neither
you nor the recipient need report it to the Internal Revenue Service, says Tom Curtis, a certified financial planner in suburban Washington, D.C.
He adds that if you're married, both you and your spouse can give $11,000 - $22,000 in total - every year and still stay under the IRS radar.
Even if you exceed that amount, you have a lifetime gift-tax exemption of $1 million (currently) that you can invoke. It can be used at one time or in smaller amounts so long as the amounts do not exceed the $1 million. Once it is totally used, it can never be used again. So, Mr. Curtis says that you and your wife can give up to $2,022,000 to your cousin free of any gift tax this year.
Next year, you can give an additional $11,000 per donor (or $22,000 for a married couple), but, once you have used your aggregate lifetime exemption, it is gone forever. More important, it will reduce the amount of your estate that can pass free of estate tax to your heirs, Curtis says.