Never Get a Refund Check, The IRS (Kind of) Looking For You

Turns out mailing address errors or incorrect addresses made approximately 383,000 of last year's refund checks undeliverable. While the IRS isn't actually actively seeking out people who's checks were returned, you can still claim your check until Nov 28, 2008. If you haven't received a check go to www.irs.gov or call 866-234-2942 or you will likely miss out on your chance.

Link: WSJ - The IRS Wants to Give You Cash

Image: sekimura @ Flickr

Obama, McCain and Your Money, The Cheat Sheet

After reading a Wall Street Journal article today about the money related positions of Barack Obama and John McCain, I figured it might be helpful to make a cheat sheet about where each candidate stands on the issues. I won't attempt to give an in depth analysis on any of the topics, this is just a very, very, brief overview.

Income Taxes:

Obama: Wants tax cuts for middle class, increases for families making $250k+ and inviduals pulling down $200k+. Wants to extend Bush tax cuts, but raise the top rates to 36% and 39.6%. Get rid of taxes on the elderly making less than $50k/yr and give people earning less than $75k/yr a credit equal to about $500 each year. The top 1% would see an approximate $19k/yr increase in taxes.

McCain: Wants to permanently extend Bush tax cuts, raise personal exemptions for each dependent from $3,500 to $7,000 over a few years. Wants to keep top tax rate at 35%. The top 1% would see a cut of $125k+/yr.

Short-Term Economic Relief:

Obama: To jump start the economy he wants to give a $1,000 rebate to each family or $500 per individual. He also would like people be able to withdraw 15% of their 401k or IRA up to $10k penalty free.

McCain: Wants to cut the capital gains tax rate for stock held more than one year to 7.5% and would increase the amount of loss that is deductible on stock sales from $3k to $15k. Would cap withdrawals by seniors from IRAs and 401(k)'s no more than 10%

Estate Taxes / AMT:

Obama: Keep 2009 estate tax rates in effect, taxing only estates worth more than $3.5 million per person at 45% per person. A $5 million dollar estate would pay approximately $675k in taxes.

McCain: Wants flat 15% estate tax (currently at 45%) on estates valued at over $5 million. A $5 million dollar estate would pay NO taxes.

Health Care:

Obama: Require employers not offering coverage to kick in a percentage of payroll towards a national plan (note small businesses are exempt). Would try to set up a national exchange for health insurance.

McCain: Would replace the income-tax exemptions for insurance paid by employers with a refundable tax credit of $5k per family or $2,500 per individual.
Investments:
Obama: Would eliminate all capital gain taxes on start-ups and small businesses, but raise top rates on securities and dividends to 20% for families making more than $250,000 per year.

McCain: Keep the max capital gain rate at 15%

Retirement / Social Security:

Obama: Wants to institute a 2 - 4% payroll tax for earners of more than $250k to be paid by employees and employers together. Would be phased in over 10 years or more. Impliment a savers credit to match 50% of the first $1,000 of savings for families earning less than $75,000.
McCain: Privitize social security and allow younger workers to place a portion of their account in the market.

Image: jvumn @ Flickr

New Grad Career Cheat Sheet

One of the great things about the internet (and Google), is that it makes it exceedingly easy to quickly find information on just about anything. The downside of this technology is that there is a lot of crummy information to sort through before you find the good stuff.

Well, if you are a new grad or know a new grad who is getting ready attack the real world the NY Times recently ran an article that you should pass along. The article entitled "A Primer for Young People Starting Their First Job" is really applicable to everyone. Let's face it - most Americans don't pay enough attention to personal finance and that's why the average savings rate is negative.

While I strongly encourage you to take a look at the article, I'll provide a quick summary below. The article does a quick and dirty summary of health benefit, tax, and retirement plan considerations for new grads. There's not a great deal of deep analysis on any of the topics, but the article serves it's purpose. It gives new grads a very bare bones outline of each and points them in the right direction and gives them the types of questions they should be asking. I think that's a noble goal in itself. You can only lead people so far after all.

If you have any good resources for new grads heading out into the world please leave them in the comments.

