01 May 2006
27 April 2006
But is the money really free? Basically, you're opening several credit cards, immediately maxing them out, and then closing them after paying off the balance with a transfer to another card. To say that potential borrowers would be scared to death of this pattern on your credit report is an understatement. It also can whack your credit score. Stop Buying Crap tracked his FICO score while running this scam and his score dropped by 140 points. 140 points can mean thousands of dollars in interest on car and home loans.
Don't think you'll need a loan in the near future? Well, your credit score could be FUBARed for some time based on past utilization. What if you wreck your car? You may need a loan before you think you do.
Not only can you wreck your FICO score, but what if you miss a payment or get a due date screwed up? What if your new card doesn't do the transfer by the day you need them to? What if you miss a payment somewhere else and the card company yanks the free interest? What if you use the card to make a purchase (purchases generally don't count for zero interest and all payments go to balance transfers first)? All of these would lead to 25% interest being paid since the date you transferred the balance.
It seems like a lot of risk for a couple of hundred bucks in "free money". Plus, you'll pay tax on the interest you do earn, so that lowers the take by another 30% (including state taxes). No, thanks.
26 April 2006
I used the "Where am I heading?" calculator from Alliance Bernstein to estimate how much I will have to live on in my retirement given constant savings rate. Right now, I am putting away 7% of my salary to a 401(k), which gets me to 10% of my salary including company match.
Alliance Bernstein estimates a 2% cost of living adjustment in retirement and estimates future inflation using a series of 10,000 simulations to pick the most likely rate over the rest of your working career (40 years in my case).
The calculator estimates that I will be able to replace my current salary (the results are calculated in today's dollars) and have an 85% chance that my money will outlive me. This assumes I retire at age 65 and live for another 30 years. If I can up my contributions by one percent per year, it will mean an extra $4,000 in income per year.
Next, I used the online Social Security calculator from the Social Security Administration. While I assume in my own calculations that Social Security will not be available when I retire, it is a useful tool for those that are closer to retirement. If I take Social Security at age 67 (when I will be eligible), I will receive $19,116 annually in today's dollars as my SSA benefit. If I hold off until age 70 to take benefits, I will receive $23,712 annually in today's dollars. Like I said, this will be found money for me if SSA benefits are available in retirement.
I am okay with these calculations. Like I said, my own shows I am in a little more trouble, but I expect (possibly foolishly) to increase not only my income but also my contribution percentage faster than my current calculations show. Plus, my wife is a teacher and will have generous benefits of her own in retirement (I ignored her salary in all this). Overall, I think we're okay (it doesn't keep me up at night), but I think we could do better. Later, I will discuss the model that I currently use to calculate my retirement.
25 April 2006
24 April 2006
Now, I am certainly not endorsing Mr. Cox, I just wanted to point out a politician who actually knows something about taxation (and has to be a masochist).
Credit card companies are working harder to extend credit to youngsters to try and get them hooked early on easy credit. An estimated 11% of teenagers have credit cards, some of them as young as 13 (minority laws apparently don’t stop credit card issuers). That is why we have to start educating children on money early, and that has to start at home.
It has to start at home because schools are falling down on this one. Only 12 states currently require any sort of personal finance course to graduate. The MSNBC story states 12 more are considering requirements, but with the pressures of state budgets and No Child Left Behind’s focus on only reading and math, there will not likely be a whole lot of push for these classes. The percentage of high school seniors that had taken a personal finance class dropped from 2004 to 2005.
There is also anectodal evidence that personal finance classes for teens don’t work. In a recent survey of financial literacy of high school students, students who had taken a class actually fared worse than those who did not.
Parents also need to know that learning doesn’t stop at the school doors. Your kids will watch what you do and pick up your habits (heck, my two year old already does things that amaze us just by watching my wife and I). If you’re poor with money, it’s likely your kids will be as well. To truly teach your kids, you need to clean up your own finances.
MSNBC has nine ways to help you teach your kids about personal finances. Some will work in the real word and some won't. You need to pick and choose what does work.
- Don’t teach, just talk
- Get them a piggybank – or a spending account
- Give them a goal
- Monitor their use of plastic
- Have a “Family Money” night
- Tone down the consumerism
- Use extracurricular activities
- Turn them into investors and donors
- Make them work for it
21 April 2006
Congress is currently negotiating on the latest round of tax cuts. Well, it's really about extending the tax cuts that Congress passed during President Bush's first term. The House wants to extend the Capital Gains and Dividend cuts that expire in 2008 for two more years fearing a Democratic takeover of one of the houses in 2006. The Senate, which has to be more pragmatic to get 60 votes, wants to extend the higher AMT exemption that expires this year.
What does this mean to you? The AMT is a separate taxing system (yes, I know there's a philosophical debate about whether or not it's truly a parallel system, but cut me some slack) that kicks in after the AMT threshold is reached. For 2005, the exemption was $58,000 for married filers and $40,250 for single filers. The exemption reverts to its pre-2001 levels this year of $45,000 and $33,750 respectively. If you make more than the exemption amount, you have to figure your Alternative Minimum Tax.
The AMT was enacted in the 60s as a response to testimony by the Secretary of the Treasury that 155 people with adjusted gross income above $200,000 had paid zero federal income tax on their 1967 tax returns. The small problem was that Congress in its infinite wisdom didn't bother to index the exemption for inflation, so it's roughly at the same spot it was in 1970. Enter the Bush tax cuts.
AMT disallows many of the deductions that are allowed on your 1040, including state income taxes, medical expenses, and home equity mortgage interest deductions. It also disallows personal exemptions, the ones you get for free for you and the kids. Now, when Congress passed the tax cuts they upped the AMT exemption so that people would not be caught by it. Because of the nature of the AMT, if they simply cut taxes and left the AMT alone a lot of the tax cut would be lost because of the AMT.
What does this mean to you? Well, if the AMT exemption isn't raised, the number of AMT filers will explode from 3.6 million in 2005 to 29 million in 2010 per the Tax Foundation. Who is at risk? Mainly those with large families or large itemized deductions since many of the deductions are disallowed for AMT purposes. The IRS released an AMT Assistant for 2005, but that won't help your planning for 2006. The only real way to see if you are at risk is to do the math yourself. However, taking 10 minutes to do the math now will let you know if you need to up your withholding for the rest of the year so that you don't have a nasty surprise come next April.
If you have a large family (say, more than 2 kids) or have a lot of itemized deductions outside of your home mortgage deduction (but including your home equity loan interest), and make more than the AMT exemption threshold, take a gander through the IRS' AMT section and whip out a calculator. Then find out if you need to adjust your withholding or if you are okay. It's painful, but a lot less so than finding out come April 2007.
20 April 2006
Last night, Apple reported profits that beat analyst estimates, sending the stock up nearly 3.5% (as of 12:30 EDT). Apple now trades at a more reasonable P/E of 36. More reasonable being relative for a company that's growing as fast as Apple is currently.
My problem is still the same as three months ago. I don't believe Apple will stay on top of the world forever. The switch to Intel chips (and the resulting success in installing Windows) has been plugged as the savior for the Mac line, but I don't agree. Pundits have been saying that education and business will flock to the Mac now that people can boot into Windows or OS X. Imagine being at your workstation and having to reboot the computer to use a Windows-specific application (and most business applications are). I wouldn't want to be in tech support for the first month of a Mac rollout.
