MiB Smarter Money » Taxes

10 Easy Tips to Reduce Your Income Taxes

Jason — Tue, 07 Feb 2012 18:35:25 +0000

Photo by John Morgan

By Jason Van Steenwyk

In the end, it’s not about how much you earn, but about how much of it you get to keep. In most cases, this means that you want to minimize your current year tax bill. There are, however, cases where it is better to pay the tax bill now in order to avoid having to pay higher taxes in future years.

November and December are prime time for forward-thinking individuals and business owners to do some tax planning for the year. Moves you make now can pay off very quickly. Here are some of the things you can accomplish now, before the end of the year, to keep the tax man at bay.

Do an AMT assessment. AMT stands for “alternative minimum tax.” The AMT is a supplementary set of income tax rules designed to ensure that families with significant incomes can’t use deductions and tax loopholes to avoid income tax altogether. When it was first passed in 1969, it was only intended to affect the wealthiest families. But they never indexed it to inflation. As a result, more and more middle class families are falling prey to AMT rules. If you have a lot of deductions, you own your own home, you normally have a significant state income tax liability, or you have several children, and your household income has been on the rise, or you got a bonus, you may well have an AMT liability this year.

Contribute to an IRA. Provided you meet the income qualifications, a traditional IRA allows you to deduct up to $5,000 in contributions. Double that for married couples, and add another $1,000 each for qualifying individuals over the age of 55. Yes, the rules give you until April 15^th, 2012 to make your contribution for tax year 2011, and April 15^th, 2013 to make your contribution for 2012. But by contributing early, you give your investments that much more time to compound. You also set yourself up to make manageable monthly contributions to your IRA for 2013. Better yet, you don’t even have to itemize your deductions! Traditional IRA contributions are “above the line” adjustments to income. You can deduct the full contribution, provided you meet the income guidelines, even if you don’t itemize.

Pay your property tax early. These are normally deductible expenses. But if you are subject to the AMT, that deduction may be disallowed. If 2012 is likely to be an AMT year, but 2013 is not, you may be better off making the payment in 2012.

Cancel out your capital gains taxes. If you sold property at a gain in 2012, you will probably have some capital gains tax liability. For long-term gains, this tax maxes out at 15 percent of your gains. If you held the property for less than a year, however, expect to pay taxes at your higher marginal income tax rate, which could be as high as 35 percent. However, if you have investments outside of retirement accounts that lost money since you bought them, you can sell some or all of them and cancel out some or all of your capital gains taxes – a technique known as “tax loss harvesting.” If you have excess losses, you can deduct up to $3,000 in losses against income per year, carrying any additional losses forward to future years. Beware, however, of “wash sale” rules. To get the benefit of claiming a capital loss, you cannot repurchase the same or substantially identical securities for 30 days.
Use your Flexible Spending Account. If you have a flexible spending account at work, you may well lose that money at the end of the year. Now’s the time to schedule that Lasik surgery, or take care of that medical treatment you’ve been putting off. Otherwise, that money goes back to your employer and you lose the opportunity. Check with your HR department for your balance and to learn how the rules apply to you.
Bunch medical deductions. Did you have substantial medical bills in 2011? You can deduct medical expenses against your income, but only to the extent they exceed 7.5 percent of your income. If you expect more medical spending in the following 2012, try to commit the funds this year, bunching your expenses into a single tax year. This will allow you to maximize your deductions, which would be substantially reduced if you spread them out between 2011 and 2012. Actually, this strategy works with all kinds of itemized deductions. Miscellaneous (non-medical) itemized deductions have to exceed a threshold of 2 percent of your income for you to begin benefitting from the deduction. Whether the applicable threshold is 7.5 percent or 2 percent of your income, you want to concentrate as much deductible spending as you can into one year. Otherwise, you’ll have to get all the way through the threshold amount all over again next year before you can begin taking deductions.
Give. You can give up to $13,000 per year to any recipient you choose, without incurring any kind of tax liability (subject to a lifetime exemption of $1 million.) If you’re married, you and your spouse can give $13,000 each, for a total of $26,000 per recipient. A deliberate gifting strategy can be a great way to move money out of your taxable estate, as well as protect it from those who may target you in a lawsuit. It may also help you qualify for Medicaid in later years, provided you make the gift more than 5 years before applying for Medicaid benefits.
Pay down your mortgage. The interest you pay is normally deductible against income. By bumping up your payments in December, you can make a noticeable reduction in your tax bill for this year.
Put Off Profitable Sales. If you don’t have any capital losses to offset gains, try to put off selling property at a profit until after the end of the year. You may have some losses you can use to offset your gains next year, and you’re putting off the due date on capital gains tax liability.
Check Your RMDs. If you are over age 70, it’s time to pay close attention to required minimum distribution requirements. The IRS requires you to begin taking money out of your IRAs and 401(k)s beginning on April 1^st of the year following the year in which you turn 70½. Thereafter, you must take the distribution by December 31^st of each year. This will create an income tax liability for you, since distributions from these accounts are taxable. But the penalty if you miss the deadline is severe: If you blow your RMD, the IRS will assess a penalty of 50 percent of the amount you were supposed to have taken.

