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.