The iPod just keeps selling! TV shows and movies are showing up in iTunes! Big deal. Apple loses money on everything that is purchased at iTunes, its a loss leader for the iPod. The iPod is currently the leader in the market, but at some point it will go the way of the Walkman. Remember when Sony was the dominant consumer electronics company?
Now, I'm not just bashing Apple to bash them. Had I won the argument, I'd have an iBook in our house right now (and Parallels gives me the way to win next time). I will likely be getting an iPod rather than one of the competitors when I do pony for an MP3 player. I use iTunes as my primary library organizer on my computer. I use and love Apple products, but I'd never buy the stock.
19 April 2006
Financial planners help people build wealth and guide them toward financial milestones such as retirement, vacation homes, or funding children's educations. But they don't work free of charge. Some, like the one who worked with Rohall, charge an hourly rate for their advice. Many more charge a commission on the products they sell, so they want clients with assets to invest in order to generate fees.As I've discussed before, I am a big believer in avoiding the people represented by the bolded part at the bottom. There are clear conflicts of interest between the advisor and the client. Don't think it happens? Free Money Finance has a post today on an advisor advising a client to cash out all the equity in his home and putting it into some sort of variable life insurance policy three years from retirement so he could generate commissions. Amazing.
Back on topic, it is difficult, but not impossible, to find a decent financial planner even if you are of modest means. Fee-only advisors generally take on those with fewer assets because they are not paid based upon commissions. The CS Monitor article basically says you either have to find a planner with a charitable streak or have family connections. Maybe if you were, say, a newly minted doctor you could find one, but otherwise you are SOL. I disagree. If you want someone to review a budget or get your 401(k) on track, you should be able to find someone easily. If you are looking to have someone manage your money for you, you probably will be out of luck without a large kitty. But that doesn't mean you can't afford a financial advisor of any sort.
18 April 2006
As always, I suggest taking advantage of free tax advice from the IRS.
New Publication 1066C, A Virtual Small Business Tax Workshop DVD (with English, Spanish and Mandarin Chinese subtitles) and Publication 1518, 2006 Tax Calendar for Small Businesses and Self-Employed, are now available.
The DVD is an innovative educational product designed to help small business owners and the self-employed understand and meet their federal tax obligations. The 10 lesson workshop consists of interactive video presentations of tax subjects and a text-only Help lesson with links to the latest information on IRS.gov.
The wall calendar features information on general business taxes, IRS and SSA customer assistance, electronic filing and paying options, retirement plans, business publications and forms, common tax filing dates and federal legal holidays.
Order these products and others online or call the IRS distribution center, (800) 829-3676.
The savior listed in the article is Sharebuilder. I've used Sharebuilder in the past and it's far from the savior it pretends itself to be. First, the fees are high. $4 per investment, or $14.95 per trade. If you manage to invest $100 per month, you are still paying a 4% commission and need to make that return just to break even. If you save $50 per month, it's an 8% commission, which is the average return for an entire year.
My suggestion would be exactly what the Motley Fool editor suggested in the article, save the money in a taxable high-yield savings account until you accumulate the required minimums to get into an IRA from Fidelity, Vanguard, or any of the other major brokerage houses. You'll get a tax deduction once you accumulate the minimum required, which will more than offset any taxes you'll pay on the interest earned in the savings account.
Additionally, some companies have automatic investment programs to allow you to build up balances gradually. Fidelity requires $200/month, but T. Rowe Price only requires $50/month to be invested in their plan. It requires an automatic deduction from your paycheck or bank account and there are stiff penalities if you stop the automatic contributions.
17 April 2006
"It's onerous and everybody knows it," said Rep. Richard Neal, D-Mass.So, three of the top four tax law writers can't even figure out the garbage their committee spits out on a regular basis. Ways and Means Chairman Thomas (R-CA) is the only one that actually does his own return (surprising since he blasted lobbyists for complicating the tax law when doing his job).
Three of the four top lawmakers on the Senate Finance and House Ways and Means committees, which are in charge of writing tax laws, pay a professional to file their annual tax returns with the Internal Revenue Service.
One of the favorites to take over Ways and Means had an interesting answer when asked if he does his own returns.
"Absolutely not," said Rep. Jim McCrery, R-La. "I'm not an accountant. I'm a lawyer."Gee, you think that's any reason why the Code is so freakin' complicated and gets more so every year that industry targeted tax cuts are passed? (cue Thomas) Get accountants on the tax writing committees! Make tax law writers do their own taxes before voting on any tax legislation!
As long as we have people that pay someone else to do their taxes writing the law, we'll never see an easier system. For these guys the system is easy: hand the documents your assistants prepared to the accountant (well, actually the mailroom guy will) and sign the return when he's done. What's easier than that?
Oh, and happy Tax Return Day!
14 April 2006
Even though I've developed my own version of many of these, it looks like the ones I looked through would work really well for someone to determine if their retirement plans are on track, for example. Or to get started on a budget. So, go check them out.
Of course, the US Government doesn't see it that way. The article points out, over and over again, that the IRS rarely goes after tax protestors. The problem with this theory is that the IRS does tend to go after very public protestors. I would imagine everyone in this article (which used real names and locations) will be getting a visit from the taxman. They may want to look up the names "Al Thompson" and "Irwin Schiff" to see what happens when tax protestors publicize their ways.
Remember, you must pay taxes. If you don't the IRS will catch up to you. All of the matching technology they have now means it will likely be sooner rather than later. So, be a good citizen and pay your taxes.
12 April 2006
Starlets at the Academy Awards receive lavish gift bags worth north of $100,000, just for being special. It's about time tax preparers got some of that.I don't drink, so bourbon's no good. Cash money is the best kickback for me. Though, the Motorola PEBL the nominees received are pretty sweet.
Maybe that time is coming. The Tickmarks blog reports that Bank of America is distributing iPod shuffles and stress balls to friendly tax preparers. Good, good. Of course, we wouldn't want other banks to feel slighted, so we are prepared to accept gifts from all comers. The Tax Update Blog is partial to good bourbon, if you're interested.
10 April 2006
Once again, DOR will be offering free Small Business Workshops from May to August. These workshops are designed for the tax novice, and are intended for new business owners or those that are considering starting their own business.
Speakers will continue to provide the latest information on a wide array of topics, including, but not limited to WebFile for Business, sales and use taxes, meals tax, certificates and exemptions, and state information (registration, employment issues, new hire reporting, estimated income tax payments, filing and payment procedures, etc.). Attendees will also have the opportunity to ask questions regarding taxes that apply specifically to their business.
The Small Business Workshops will take place on the following dates and locations: May 3 (Boston), May 23 (Worcester), June 9 (West Barnstable), July 13 (Springfield) and August 10 (Andover).