Remember, tax planning is complicated – even for professionals. Very few people who don’t do taxes for a living can efficiently keep track of all the tax issues, traps, pitfalls and planning opportunities that may arise. Except for the very simplest of cases, it almost always makes sense to invest in the services of a tax professional.

Need Help Getting Rid of Tax Debt?

Hank — Sun, 25 Jul 2010 21:04:17 +0000

Taxes are nerve wracking for most people. With an increasing number of Americans falling into debt each day, tax debt greatly adds to the financial stress. Therefore, it’s very important to find ways to relieve yourself from the burden of tax debt. Read on to know how you can go about doing this successfully.

1) Seek help of a tax agent: A professional tax agent or a trustworthy accountant can help you to take control of your tax problems. Do not worry about the fees that you will have to pay to your tax agent as it will be menial compared to the much larger debt accumulation and IRS penalty fees later on. The worst thing you can do is to wait for things to get out of control. Meet with a professional after organizing all your financial papers, tax documents, spending records etc. This will help you to get rid of your tax debt as fast as possible.

2) File for an extension: If you are facing trouble filing your (federal) tax forms on time, you can file for an extension. You, or your accountant, can file Form 4868: Application for Automatic Extension of Time To File U.S. Income Tax Return. This helps you to extend your time by six months to file your taxes. You should file for form 4868 by April 15^th and you do not get extra time once your six month extension is over.

3) Set up a payment plan for your back taxes owed: Set up a payment plan with the IRS if you can’t pay your taxes in full this year or you still owe taxes from the previous year. But for this, you need to prove to the IRS that you will be unable to make your payments in full without experiencing economic hardship. Once you can meet this qualification, an affordable payment plan can be chalked out. This will satisfy both you and the tax collector.

4) Consider an Offer in Compromise (OIC): If you are unable to meet even the minimal fees of tax collectors, then you can go for an OIC. This is an agreement between you and the IRS that allows you to settle your tax debt by paying a one-time discounted settlement on the taxes that you owe. But the deal comes with a hitch; you need to sign an agreement which states that you promise to pay your taxes on time and in full for the next five years.

5) Submit a Penalty Abatement request to the IRS: If you can prove to the IRS that you have a valid reason for not paying your taxes on time, then a Penalty Abatement request can prevent the penalty fees from being imposed by the IRS for your unpaid tax debt. An accountant can help you draw up an accurate representation of your financial situation while submitting a Penalty Abatement request.

It is important to understand as much of the tax process as possible in order to take control of your tax debt. Prepare for your next year’s taxes from now to prevent your tax debt from snowballing. Take your accountant’s help, make quarterly tax payments ahead of time and create a budget which helps to keep little money aside each month to make your tax payments. These steps will surely help to keep your financial worries at bay!