Stimulus Check Payment Amounts - What You Need To Know

By now most people know that Pres. Bush's economic stimulus checks are soon to be on their way. But, when -- and more importantly how much?

I did a little research on the IRS website today and it says that checks are being mailed by the final two digits of their social security number in waves. Checks will first be mailed May 2nd and the chart below shows when you can expect to receive your check.

DIRECT DEPOSIT
Last two SSN digits
Payment will be transmitted:

00 through 20
May 2

21 through 75
May 9

76 through 99
May 16

PAPER CHECK
Last two SSN digits:
Payments will be mailed by:

00 through 09
May 16

10 through 18
May 23

19 through 25
May 30

26 through 38
June 6

39 through 51
June 13

52 through 63
June 20

64 through 75
June 27

76 through 87
July 4

88 through 99
July 11

The full chart can be found here. It should be noted that the IRS also says that people who filed late will receive their stimulus check approximately two weeks after their scheduled payment date.

If you have your 2007 1040 printed and handy, you can head over to the IRS Economic Stimulus Payment Calculator to determine how much you will be receiving. Generally, the checks will be $300 for individuals and $600 for married couples jointly filing, but this can be complicated when dependents are thrown into the mix.

Deducting Tax Advice Fees

I tend to prepare my own taxes, but came across a post yesterday asking if tax advisory fees can be deducted from returns. The answer is technically yes, but the average taxpayer is unlikely to qualify.

Tax preparation fees fall under "miscellaneous itemized deductions." Other items in this category include job search fees, union, dues, legal fees related to tax advice, and even safety deposit box fees (provided that they hold investment related goods).

However, miscellaneous deductions are only deductible to the extent they exceed 2% of your adjusted gross income. So, if your income was $100k and you had $3k in miscellaneous expenses, then you would only qualify for a deduction of $1,0000. It should also be noted that while investment advice qualifies under miscellaneous itemized deductions, broker commissions don't.

You can read more about the wonderful world of miscellaneous itemized deductions in Pub 529 (note this is a pdf document) over at the IRS website.

Image: Blmurch @ Flickr

FULL DISCLOSURE, I'm not a CPA and don't pretend to be. Consult a tax attorney or CPA for your specific tax questions.

Most Overlooked Tax Credits and Deductions

It's approaching that time of the year. It's a time that no one is particularly fond of, but if you have to pay taxes -- you might as well only pay your fair share. H&R Block recently posted an article on its website about the top 10 overlooked credits and deductions. The top 10 are listed below.

1) Earned Income Credit
- Available to low-income workers.

2) Child Tax Credit
- $1,000 for each child, the amount you can claim for each child decreases once your adjusted gross income hits $75,000 as a single filer or $110,000 jointly filing.

3) Saver's Credit
- Get credit for up to half you contribute to a retirement plan. Restrictions apply.

4) Education Tax Benefits
- Hope Credit: 100% credit of first $1,100 and 50% next $1,100 per student for tuition and fees with a max of $1,650. Restricted to your first two years of college.
- Lifetime Learning Credit: Credit of 20% annual tuition and fees. Max $2,000. Unlimited number of years.
- Tuition and Fees Deduction: Allows you to deduct up to $4,000 for tuition and fees.
- Student Loan Interest Deduction: Deduct up to $2,500 per return for interest paid on student loans.

5) Medical Expenses
- Deduction available if you spend more than 7.5% of your income on medical expenses (you must itemize to claim).

6) Moving Expenses
- You can claim this even if you don't itemize so long as your move was 1) job related, 2) would have increased commute by more than 50 miles, 3) were employed full time at least 39 weeks during the 12 months after you moved, 4) your moving expenses weren't reimbursed by your employer.

7) State & Local Taxes
- If you itemize, you can claim your state and local sales tax or income tax. You will need receipts if you choose to claim the sales tax deduction.

8) Charitable Donations
- If you itemize you can deduct these, but keep your receipts for money donations, items donated, or mileage while driving for charity.

9) Out of Pocket Job Expenses
- These are deductible provided you keep records and are not reimbursed by your employer.

10) Self-employment Deductions
- Half your self-employment tax, up to $112,000 of new or used business equipment purchased this year, your home or office furniture if its used solely for your business.