If you or your clients are interested in attending one of the Department's free Small Business Workshops, please visit http://www.mass.gov/dor and click on "Workshops and Seminars" for additional information. If you have any questions, please do not hesitate to contact DOR's Speaker's Bureau at firstname.lastname@example.org or at (617) 887-5660.
|Net interest on Debt|
|Education, training, employment, and social services|
|Veterans benefits and services|
|* Includes community and regional development; administration of justice; international affairs; natural resources and environment; agriculture; general science, space, and technology; general government; commerce and housing credit; energy; and undistributed offsetting receipts.|
|Source: Office of Management and Budget, Analytical Perspectives, Budget of the United States Government, Fiscal Year 2007 (available at http://www.whitehouse.gov/omb/budget/fy2007/); Tax Foundation calculations.|
Looking at that chart, it's hard to see where the "Starve the Beast" proponents plan to cut spending. The Tax Foundation also found that most people feel the same way.
What does that mean to you? Eventually, much like a consumer, the debtload of the Federal government will break its back and something will have to be done. If we can't cut spending, the government will have to raise revenues. That means tax increases, which don't seem very popular currently.
If you've got the choice between the IRA and a Roth IRA and you're in a pretty low tax situation now you may want to select a Roth because you will be locking in today's lower tax rates. If you're self-employed, it may not make a difference because you will pay an additional 15.3% in self-employment taxes on your IRA or Roth. If you have a 401(k) at work you may be able to hedge your bets by funding the 401(k) to get the maximum match and then contributing to a Roth. Contributions to Roths are subject to income maximums, so you'll have to make sure that you can make Roth contributions.
09 April 2006
52% of respondents said that they would be willing to give up some deductions to make the tax system simpler. However, 80% said the Federal tax system was overly complex and needed major adjustments (28% said "overhaul everyone else", apparently). 63% said it was unfair for one-third of all American taxpayers to pay no tax and that everyone should pay at least a little tax (that's the much-despised AMT!).
When it comes to raising taxes and Congressional spending the results are bad news. When asked if they would be willing to pay additional taxes to pay their share of the current-year U.S. deficit (approx. $2,470 per person), only 9% said they would pony up the cash. Of those that said they would pony up the cash, 63% said Congress would just increase spending with the raised taxes and wouldn't pay off a dime of the deficit.
Only 55% of respondents actually prepared their own taxes, either using software or on their own. 36% paid an outside tax preparer (more on that later this week). 59% said they paid too much in tax and 30% said they paid the right amount (the 1/3 that pay no tax?) and 66% said they get a fair or poor return on the money they pay in Federal taxes.
Federal taxes have never been popular. Everyone complains about them (some more than others) but the number of people unhappy with the current system will only get larger unless Congress does something about the complexity of the Federal tax system. Congress also needs a lesson in personal financial management in order to reverse the trend of people believing that Congress has no willpower to restrain spending.
Hopefully, we'll get more than lip service about reforming Federal taxes in the near future (certainly more than running on a platform of simplifying taxes while passing the most complex piece of tax legislation ever). I won't hold my breath.
07 April 2006
The certification amounts:
• 2006 Ford Escape Hybrid Front WD $2,600
• 2006 Ford Escape Hybrid 4 WD $1,950
• 2006 Mercury Mariner Hybrid 4 WD $1,950
• 2005 Toyota Prius $3150
• 2006 Toyota Prius $3150
• 2006 Toyota Highlander 4WD Hybrid $2600
• 2006 Toyota Highlander 2WD Hybrid $2600
• 2006 Lexus RX400h 2WD $2200
• 2006 Lexus RX400h 4WD $2200
The IRS also reminds taxpayers of the details of the program.
Starting in 2006, this tax credit replaces the tax deduction of $2,000 which was previously allowed for taxpayers who purchased a new hybrid vehicle before December 31, 2005 for the clean-burning fuel deduction. The tax credit requires a different certification. Many currently available hybrid vehicles may qualify for this new tax credit.So, if you're thinking of buying a hybrid, now you'll know the amount of tax credit you'll get back.
Consumers seeking the credit may want to buy early since the full credit is only available for a limited time. Taxpayers may claim the full amount of the allowable credit up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th vehicle. For the second and third calendar quarters after the quarter in which the 60,000th vehicle is sold, taxpayers may claim 50 percent of the credit. For the fourth and fifth calendar quarters, taxpayers may claim 25 percent of the credit. No credit is allowed after the fifth quarter.
The big pluses of SEP-IRAs are the high contribution limits (25% of compensation or $42,000) and lack of broad regulation (similar to 401(k) plans). The downsides are that contributions are limited to employer-only and everyone must get the same percentage if there is more than one employee. Also, SEP-IRA contributions vest immediately, unlike many other plans that allow step-vesting.
The SEP-IRA is available for businesses of all sizes, but is aimed particularly at small businesses. If you are self-employed, I see no reason not to use one to lower employment and income taxes.
06 April 2006
The Small Business Resource Guide, CD-ROM provides critical tax information to small businesses including forms, instructions, and publications. The CD also provides valuable business information from a variety of government agencies, non-profit organizations, and educational institutions. The CD contains essential startup information needed by new small businesses in order to be successful. The design of the CD makes finding information easy and quick and incorporates file formats and browsers which can be run on virtually any desktop or laptop computer.There are several others for small business, including a DVD version of Publication 1066-C, A Virtual Small Business Tax Workshop. So, if you are a small business or thinking of starting one, pick it up. After all, it's free tax advice from the IRS.
05 April 2006
My current allocations as of 3/31 were:
48.02% Domestic Value
13.09% Emerging Markets
12.86% Real Estate
10.34% Domestic Growth
I am primarily a value investor and seek out value stocks that pay dividends. One of my largest holdings is a Fidelity fund that specializes in underpriced stocks and is currently closed to new investors (you can figure it out if you really want to). Because of the minimums to avoid fees in this fund, it makes up over 20% of my IRA. When I rebalance I sell enough of the fund to get to the minimum in order to continue to diversify my portfolio. I am probably overly weighted in Domestic Value and need additional weighting in Domestic Growth, but I’m not terribly worried about it. I am overweighted in large-cap stocks, but the aforementioned fund invests primarily in small and medium caps, so I do have some exposure there.
On the international side, I am underweighted overall (only 28%) but overweighted in emerging market stocks. This is primarily due to the outsized returns of emerging market funds over the past year.
Real estate is right on target with 12.86% being smack in the middle of my target allocation of 10-15%.
So, by looking at my current allocations, I am overweighted in domestic stocks and emerging markets and underweighted in international stocks generally. Like I said before, I’m not overly concerned about being underweighted in domestic growth stocks. I want to get my international stocks to allocation before adjusting my domestic allocation (mainly to avoid trading fees).
I will sell off enough of the emerging markets funds to get down to my 10% target allocation. I will use the proceeds from the sale and the dividends that I received this quarter to purchase additional shares of international funds. This will not get me to my targeted allocation in international stocks, but I will continue to use my dividends and sell overweighted funds in order to reach my designated allocation.
So, that’s how I rebalance my portfolio. Your mileage may vary and it’s only one example, but it should be enough to get you started.
04 April 2006
Professionals and personal finance bloggers often tout the benefit of rebalancing your portfolio every so often in order to maximize gains. The problem is that they never explain how to go about doing this. I try to rebalance my IRA every quarter when I receive the dividends on my investments. To me, this is the most logical because I have to reinvest the dividends anyway on all of my ETFs. If you have mutual funds that automatically reinvest dividends, doing a yearly rebalancing is all that’s really necessary (unless you are obsessive like I am).