Should I Buy a Loaded Mutual Fund?

hank — Wed, 13 Feb 2008 08:01:48 +0000

My mother is not very financially savvy – and when I try to explain anything to her; it can often times take the better part of an hour. It may be her age or the fact she never had any financial education being a stay at home mom, but I like to try to give her the best info possible. This was a specific instance of that time.

She mentioned that she was heading into an Edward Jones investment rep this afternoon and wanted me to chime in with a few questions to help her make a good decision. Like I said, she is 55 with no retirement money aside from about 20k she cashed out of a universal life insurance policy she had out on my dad that was taking payments out of the equity it had built up.

That’s another conversation, but for this one, we’re focusing on how her conversation went.So the rep called me up and we had a conversation about what my mom had, and what she was doing now, and where she was headed. The first thing he mentioned was that “we need to start making your Mother’s money work for her NOW!” I obviously agreed and mentioned to him, “what funds do you recommend she get in?”

He came back with a handful of loaded mutual funds and I just stopped him in the middle of it and ask him why he wanted to put my mother in loaded funds. He actually was very up front about why. He said, “Clearly because that is how I make my money.”

I agreed and proceeded to tell him that we weren’t interested in his services and thanks for his time. He proceeded to tell me how “scary” and “difficult” and “dangerous” it was to be investing on your own. He said, “There are a lot of pitfalls along the way. Wouldn’t it be nice if you had someone to help you?”

I responded, “Yes, that would be nice to have someone that would warn me about financial advisors like yourself.”

That stopped him in his tracks and my mother took off.

New to the blog? Asking yourself, “what are loaded mutual funds exactly Hank?”

When I say “loaded mutual fund,” I mean a mutual fund that carries a sales load. A sales load is a mutual fund commission paid to brokers like this Edward Jones rep for selling you something you don’t need their help in buying. Sales loads do not benefit you, they benefit, and ONLY benefit the person selling them to you, much like an insurance policy.

Load fees typically range from four to eight percent and the way they are paid varies:

1. Front-end load (usually class A shares) – you pay the sales fee up front to the helpful broker.
2. Back-end load or deferred load (usually class B shares) – you pay the sales fee on your way out to your helpful broker.
3. Constant load fund (usually class C shares) – you pay the sales fees every year and might even have to pay a full load when you sell to the fine person selling you this.

Well Hank, I really like paying extra money for things I can do for myself (joking) what else is it costing me?

Well, think of it this way. By purchasing a loaded fund, you’re starting two steps behind. Let’s use simple numbers, say you bought a loaded fund with $10,000 that carried a 5% front end load. Well, as soon as you sign on the dotted line, you’ve just lost $500, so you’re starting with $9,500.

Think of the same guy that has the entire $10,000 to run on – who is going to be ahead in 1 year? 2 years? You can’t catch up because you’re starting behind. Think of it like an oval race track. If you are both running in the same lane, you are starting 5% of the way behind them, and will likely not catch up.

But Hank, they broker told me that these funds were spectacular and that I should make more from them than a no-load fund. Isn’t that worth it?

If a broker really did tell that to you; you are in a bad situation. Turn and run immediately. Do not pass go, do not collect $200. I can almost guarantee if you give me a loaded mutual fund ticker symbol, I can find a very similar NO-load fund out of the 12,000+ funds out there.

Feel free to contact me if you don’t believe me; I’ll find one for you. How many different ways can a sales guy scare you into buying the fund? Anyone else have some wise lines brokers have used to get you in their grasps and in to your pockets? I think if I wouldn’t have figured it out on my own, I’d still be playing Poker to take care of my retirement.
Photo by: Snap@

Another Way To Make Money Online; Courtesy Of Microsoft…

hank — Sun, 20 Jan 2008 08:13:37 +0000

Photo by: A Fighting FaithNo, I’m not talking about the ol’ “Bill Gates will send you money if you forward this email” spoof. I am talking about Microsoft’s Usability Research team. Clearly Microsoft has a lot of new products that need testing, and it can’t all be done in house; they need a larger audience of NON-Microsoft employees. That’s where we come in. Before you jump off this post because you think it is a tag to get you to buy Microsoft stuff, don’t! I went over to the corporate office in Redmond, WA last week, took 45 mins worth of testing a new Windows Mobile product, gave my opinion, and walked out the door with a copy of Microsoft Office 2007 (currently on Amazon for 399.99).