You can also follow the link here to read more about each credit (but whatever you do, if you have H&R Block prepare your taxes -- please don't sign a tax refund loan).

Why Tax Refund Loans Make Bad Financial Sense

It's getting to be tax season which means a slew of tax preparation companies will spring into action and in the process begin to push tax refund loans on consumers. Reports state that nearly 12 million Americans take companies up on these offers -- and fatten the bottom lines for return preparation companies in the process.

There are a few factors at work here. The first is that people love receiving tax refunds. However, say you receive a $2,150 refund. The important thing to remember is the government is really just returning the excess money you paid over what you owe. It's not free money -- its your money that you just gave to the government interest free for a year. Second, what the tax preparation companies tend not to advertise is that these loans are similar to payday loans and charge APR's often in excess of 100%. A $100 finance charge on an average refund of $2,150 has an APR of 178%.

If you are receiving a large refund you've already given the IRS a good deal, don't give the tax preparation firm an even better deal. If you use a tax refund as a way to force yourself to save money open an online savings account (ING, HSBC, and E*Trade all are easy to use and allow you to link multiple accounts). Take the amount of taxes you owed the previous year, divide by 12, and set up an automatic savings plan with the online savings account to regularly deduct a portion of that amount out of your checking monthly, weekly, or bi-weekly. This way you don't make an interest free loan to Uncle Sam and you are able to actually earn some interest yourself in an FDIC insured account.

Read more about Refund Anticipation Loans @ Wikipedia

Image: RBereig @ Flickr

2007-2008 IRA Contribution Limits

Although you have until April to get your retirement contributions figured out, below are the limits for this tax year (2007) and 2008 for those of you thinking ahead. For 2007, individuals under 50 can contribute up to $4,000. This number rises to $5,000 for 2008. If you are over the age of 50 you can make "catch-up" contributions and contribute $5,000 in 2007 and $6,000 in 2008.

It should be noted that these limits apply to individual contributions to Roth IRA's, traditional IRA's and to SEP plans.

The Rising Price of Civilization

Scott Burns has a great article over at his site about the rising cost of civilization and particularly the exponential cost of government. He does a nice job of pointing out the runaway unfunded liabilities in our government and where the majority of them. Turns out the unfunded liabilities for Medicare are 8.5x the unfunded liabilities for Social Security and the government promised $63.675 trillion more in benefits than it took in. If this all leaves you a little uneasy, the post goes on to say that it's the way the world's governments work and we aren't alone.... for some reason that seems like cold comfort for me. Where are all the fiscally conservative people? I guess that doesn't get you elected.

Link
AssetBuilder - The Rising Cost of Civilization

Online Personal Finance Calculators

I've said this before, I love the wide variety of online personal finance calculators there are out there to save us everyday folk time. They save people like you and me from breaking out something like this...
Here are three more to add to the list of handy time savers. This group covers the value of your college education, taxation of bonuses and whether you should exercise stock options.

How much is your graduate education worth? This calculator takes what you expect to make before, after, years till retirement and the cost of your education into account. I personally like it because it shows you the break even point to where your education has paid for itself.

What will my bonus net after taxes? This calculator is pretty straightforward, it takes your bonus amount, income, deductions and allowances to determine how much you will get and how much Uncle Sam keeps for himself.

Should I exercise "in the money" options? With obvious shortcomings - since there is no way for the calculator to know if your company is in a downward spiral - this calculator will attempt to give you a good idea about whether or not you should exercise those options floating around in your portfolio (if you are fortunate enough to have some).

Think Dual Incomes is a Great Thing? Not Always

The prospects of having two incomes to support household expenses sounds great. What's not to love? Double the money to pay bills, send your kid to college or enjoy life. Well that pesky "marriage tax" makes the calculation a little more difficult. True, individually two incomes are great, but in married couples are subject to different tax scales. There is a point of diminishing returns as your combined income gets higher and higher.