The first thing I do is make sure that I’m still on track. I compare my overall gain to the S&P 500 returns for the quarter to see if I was able to beat the “broader market”. The S&P 500 seems to be the benchmark that most funds use, so I go ahead and use that. I use the “Spartan U.S. Equity Index Fund” because it’s the one that’s easily accessible in my 401(k). The YTD return as of 3/31/2006 was 4.19%. I calculated my return as 7.30% for the first quarter of 2006, so once again I managed to beat the market (which makes me happy).
The next step is to compare my current allocations to my targets. Generally my targets break down as:
45-55% Domestic Stocks
35-40% International Stocks
10-15% Real Estate
I break down the International category a little further into 10% Emerging Markets and 25-30% broad-based international. As you can see, my portfolio is all stock, which I feel is appropriate for someone of my age (late 20s). I have 40 years to ride the ups and downs of the stock market, so I am willing to take on more risk for the better returns that stocks have provided over the long term for the past two centuries.
(continue to part two)
03 April 2006
SEP-IRAs are basically pension plans for those that are self-employed. You can contribute up to 25% of self-employment income (with a maximum contribution of $42,000) as an employer. As an employee, you can make an additional contribution up to the IRA limit of $4,000 less any contributions to other IRAs (including Roths).
The good thing is that SEP-IRA contributions made by an employer are deductible for income and employment tax purposes, saving 50% in taxes if you are in the top tax bracket (35% income taxes plus 15.3% employment taxes).
So, if you're a blogger and you make income from the site, you do need to report it on Schedule C of your tax return (unless you incorporate). If you are under the income limits for contributing to IRAs, you can make the employer contribution to the SEP-IRA and then contribute the rest of the income as an employee contribution to the SEP-IRA. Your employee contribution will still be taxable for employment tax purposes, but will be deductible for personal income taxes. This way you'll only pay the 15.3% tax on your blogging income now and defer the rest until retirement. On top of that, you can deduct half of the employment taxes paid on your personal return as a business expense.
It's a way to shelter up to $4,000 of blogging income per year, which is better than paying a 50% tax rate on the income.
31 March 2006
With the April 17th tax deadline looming, Americans are feeling the weight of their annual income tax burden. But there's a quirk of the federal tax code that may actually entice taxpayers to pay a little extra to Uncle Sam this year: the ability to write a special check to help pay down U.S. public debt.So if you are really scared of the national debt and have a little extra cash, send some the Treasury's way.
Each year a handful of Americans take advantage of this oddity in the tax code, voluntarily sending debt-reduction checks to the IRS along with their regular tax return. It's no surprise few taxpayers take advantage of it, since it's not well advertised by the IRS. There's no line on the 1040 form for "public debt reduction." However, the IRS website offers detailed instructions for those inclined toward charitable gifts to Uncle Sam's debt-relief fund:
How do you make a gift to reduce debt held by the public?
If you wish to do so, make a check payable to “Bureau of the Public Debt.” You can send it to: Bureau of the Public Debt, Department G, P.O. Box 2188, Parkersburg, WV 26106-2188. Or you can enclose the check with your income tax return when you file.
Tip: You may be able to deduct this gift on your 2006 tax return.
According to the most recent IRS Data Book, last year 48 taxpayers mailed in contributions to reduce the public debt, for a total of exactly $21,179. That's $441 per gift. Since 1982, there have been a total of 16,122 voluntary contributions to reduce the debt, for a grand total of $9.8 million—or about 0.00012 percent of the nation's public debt of $8,367,661,575,868 as of March 29, 2006 according to the U.S. Treasury.
29 March 2006
Most companies use software to match a resume to a job. Many even have simple surveys on their website that can disqualify you based on your answers. It's a natural response to the flood of resumes that companies now receive thanks to the internet. The article lists five tips for getting your resume read.
1. Keep resume formats simple.
This is the easiest way to get your resume tossed. A font that looks great on paper is unreadable on screen. Add to that some companies still print returns and use a scanner to pick keywords from resumes. Non-standard fonts will cause a scanner to kick out the resume and it will never be entered into the system.
2. Match your resume to the job.
See #1. Tailoring your resume will take all of ten minutes and very likely could be the difference between getting an interview or not. Take the requirements for the position and change your previous experience to highlight how you've met the requirements for the position you are seeking (but be honest). Try to match as many of the requirements listed in the job ad, the more you meet the more likely you are to get an interview.
3. Consider an end run - or not.
This is the big debate. Should you contact a human in order to try and gain an advantage? I would suggest not doing it unless you have a connection in some way. My profession is all about networking, and since I live in a city with a small pool of taxpeople I can usually find someone I know that a tax manager knows. In that case, trying to get a contact might work. If you randomly call a company and ask the receptionist for the hiring manager, you're just as likely to get the janitor as anyone that can actually make a decision.
4. It's still 'who you know.'
5. Always be honest.
This is a good rule no matter what you do, but is moreso in job hunting. In more technical fields, you will be asked about certain requirements listed in the ad to make sure you actually have that knowledge/experience. Almost every has a "probation period" to make sure that you can handle the job once you get there. Getting fired during the probation period will be a red flag to other potential employers, so be careful.
28 March 2006
The ex-partners (they were indicted and thrown out of the practice in order for KPMG to escape indictment) had kept a united front that the shelters were not illegal at the time they were created and were just creative ways to generate losses using the tax code.
The agreement with the accounting firm was an attempt by the government to not bring down another of the gigantic global accounting firms. What was once known as the "Big 8" has been reduced to five with mergers and the implosion of Arthur Andersen. Losing KPMG would mean that four firms would control the vast majority of large corporate audits and tax planning. Global corporations rely on the Big 5 because they have offices wherever the companies do and can audit and advise on local taxes. Many governments have already commented on the lack of diversity in the firms and losing another major firm would have been a large blow to the profession.
We will see if anyone else decides to flip now that one has. It's the classic prisoner's dilemma. Who do you trust?
27 March 2006
If you made less than $25,000 and filed a 1040A, the audit percentage was 0.5%. If you filed the full 1040 (meaning you took itemized deductions), your chance of being audited tripled. Made over $100,000? Your chance of being audited acutally fell from 1.4% to 1.2% in FY 05. Are you a farmer? Congratulations! You had some of the lowest audit rates at less than 0.5% if you made under $100,000.
The highest percentage of audited returns were people that filed a Schedule C for an unincorporated business. As I've discussed before, the IRS is hitting these returns hard because of rampant fraud in claiming personal expenses as deductible business expenses. If you made less than $25,000 or more than $100,000, you had a 1 in 25 chance of being audited (still not a great chance). If you made between $25,000 and $100,000 your audit chance was 1 in 50.
All of this doesn't include computer matching audits (matching your income to filed W-2s from employers) and simple mathematical mistakes.
Now, if you're lucky enough to get selected for audit, what are your chances of making it through without an adjustment? Well, not very good. The IRS broke it down by who does your examining, but none of the subsets had more than a 1 in 5 chance in getting a "no adjustments" audit. If you get referred to a tax examiner, your chances are 1 in 20 of not getting at least one adjustment.
So, your chances of being selected are not very good (as long as you file a correct return) but if you get selected, the IRS will likely make changes to it. Remember though, that the IRS uses a computer scoring program to score you against the norms for your income group and uses a different program to match you to any 1099s and W-2s filed by others. So, even though your chance of being selected is low it still doesn't pay to cheat on your taxes.