I have no reason to use the product, so it’s likely going to find a home on Ebay. But that works out to $533.32 an hour! How about them apples? Well worth my 45 minutes to roll over basic questions and give your opinion.

“But Hank, I don’t have an ounce of technical savvy blood in my body. How can I make any money off it?”

Easy answer – they don’t always want the experts to give the opinions on their products. They want the entire gamut of people to test out their products; not just experts. Toss your name out there, you never know if you’re what they are looking for. It takes about 5 minutes to sign up and tell them what you do.

“Ok Hank it DOES sound like a good idea, but I don’t live anywhere near Redmond, WA.”

Again, no problem. A lot of their questions can come over the phone, or through a web interface to test out and poll on certain product aspects. Sign up and you may be pleasantly surprised what they can call you on.

“Fair enough, I’ll sign up; but what about tax-wise? They’ve given me a gift? Don’t I have to pay it on taxes?”

They’ll put your name in their database and send you out a 1099 form if your gifts are over $1000 for the year. Currently the most expensive piece of software I saw on the list was Microsoft Visio 2007 at 559.99. You can get calls back for as many of the items that you can qualify for. I signed up in December and got my first call last month, so I guess we’ll see how many times they call. Yea, they tax you, but the tax is only on free money. You’ll probably pay $100 of your $1000 to Uncle Sam, and that’s not too bad.

Yes, they’ve been dubbed “the Evil Empire,” but as frugal guy, I don’t care who is giving out the money, I’m happy (and so should you) to take the gratuity for a short stint of my time and quick returns like that. This new found cash is likely headed into my Charles Schwab ROTH IRA before the April 15 deadline.

Should I Hire An Accountant Or Do My Taxes On My Own?

hank — Thu, 17 Jan 2008 08:13:44 +0000

Photo by: herzogbrMy old man used to tell me, “Hank, you want to find yourself a CPA that will walk you RIGHT UP TO the door of jail, but not let you go in.” I think that’s pretty good advice – take what you can, when you can (legally) because the Government is not going to point it out if you missed it.
Tax season is quickly coming upon us, and there are a handful of things to ask yourself when drilling through this question, right? Well, not really. I think it is a pretty basic formula. It is almost like a job application that you’re hiring for. Look around, ask your friends, and keep an ear to the ground. CPA’s are NOT that expensive. I have a guy that charges $100-$150 to sort through my pages and pages of stuff I get sent in the mail, and magically comes out on the other end with a refund.

But Hank, how do you know he isn’t screwing you over and taking your money?

Well, I’m not stupid, I know the GENERAL amount that I should be getting (or paying) based on my salary, my house, and what I’ve got invested elsewhere – So maybe he is not getting all the break and discounts I can account for, but that is partially on my part. The facts are these:

– He is taking $100-$150 to do the job.
- He wants to keep me as a customer, so he wants to make me happy.
- If he makes me happy, I refer him to others.
- If I refer him to others, he makes more money.
- If he makes more money off me, he’ll continue to try to find tax breaks and benefits for me to keep ME happy so I refer more people.

That is the general outline, and how do I find this said person? Like I said above, I interviewed 5-10 potential candidates and decided if he was a good fit. I LIKE tax deductions and I will take them when I can – I want to get the most bang for my buck and put it to good use.