Take this hypothetical:
John makes $75,000 per year. Jane (his new wife) makes $50,000. Combined they bring in $125,000 yearly. If both work full-time childcare expenses will be $500 per month before and after school. Jane will also spend $1,000 a year to commute to and from work. Let's also say the local tax rate is 6% and they don't have a flexible spending account to sock pretax money for the additional childcare expenses.

Individually John would be in the 25% tax bracket approaching the 28%. Jane would be in the 25% tax bracket. While they individually hit the 28% tax bracket at $77,100, as a married couple they don't hit this bracket until $128,500. So, for income tax there is no real difference assuming that they don't get salary increases to move them into the 28% bracket.

However, the real problem is they will lose out in a lot of other ways. They will be taxed more for social security and medicare (jumping to 7.65% up to $97,000 then 1.45% thereafter. The child tax breaks begin phasing out at $110,000, they will also be unable to claim the Hope Education credit. The effective tax rate is a whole lot more than what the charts show.

So back to the fact scenario above. Assuming the very broad facts laid out above in my hypothetical the actual take home from Jane's $50,000 salary will be around
$27,425 or to put it a different way she nets 54.85% after costs and taxes. This is obviously a very rough estimate and there are lots of variables, but it's helpful to think about some of the other factors aside from just the salary figure. Try the calculator SmartMoney has created to simplify these factors and read about other potential problems that might come up.

Note: I'm not implying that the $20,000+ take home is a small sum, just that there are diminishing returns for high income couples and there are more variables to take into account. The $27k would most definitely be worth it for me. I also acknowledge that there are a lot of soft factors not in the equation. Lots of families decide that soft factors like spending more time with their spouse or raising children should trump extra income. That is a great decision for many people and I don't want to discount that - however, it would take an economist to figure out the opportunity cost (which I don't pretend to be) so it has been left out of my analysis. I would guess that if it was added in it would make a spouse staying home more attractive to some and less to others.

Link

Smart Money Should You Go Back to Work Calculator

Tax Crunch Time

Only a little over a week till tax time is here. With that in mind, here's are some quick links to what other blogs are saying about it.

Getting Green has an article about 10 Ways to Avoid an Audit.

Additionally, the IRS has a list of the top five most overlooked items by taxpayers in their 2006 tax returns.

Those of you paying someone to prepare your taxes may be interested in the article on TaxProf Blog about the government charging 125 Jackson Hewitt franchises with tax preparation fraud.

People using popular tax preparation software packages like TurboTax or TaxCut can find coupon codes for H&R Block's TaxCut software over at FIRE Financial.

Living Almost Large has a nice article about her philosophy as to when it makes sense to pay off a mortgage early.

If you are still hungry for more tax goodness, Don't Mess with Taxes has a variety of other Tax related links.

...don't forget to thank your local IRS auditor for all the wonder this time of year brings.

Tax Time: Big Time Write-offs

If you have a home business or office you can legally write-off a lot of things you might not expect (provided they have a use related to your office). Like most laws, tax laws use the terminology that is vague at best and baffling to most. Luckily there are CPA types who love this stuff that the rest of us find mind-numbingly boring.

To write off an item it must be "reasonable and customary" and connected to a trade or business. The good thing is that as the CPA says in this article, "there's almost nothing that isn't deductible under the right circumstances." This article describes tax write-offs for car, mileage, educator expenses, big screen TV, and higher education expenses. While it might be a good start, a better place to get deductions obviously is to call up your local CPA.

MSN Money: Taxes

Don't Forget the Telephone Tax Break

The government has offered to give $30-$60 back to each American in the form of a telephone break. Any money you can get back from the tax man is good and you may say that you had a professional file your return so you are safe. Think again. The IRS is estimating that 10 million Americans already have forgotten to file for the credit costing them $300-$600 million dollars in lost refunds. Already file? No problem. There is a form you complete in less than 30 mins to collect your money. Here is a step by step tutorial to bypass the fluff and get your money fast.

Read full article here.

TurboTax vs. TaxCut

By now if you haven't seen a commercial yet or heard of TurboTax (Intuit) or TaxCut (H&R Block) consider yourself sheltered fortunate. I even heard an advertisement for one of the packages while shopping this week. I'll break down exactly what they are and how they compare in this post.