23 March 2006
Luckily, the Washington Post saved me a long post by explaning this exact phenonoma in a recent article. The Vanguard funds are far too conservative. A portfolio aimed at a 45 year old, still 20 or more years from retirement, has only 57% of its assets in equities. A 45 year old should have more than 80% of their assets in stocks because they are far enough from retirement to ride out any short term ups and downs. During retirement, the Vanguard fund will drop to 30% stocks. Again, this is far too low to benefit from the long term trend of higher returns on stocks.
People will be using their retirement funds for 15 years on average and they may run out of money using such a conservative allocation. Fidelity does a little better job with 73% and 45% for their version of the same funds. T. Rowe Price does the best to take advantage of stock returns with 82% and 55% in their funds at the same timeframe.
T. Rowe Price has the highest cost, however, at 0.82% which still lower than most actively managed funds. And all of the funds are simply a "fund of funds" apporach that invests in other funds managed by the three companies, so you still need to look at the underlying funds to make sure that it fits in with your overall portfolio.
22 March 2006
Revenue Ruling 2006-17 emphasizes to taxpayers, promoters and return preparers that inserting the phrase “nunc pro tunc” on a return or other document submitted to the Service has no legal effect and does not validate an invalid return, make a delinquent return timely, invalidate a signature, create a claim for refund of taxes previously paid, or reduce one’s federal tax liability.Additionally, the IRS issued a Notice that explained these and even more common frivilous arguments (PDF link) and reminded taxpayers what the penalties for making frivilous arguments for delay of collection are (read: not fun).
Revenue Ruling 2006-18 emphasizes to taxpayers, promoters and return preparers that any argument that Forms W-2 only record and report payments made to federal employees, or that only federal employees or residents of the District of Columbia or federal territories and enclaves earn wages subject to tax, has no merit and is frivolous.
Revenue Ruling 2006-19 emphasizes that an individual cannot escape taxation by attributing income to a purported trust. The Service will take vigorous enforcement action against frivolous arguments relating to trusts.
Revenue Ruling 2006-20 emphasizes to taxpayers, promoters and return preparers that any argument that Forms W-2 only record and report payments made to federal employees, or that only federal employees or residents of the District of Columbia or federal territories and enclaves earn wages subject to tax, has no merit and is frivolous.
Revenue Ruling 2006-21 emphasizes that an individual cannot escape taxation by attributing income to a purported trust. The Service will take vigorous enforcement action against frivolous arguments relating to trusts.
I love reading tax protestor arguments and laughing. Again, if anyone tells you that you can avoid all taxation and they have the answer (for a large fee, naturally) run the other way. If you get a card, call the IRS; you may just be in for a reward.
21 March 2006
Sound familiar? Looking at the IRS Press Release on finding a tax preparer, the number one hint was:
Be careful with tax preparers who claim they can obtain larger refunds than other preparers.While the IRS press release was primarily dealing with
20 March 2006
The basic question is whether a science teacher should ditch his collection of mutual funds for a professional money manager that will take 2% of assets as his fee. The Expert says it's likely that he'll lose out since he'll be paying 1% more annually than he is paying now for a service he could do himself.
He does have a good point. The "lifestyle" funds that he mentions are a great tool for those that don't want to deal with rebalancing and tracking their own portfolio of mutual funds. These funds are far from perfect (and often way more conservative than they should be) but for a market-phobe it's a decent tradeoff of risk and return.
Another option would be to pick up either Kiplinger Personal Finance or Money when they do their annual Mutual Fund guides and use those model portfolios as guides for setting up your own portfolios.
Stay away from money managers unless you have enough money that you absolutely need to diversify into commodities, real estate, and the like. If you're asking yourself if you meet that test, you probably don't. Spending a few hours reading one of the publications above should give even the market novice a good head start.
If that still isn't an option, going to a fee-only personal financial advisor would work as well. They can guide you to a diversified portfolio without taking a percentage off of the top every single year.
16 March 2006
Congress needs to follow the same rules as everybody else that runs up tons of long term debt to pay for short term items. Either get more income (raise taxes) or cut spending. If the Treasury is paying an average of 4.75% (based upon the current yield which may or may not reflect the true interest paid), the annual interest cost of carrying the current debt of $8.2 trillion is $392.8 billion. Every single year that's the amount going just to service the debt, not to pay any of it off.
The debt is unsustainable, but nothing will happen until the mood changes in Washington (or a fiscal catastrophe happens). Unfortunately, this debt glut trickles down to people who often joke that why should they balance their budgets when Congress can't? It's a good question.
15 March 2006
These accounts were created to take advantage of
This seems like a great program that could actually benefit customers. People, especially lower income people, need to save for retirement. This allows them to use money that they never had to fund these accounts. But, the Devil is in the details.
According to Mr. Spitzer, 85% of accounts paid more in fees than they earned in interest. The median account balance of $323 earned $3 per year in interest but paid $10 per year in maintenance fees, $15 to set up the account, and a $15 “re-contribution” fee (whatever that is). Customers also paid $25 if they wanted to close the account. Customers could only invest in H&R Block’s money market account, so they could not get better returns even if they wanted to.
So, these accounts paid a return that was below inflation. That meant accounts were losing purchasing power every single year. On top of that, the median account was being charged around 7.75% in annual fees ($25/$323) in order to earn 1% ($3/$323) meaning the account was slowly being drained by H&R Block.
Brilliant! H&R Block figured out how to capture customers total refunds (albeit slowly) on top of their fees! Throw in funding via Refund Anticipation Loan and these appear to be a blockbuster (for H&R Block at least).
So, in the past few weeks we’ve learned that H&R Block charges outrageous interest rates on “loans” it pushes, cheats on its own taxes, sells your tax data, and now sets up IRAs for its customers that do nothing but enrich itself.
People may say that I'm anti-H&R Block. Really, I'm anti anyone that has a fiduciary duty that repeatedly uses that duty to enrich itself at the expense of people that they know do not know any better, which is apparently what H&R Block is doing over and over again.
Friends don't let friends use H&R Block.
14 March 2006
1. Overkill on Charitable Contributions
Aah, the prototypical "fudge" number on people's tax returns. These have been abused so long (and now in lots of more ways) that the IRS will look at any return that has a much higher percentage of charitable contributions than other taxpayers in their income bracket.
2. Self-Employed Expenses
Another oldie but goodie. People have been writing off all kinds of items as "business deductions" for so long that taking any sort of S/E expenses (especially if you have a full time job elsewhere) might as well be printed on bright red paper and have flashing lights on it. I would add abuse of the hobby loss rules to this as well.
3. Above Average Deductions
The IRS uses a computer matching program that scores your return against others in your tax bracket in various ways such as deductions, credits, and exclusions. If your score is too high, you'll get flagged for audit. Does that mean you should tailor your return to score low? No, you should take every deduction and credit you are entitled to. Just make sure that you are entitled to it and that you keep documentation so that it can withstand an audit.
4. Making Six Figures
IRS audit records have shown for years that you are much more likely to get selected for audit if you make $200,000 than if you make $20,000,000. The simple fact is that the more money you make the more likely you are to use a professional that is legally bound to file a correct return. People making low six figures can still file their own returns and may be tempted to stretch deductions (see #1 and #2) to lower their tax bite.