I used a fairly straightforward approach to interviewing the first round of CPAs that you’re welcome to use:

1. How long have you been doing this?
2. How many customers do you have?
3. Do you like your job? (If he likes numbers, he/she’ll certainly show it)
4. How long do you see yourself continuing to do this? (You want someone that will be around for a while to keep you up to date)
5. Do you email? (I LOVE email and do all 95% of ALL my communication through it)
6. How tightly do you watch the numbers? Is it just you that will see my tax return? (Usually having 2 or 3 sets of eyes helps)
7. Do I have to pay you a yearly fee to do this, or is it one time?
8. Do you give consultations through the year if I request? At a charge? (my guy doesn’t charge for these)

Those were the first basic questions I asked just to get a feel for the person I was hiring. Most of the time the H&R Block tax people aren’t that in depth with the questions; most of the people I’ve talked to (including the one I interviewed) said that the person they used from H&R Block was a 23 year old fresh out of school that had book smart, but not so much tax smart; which isn’t conducive to question #1.

Furthermore, do I even want to bother dealing with the mess? I took American Government 10+ years ago in high school and we filled out our w-2, w-4, 1099, and filed through the mail – but do I remember how to do that? Do I WANT to remember how to do it? Not really. How about stack on top of that the 100ish new laws that went into effect this year, do you know those laws? Do they apply to you? Do you want to keep up on those for $100? Is your time worth that? Not mine.

Everyone is different though, maybe $100 to you is a big deal and you want to try to tackle it yourself online at TurboTax, TaxCut, or somewhere else, and that’s fine too. But my rebuttal to that is: what if you do something wrong? The only person to blame is yourself, whereas for $100 you can have someone to dump the case on when Uncle Sam comes knocking at your door because you claimed 0 and have 12 kids.

If you own a business, there’s 1,000,000 or so more reasons to pay someone to do your taxes. You’re no longer talking about just YOUR salary or just YOUR deductions, YOUR rent, and YOUR student loans. You’re taking on everything a business owner needs to address, and everything a business owner stands to lose if you’re caught in a tax nightmare like an audit. A professional CPA, for $100-$200 could certainly be a shield between a hellacious tax audit by yourself at night, and having someone to put the burden on and you just standby and give info as needed. In my opinion, that alone is worth the $150ish bucks I pay for it.

Why Is It So Taboo To Talk About Salary And Compensation?

hank — Tue, 15 Jan 2008 09:13:54 +0000

Photo by: takashy

How is it that when we can readily see public sector and professional athletes salaries on the web and not bat an eye at it. I’m sure they discuss these things over caviar all the time and it isn’t that big of a deal; but why does middle class America think it is so taboo to discuss it? I admit it, I never ask friends and family what they make. If they make it readily available for me, I’ll certainly listen, but I have never asked about it. Is it a status thing?

It seems even more ridiculous when you can find and know the price of everything with the advent of the internet. I can find out prices of cars, prices of houses, prices of groceries, tax information, and daycare prices if I really want to online. We have a pretty good idea of how much someone is worth by these things, but still feel it is some top secret information to readily discuss the last piece of that puzzle.

Do I disclose my salary on this site? No. But could you find it out if you wanted to? Totally. Look at my balance sheet, my net worth, and see how much goes in and out. Feel free, it’s out there to find, but I still find myself reluctant, even through anonymity to release that piece of information.

I think it may fall in the way we were raised and the environment we grew up in. I think a big reason may be that some of us are always trying to “keep up with the Joneses” and don’t want to give in that those said Joneses really are kicking our butts in the income category.

Photo by: takashy

I think another big piece of it MAY be the fact that the athletes, public officials, and some celebrities salaries are posted (including the fact that Paris Hilton gets paid MILLIONS to attend parties). We realize that we’re up against some pretty big $$$ and that our measly salaries are nothing compared to those apples…

But why the mindset in the first place? I never knew what my parents made growing up. Eating hotdogs and macaroni and cheese 4 times a week though gave me a pretty good indication; but they never actually let on anything. I’d suspect that my dad (mom stayed home to take care of us) brought in no more than 20k through the 80′s and left in the 90s and I’d bet when my mom went back to work she was barely pulling in 10-12k in her first few years, nearly to 25k now, but I never knew.