What Do They Do?
---------------------
Both programs are software packages that you can pick up at any local chain or electronics retailer (Wal-Mart, Best Buy, Circuit City, Target). The programs install and being by asking you a series of questions - an "interview" as the programs refer to them. Questions range from how many children do you have and are you married to the size and number of charitable deductions you made over the year. Your responses are dropped down into the tax form in the appropriate area after submission and calculations are made. After the process is completed the programs allow you to print off a completed form to mail or send in electronically "e-file."

New Features
------------------
The big push this year has been to push "audit protection" features which of course entitle the companies to extra fees. Both companies offer similar services so this is a wash. However, if you e-file TaxCut throws the service in for free. TurboTax will cost you around $40 for the protection.

Transferring Data
----------------------
You can save yourself a sizable chunk of time if you avoid re-inventing the wheel and import your data from other programs. TaxCut and TurboTax vary slightly on which programs they play nice with.

TurboTax can talk with:

1. Quicken and QuickBooks
2. W-2, 1099, 1098
3. TaxAct
4. TaxCut
5. Anything that can create a .txf file
6. Microsoft Money
7. ItsDeductible
8. Quicken Rental Property Manager

TaxCut can talk with:

1. TurboTax
2. H&R Block Deduction Pro
3. Deduction Pro
4. Money
5. Quicken

Tech Support
---------------------
Both companies have phone, chat and email support. I haven't used the feature on either package to be able to give much guidance here. From reading up TaxCut's "Ask a Tax Advisor," (another way for H&R block to throw work to its accountants) costs $19.95 per question (federal or state). TaxCut also runs a blog which is free to view. TurboTax has a "Live Tax Advice feature" where you can talk one on one for FEDERAL tax questions ONLY and is more expensive at $39.95 per question.

Pricing
---------------
TurboTax

• Free Federal: Free
• Deluxe: $29.95 (Fed Only)
• Premier: $49.95 (Fed Only, need this if you have investments)
• Home & Business: $74.95 (Fed Only, Schedule C's included)
• Note - State returns cost an extra $24.95
  

TaxCut:

• Basic + E-file: $9.95 (1040EZ only simple returns)
• Premium + E-file: $19.95 (More in depth plus 1 ask a tax advisor session free, State extra)
• Premium + State + E-file: $39.95 (State + Fed + everything in the Premium)
  

The quick recommendation: In my opinion the average taxpayer will get a better value from TaxCut. It is less expensive, you get state and federal returns, and can talk to an advisor if you have a question and won't get charged extra.

You can buy either package online from the source TaxCut.com or TurboTax.com

That's all folks...

++++ UPDATE 02/28/07++++

Additionally, it has been brought to my attention that while TurboTax's free edition supports only the 1040EZ filing, TaxCut supports 1040EZ, 1040A, and 1040 forms: You have to purchase the Deluxe or Premier to get those forms with TurboTax.

It's Tax Time: Get Someone To Do Your Dirty Work For Free

The number of people who enjoy filing their taxes can likely be counted on one hand (even CPA's dread this time of year), but if you match the qualification criteria you can get someone to do your dirty work for you and not pay a dime. The VITA program (Volunteer Income Tax Assistance) sponsored by the IRS recruits a small army of college students and other individuals who after undergoing thorough training can fill out you taxes for you.

Good deal huh? What's the catch?

Well the big catch is you typically have to have $39,000 in income or less, the second is you need to find a VITA center (generally pretty easy if you live near an university that has a business or law program). If you meet the criteria find a volunteer location on the IRS website, round up all your documents and walk right by the H&R Block or Jackson Hewitt guys hawking their services around town.

It's Tax Time: Articles Abound

For those of you avoiding this dreaded time of the year CNN.com ran a story this week about often overlooked tax breaks people don't take advantage of. The article isn't ground breaking, but may be helpful to those of you doing taxes the "old fashioned way." Those of you using TurboTax, TaxCut or any other of the commercial tax software packages you can probably skip it.

The gist of the the story is that there are tax breaks for professional periodicals, real estate taxes, tuition, state taxes, self-employed, retirement savings, child care, telephone service, and energy efficiency.

Check out the full story over at CNN