5. Careless Omissions
If you don't attach a W-2, or worse yet don't include it income, you'll be flagged immediately as part of the IRS push to match documents like W-2s and 1099s to tax returns. So, report everything!
13 March 2006
Currently, companies can give your tax return information to affiliates if they bury it in a disclosure that you have to sign. The IRS has decided it just might be a good idea to allow companies to sell your tax return data to unaffiliated companies if they get permission. The IRS says this will empower consumers to use their tax return data how they see fit. I say it's a scam and many people will have no idea that their tax return data is being marketed to the highest bidder.
It also seems to be a bright shiny beacon to identity thieves. Here! Buy people's most sensitive data! You don't even have to fake out ChoicePoint anymore!
Bad, bad, bad idea. I really hope the IRS wises up and quick.
For anyone checking out the Investimist for the first time, welcome and get comfortable. I can be reached by leaving a comment (I will always try to respond). I welcome comments (and even the occasional criticism).
10 March 2006
Nearly 80% cite daily living expenses as a barrier to saving. While I know this can be a legitimate issue, there are ways to cut living expenses to the point where you can save. I, personally, just began putting money into my 401(k) again after buying a house and the birth of my daughter put a crimp in our budget (my wife is a teacher with a pension, so she was automatically saving). But we made every attempt to get back to putting into my 401(k) as fast as possible once my employer began offering a match.
61% cite "lifestyle purchases" as reasons not to save. This would be buying a nicer car, a big freaking tv, the latest iPod, etc... Why is this important? Compounding!
Here's an example from Choose to Save, a public education program. Suppose you want to save $100,000. If you have 20 years, you can reach your goal by saving $3,272 a year and earning a 4% annual return. Shorten your time frame to 10 years, and you'll have to save $6,559 a year and earn 8% annually to achieve the same goal.It gets worse when you have 40 years to save before retirement but put it off until they are 50 and are unable to match the amount they would have earned. About.com has another example of this power.
So, Gen Yers. Save now. The more you save now the earlier you can stop working. There, that should be enough incentive.
08 March 2006
The advice that they give is impeccable. However, not everyone has the ability, or time, to not only become an expert in one industry but to read through SEC filings. Abandoning Yahoo! Finance or other screeners just isn't an option for most people. So, what do they suggest? Buy their newsletter! (of course)
Instead, they should be telling you to rely on time-tested ideas like finding stocks with lower P/E ratios than return on capital ratio. Stick to companies you've heard of. Do a Google News search for any bad news out there. Look at news stories on Yahoo! or MSN Money to see if anything has come out that would knock the stock down.
Or, conversely, you could invest in mutual funds or ETFs that invest primarily in dividend stocks and let professionals do the work for you. That's my suggestion and that is what I do.
07 March 2006
It has about $3,800 in the bank. No one has a retirement account, and the neighbors who do only have about $35,000 in theirs. Mutual funds? Stocks? Bonds? Nope. The house is worth $160,000, but the family owes $95,000 on it to the bank. The breadwinners make more than $43,000 a year but can't manage to pay off a $2,200 credit card balance.How do financial advisors rate the median family? They would prescribe the typical cut expenses, save more mentality. We keep harping on it, but it really is the only way to build wealth. Less than 50% of Americans have a retirement account. While I don't think that includes pension accounts (the article doesn't say), that's still an astounding number given the shedding of pensions lately.
Case in point. We've replaced our furnace already this year. We just got word that our roof and siding will have to be replaced thanks to a freak February hailstorm. Luckily, we have insurance and have an Aon Home Warranty, so we'll only pay $1,100 of the total $15,000 cost. But how many families have $15,000 for emergencies? We'd use most of our savings to pay the bill but would likely have to take on little debt. How many would be so lucky? Certainly not the median family listed above.
03 March 2006
One of the ideas floated includes an automatic IRA for employees that don't have pension benefits through their employers, either in the form of a true pension or even a 401(k) plan. The idea would be modeled on the Federal Employees Thrift Savings Plan and would allow employees to opt out if they do not want to participate. However, employees would initially be enrolled to take advantage of inertia of most employees.
There are several obstacles. If they make it truly automatic, it would work a lot like Social Security and would essentially tax the poor even more. However, it is the poor that need the help the most, which is why individual Social Security accounts are such a bad idea. If they don't make it truly automatic, many lower income employees would opt out so that they could pay for things like food and rent. Again, these are the exact employees these IRAs are supposed to target.
On the other side, the reason that employers don't provide 401(k)s are anti-discrimination rules to ensure that highly paid employees are not treated better than everyone else and the costs involved of paying a trustee for the plan. This idea would would require all employers offer automatic IRAs, but would allow a tax credit of $250 to offset start up costs. Also, since the plans are straight IRAs, there would be no regulations on highly compensated employees or contributions to be made.
All this might work, but it would really be better to not add to the confusing number of retirement options. One of the great ideas the GOP has had in the past few years was to combine the various retirement accounts into one option. I would love to see everything combined into a 401(k) account with the 401(k) limits. It would level the playing field and not handicap workers just because they work for an employer that doesn't offer a 401(k).
01 March 2006
Personal incomes rose 0.7% in January, but spending rose 0.9% meaning consumers spent all of their raises and then some in January. That, in and of itself, isn't entirely bad. However, coupled with the fact that we were already at a negative savings rate, that means consumers were spending more of their savings in January.
This is not sustainable. The fact that it hasn't happened since the Great Depression should be the first indication of that. People need to save, otherwise they'll be sorry once their savings are depleted and they just can't have that plasma screen they NEED RIGHT NOW!
28 February 2006
Their five suggestions are:
* Shred paperwork you don't need. Bank/Credit Card statements after one year, paystubs other than your latest. Titles and CDs as soon as you get rid of the investment.
* Consolidate all your IRAs into one IRA so that you only need to track one set of investments.
* Consolidate savings accounts into one bank. Same reasons as consolidating IRAs.
* Close unnecessary credit cards. Keep any older than five years and one from two of the major issuers (Visa, Mastercard, AmEx, Discover). I would suggest closing any store credit cards you don't use frequently as they could be fodder for identity theft.
* Close insurance gaps. Review insurance policies and wills to see if any life changes necessitate changes in coverage.
All good ideas that people put off for far too long (like cleaning out the garage). Take one weekend to clean the garage and one weekend to tackle your financial garage. If you need help, certified financial advisors can help. But, as always, make sure they have some sort of certification.
26 February 2006
For anyone checking out the Investimist for the first time, welcome and get comfortable. I can be reached by leaving a comment (I will always try to respond). I welcome comments (and even the occasional criticism).
24 February 2006
What H&R Block
Anyone that has worked on a corporate tax footnote calculation is smiling at that. Everyone knows the state effective tax rate is too low but a song and dance happens every year to show that it's just a one year anomaly. CPA firms are scared to death at getting sued out of existance thanks to SOX, so they're not letting clients get away with the wink, wink, nudge, nudge anymore. And that's why, as the article notes, that there are a lot of "it's an honest mistake, honest" restatements happening thanks to the effective tax rate.