Does the lower class discuss salaries openly? In tight knit families I bet they do. If you’re all working to pay for the roof over your head, I’m sure it is readily available information at the dinner table. Heck, it would have to be.

Photo by: takashy

I’m not rich, nor am I poor, but I can’t tell you the salary of any of my family members, nor do I feel I should ask. Yes, I am certainly interested; but not enough to pry and ask. I would actually probably feel pretty uncomfortable about it. I remember growing up when you’re in your teens, people older than you always asked me though, assuming that I made minimum wage, I’d be happy to pipe up that I was making WELL above the minimum wage of $4.75 and that I was paid very well at $5.15.

So how about worldwide though – Is it just an American thing? Like I said earlier, I’m even confining it to American middle-class right now – prove me wrong if you can, I’m happy to listen. Half Sigma started a post last year about it and what he makes and it has generated a pretty good list so far. These people seem willing to share, anonymously, but still willing.

Is there ever a GOOD time to ask what someone makes? Maybe a rephrase, is there ever an appropriate time to ask what someone makes? I ran across a post my MyOpenWallet and they said:

“The question isn’t one that people are used to asking, I think. It seems rude, and your motivation for asking could be questionable. In many cases, maybe people would rather not know. But more often, I’m sure people are dying to know, although they would never dream of just coming out and saying it: “How much money do you make?”

And I agree – it DOES seem rude, but is that a thing that is a mindset? Would you care as much if you knew EVERYONES salary? if you knew the salary your boss, his boss, your co-workers, your family, your friends – would it numb the subject any? I’d think it would certainly change things up, but in different facets. The newly found rich people would be hit up by charities more, the poorer people wouldn’t have to try to live up the Joneses mentality, and likely would be richer by NOT having to live up to something they weren’t.

Ultimately it sounds like the issue isn’t going anywhere anytime soon. I’m sure I’m not going to be passing on any new developments on that front because to me, it is rude, at least at this point in my life… Convince me differently?

How Do I Plan To Reach My Investing Goals For Retirement?

hank — Sun, 23 Dec 2007 13:00:50 +0000

Photo by: emdot

Only 0 days 5 hours 2 minutes left until Hanks Holiday Handout drawing!

To make my goal of having my net worth be $1,000,000USD by 2020 I need to have a plan laid out. Yes it will change through the years, My wife and I will get raises; we won’t get the return we’re shooting for with investments in some of the years, but as a base goal if we take our current principal of $75,000 and continue to invest $21,500 per year for the next 13 and that will put us just over the 1MIL mark. That first MIL is the hardest, Pinyo lays it out here.

Where do I find $21,500 per year to invest? We’re currently contributing 10% of each our salaries for about $16,000 per year to our 401k plans, then add in $4,000 each for our ROTH IRA accounts and we’re well over the limit there. We’re planning on bumps in the road, so that’s why I’m giving the $21,500 number. There are a lot of calculations that need to taken into account, but that is the same with any investment plan. At 10% return with those calculations we’re looking at just under 840k, and at 12% that puts us over the 1MIL mark.

We could have a year where we can’t pay contributions to either our 401k or ROTH, but on the same note, there could be years where we’d contribute MORE to those accounts, For instance, we’re planning on trying to bump the 401k contributions up to 15% in 2008 and that would be $24,000 in itself; add in the ROTH IRA contributions and we’re looking at $32,000 invested per year and in 13 years, that will be worth 1.33MIL.

Numbers are numbers – sticking to the path of just getting money in is the key. In 13 years I’ll still be nowhere near retirement, but the first million is always the hardest to make, after that, it is quite ridiculous how fast it grows. In 35 years on this same $21,500 per year at 10% return we’re looking at 8.5MIL. Which is dreaming, and a lot can happen in 35 years, but there is no time like the present to start planning on it!

Time, as usual, is the key piece of this financial pie; variables are always tossed in to make it interesting. As long as we’re putting in the $21,500 we’ll be on a good pace. I’m sure there will be other investment opportunities, more job promotions, more raises, maybe more kids, but staying on this basic path is the key to our specific financial goal. What’s your path?