UPDATE: No, it looks like H&R Block actually used the wrong state tax rate on its tax returns and will now owe $32 million in back taxes. Because they owe taxes and have to restate earnings down, my guess is that they used too low a rate on the financial statements and too high on its tax return. How could that be? hmm....
23 February 2006
- Inflation. Rapidly rising prices in the 1970s and early 1980s meant you could count on hefty annual raises. Today, you can’t rely on double-digit income boosts to make your mortgage payment less of a burden each year.
- Two-income couples. A generation ago, single-income families were more common. If the breadwinner lost a job, the other spouse could go to work to save the house. With more two-income families needing both paychecks to make the mortgage payment, there’s no one on the sidelines to take up the slack -- unless you put the kids to work.
- The lending industry. Thirty years ago, it was pretty tough to get a mortgage for more than you could really afford. Today, it’s fairly commonplace. More lenders have loosened their criteria, knowing that the vast majority of their borrowers will do whatever it takes to pay their mortgage -- even if it means trashing the rest of their financial lives.
- Retirement. A much bigger proportion of the workforce was covered by traditional, defined-benefit pensions 30 years ago -- which means they didn’t have to save massive amounts of money on their own to have a decent retirement. Today, the onus is typically on you to carve enough out of your budget to fund 401(k)s and IRAs.
All of these are great points, but it doesn't help you figure out how much house you can truly afford. There are a few tables to figure out how to calculate how much house you can afford, but I prefer the budgeting method.
Do a budget for six months. That is a long enough time frame to start to figure out necessary monthly expenditures (one year would be better). Using that data, figure out what you can truly afford to spend monthly on a house. Subtract 10% from that amount to give a little monthly wiggle room. Now, subtract $200/month for taxes and insurance (or figure out an approximate amount for houses in your area). Take that remaining amount and plug it into an online calculator to figure out how much house you can afford.
One important last step, though. House repairs generally cost 1-2% of the value of the home each year. So, if you purchase a $200,000 house, expect to sock away at least $2,000 per year for home repairs. Take this amount into account and re-calculate the house you can afford. This will give a little more wiggle room if the house needs major repairs, or if you want to replace carpeting or tile.
We went through a similar calculation when we bought our house. We ended up spending a tad more than we calculated initially, but the house came with a Aon Home Warranty for the first year, which gave us breathing room on repairs. It allowed us to allow our salaries to catch up and gave us a little cushion on repairs.
That's just my suggestion, however. There are tons of resources on the internet on how to determine how much house you can afford. I will suggest one more thing, get a traditional 15 or 30 year mortgage and avoid the interest-only and other bizarre mortgages that have cropped up in the past few years. It will skew your calculations and could lead to a greater chance of default and selling the house for a loss. That's not good.
22 February 2006
The only answer is the IRA or Roth IRA, which allow a maximum contribution of $5,000 per year. That leaves $13,000 on the table every single year. Just because the worker happens to work for a company that chooses not to offer their employees a 401(k).
His suggestions are to invest in tax-managed funds and ETFs, mutual funds that trade like stocks. Both of these would keep taxes to a minimum. In the first case, the fund manager does not trade often or takes losses when appropriate, both of which lower the required capital gains distributions (which are taxed). ETFs trade like stocks and so capital gains are only taxed when the ETF is sold.
Additional options include index funds and tax-exempt funds. Index funds are lightly traded in because the composition of the major indexes rarely change. Tax-exempt funds are funds of municipal bonds that are exempt from Federal taxation (and sometimes state taxation as well). Municipal bond funds have lower returns, but when the tax benefit is taken into account, usually return 5-6% per year, much below the average 10% return of stock funds.
Those are your options, which is why a good 401(k) is a great benefit for employees. My employer just switched from a crappy one to a great one. It's nice not only having a 3% match, but to be able to invest in funds with high returns and low expenses, rather than the other way around.
20 February 2006
“That’s good he makes you do it every year, even if it’s just more revenue for him.”
“Yeah, I should go, it’s at least less painful than the dentist”
“And just as important, can I ask you a question? Is he a ‘fee-only’ advisor?”
“I have no idea. Does it matter?”
“Well, yes. It’s really important actually and most of the big name branches like Edward Jones and Fidelity are not.”
“Uh oh, why does it matter?”
“Fee-only means they only get paid by you, not by the mutual funds they’re selling.”
“That’s important because they are truly independent and have no conflicts of interest if only you are paying them.”
“Ok, let’s say that there are two mutual funds that fit your profile. Fund A has high returns and low expenses. Fund B has lower returns and higher expenses.”
“I’d rather be in Fund A”
“Of course. But let’s say that Fund B pays a commission that’s 10% higher than Fund A. Now, does your advisor put you in the fund that’s best for you, Fund A, or the one that’s best for him, Fund B?”
“I hope the one that’s best for me.”
“Do you know that?”
“A lot of the big brokerage houses have been fined for selling their customers Fund B rather than Fund A and not telling them about Fund A. Who is your guy with?”
“They’re one of the ones that paid fines. I can’t tell you your guy was one of the guilty, but it seemed like they were pressured company-wide. It may be time to look into a fee-only advisor.”
16 February 2006
Lockyer wants Kansas City, Missouri-based H&R Block to reimburse customers in an amount he said could reach the hundreds of millions of dollars, and pay a civil fine of at least $20 million.That's all well and bad, but the last part of the complaint should also draw a lot of focus.
H&R Block said the lawsuit lacks merit. Lockyer filed his 20-page complaint in state superior court in San Francisco.
In December, H&R Block said it agreed to pay $62.5 million to settle four class-action lawsuits over the loans. Last May, a federal judge in Chicago rejected a $360 million nationwide settlement raising similar issues, calling the sum inadequate.
Lockyer also accused the company of sharing customer's tax return information without consent, and using it to market other financial products and collect debts.Holy disbarment, Batman! Sharing client's personal tax data is like numbers 1, 2, and 3 on the "Preparers Don't Do" checklist.
So, you go to H&R Block to prepare your tax return. You get strongarmed into a loan at a rate that makes Freddy the Fish jealous and then they sell YOUR TAX RETURN DATA to market other products to you.
Wow. Simply wow. The more I learn about this company, the more I have to stress that NO ONE should take their returns there. I'm so glad I didn't take a tax season job there a few years ago like I could have. I'd have an extremely guilty conscious right about now.
14 February 2006
[P]eople who walk down the aisle and stay hitched accumulate nearly twice as much wealth as those who are single or divorced.The main reasons cited in the study was economies of scale. Single people need two homes while married couples only need one, etc...
Economist Jay Zagorsky of OSU's Center for Human Resource Research, tracked the financial and marital status of more than 9,000 people from 1985 to 2000. Married people amassed an astonishing 93 percent more than single or divorced people over the 15-year period.
(Though I don't think Valentine's Day costs are included in the study. That would certainly set a drag on the growth of wealth!)
13 February 2006
While the list is not exhaustive, following these five ideas will go a long way to pumping up returns for retirement.
* Stop ignoring the little thingsThe two most important items on that list are the last two. Cashing out 401(k)s when you leave a job is retirement suicide. You might as well be asking to survive on dog food in your old age.
* Don't overpay The Man
* Avoid overdosing on accounts
* Keep your hand out of the cookie jar
* Don't diss dividends
Chasing the latest growth stock is another way to the poor house (or at least to the "not as rich" house). Why?
A Standard & Poor's study found that from 1980 to 2002, dividend-paying stocks returned an annual compounded 2.7% more than non-payers did.Not a bad return for 25 years of no work, eh? If you had cashed out that $6,000 in 1980 (see point 4) you'd have zero and whatever you spent it on you'd likely no longer have (even that sweet tv you've had your eyes on).
Perhaps you've heard of ExxonMobil, Coca-Cola, and Johnson & Johnson? (OK, so that last one does conjure up images of Grandpop, but still.) If, in 1980, you had purchased $2,000 of each, today you'd be sitting on a portfolio worth close to $360,000 by deferring taxes and reinvesting dividends.
Easy advice to follow, but it could be worth literally hundreds of thousands of dollars in retirement.
10 February 2006
Throw up your hands
The CS Monitor has an excellent article on selecting a tax preparer. Several of the points in the article are worth noting.
First, tax preparers do not have to be licensed in many states. The article points out that hairstylists usually have to have a license, but only California and Oregon require tax preparers to have a license. A better idea is to use someone that is either a CPA or an Enrolled Agent (basically the IRS version of a CPA). Both titles mean they have been licensed by the state or the IRS and can not only prepare returns but can also represent you in the case the IRS has "questions" about your return.
Next, ask questions about the preparers background and qualifications. Ask how long they have been in business. Ask if they are open all year or if they do taxes on the side (just because they do them only on the side should not disqualify the preparer if everything else checks out). Will they help you out if you are asked questions about the return by the IRS.
Finally, if the preparer promises a large refund, walk out. If they begin to talk about the fact that you don't have to pay taxes, walk out. It is illegal for a CPA or enrolled agent to prepare returns on a contigency basis. If it is offered, walk out. Any of these arrangements could lead to a falsified return, which you are responsible for.
The Motley Fool also has several excellent suggestions on selecting a tax preparer.
Last week, I wrote about the IRS' suggestions for selecting a tax preparer. These are additional suggestions on what to ask a preparer and ways to spot a fraud.
09 February 2006
To Use or Not to Use
I am a firm believer in non-tax types using tax software. The major products from Intuit and H&R Block are so easy to use that most people should be able to follow along without much problem. They are definitely a step above using paper and pencil to file returns if you are unsure what you are doing.
The Motley Fool has a pretty one-sided article on the pros of using tax-prep software.
- You don't have to gather any forms; they're all in the program already.
- You can revise and revise and revise, without making a mess with whiteout or an eraser. Enter your information to see what your tax liability is, and then you can make adjustments, playing out different scenarios to see which is most cost-effective. (You might see that it's smart to realize some capital gains this year, for example.)
- The software can assist you with decisions. It asks you questions and either makes decisions for you (regarding which forms to use, for example) or offers you some information and asks you to make a choice.
- You can pay less attention to details. Once the program has certain information, it will make sure that it's carried over to and entered in all the required places. You don't have to worry about that.
- Carryovers from year to year get taken care of automatically -- if you used the same program to prepare your return last year.
Overall, I can't recommend enough that non-professionals use tax software. I participated in free file last year so I was able to prepare my return for free with Turbo Tax Online (I would have to pay to e-file, but I chose to paper file for free). The cost will likely be saved by the time and frustration that will be saved by non-professionals trying to grapple with form instructions. Add to that the fact that the software can find deductions non-professionals may miss and you could save the cost just in gained deductions.
07 February 2006
Use Tax-Deferred Accounts
This past year, I used my Dependent Care and Health Care Spending Accounts, my 401(k), and my wife’s pension in order to shelter about $10,000 from Federal taxation. Assuming a 25% tax rate, those alone saved $2,500 in taxes this past year. Missouri follows the Federal tax treatment of these items, so throw in another $600 saved in state taxes. I’ve saved $3,100 in taxes without really going out of my way.
I figure that I’m young enough that Social Security will no longer exist by the time I get to retire. Therefore, I have to save for retirement anyway. My wife has to contribute to her pension for the same reason. In both cases, we’re getting an automatic 25% return by being allowed to use tax-deferred money to fund these expenditures. In addition, my employer matches 3% of my salary, which is another automatic return on my contributions.
We fully fund the Dependent Care account since we pay more than $5,000 in child care during the year. This allows us to save $1,250 in taxes alone. Again, we’re essentially saving 25% on our child care just by using the Dependent Care account. We use the Health Care Spending Account to fund our anticipated expenses for the year. Since the rules regarding the use of the HCSA were liberalized to include over the counter drugs in 2003, it is much easier to guarantee that there will not be any money left over at the end of the year (which is forfeited).
There are other ways to achieve the same result. An IRA could be used, but the deductions are limited to $3,000 and are severely limited if you are covered under an employer sponsored pension plan. Additionally, a deduction is available for child care expenses if a Dependent Care Flexible Spending account is not utilized (Form 2441).
However, I believe the easiest way to achieve these savings is simply to invest in a 401(k) and use the Flexible Spending Accounts so that the money is available throughout the year rather than simply after you file your tax return.
06 February 2006
Keep Those Receipts!
I managed to do my Federal and State taxes in under two hours on Saturday and Sunday. While it has something to do with the fact that I do it for a living, but it was also because I was organized.
My wife and I keep all of our receipts that could potentially have tax consequences. Chartiable donations, my wife's classroom expenses, contributions to our daughter's college fund, etc. All year we have a manilla 9x12 envelope in the same area as our unpaid bills and we drop the receipts into the envelope. Come tax time, all of our receipts are in one location and we just have to organize them.
We use Microsoft Money to manage our finances (checkbook and credit cards). Money has a feature that allows you to check a box when a payment is recorded to identify it as a tax-related item. At the end of the year, a report can be run where all of your tax-related payments are on one sheet. This doesn't replace receipts (which are the best record for IRS purposes) but can be a nice way to reconcile the receipts to make sure that nothing is missed.
How complicated is our system of receipt keeping? Not at all. How easy does it make tax time? Much easier.
02 February 2006
* Avoid preparers who base their fee on a percentage of the amount of the refund.Of course, they remind taxpayers that they are ultimately responsible for what's on the tax return and then have snippets of various taxpayers and tax preparers that have been sent to jail (the IRS, never known for it's tact).
*Use a reputable tax professional who signs your tax return and provides you with a copy for your records.
*Consider whether the individual or firm will be around to answer questions about the preparation of your tax return months, or even years, after the return has been filed
Then Roth, CPA (one of my favorite tax sites) follows with it's own helpful hints for finding a tax preparer.
* Avoid preparers who base their fee on the unused amount of your credit card borrowing limit.Ha! Seriously, though, if you are hiring a paid preparer make sure the person is a CPA. While not all CPAs are quality, it will show that at the very least they have to do enough to maintain credentials. Asking for references are also key. If they start to promise you that you'll pay no taxes because they're illegal or some such run as fast as you can and then refer to the IRS page with the penalties for fraud.
* Use a reputable tax professional who doesn't sign his returns as "Brett Favre."
* If your your tax professional prepares returns out of his car, the presence of cases of pseudoephedrine in the back seat is a classic warning sign.
* Don't use a tax preparer whose web site is hosted here.
* Don't hire this guy to prepare your return. Or this guy. Not this guy, either.