What Is The Difference Between A Taxable And A Non-taxable Investment Account?

hank — Tue, 18 Dec 2007 16:21:29 +0000

Only 5 days 2 hours 14 minutes left until Hanks Holiday Handout drawing!

Good Morning Hank,
I was reading this article from Morningstar and they said in it: “Mutual funds are required by law to pass along any income and capital gains they’ve earned throughout the year. These distributions typically take place near year end, and they can cause a tax headache if you’re not careful. (Dividend income and long-term capital gains are taxed at a 15% rate, while bond income and short-term capital gains are taxed at your highest marginal tax rate.”
Everyone talks about their ‘taxable or non-taxable’ accounts and the tax efficiency. What’s the difference? How do I know? Is my 401k taxable? -Amanda from Nashville

Hello Amanda,

Nice question, but it is a bit trickier than that. All accounts are “taxable” to an extent. Your 401k WILL be taxed when you take it out; so to that extend, yes, it is taxable. But as far as your YEARLY taxes are concerned, you can put whatever you’d like (or have the option to like as per your company retirement plan) in that account through your company without tax consequence. It is growing tax deffered, so it would be considered a NON-taxable account as far as yearly taxes are concerned.

The best way to simplify it is to think taxable (brokerage account) vs. NON-taxable (retirement accounts). Your IRA and 401k plans grow without Uncle Sam dipping his paws in. In the case of the ROTH IRA, Sam already dipped as you’re using after tax dollars to fund it (but you get to take it out without Uncle Sams hands either). A regular brokerage account would hold any stocks or funds that were invested outside of your retirement accounts, with after tax money; generally, ANYTHING outside of retirement accounts (401k, 403b, IRAs, etc) are considered taxable. Check out MyMoneyBlog’s post about the efficiency of funds for a better clarification of the funds OUTSIDE your 401k.

in reference to your quote from Morningstar, the mutual fund IS required to pass along incomes they’ve received through the year (dividends) – So if you have that fund in your 401k or ROTH, don’t worry about it; it is likely getting rolled back in the account. However if you have it OUTSIDE your retirement package, just through a brokerage, you’re going to have to pay on those taxes to Uncle Sam. That’s why the article says they can cause a tax headache. Check with your financial advisor if you don’t know if you’re going to get hit with a larger than average tax bill for the funds you’re in OUTSIDE of retirement.

Hope that clears it up a little! Let me know if not!

GOOD Decisions I’ve Made On My Investing Journey

hank — Sun, 04 Oct 2009 18:00:46 +0000

I’ve had 2 posts worth of BAD investing decisions so far (1, 2). I didn’t want people to think I’ve not made any GOOD decisions, because I have, just not as many yet. I’m still young, had no financial education, and had some bad financial advice early in my career. But I’m riding the wave and learning from my mistakes to be able to make good financial decisions as my journey continues…

1. I started a ROTH IRA when I got my first job. Although I went through 9 different reps at Edward Jones, I ultimately didn’t have much to do in the summer of 1998 when I had a job that paid more than I needed so I consulted a rep there that showed me the light. I got started and put in on it until I cashed it out in my “bad decisions” tab #4.

2. Marrying my wife. No, this isn’t just a sentimental number, but you’d be surprised the $ you save on taxes filing jointly as opposed to separate and living together.

3. Having children at the end of the year. No, seriously – I had both of my kids at the end of the year, but am able to claim them for the entire year, Uncle Sam doesn’t care what month, just what year.

4. Bought my first place at the right time. The market was rising, but topping out yet in 2004 when I signed the papers. A year and some change later I sold it for 60k more than I bought it for. This also falls in my BAD investing choices also because I didn’t wait the 2 years of owing the properly and had to pay capital gains for it of around 11k.

5. I can’t fund any of my retirement or investing positions if I don’t have confidence and ability to do my current day job. I’m always searching for ways to improve processes and making my upper management aware of the projects I am working on, while keeping an eye open for new positions. In 2007 I’ve increased my salary by almost 30% and have a prospective new position on the horizon at the beginning of the year. Invest in yourself and keep the resume up to date; someone may be searching for someone with your EXACT skillset.

6. This blog. No kidding. It has been very good at keeping me on task; and pointing out what I need to get done. People have been very receptive to the blog and I hope I’m providing help to others searching it.

7. Keeping a net worth update monthly. It keeps me on the tails of the folks that are watching my accounts so I’m not missing anything.

I’ll have more in the future; maybe enough to negate all the bad, but for now, I’ve had my stumbles…

End Of Year Tip – Change Your W-4 To Keep More Cash In Your Pocket Next Year, Not Uncle Sam’s!

hank — Wed, 31 Dec 2008 09:00:16 +0000

So I’ve been asked this one a time or 2 before and I honestly hear different things for different people all the time. The general consensus is “it depends on your financial situation” about 99.99% of the time. Isn’t that how it is with ANY financial question? There’s no “silver bullet” or “one size fits all” answer to most of life’s financial questions, but I’ll try to break it down with a few resources I’ve found.

Hook Me Up With The Refund!

First we might want to debrief on the benefits of getting a big tax return in April and if you fit in this category. As much as it is not for me, it COULD fit your personality and spending style. You may fit in this category if you are a bad saver. This means that you can’t find spare $ to put in the bank each month because money burns holes in your pockets. You’re always wanting the next gadget and can’t find time (or money) to set aside and save for a rainy day.

There is nothing wrong with being a bad saver, you just like to spend, fine. But what I’d recommend is making sure you put some of that money away once you DO get the big check back from Uncle Sam.

Why Wouldn’t I Want A Big Return On Tax Day?

Well, getting a big refund is nice, but having that money throughout the year might be better if you’re good with your money. For the sake of numbers, let’s say you would get $1,000 back from the government after taxes. They’re not paying any interest on that. It is just money that you’re overpaying them in your paycheck each period.

That money is a free loan to them for the year that you’re not using it. They’re putting that wherever they need/want to as free money and then just giving it back at the end of the year. Does anyone think that loaning me $1,000 to have for the year and at the end of that time I give you back just that $1,000 is a good deal? If so, contact me and I’ll be happy to strike a deal with you there.

You’re not only losing out on possible interest that it may accumulate in an MMA or High Yield Savings account, but you’re also losing ground to inflation.

Granted, in 2008 the US inflation dropped pretty steep to just above 1%, but still, look at past years where it is averaging around 3%, and now you’re only getting 970 of your original loan of 1000.

Now take that $1000 that you’re loaning out to Uncle Sam and put it away each paycheck for the year in a CD or MMA and you’re at least making 3-5% and cashing it out in a year at $1050-ish. Not winning the lottery, but put that number in your OWN calculator to see what your scenario would be.

So How Many Should You Claim?

Well the quickest rule of thumb is the more you claim the less you get (or owe). If you claim 0, you’ll get a good chunk of change back at the end of the year. If you claim 7 (you can claim up to 9 if you want), you’ll likely be paying, but that’s not a bad thing if you’re offsetting it with deductions to write-off and mitigate the overall number you’re left with at year end.

Another thing to keep in mind is that adjusting your W4 does NOT change the amount of your tax burden, it just changes when and how you pay it.

I have had the discussion a handful of times and honestly the best reference I have found (as of recent) is over at the IRS.gov website. They have a handy calculator that will help you estimate what you’ve been paying and let’s you determine the best bang for your buck. Be sure to use these tips for using their calculator:

* Have your most recent pay stubs handy.
* Have your most recent income tax return handy.
* Fill in all information that applies to your situation.
* Estimate values if necessary, remembering that the results can only be as accurate as the input you provide.
* Consult the information links embedded in the program whenever you have a question.
* Print out the final screen that summarizes your input and the results, then use it to complete a new Form W-4 (if necessary), and keep it for your records.